Reported Decision : (2003) NSW ConvR 56-048 New South Wales Court of Appeal CITATION : Tanwar v Cauchi [2002] NSWCA 35 FILE NUMBER(S) : CA 40610/01 HEARING DATE(S) : 6 February 2002 JUDGMENT DATE : 15 March 2002 Tanwar Enterprises Pty Limited PARTIES : v Joseph Cauchi & Ors JUDGMENT OF : Handley JA at 1; Beazley JA at 39; Mathews AJA at 40 LOWER COURT JURISDICTION : Supreme Court - Equity Division LOWER COURT ED 3321/01; ED 4891/00 FILE NUMBER(S) : LOWER COURT Windeyer J JUDICIAL OFFICER : COUNSEL : Appellant - D E Grieve QC/B Slowgrove Respondent - I M Wales SC SOLICITORS : Appellant - Alexander Lee & Associates Blacktown Respondent - Low Doherty & Stratford Blacktown CATCHWORDS : EQUITY - rescission - forfeiture - unconscionable conduct - exceptional circumstances LEGISLATION CITED : Conveyancing Act 1919 (NSW) Legione v Hateley (1983) 152 CLR 406 Stern v McArthur (1988) 165 CLR 489 CASES CITED: Steedman v Drinkle [1916] 1 AC 275 Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 Ciavarella v Balmer (1983) 153 CLR 438 DECISION : Appeal dismissed with costs IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40610/01 ED 3321/01 ED 4891/00 HANDLEY JA BEAZLEY JA MATHEWS AJA 15 March 2002 TANWAR ENTERPRISES PTY LIMITED v JOSEPH CAUCI & ORS EQUITY – rescission – forfeiture – unconscionable conduct – exceptional circumstances The vendors entered into contracts for the sale of land to the appellant for $4,502,526 with completion to take place on 28 February 2000. The date for completion was later extended to August 2000. Completion did not then take place because the purchaser had difficulties with some of its finance. The vendors purported to rescind but their right to do so was disputed by the purchaser. The dispute was settled when deeds were executed on 3 June 2001 which extended the completion date to 25 June with time of the essence. Completion did not occur on this date, because the purchaser did not have all its finance available. After exchange the purchaser obtained development consents for sub-divisions which could be availed of by any owner. Pending completion the purchaser had made substantial payments to the vendors on account of the purchase price. The vendors' solicitor rescinded the contracts on 26 June although he and the vendors knew that the balance of the funds were then available. The trial Judge found that the failure of funds to arrive in time for settlement on 25 June 2001 was not due to what equity would consider accident and refused relief against forfeiture because the vendors had not acted unconscionably in terminating the contracts. The appellant submitted that the property had increased in value as a result of the development consents and its other expenditure on the property. It also submitted that the delay of one day was trivial in the circumstances, and it was unconscionable for the vendors to take advantage of that breach to capture for themselves the increase in the value of the land, and to forfeit the part payments in addition to the 10% deposit. HELD : dismissing the appeal: (1) The value of the land would have increased as a result of the development approvals. (2) The appellant had a clear right to relief from forfeiture in respect of part payments of the purchase price in excess of the conventional 10% deposit (Steedman v Drinkle [1916] 1 AC 275, 279-80). (3) Allegations of unconscionable conduct against vendors must be evaluated in the light of the entire transactional history and the whole of the surrounding circumstances. (4) Ciavarella v Balmer (1983) 153 CLR 438 established that exceptional circumstances involving unconscionable conduct by the vendor must be established before relief against forfeiture can be granted after an otherwise valid rescission. (5) There was nothing to suggest that the vendors' rescissions were precipitate, or were effected in order to obtain the benefit of an unmerited windfall at the expense of the purchaser. (6) Unconscionable conduct by the vendors had not been established. Legione v Hateley (1983) 152 CLR 406 and Stern v McArthur (1988) 165 CLR 489 distinguished. ORDERS Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40610/01 ED 3321/01 ED 4891/00 HANDLEY JA BEAZLEY JA MATHEWS AJA 15 March 2002 TANWAR ENTERPRISES PTY LIMITED v JOSEPH CAUCI & ORS Judgment 1 HANDLEY JA: The appellant was the purchaser under three related contracts dated 19 October 1999 for the sale of land at Glenwood near Blacktown for a total price of $4,502,526.90. It had appealed from the dismissal by Windeyer J of its suit for specific performance, or in the alternative for the return of its deposit. The substantial issues concern its claim to be relieved from the forfeiture of its equitable interests on rescission, in accordance with the principles considered in Legione v Hateley (1983) 152 CLR 406 and Stern v McArthur (1988) 165 CLR 489. 2 The facts are within a small compass and are not in dispute. The contracts originally provided for completion on 28 February 2000 but, by deeds dated 5 November 1999, the date for settlement was extended to August 2000. Completion did not occur at that time because the purchaser had difficulties with some of its finance. The deeds of 5 November 1999 are not in evidence, and the precise date on which completion should then have occurred is not known. On 20 August 2000 the vendors purported to terminate the contracts for failure to complete, but the purchaser claimed that the terminations were invalid, and that the contracts remained on foot. 3 Protracted negotiations followed which culminated in the execution of further deeds on 5 June 2001. These recited some of the history and provided in cl 2 for completion to take place by 4 pm on Monday 25 June, "time of the essence". Clause 6 was as follows: "The Purchaser acknowledges that the contents of this Deed are a final arrangement to complete the sale of the Property. If the Purchaser does not complete the sale in accordance with the provisions of this Deed the Purchaser will: (a) forfeit all monies paid pursuant to the Contract for Sale and acknowledges the Vendor's rights under clause 9 of the Contract for Sale". 4 Completion did not take place by 4 pm on 25 June because the purchaser's second mortgage finance, which was coming from Singapore, did not arrive in time. The funds in question were paid into the trust account of Corrs Chambers Westgarth at the Westpac branch, 273 George Street, Sydney some time before 10.56 am on 26 June (blue AB 1/54). 5 On the morning of the 26th the purchaser's solicitor sent a letter by facsimile to the vendors' solicitor rehearsing the events of the day before, and stating that he was making preparations to settle at 3.30 pm that afternoon. The only information in the letter about the balance of the funds required for settlement was the statement that the solicitor from Messrs Corrs Chambers Westgarth had advised Mr Doherty, the vendors' solicitor, the previous afternoon that the funds had arrived in a holding bank and would be available the next day. It is not clear whether Mr Lee, the solicitor for the purchaser, knew when he sent this letter that the funds had actually reached the trust account of Messrs Corrs Chambers Westgarth. 6 Mr Doherty replied by a facsimile letter, received in Mr Lee's office at 11.35, which stated that he had received instructions to terminate the contracts (1/46). Some time during that morning, and probably after this facsimile was received, Mr Doherty was told that the second mortgage funds were then available (black 35). 7 Mr Doherty met with the vendors between 9 and 10 that morning and received instructions to terminate the contracts. They did not know that the funds had reached Corrs Chambers Westgarth and this may not have occurred until later. When Mr Doherty learned later that morning that the funds had been received, he informed his clients who confirmed their instructions. He sent notices of termination to the solicitors for the purchaser early that afternoon (35). 8 The purchaser commenced proceedings for injunctive and other relief on 27 June and obtained leave to serve short notice. The proceedings came before a judge on 2 July. The plaintiff obtained interlocutory relief and directions were given for an expedited early final hearing. The plaintiff was content with the affidavit evidence that had been filed on its behalf, and there were no directions for any further affidavits in chief. The defendants were ordered to file their affidavits by 13 July, with affidavits from the plaintiff in reply by 20 July. The hearing was subsequently fixed for 2 August. 9 Windeyer J held that the failure of the funds to arrive from Singapore in time for settlement on 25 June was not the result of what equity would regard as accident. He then considered whether the vendors had acted unconscionably in exercising their rights of termination under the deeds of 5 June. He said although it was likely that the value of the land had increased there was no evidence of this, and there was no evidence of the costs incurred by the purchaser in obtaining the development consents for the sub-division of the land on 18 February 2000. He continued: "… it seems to me that the statement [in the deeds] that on failure to complete the vendor will forfeit all monies paid makes the position of the vendor almost unassailable. With that provision and having regard to the date of the contract, the original date of 28 February 2000 provided by the contract, the failure to complete, probably in August 2000, because funds were not available, and the bargaining which took place to fix the time for completion of 3 weeks, I do not think it could be said it was unconscionable to exercise clear contractual rights of termination and forfeiture or in the terms of relief in the case of accident, that it would be inequitable to allow the loss to fall on the plaintiff". 10 Turning to the claim for relief under s 55 (2A) of the Conveyancing Act, the Judge said that no real argument had been addressed to this issue, but that it had to be shown that it would be unjust and inequitable to allow the vendors to retain the deposits. He considered that no separate question arose and dismissed all claims for relief. 11 Ground 13 of the appellant's amended notice of appeal alleged error by the trial Judge in rejecting paragraph 7 of the affidavit of Ramesh Tanwar, sworn on 2 August 2001, and the valuation report of Landmark White, dated 5 March 2001. The affidavit of 2 August was filed in court at the start of the hearing that day, outside the time limit for evidence in reply fixed on 2 July. Paragraph 7, which was objected to and rejected, contained a list of what were said to be the plaintiff 's expenses in connection with the development of the properties. The amounts for each of the 17 items were stated to be approximate and were rounded off to the nearest $1,000 or $10,000 as the case may be. The accounts were neither exhibited nor annexed. The paragraph was bad in form and inadmissible as evidence of the contents of the accounts. 12 The development consents for the subdivisions obtained by the purchaser operated in rem and would probably have increased the value of the land. Most of the other items of expenditure appear to have been personal to the purchaser. They may well have increased the value of the land to the purchaser but not to anyone else. Further evidence may have established otherwise but there was none. It is not clear that the equitable principles invoked by the appellant are attracted by expenditures which would not accrue as windfall gains to a rescinding vendor. The bulk, if not all, of this expenditure must have been incurred before the deeds of 5 June 2001. There was no evidence that the vendors were aware of all this expenditure and its effect, if any, on value. The only vendor who gave evidence was not cross-examined on this issue. The vendors or their solicitor would have known that expenses would have been incurred in stamping the contract, obtaining the development consents, and in surveying the property. In any event it seems to me that it is the increase in value rather than the cost as such which is relevant in this type of case. 13 The defendants were well within their rights in objecting to this evidence and it was properly rejected. Mr Grieve QC, who appeared for the appellant but had not appeared below, submitted that the Judge should have invited counsel for the defendants to seek an adjournment in order to meet this evidence, but the Judge was not obliged to take this course. The onus rather was on senior counsel for the plaintiff to seek an adjournment to put this evidence into admissible form if he thought this was necessary in the interests of his client. No such application was made. 14 Counsel for the plaintiff later tendered the valuation report dated 5 March 2001 of Landmark White (NSW) Pty Limited. This was not supported by an affidavit of the valuer, and the document was not admissible without further proof. It must have been in the hands of the plaintiff for many months, but there was no explanation for its late production. It was rightly rejected and once again senior counsel for the plaintiff did not seek an adjournment to enable this evidence to be put into admissible form. 15 This ground of appeal fails. 16 Mr Grieve submitted that the Court should infer that the land had increased in value as a result of the development consents and general market forces, and that the cost to the purchaser of obtaining these approvals would have been substantial. I would accept this submission. He then drew attention to the relevant decisions of the High Court, and in particular to the statement of principle by Mason and Deane JJ in Legione (1983) 152 CLR 406, 449. In their view relief from forfeiture after a contract of sale had been validly rescinded depends on proof of unconscionable conduct by the vendor. They identified the following questions which would normally arise in considering whether this had been established: "1. did the conduct of the vendor contribute to the purchaser's breach? 2. was the purchaser's breach (a) trivial or slight, and (b) inadvertent and not wilful? 3. what damage or other adverse consequences did the vendor suffer by reason of the purchaser's breach? 4. what is the magnitude of the purchaser's loss and the vendor's gain if the forfeiture is to stand? 5. is specific performance, with or without compensation, an adequate safeguard for the vendor". 17 Mr Grieve submitted that the facts brought the present case within paragraphs 2 to 5 above, and established an entitlement to relief. His submission on para 4 was that the loss to the purchaser and the gain to the vendors if the forfeiture were to stand was in the order of $2 m. representing the amounts paid to the vendors in addition to the deposit, and the increase in the value of the land as a result of the development consents. 18 There is however no evidence of the increase in value due to the consents and Mr Wales SC, who appeared for the vendors, said that during the trial he had acknowledged the purchaser's entitlement to relief against forfeiture of the sums paid to the vendors in addition to the deposits, and he maintained that acknowledgment in this Court (written submissions para 7). 19 The amounts in question which total $397,473.40 are made up of part payments of the purchase price made to the first respondent on 30 June 2000 and to the first, second and third respondents on 20 July 2000. Mr Wales' acknowledgment did not extend to amounts totalling $80,000 paid to the first and fourth respondents on 20 July 2000 because these were not part payments of the purchase price, but amounts paid in consideration of extensions of time granted by those vendors. Rescission of the contracts will not occasion any failure of consideration in respect of these payments. In my judgment Mr Wales' concession was properly made. The decisions in Steedman v Drinkle [1916] 1 AC 275, 279-80 and Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319, as this was explained in the later decision, establish a clear right to relief from forfeiture in respect of part payments of the purchase price in excess of the conventional 10% deposit. 20 Mr Grieve submitted that the vendors were not entitled to rely on the purchaser's right to relief from the forfeiture of the part payments because they had not tendered these amounts to the purchaser. There is nothing in this point. This litigation remains on foot, the purchaser continues to maintain a right to specific performance, and the vendors are not seeking equitable relief. 21 The purchaser's breach was said to be trivial and not wilful because the deeds of 5 June 2001 made the purchaser's earlier defaults irrelevant. The case had to be approached, it was submitted, as if 25 June 2001 had been stipulated as the date for completion in the original contracts. The delay of one day was clearly trivial when the purchaser had been allowed all the time between 19 October 1999 and 25 June 2001 to complete. 22 I am unable to accept these submissions. The deeds of 5 June recited much of the earlier history anyway, but apart from that equity looks to substance rather than form. See Meagher Gummow and Lehane "Equity Doctrine and Remedies" 3rd ed p 89. Allegations of unconscionable conduct against vendors cannot be considered on a narrow or artificial view of the facts. The conduct of the parties must be evaluated in the light of the complete history of the transaction and the whole of the surrounding circumstances. 23 The purchaser's breach on 25 June, evaluated in this light, cannot be characterised as trivial. On 5 June the parties, by deed, fixed 25 June as the date for completion, with time to be of the essence. The date for completion was not fixed unilaterally by a notice to complete, but consensually. The date was fixed and agreed in circumstances where some 10 months earlier the purchaser had failed to complete in breach of contract and the vendors had purported to rescind. The validity of that rescission was disputed and the Court knows nothing of the merits. That dispute was compromised by the deeds of 5 June to give the purchaser a last chance ("final arrangement") to complete on a time of the essence basis. The purchaser failed to do so on the day, and in that respect its failure was complete. There was a substantial shortfall in the funds required for completion. The breach was not inadvertent because the purchaser did not have all its funding in place on 5 June when it agreed to settle on 25 June on a time of the essence basis and it took a risk. 24 The facts of this case bear little resemblance to the facts in Legione (1983) 152 CLR 406 and Stern (1988) 165 CLR 489. In Legione the purchasers had gone into possession under the terms of the contract and built a house on the land. The vendors gave a valid notice to complete by 10 August 1979. The purchasers' solicitor sought an extension until 17 August and the vendors' solicitor's secretary said she thought that would be alright but would have to get instructions. There was no further communication before the vendors rescinded on 14 August. The purchaser's tender of performance the next day was refused. 25 Gibbs CJ and Murphy J held that the conversation gave rise to an equitable estoppel which prevented the vendors from treating the contract as rescinded when the tender was made (423). They also held that the purchasers were entitled to equitable relief against the forfeiture of their equitable interest as a preliminary to an order for specific performance (429). They said that important facts leading to this conclusion were that "the purchasers have erected on the land a house of considerable value and if the contract is rescinded the vendors will receive an ill-merited windfall … to enforce the legal rights of the vendors in these circumstances would be to exact a harsh and excessive penalty for a comparatively trivial breach" (429). 26 Mason and Deane JJ rejected the claim based on an equitable estoppel, but upheld the purchasers' claim for equitable relief against the forfeiture, not because it was a penalty, but because the vendors' conduct in exercising their right of rescission was unconscionable (444-6). They said at 449: "… it is only in exceptional circumstances that specific performance will be granted at the instance of a purchaser who is in breach of an essential condition. Whether the exceptional circumstances exist in the given case hinges on the existence of unconscionable conduct. It is impossible to define or describe exclusively all the situations which may give rise to unconscionable conduct on the part of a vendor in rescinding a contract for sale. Nonetheless it may be said that where the conduct of the vendor, though not creating an estoppel or waiver, has effectively caused or contributed to the purchaser's breach of contract there is ground for exercising the jurisdiction to relieve. And if it also appears that the object of the rescission is not to safeguard the vendor from adverse consequences which he may suffer as a result of the contract remaining on foot, but merely to take unconscientious advantage of the benefits which will fortuitously accrue to him on forfeiture of the purchaser's interest under the contract, there will be even stronger ground for the exercise of the jurisdiction". (emphasis supplied) 27 Brennan J, the other member of the Court, dissented. 28 The parties in Stern (1988) 165 CLR 489 had entered into a terms contract in 1969 which provided for monthly payments of purchase price and interest. The purchasers were not entitled to possession but the vendors allowed them to enter, and they had built a house on the land. They defaulted in 1977 but some payments were later made. During 1978 the vendors attempted unsuccessfully to obtain payment of the balance of the purchase price but without success. Finally in January 1979 a notice to complete was served making time of the essence and in February the vendors terminated the contract and offered to give the purchasers the benefit of any improvements they had erected on the land. 29 The High Court, by majority, Deane, Dawson and Gaudron JJ, Mason CJ and Brennan J dissenting, held that the purchasers had been entitled to relief against the forfeiture of their interest in the land. The case lacks a clear ratio because Deane and Dawson JJ found in favour of the respondent on one basis, and Gaudron J on another. Deane and Dawson JJ considered the two majority judgments in Legione, and said (526): "We do not understand there to be any significant difference between these two approaches". After referring to the joint judgment of Mason and Deane JJ they said at 526: "… a court will be reluctant to interfere with the contractual rights of parties who have chosen to make time of the essence of the contract. Circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable – or, more accurately, unconscientious – conduct. In considering whether such intervention is justified great weight will be given to the bargain which the parties have made for themselves. 'Generally speaking equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment' Shiloh Spinners Ltd v Harding [1973] AC 691, 723 per Lord Wilberforce. Nor would it remake the parties' contract simply because it transpires that as things have happened one party has made a bad bargain … it is in that sense that it is said that the circumstances must be exceptional to warrant relief in favour of a purchaser who is in breach of an essential term and that there must ordinarily be something such as fraud, mistake, accident or surprise before relief will be granted. These elements do not, however, exhaust the scope of unconscionable or unconscientious behaviour; they are referred to in this context to emphasise that a strong case must be made out to warrant departure from the general approach, which is to hold the parties to their bargain". 30 They held that as a result of subsequent events, the contract had become a security for the payment of the balance of the purchase price akin to a mortgage so that the purchasers did not have to establish "unconscionable or unconscientious behaviour of an exceptional kind" (527-8). They continued at 528: "… the contract as it was carried into effect was essentially an arrangement whereby the appellants undertook to finance the respondents' purchase upon the security of the land … there was a close and obvious parallel between it and a purchase with the aid of a mortgage … and the parties acted upon that basis. Had there been a mortgage equity would have regarded the respondents as entitled to their equity of redemption without regard to any stipulation as to time. … That being so there seems to us to be no good reason why equity should not extend a similar remedy in a transaction of such a similar character or why that similarity should not provide the justification for refusing to hold the respondents strictly to their bargain". 31 Gaudron J decided the case in favour of the purchasers, not on that ground, but because the conduct of the vendors in insisting on their strict contractual rights was unconscionable (540-1). She reviewed the judgments of Gibbs CJ and Murphy J, and of Mason and Deane JJ, in Legione and, contrary to the views of Deane and Dawson JJ (para 29), said at 538-9: "The difference between the two approaches is manifest. The approach adopted by Mason and Deane JJ concentrates on the quality of the vendor's action. The approach adopted by Gibbs CJ and Murphy J assimilates the consequences of that conduct to a penalty. If it is the conduct of the vendor that is in issue then, in my view, it is the quality of that conduct which must be evaluated, and for it and its consequences to be disregarded, it must amount to unconscionable conduct. In view of the different approaches taken in Legione that case cannot be taken to have decided that specific performance can be granted to a purchaser in breach of an essential term only if the actions of the vendor in rescinding the contract amount to unconscionable conduct". 32 It is clear therefore that the two cases lack a clear ratio which is binding on this Court. The decisions on their facts, and on facts which are indistinguishable, are of course binding and it is also clear that equitable relief will be available in Australia in circumstances where it would be refused in England. Compare Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514. 33 There is nothing in this case akin to the conduct of the vendors' solicitors in Legione which contributed to the purchasers' breach. This purchaser has not constructed permanent improvements on the land comparable to the house erected by the purchasers in that case at a cost of $35,000 (450) on land purchased for $35,000 (407). There is no evidence or suggestion in this case that the development consents have increased the value of the land by $ 4.5 m. I would infer that the subdivision, which created the lots to be retained by the vendors, had been registered, but there is no evidence that the subdivision of the balance had been. While the development consent for that subdivision would be of some value to the vendors, even if the plan had not been registered, there is no evidence that they were entitled to use the plans prepared and paid for by the purchaser. This consent might be of little value to the vendors unless and until they either had the property resurveyed in accordance with the consent and had new plans prepared, or purchased the existing plans from the purchaser. 34 There is no evidence that this was a grasping or catching rescission to obtain the benefit of an unmerited windfall at the expense of the purchaser (compare para 26). Any relevant increase in value had occurred prior to 5 June, and the vendors did not seek to capture it for their own benefit by enforcing their rescission of 20 August 2000. There is nothing to suggest that their decision to rescind on the morning of 26 June was motivated by such considerations. The vendor who gave evidence was not cross-examined on this point. 35 The joint judgment of Gibbs CJ, Mason, Wilson, Deane and Dawson JJ in Ciavarella v Balmer (1983) 153 CLR 438 provides the clearest guidance for lower courts in factual situations removed from those in Legione and Stern. The Court referred to the absence of precipitate conduct on the part of the vendor (453), the need to prove unconscionable conduct (452, 453), and the need to show exceptional circumstances before relief against forfeiture can be granted after an otherwise valid rescission (454). 36 These vendors cannot be accused of precipitate conduct, and in my judgment exceptional circumstances have not been shown. The unearned increase in the value of the land is not an exceptional circumstance. As far as land in and around Sydney is concerned it is the normal result of a deferred settlement. The actual increase in value due to the development consents is not known and, for the reasons given, uncertain. The circumstances which were held to be exceptional in Legione and Stern are not present here. 37 There are exceptional circumstances in this case but they do not assist the purchaser. In my judgment the commercial nature of the contracts, the extensions of time for completion from February until August 2000 and then to 25 June 2001, the purported terminations, the dispute, and the settlement on 5 June with an agreed peremptory date for completion 21 days later, demonstrate that the vendors were not acting unconscionably in enforcing their strict contractual rights. 38 The appeal should be dismissed with costs. 39 BEAZLEY JA: I agree with Handley JA. 40 MATHEWS AJA: I agree with Handley JA. ****** 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.