Supreme Court New South Wales Medium Neutral Citation: J & Z Holding (Aust) Pty Ltd v Vitti Pty Ltd [2022] NSWSC 1718 Hearing dates: 7 and 8 December 2022 Decision date: 20 December 2022 Jurisdiction: Equity Before: Lindsay J Decision: Subject to allowing the parties an opportunity to be heard as to the form of the orders and costs: (1) DECLARE that the defendants are absolutely entitled to retain the sum of $2,050,000 referred to in the Option Agreement (as amended) as "the Call Option Fee" and in "the contract" created upon exercise of their Put Option as "the deposit". (2) ORDER that the plaintiff's statement of claim otherwise be dismissed Catchwords: LAND LAW — Conveyancing — Options – Put and call option – Classification of a payment as an option fee or a deposit – Payment properly characterised as an option fee for full consideration – Not recoverable as a deposit upon the contract coming to an end otherwise than by completion Legislation Cited: Conveyancing Act 1919 NSW Evidence Act 1995 NSW Cases Cited: Akron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 Aslan v Stepanoski [2022] NSWCA 24 Brien v Dwyer (1978) 141 CLR 378 Carr v Keys-Arenas (1981) 2 BPR 9498 Carter v Mehmet [2021] NSWCA 286 CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Doyle v Howey (1990) 6 BPR 13,401 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 Foran v Wight (1989) 168 CLR 385 Howe v Smith (1884) 27 Ch 89 Iannello v Sharpe (2007) 69 NSWLR 452 Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504; 18 BPR 36,353 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; 12 BPR 23,629 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Proctor v Chahl [2008] NSWSC 1252 Shevill v Builders Licensing Board (1982) 149 CLR 620 Toll (FGCT) Pty Ltd v AlphaPharm Pty Ltd (2004) 219 CLR 165 Velik v Steningold [2013] NSWCA 303 Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 Category: Principal judgment Parties: Plaintiff: J & Z Holding (Aust) Pty Ltd ACN 620 110 287 First Defendant: Vitti Pty Ltd ACN 089 324 649 Second Defendant: Michael Patrick Hannah Third Defendant: Janet Lee Santwire Representation: Counsel: Plaintiff: GA Sirties SC and PD Reynolds Defendants: RS Angyal SC Solicitors: Plaintiff: MLH Lawyers Defendants: Mills Oakley File Number(s): 2021/00251393 Judgment INTRODUCTION 1. Between 17 August 2018 and 23 August 2021 or thereabouts: 1. the plaintiff was a prospective purchaser of land known as 562-576 Harris Street, Ultimo, in the State of NSW ("the Property"); and 2. the defendants were the registered proprietors of the Property and prospective vendors to the plaintiff. 1. The parties are in dispute about whether an option fee, paid by the plaintiff to the defendants for the defendants' grant to it of a call option (initially on 17 August 2018), and taken into account as a "deposit" credited against the purchase price in a contract created by the defendants' exercise of a put option (on 22 January 2021), upon the contract coming to an end otherwise than by completion, belongs to the defendants in its character as an option fee or is recoverable by the plaintiff as a "deposit", so described in the contract, notionally paid by the plaintiff under the contract. 2. That the contract came to an end no later than 23 August 2021 or thereabouts is common ground. By that date each party had purported to terminate the contract by way of acceptance of allegedly repudiatory conduct on the part of the other. The defendants purported to terminate the contract on 19 July 2021 based upon a failure of the plaintiff to complete the contract when called upon to do so by a notice to complete dated 2 July 2021. After some equivocation, the plaintiff disputed the validity of the notice to complete and purported (on or about 20 August 2021) to terminate the contract on the basis of the defendants' allegedly wrongful repudiation. By a letter dated 23 August 2021 the defendants disputed the plaintiff's alleged termination of the contract, maintained the validity of their notice to complete and their own notice of termination, and declared "[the] contract between the parties is at an end". 3. No party claims damages against another. The only substantive claim for relief is the plaintiff's claim for a "return" to it of "the deposit" on restitutionary grounds. 4. The plaintiff's claim is advanced on two bases. First, it contends that, having "rescinded" the contract for the defendants' alleged repudiation of the contract, it was entitled to recover "the deposit" which it had notionally paid under the contract: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 470 and 476-479; Foran v Wight (1989) 168 CLR 385 at 438; CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232 at [10]. Secondly, it contends that "the deposit" (an amount equal to 20% of the purchase price) was a "penalty" which the defendants are allegedly not entitled to retain (a question, as established by Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86-87, to be determined at the time the parties' contract was created, not upon a breach of contract). 5. The outcome of these proceedings ultimately depends upon whether, upon the proper construction of the contract read in the context of the option agreement, the disputed sum is to be characterised as an amount (a "conventional deposit") notionally paid by the plaintiff as a purchaser to the defendants as vendors in earnest to provide security for the defendants that the plaintiff would perform the contract. 6. If the disputed sum is taken to have been a conventional deposit (notionally) paid under the contract, it must be characterised as a penalty because it represented more than 10% of the purchase price, conventionally the limit of a deposit able to be forfeited to a vendor on breach by a purchaser of a contract for the sale of land. 7. If the disputed sum was otherwise enforceable as a conventional deposit taken to have been paid under the contract, and the contract came to an end by reason of an acceptance by the plaintiff of repudiatory conduct on the part of the defendants, the plaintiff would be entitled to recover the sum in restitution because the defendants cannot retain both the deposit and the Property and at the same time refuse to perform the contract. 8. If the disputed sum is not characterised as a conventional deposit paid under the contract (but rather, as the defendants contend, a credit against the purchase price of an amount equal to a call option fee received by the defendants) then there is no foundation for a finding that there was a failure of consideration or that there was any form of property to be restored to the plaintiff. 9. If (as the plaintiff contends) the contract came to an end when the plaintiff purported to terminate it by acceptance of the defendants' purported termination of the contract (based upon a notice to complete the validity of which is contested), and the defendants are entitled to retain the disputed sum as the option fee paid to them in consideration for their grant of a call option to the plaintiff, the only practical consequence of the plaintiff's termination of the contract would be that the plaintiff was relieved of any future obligation to perform the contract. 10. If a door is opened to the plaintiff's claim for restitution on either or both of the two bases advanced by the plaintiff, the claim must nevertheless fail, on the defendants' case, because the sum was paid by the plaintiff to the defendants as consideration for the grant of a call option the full benefit of which was enjoyed, but not availed of, by the plaintiff. On that case, there has been no failure of consideration. The defendants fully performed their obligations arising from the grant of a call option and there has been no unjust enrichment of the defendants in their retention of the disputed sum. 11. The character of the option fee, in the context of the parties' contractual arrangements and the manner in which the contract came to an end, lies at the heart of the proceedings. THE OPTION AGREEMENT 1. By a written agreement dated 17 August 2018 made between the defendants (as "Owners") and the plaintiff (as "the Grantee") and styled "Put and Call Option Agreement" ("the Option Agreement"): 1. the defendants granted to the plaintiff "an exclusive right to purchase the Property" ("the Call Option") for a period of 22 months expiring on 17 June 2020 ("the Call Option Period") for the agreed price of $10,250,000; and 2. the plaintiff "irrevocably offered to purchase the Property" if the offer were to be accepted by the defendants during a period of five business days ("the Put Option Period"), commencing upon expiry of the Call Option Period ("the Put Option"). 1. The Option Agreement provided for the plaintiff to pay a fee equal to 20% of the purchase price, $2,050,000 ("the Call Option Fee") by four equal instalments of $512,500, the first of which had been paid at the date of the Option Agreement, with the remaining three to be paid at six monthly intervals (that is, 17 February 2019, 17 August 2019 and 17 February 2020), the intention being that the whole of the Call Option Fee would, if duly paid, be fully paid four months before expiry of the Call Option Period on 17 June 2020. 2. The Call Option was able to be exercised at any time during the Call Option Period; between the date of the Option Agreement (17 August 2018) and the expiry of the Call Option Period (17 June 2020). To accommodate that fact, with the intention that any contract created by the exercise of an option provide for a 10 percent deposit, clauses 3.3(b) and 4.5(a)(ii) of the Option Agreement provided as follows: "3.3 Consequences of exercise of Option If the Call Option is exercised: … (b) the Call Option Fee (being the First Instalment and the Second Instalment) shall be taken to form and constitute the deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract … 4.5 Consequences of exercise of Put Option (a) if the Put Option is exercised: … (2) the Call Option Fee (being the First Instalment and the Second Instalment) shall be taken to form and constitute the Deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract …" 1. These provisions each contemplated that the first two instalments of the Call Option Fee ($1,050,000 representing 10 percent of the purchase price) would "be taken to form and constitute the deposit payable under the Contract and … be subtracted from the purchase price payable at completion of the Contract". The expression "taken to form and constitute" presents itself as a deeming provision predicated upon a recognition that payments were made in the character of an option fee rather than as instalments of a deposit. 2. Both provisions were deleted from the Option Agreement by the Amending Deed which (by clause 2) required that the total amount of the Call Option Fee be paid as a condition of an extension of the Call Option Period together with an express acknowledgement (by reference to clause 3.4(a) of the Option Agreement) that the Call Option Fee was the defendants to keep "irrevocably and unconditionally". THE AMENDING DEED 1. On the day the Call Option Period expired (17 June 2020) the parties executed a "Deed of Amendment" ("the Amending Deed") the effect of which was, inter alia: 1. upon condition that the plaintiff pay two "extension fees" totalling $220,000 in addition to the Call Option Fee of $2,050,000, to extend the Call Option Terminating Date from 17 June 2020 to 17 January 2021; and 2. implicitly, to extend the Put Option Period for five business days after that date. 1. The Call Option Fee of $2,050,000 was paid by the plaintiff to the defendants, with delay not presently material, by 17 June 2020. That it do so was a condition of the Amending Deed. 2. The plaintiff also paid the "extension fees" which entitled it, under the Amending Deed, to have the benefit of its Call Option up to and including 17 January 2021. It is common ground that the defendants are entitled to retain the "extension fees". THE NATURE AND AMBIT OF DISPUTE 1. In these proceedings, the plaintiff seeks to recover from the defendants the sum of $2,050,000 consequent upon discharge of the contract (between 19 July and 23 August 2021 or thereabouts) made on 22 January 2021 when, the plaintiff not having exercised its Call Option, the defendants exercised their Put Option. 2. The dispute between the parties is confined to competing claims of entitlement to the sum of $2,050,000 which: 1. on the plaintiff's case, must be characterised, in form and substance, as a deposit notionally paid by it under the contract; and 2. on the defendants' case, must be characterised as an option fee at all material times vested in them; not to be characterised as a conventional deposit intended to bind the purchaser in earnest to complete the contract; and, in substance, no more than a credit to be allowed against the purchase price upon completion of the contract, should the contract be completed. THE PARTIES' CONTENTIONS 1. The plaintiff contends that the parties' contract, created upon the defendants' exercise of their Put Option, must be construed as a stand-alone contract, without regard to the Option Agreement (as amended) pursuant to which the contract was created. It contends that the description of the disputed sum in the Amending Deed, and implicitly in the contract, as a "deposit" is a correct legal characterisation of the sum and one which, being a sum in excess of 10%, must (in accordance with conveyancing convention) be characterised as a penalty. It contends that characterisation of the sum as a penalty entitles it to recover an equivalent amount from the defendants under the law of restitution, implicitly as money had and received, but not articulated as such. 2. At the commencement of the hearing of the proceedings, the plaintiff abandoned a claim for an order for "return of deposit" under section 55(2A) of the Conveyancing Act 1919 NSW. It did so without explanation but in circumstances in which the defendants had foreshadowed a contention that the disputed sum was not a "deposit" within the meaning of section 55(2A). 3. After the contract came to an end (to use a neutral expression) the defendants resold the Property at a loss. They have not sought to recover any form of compensation for that loss because, they invite the Court to infer, the plaintiff is impecunious. 4. Whether or not the plaintiff is impecunious is immaterial to the task of the Court. The point is that no claim for compensation for breach of contract has been made by the defendants any more than by the plaintiff. 5. Upon the defendants' resale of the Property the disputed sum ($2,050,000) was paid into a bank account to abide orders to be made by the Court upon disposition of the proceedings. 6. The defendants contend that the disputed sum is theirs because it represents an option fee paid to them for their grant of a call option to the plaintiff. They contend that they became absolutely entitled to the Option Fee, under the Option Agreement (as amended), before the time arrived for the exercise of any option under the Option Agreement (as amended). They contend, further, that nothing in the contract created upon their exercise of their Put Option diminished that entitlement. THE CONTRACT 1. The "contract" took the form of the printed 2018 edition of the "Contract for the Sale and Purchase of Land" approved by the Law Society of NSW and the Real Estate Institute of NSW, with particulars of the parties' transaction inserted in the printed form, coupled with transaction-specific amendments to the printed form that included "additional clauses" here described as special conditions. CONSIDERATION Characterisation of the Option Fee/Deposit 1. The plaintiff did not, in fact, make any form of payment in the nature of a deposit under a printed term (clause 2) of the contract that, but for special conditions of the contract, would have required it to pay money to the vendors' agent as a stakeholder. It relies upon clauses 2(c) and 4(a)(vi) of the amending Deed which, together, provide that, "in keeping with the Option Agreement", on an exercise of any option under the Option Agreement as amended, "the Call Option Fee will comprise the Deposit payable under the Contract" and be identified as such on the front page of the Contract. 2. A special condition of the contract (special condition 41, given primacy over any inconsistency in the printed form of contract by special condition 32.2) contained an express acknowledgement, by the plaintiff that "the deposit" was to be "unconditionally and irrevocably released to [the defendants] immediately after exchange" of contracts, and that acknowledgement operated "despite any other provision of [the] contract, including any provision purporting to refund the deposit to the vendor [sic]". 3. A clause of the printed form (clause 16.10) that provided that "[on] completion the deposit belongs to the vendor" is inconsistent with special condition 41 if it is to be read as "on completion and not before completion", and it has no material operation unless it relates to a deposit for which clause 2 of the printed form provided and which was not paid by the plaintiff. 4. The contract must be read in the context of the Option Agreement (as amended), to which the contract referred in passing, and which explains the fact and terms of the contract and the plaintiff's special condition 41 "acknowledgement". The contract is not embodied in a stand alone document. The plaintiff's case, no less than that of the defendants', relies upon the terms and operation of the Option Agreement (as amended). 5. The contractual intention of the parties must be construed objectively. This requires consideration of both the text and (as known to the parties) the context of the contract as well as the purpose and object of the transaction the subject of the contract: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v AlphaPharm Pty Ltd (2004) 219 CLR 165 at [35]-[50]. 6. The contract must be read in the context of the Option Agreement (as amended) as part of its "surrounding circumstances" in construction of references to "the deposit" (Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350-352) and as part of its "inherent circumstances" upon a consideration of whether "the deposit" bears the character of a conventional deposit or a penalty (O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 399-400). 7. The terms of the Option Agreement (in particular, clauses 2.1(a), 3.3, 3.4(a) and 4.5(2)) and the Amending Deed (particularly, clauses 2, 4(a)(ii), 4(a)(iv) and 4(a)(vi)) provided for the disputed sum (as events unfolded, $2,050,000) to "vest" in the defendants (to use a compendious expression) as consideration for the Call Option and for it, upon completion of the contract, to be credited against the balance of the purchase price ($10,250,000) payable by the plaintiff on completion ($8,200,000). Clauses 4(a)(ii) and 4(a)(iv) respectively deleted clauses 3.3(b) and 4.5(a)(2) of the Option Agreement, making way for the operation of clauses 2 and 4(a)(vi). 8. Clause 2 of the Amending Deed is in the following terms: "2 Call Option Fee (a) This deed is conditional upon the Grantee [the plaintiff] paying the total amount of the Call Option Fee of $2,050,000 to the Owners [the defendants] before 5pm 17 June 2020 [the date of the Amending Deed]. (b) In keeping with the Option Deed [the Option Agreement], the Grantee acknowledges that clause 3.4(a) of the Option Deed applies and the Call Option Fee is and has been irrevocably and unconditionally forfeited and released to the Owners. (c) In keeping with the Option Deed, the parties agree and acknowledge that if the Contract is exchanged pursuant to the Option Deed, the Call Option Fee will comprise the Deposit payable under the Contract." 1. Clause 3.4(a) of the Option Agreement is in the following terms: "3.4 Consequences of non-exercise of Option If during the Call Option Period the Call Option is not exercised: 1. the Owners keep all amounts paid as the Call Option Fee …" 1. The Option Agreement (as amended) did not, in terms, impose upon the plaintiff any obligation to pay a deposit. The form of contract attached to the option agreement as "Attachment E", intended to come into effect upon an exercise of option, did not separately identify a sum (payable under clause 2 of the printed form of contract) as a deposit. 2. In conjunction with clause 2(c), clause 4(a)(vi) of the Amending Deed simply provided for an amendment to the Option Agreement in the following terms: "The deposit and balance amounts stated on the front page of the contract shall read: 1. Deposit: $2,050,000; and 2. Balance: $8,200,000". 1. The plaintiff's reliance upon the expression "the Call Option Fee will comprise the Deposit payable under the Contract" in clause 2(c) and the clerical description of the "Deposit" in clause 4(a)(vi) must be read in the context of clause 2 as a whole. Clause 2(a) required the whole of the Call Option Fee (the instalments of which had not been paid in the timely manner required by the Option Agreement) to be paid as a condition of extension of the Call Option Period. Clauses 2(b) and 2(c) are both introduced by an expression ("in keeping with the Option Deed") which places the Call Option Fee firmly within the context of the Option Agreement and implicitly confirms the character of the fee as a payment for the grant of an option. Clause 2(b) emphatically acknowledges that the Call Option Fee had been "irrevocably and unconditionally forfeited and released" to the defendants who were acknowledged to be entitled "to keep all amounts paid as the Call Option Fee". Clause 2(c) does not, by way of a contradiction with or qualification of clause 2(b), confer upon the plaintiff an interest (contingent or otherwise) in the Call Option Fee in recording that "if [which never in fact occurred] the Contract is exchanged pursuant to the Option Deed" the Call Option Fee "will comprise" the Deposit "payable" under the contract. 2. The plaintiff's reliance on clauses 2(c) and 4(a)(vi) is misplaced. Having secured their ownership of the Call Option Fee in return for an extension of the Call Option Period, the defendants cannot objectively be found to have surrendered it, in whole or part, in anticipation of an exercise of an option in which the focus for attention was upon "the balance" of the purchase price fixed by the contract. 3. The contract must be read in the context of both the Option Agreement and the Amending Deed, particularly, because the plaintiff did not (as required by clause 4.5(a)(3) of the Option Agreement as amended) give a signed counterpart of the contract to the defendants upon the defendants' exercise of the Put Option. The fact of the existence and terms of the contract necessarily depends upon reference being made to the Option Agreement as amended. 4. The contract imposed on the plaintiff no obligation to pay the disputed sum. It paid that sum as the price for the grant, and extension, of a call option the operation of which was fully enjoyed by it. There was no obligation on the plaintiff under the contract to pay money which can be characterised as penal or from which the plaintiff can be relieved upon an exercise of equity jurisdiction. The plaintiff got what it bargained for in return for its payment of the Call Option Fee. The parties cannot objectively be found to have intended that, having borne the burden of the Option Agreement (as amended), the defendants would, by their exercise of the Put Option, have surrendered the absolute entitlement to the Call Option Fee they were at such pains to have the plaintiff acknowledge as theirs. 5. Upon the proper construction of the contract as a whole, the disputed sum was not a conventional deposit (of the nature described in Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; 12 BPR 23,629 at [24]) required to be paid by the plaintiff, as purchaser, upon creation of the contract as a payment in earnest to secure its completion of the contract. 6. The disputed sum was not, as a deposit ordinarily is, a payment made by a purchaser to a vendor as "an earnest to bind the bargain" and as security to the vendor for performance of the contract by the purchaser, the party at risk of losing the deposit if it does not perform the contract: Howe v Smith (1884) 27 Ch 89 at 101-102; Brien v Dwyer (1978) 141 CLR 378 at 401 and 406; Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 at 578-579. In this case, "the deposit" was the defendants' property as an option fee they were entitled to retain. It was not paid by the plaintiff, as purchaser, in earnest of its performance of the contract created upon the defendants' exercise of the Put Option. 7. It was simply a means of identifying an obligation on the part of the defendants to provide a credit in favour of the plaintiff in reduction of the balance of the purchase price payable by the plaintiff upon completion. 8. The fact that the parties attached to the disputed sum the label "deposit" is not determinative of its legal character: O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 400; Iannello v Sharpe (2007) 69 NSWLR 452 at [31]; Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504; 18 BPR 36,353 at [26]. 9. The question whether a contractual provision imposes a penalty is one of substance rather than one of mere form: Akron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 at 520. 10. There was, under the contract, no obligation upon the plaintiff to pay money (whether referable to the sum of $2,050,000, labelled a "deposit" on the front sheet of the contract as a credit against the purchase price, or otherwise) which is reasonably capable of characterisation as a "penalty". 11. At the time the Put Option was exercised (and the contract was therefore created in accordance with clause 4.5(a)(1) of the Option Agreement as amended), and at all times thereafter, the disputed sum belonged to the defendants, to whom it had been paid by the plaintiff as consideration for the Call Option granted to it by the defendants. Does it Matter How the Contract Came to an End? 1. My determination that the disputed sum is not to be characterised as a conventional deposit but as a credit (for the Call Option Fee paid to the defendants as the price for their grant, and extension, of a call option to the plaintiff) carries the consequence that: 1. "the deposit" cannot be characterised as a penalty; 2. there is no foundation for a finding that "the deposit" was attended by any failure on the part of the defendants to provide consideration for its payment by the plaintiff; 3. the plaintiff has no entitlement to recover "the deposit" (more accurately, the Call Option Fee) on a claim for restitution whether arising from: 1. termination of the contract; or 2. the law governing penalties and relief against forfeiture; and 1. the prayers for relief in the plaintiff's statement of claim seeking recovery of "the deposit" must be dismissed. 1. The statement of claim also seeks declarations to the effect that the defendants' notice to complete was not valid, the defendants did not validly terminate the contract and the contract was validly terminated by the plaintiff. 2. Those declarations were sought in aid of the first basis upon which the plaintiff contended that it has a right to recover "the deposit" under the law of restitution. 3. There is no utility in addressing these claims for declaratory relief unless upon an assumption that, contrary to my finding, "the deposit" is assumed to have been a conventional deposit notionally paid in earnest to provide security for the defendants that the plaintiff would perform the contract. 4. The question whether the contract was validly terminated by the defendants or by the plaintiff and, more generally, how it came to an end is largely documentary and, to the extent it is otherwise, takes the form of affidavit evidence, not the subject of cross examination. 5. The key event in the parties' dispute about the circumstances in which the contract came to an end is the service by the defendants on the plaintiff of a notice to complete at about 11.43am on 2 July 2021. 6. The defendants' entitlement to serve a notice to complete is not in dispute. The time for completion of the contract according to its terms was on the thirtieth day after the contract date. By agreement between the parties, upon the plaintiff's payment of an extension fee of $220,000 to the defendants in May 2021, the date for completion was varied to 30 June 2021. The plaintiff's default in failing to complete the contract on or before that revised date justified the defendants in their service of a notice to complete on 2 July 2021. 7. Clause 15 of the contract provided that "[the] parties must complete [the contract] by the date for completion and, if they do not, a party can serve a notice to complete if that party is otherwise entitled to do so". 8. So far as is material, special condition 37 of the contract provided as follows (with emphasis added): "If this contract is not completed under clause 15, the party not in default may serve a notice (including a notice served after 3:30 pm on the completion date) making time of the essence in respect of completion both at law and in equity requiring the other party to complete this contract within a period of at least 14 days after service of the notice. … This notice may be withdrawn at any time." 1. Clause 21.5 of the contract provided that, "[if] the time for something to be done or to happen is a day that is not a business day, the time is extended to the next business day" except in cases not presently material. 2. By clause 1 of the contract the expression "business day" was defined (with emphasis added) to mean "any day except a bank or public holiday throughout NSW, or a Saturday or Sunday". 3. The defendants' notice to complete, addressed to the plaintiff, was in the following terms, so far as is material: "1. the vendor [the defendants] is ready, willing and able to complete the conveyance from you of [the Property] in accordance with [the contract]; 2. you are required to complete the sale on or before 3.30 pm Friday 16 July 2021 and in this respect time is of the essence for the completion of the contract; 3. the vendor appoints on or before 3.30 pm on Friday 16 July 2021 in the electronic workspace identified as PEXA … as the time and place for completion or at such other place as the vendor may direct; and 4. should you fail to complete the contract for sale of land within the period specified in this notice then you shall be in breach of the contract and the vendor shall exercise all other rights and remedies as are available to them by reason of your breach." 1. It is common ground that the day upon which the notice to complete was served (Friday 2 July 2021) is not to be counted in calculation of the "period of at least 14 days after service of the notice" referred to in special condition 37 of the contract. The fourteenth day after service of the notice to complete was 16 July 2021, the day appointed by the notice for completion. 2. The notice to complete was invalid because, allowing for a weekend, it did not provide fourteen clear days for completion as required by special condition 37: Carr v Keys-Arenas (1981) 2 BPR 9498 at 9500; (1982) 2 BPR 9498 at 9502; Doyle v Howey (1990) 6 BPR 13,401; Velik v Steningold [2013] NSWCA 303 at [53]-59]. To be valid, the notice was required to specify a time for completion no earlier than Monday 19 July 2021. 3. The defendants' submission that clause 37 authorised the service of a notice to complete appointing a time for completion "within" (that is, less than) fourteen days is contrary to authority and misconceives the nature and purpose of a notice to complete of the type given in this case. 4. In Louinder v Leis (1982) 149 CLR 509 at 519-520 Mason J made the following observations of present significance: "A discussion of the topic necessarily demands some mention of the difference in attitude of the common law and equity to time stipulations in contracts. The date for completion is a term of the contract, breach of which would at common law entitle the innocent party to determine the contract and recover damages. If, however, the parties did not make time of the essence of the contract, equity would order specific performance, unless to do so would be unjust, and would prevent the innocent party from enforcing his common law rights (Canning v Temby (1905) 3 CLR 419, esp at 426). By reason of the approach taken by equity a practice developed whereby an innocent party, after default by the other party, gave notice requiring completion of the contract within a reasonable specified time, thereby seeking to establish, if the notice was not complied with, that there had been such delay as to disentitle the party at fault from specific performance and to justify rescission of the contract." 1. A contractual term that specifies the period of notice required for a notice to complete is designed to avoid disputation about what is "reasonable notice". The object of a notice to complete could not be served by a term that does not specify a minimum period of notice. 2. No submission has been made that, independently of special condition 37, the time allowed by the defendants' notice to complete was reasonable and, so, sufficient to make time of the essence of the contract. 3. The time specified by the notice to complete for completion passed without completion. 4. Acting upon an assumption that the notice to complete was valid, the defendants on 19 July 2021 served a formal "Notice of Termination of Contract" addressed to the plaintiff. So far as is material, it provided as follows: "As a result of your default under the contract and the notice to complete dated 2 July 2021 making time of the essence for completion of the contract, we give you notice that the contract is terminated and is entirely at an end. The vendor will retain all monies paid by you pursuant to the contract and take action for recovery of damages resulting from your default." 1. That notice appears, in form, to have been served in purported exercise of a contractual right of termination conferred by clause 9 of the contract: "If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice …" 1. The plaintiff's solicitors responded to the defendants' notice of termination by a letter dated 20 August 2021 which, so far as is material, was in the following terms (addressed to the defendants' solicitors): "Notice to Completion Your Notice to Complete issued on 2 July 2021 was invalid. This is because it did not provide the contractually agreed notice period for completion and, in any event, the notice period stipulated in it was not reasonable (we also note that these reasons are not intended to be exhaustive and we reserve our client's rights to raise additional matters). In this regard, we note the following: (a) Special Condition 37 of the Contract provided that the Notice shall require completion 'within a period of at least fourteen days after service of the notice …'; (b) the Notice to Complete served on 2 July 2021 required completion on or before for 3.30pm Friday 16 July 2021; (c) as you will be aware, the day on which notice is served is excluded from computation of the fourteen days referred to. Your Notice to Complete only allowed thirteen clear days for our client to complete; (d) your Notice to Complete accordingly failed to provide the agreed notice as per special condition 37 of the Contract; and (e) furthermore, the period stipulated in the notice did not, in all of the circumstances, provide our client with a reasonable time for completion and it was, accordingly, invalid. See for example Velik v Steningold [2013] NSWCA 303 at [60]-[72] per Sackville AJA. Termination Having regard to the matters set out above, it follows that your clients were not entitled to terminate the Contract and, accordingly, the purported termination as set out in your letter dated 19 July 2021 was a wrongful repudiation of the Contract. In these circumstances, our client hereby elects to terminate the Contract on the basis of your clients' wrongful repudiation. In addition, we require your clients to return the deposit, being $2,050,000, to our client within fourteen days from the date of this letter. A party that terminates a contract based on the other party's breach of contract, is entitled to a return of the deposit pursuant to restitutionary principles, or as loss and damage flowing from the breach of contract. A vendor is not entitled to retain a deposit in circumstances where the vendor has wrongfully repudiated the sale agreement. We also observe that the deposit in the present case is 20 percent of the purchase price of the property and, as such, is a penalty in any event. In the event that your clients do not refund the deposit within the time period stipulated above, our client will commence proceedings against your clients seeking the recovery of the deposit, without further notice to you. In the event that your client does so, it will seek interest and costs in addition to the deposit sum. As noted above, nothing in this letter is intended to limit the matters that our client might raise in due course. All of our client's rights are reserved." 1. On 23 August 2021 the defendants' solicitors responded to the plaintiff's termination letter in a letter of that date in the following terms, so far as is material: "We refer to your letter dated 20 August 2021. We are instructed to reject the assertions made in your letter. The Notice to Complete dated 20 July 2021 is valid. The Notice of Termination dated 19 July 2021 is valid. The contract between the parties is at an end." 1. The evidence adduced at the hearing of these proceedings included an affidavit from a responsible officer of the corporate defendant recording the following: "[84] The Seller [the defendants] received no protest by the Buyer [the plaintiff] until 20 August 2021 that the time to complete the Contract for Sale provided by the Notice to Complete given by the Seller on 2 July 2021 … namely by 16 July 2021, was less than fourteen days after service of the notice and therefore too short. [85] Had the Seller, at any time before 19 July 2021, received a protest by the Buyer that the time to complete the Contract for Sale provided by the Notice to Complete given by the Seller on 2 July 2021 …, namely by 16 July 2021, was less than fourteen days after service of the notice and therefore too short, the Seller would either have withdrawn the Notice to Complete, would not have taken any action in reliance on it, or would have issued a fresh Notice to Complete requiring completion within fourteen days after service of the fresh notice. [86] The Seller's purported termination of the Contract for Sale on 19 July 2021, in reliance on the Notice to Complete given by the Seller on 2 July 2021 … was done in the bona fide belief that the time period to complete the Contract for Sale provided by the Notice to Complete (by 16 July 2021) was at least as long as was required by the Contract for Sale, namely fourteen days after service of the notice. [87] If the Seller's belief referred to in the previous paragraph of this affidavit was incorrect, it and the Seller's purported termination of the Contract for Sale on 19 July 2021 in reliance on the belief both were the result of the bona fide mistake and were not the result of an intention on the part of the Seller not to perform the Contract for Sale according to its terms." 1. Paragraphs 85, 86 and 87 of the affidavit were admitted into evidence subject to an order under section 136 of the Evidence Act 1995 NSW that they were to be taken not as evidence of the truth of facts stated but is evidence of the state of belief of the deponent, if relevant. 2. The Court having concluded that their notice to complete was invalid, the defendants invite the Court to proceed on the basis that, in purporting to terminate the contract on 19 July 2021 based upon a mistaken construction of special condition 37 of the contract, they did not intend to repudiate their obligations under the contract. 3. They remind the Court that a finding of repudiation is a serious matter, not to be lightly found or inferred: Shevill v Builders Licensing Board (1982) 149 CLR 620 at 633; Carter v Mehmet [2021] NSWCA 286 at [157]. 4. They rely upon the observations of Stephen, Mason and Jacobs JJ in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 432: "No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of the contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. As Pearson LJ observed in Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 at 734: 'In the last resort, if the parties cannot agree, the true construction will have to be determined by the Court. A party should not too readily be found to have refused to perform the agreement by contentious observations in the course of discussions or arguments …' In this case the appellant acted on its view of the contract without realising that the respondents were insisting upon a different view until such time as they purported to resend. It was not a case in which any attempt was made to persuade the appellant of the error of its ways or indeed to give it any opportunity to reconsider its position in the light of an assertion of the correct interpretation. There is therefore no basis on which one can infer that the appellant was persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement." 1. The defendants rely upon the absence of any warning by the plaintiff of the invalidity of the notice to complete and, as they put it, the consequent failure of the plaintiff to allow them an opportunity to reconsider their position in light of a correct construction of special condition 37. 2. They have drawn to the Court's attention the observations of Macfarlan JA (with whom Gleeson and Payne JJA agreed) in Aslan v Stepanoski [2022] NSWCA 24 at [67]: "…, bona fide insistence on a mistaken interpretation of a contract will not, without more, constitute repudiation (see DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431-432; [1978] HCA 12; Australia City Properties Management Pty Ltd v The Owners– Strata Plan No 65111 [2021] NSWCA 162 at [307]; Carter v Mehmet [2021] NSWCA 286 at [163] ). A significant factor in this context is whether the other party has attempted to persuade the allegedly repudiating party that it is taking an erroneous position. In the absence of that occurring, it will be difficult to conclude that the first party was "persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement" (DTR ibid). No such attempt was made by the Owners in the present case." 1. There are two impediments in the way of acceptance of the defendants' submissions on the question of repudiation. 2. First, a finding of repudiation is based, not upon an inquiry into the subjective state of mind of the party in default, but upon an objective assessment of whether the conduct of that party conveys to the other party an inability or unwillingness to perform its obligations under the contract or to fulfil those obligations only in a manner substantially inconsistent with its obligations and not in any other way: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 647. 3. Secondly, the letter of the defendants' solicitors dated 23 August 2021 was expressed in such emphatic terms as to invite a finding that, had the defendants earlier been advised of their "mistake", they would have remained steadfast to the view that their notice to complete was valid. At no time short of these proceedings did they demonstrate a preparedness to reconsider their position. Their primary submission at the hearing of the proceedings was that the notice to complete was valid. They remained unconvinced of any error. In these circumstances, viewing the evidence objectively, the defendants must be taken to have repudiated their obligations under the contract. 4. Accordingly, I find that the defendants' wrongful termination of the contract on 19 July 2021, for the plaintiff's non-compliance with a notice to complete which was invalid, constituted a repudiation by the defendants of their obligations under the contract (Proctor v Chahl [2008] NSWSC 1252 at [95]) and that the contract came to an end when the plaintiff on 20 August 2021 accepted that repudiatory conduct as putting an end to the contract. 5. That said, in the absence of any claim for consequential relief other than the claim for a return of "the deposit" (which is to be dismissed), there is no utility in making declarations as to the circumstances in which the contract came to an end and, for that reason, I decline to do so. CONCLUSION 1. Subject to allowing the parties an opportunity to be heard as to the form of the orders, and costs, I propose to make orders to the following effect in disposition of the proceedings: 1. DECLARE that the defendants are absolutely entitled to retain the sum of $2,050,000 referred to in the Option Agreement (as amended) as "the Call Option Fee" and in "the contract" created upon exercise of their Put Option as "the deposit". 2. ORDER that the plaintiff's statement of claim otherwise be dismissed. 1. Although the defendants have not filed a cross claim it is appropriate to make a declaration in their favour – the reverse of declaratory relief sought by the plaintiff – in order to make plain the basis upon which the plaintiff's statement of claim is to be dismissed. ****** Amendments 20 December 2022 - Coversheet amendment 03 February 2023 - At [86] the word "declined" is amended to read "decline". 29 July 2024 - On cover sheet, the ACN number for J&Z Holding (Aust) Pty Ltd amended to read "620 110 287" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 July 2024