Reported Decision : (2006) NSW ConvR 56-147 New South Wales Supreme Court CITATION : Manufacturers House Pty Limited v Ashington No 147 Pty Limited [2005] NSWSC 767 HEARING DATE(S) : 25 July 2005 JUDGMENT DATE : 1 August 2005 JUDGMENT OF : Smart AJ at 1 DECISION : See para 63 CATCHWORDS : Fresh Notice to Complete not required when time extended under original notice - Rescission of contract - Forfeiture of Deposit - Deposit in excess of 10 pc constitutes penalty in absence of special circumstances LEGISLATION CITED : Conveyancing Act s 55(2A) Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 Traders Limited v Goonan (1964) 111 CLR 41 CASES CITED : Barclay v Messenger (1874) 43 Ch 449 Romanos v Pentagold Investments (2003) 217 CLR 367 Workers Trust & Merchant Bank v Dajap Investments Ltd (1993) AC 573 PARTIES : Manufacturers House Pty Limited v Ashington No 147 Pty Limited FILE NUMBER(S) : SC 3325/05 (P) D Allen COUNSEL : (D) R J Powell SC (P) Avendra Singh Strati & Kam SOLICITORS : (D) Dobes & Andrews LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION HEARING LIST SMART AJ Monday, 1 August 2005 3325/05: MANUFACTURERS HOUSE PTY LIMITED v ASHINGTON No 147 PTY LIMITED JUDGMENT 1. On 19 October 2004 Ashington No 147 Pty Limited (the defendant) entered into a contract with Manufacturers House Pty Limited (the plaintiff) for the sale of Lot 48, 141-147A King Street, Sydney being Lot 48, Strata Plan 67212 and commercial premises, for $535,000. 2. The plaintiff claims: 1. A declaration that the purported notice of termination by the defendant of the contract dated 19 October 2004 for the sale and purchase of land ("Contract") situated at Lot 48, SP 6712 … ("Land") entered between the plaintiff and the defendant is of no effect. 3. A declaration that the plaintiff is entitled to have the Contract specifically performed by the defendant … conveying the Land to the plaintiff. 5. ... a declaration that the plaintiff is entitled to the return of the deposit paid under the Contract whether in Equity or pursuant to section 55(2A) of the Conveyancing Act 1919. 10. Costs. 3. The other relief sought in the Summons was not pressed. 4. The defendant (vendor) was the deposit holder. The deposit did not have to be invested. Special provisions were made as to the deposit. Clause 45 reads: " 45 Deposi t 45.1 The deposit of 10% of the Price shall be paid as to twenty thousand seven hundred and fifty dollars ($20,750) upon the exchange of contracts and as to the balance upon the earlier of the following events:- (a) default by the purchaser in the observance or performance of any obligation hereunder which is, or the performance of which has become, essential, or (b) completion of this agreement. and the purchasers agree that they shall have no right whatsoever to terminate this agreement (whether pursuant to the conditions hereunder or otherwise) unless and until the said balance of the deposit shall have been paid and references to the deposit in condition 2 shall where the context permits include references to part of the deposit." 5. Under the contract the completion date was specified as the 120th day after the contract date. Condition 15 provides: "The parties must complete by the completion date and, if they do not, a party can serve a notice to complete if that party is otherwise entitled to complete." 6. Condition 32 provides: " 32 Notice to complete 32.1 If either party is unable or unwilling to complete before 3.30pm on the completion date the other party shall be entitled at any time after the completion date to serve a notice to complete requiring completion within a period of not less than 14 days after the date of service of the notice and making time of the essence for completion. 32.2 The parties declare that they consider such a period in a notice to complete reasonable and sufficient to make time of the essence for completion. 32.3 The party giving the notice shall be entitled by notice served on the other to withdraw it at any time but withdrawal shall not preclude the subsequent issue of a further notice to complete." 7. Condition 33 provided for the purchaser to pay interest if completion did not take place on the completion date due to the purchaser's default. 8. After letters of 7 and 15 February 2005 noting that the contractual date for completion was 17 February 2005 the vendor's solicitors again wrote to the purchaser's solicitors on 17 February 2005 stating that no arrangement had been made for settlement that day and that they were instructed to issue a notice to complete tomorrow, 18 February, 2005. 9. On 18 February 2005 the vendor's solicitors served a Notice to Complete, making time of the essence of the contract and appointing 2pm on Monday 7 March 2005 at the office of Gadens, 77 Castlereagh Street as the time and place for completion. By letter of 25 February 2005 the purchaser's solicitors advised that the purchaser may have difficulty settling the transaction by 7 March 2005. A copy of a loan approval was enclosed. 10. By letter of 28 February 2005 the vendor's solicitors wrote: "We are instructed that the vendor is prepared to extend the time under the notice to complete to Monday, 21 March 2005 upon the payment of a further deposit of $15,000 by bank cheque on or before Friday 4 March 2005. That cheque should be payable to Ashington No 147 Pty Limited and will be released to them forthwith Upon that payment, special condition 45 of the contract will be amended to read:- ' 45. Deposi t. 45.1 The deposit of 10% of the Price shall be paid as to twenty thousand seven hundred and fifty dollars ($20,750) upon the exchange of contracts, as to fifteen thousand dollars ($15,000) on or before Friday 4 March 2005 and as to the balance upon the earlier of the following events:- (a) default by the purchaser in the observance or performance of any obligation hereunder which is, or the performance of which has become, essential, or (b) completion of this agreement. and the purchasers agree that they shall have no right whatsoever to terminate this agreement (whether pursuant to the conditions hereunder or otherwise) unless and until the said balance of the deposit shall have been paid and references to the deposit in condition 2 shall where the context permits include references to part of the deposit.' " 11. The further deposit of $15,000 was reduced to $10,000: see letter of 3 March 2005 from the vendor's solicitors. 12. By letter of 21 March 2005 the vendor's solicitors wrote: "The vendor hereby extends the completion date under the notice to complete dated 18th February 2005 to 3.30 pm on Wednesday 23 March 2005." 13. By letter of 23 March 2002 the purchaser's solicitors advised the vendor's solicitors that the purchaser was "not yet in a position to complete … The delay remains one relating to the procurement of finance." There had been delays in obtaining a valuation. An extension of the notice to complete until 13 April 2005 was sought. 14. By letter of 23 March 2005 the vendor's solicitors wrote: "We are instructed that upon the payment of a further deposit of $10,000 … on or before 3.00pm on Thursday 24th March 2005 the vendor is prepared to extend the time for completion under the notice to complete until Wednesday 13th April 2005." 15. By letter of 23 March 2005 the purchaser's solicitors explained that the time limit could not be met and requested until 3.00pm on 31 March 2005. That further request was granted and $10,000 was paid on 31 March 2005. 16. By a further letter bearing date 23 March 2005 the vendor's solicitors wrote: "We are instructed that upon the payment of a further deposit of $10,000 … on or before 3.00 pm on Friday 29 April 2005 the vendor is prepared to extend the time for completion under the notice to complete until Wednesday 12th May 2005. … Upon receipt of that payment, the contract will be amended to read:- 1. the deposit on the front page shall be '$56,750' and the Balance shall be '478,250'; 2. next to the deposit on the front page delete '(10% of the price)'; 3. in clause 9.1 delete '(to a maximum of 10% of the price)'; 4. Special condition 45 be amended to read: 45. Deposit. 45.1 The deposit of fifty six thousand seven hundred and fifty dollars ($56,750) shall be paid as to twenty six thousand seven hundred and fifty dollars ($26,750) upon the exchange of contracts, as to ten thousand dollars ($10,000) on or before Friday 4 March 2005, as to ten thousand dollars ($10,000) on or before Thursday 24th March and as to ten thousand dollars ($10,000) on or before Friday 29th April 2005 and the purchasers agree that they shall have no right whatsoever to terminate this agreement (whether pursuant to the conditions hereunder or otherwise) unless and until the said balance of the deposit shall have been paid and references to the deposit in condition 2 shall where the context permits include references to part of the deposit. The purchasers further acknowledge and declare that the above instalments of the deposit are to be released forthwith to the vendor.'" 17. It may be that this letter bears an incorrect date. I say this because of what follows. 18. By letter of 13 April 2005 the vendor's solicitors wrote to the purchaser's solicitors noting that the time under the notice to complete expired that day. In response the purchaser's solicitors advised that delays continued to arise from the financier and valuer. An extension of two weeks in the settlement date was sought. 19. By letter of 26 April 2005 the vendor's solicitors noted that the notice to complete expired on 27 April 2005 and requested settlement. By letter of 27 April 2005 the purchaser's solicitors advised that its client had been forced to approach an alternative financier and requested a further extension of four weeks. Some negotiations followed. 20. By letter of 29 April 2005 the vendor's solicitors wrote: "We are instructed that upon the payment of a further deposit of $5000 … on or before … 4 May 2005 the vendor is prepared to extend the time for completion under the notice to complete until … 18 May 2005." Condition 45 was further amended. 21. The purchaser could not provide $5000 until 6 May 2005. The vendor was prepared to accept this. Its solicitor's letter of 5 May 2005 continued: "We are instructed that our client will not agree to any further extensions. If the money is not received then our clients will terminate the contract and require vacant possession." 22. By letter of 18 May 2005 the vendor's solicitors noted the notice to complete expired that day and stated "If settlement is not effected today our client will terminate the contract and require immediate vacant possession." In reply the purchaser's solicitor advised that it was still awaiting mortgage documents. An extension of two weeks was sought. 23. By letter of 18 May 2005 the vendor's solicitors wrote: "Our client will agree to extend the time under the notice to complete to 31 May 2005 (in which respect time is of the essence) but only upon the following conditions:- 1. That we receive a bank cheque from your client payable to Ashington No 147 Pty Limited by 12 noon tomorrow for $5,000. This time is not negotiable; and 2. Your confirmation that special condition 45 is amended to read:- ' 45. Deposit. 45.1 The deposit of fifty six thousand seven hundred and fifty dollars ($56,750) shall be paid as to twenty six thousand seven hundred and fifty dollars ($26,750) upon the exchange of contracts, as to ten thousand dollars ($10,000) on or before Friday 4 March 2005, as to ten thousand dollars ($10,000) on or before Thursday 24th March 2005, as to five thousand dollars ($5,000) on or before Wednesday the 6th May 2005 and as to five thousand dollars ($5,000) on or before Thursday 19th May 2005 the purchasers agree that they shall have no right whatsoever to terminate this agreement (whether pursuant to the conditions hereunder or otherwise) unless and until the said balance of the deposit shall have been paid and references to the deposit in condition 2 shall where the context permits include references to part of the deposit. The purchasers further acknowledge and declare that the above instalments of the deposit are to be released forthwith to the vendor.'" 24. The letter warned: "… if you do not contact us to make arrangements for settlement on or before 31 May 2005 the contract will be terminated after that time and our client will then take immediate steps to obtain possession of the property." $5,000 was paid 25. By letter of 30 May 2005 the purchaser's solicitors advised that it would not be in a position to settle on 31 May 2005 and that the mortgage documents were expected to be available and signed that day . An extension of time until 6 June 2005 was sought. By letter of 30 May 2005 the vendor's solicitors advised that the vendor was not prepared to grant further extensions of the time under the notice to complete and that if settlement was not effected on 31 May 2005 the vendor "will terminate the contract and require vacant possession of the premises". 26. It appears from the mortgage documents that the purchaser had arranged to borrow $440,000. This meant that the purchaser had to provide about $40,000 – from another source. This would not have inspired confidence. 27. By letter of 1 June 2005 the vendor's solicitors advised - "the vendor hereby terminates the contract dated 19 October 2004 for the sale of Lot 48 at 141-147A King Street, Sydney because of the purchaser's failure to complete the sale in accordance with a notice to complete dated 18 February 2005, the purchaser being in breach of an essential term of the contract". 28. The history set out earlier shows that the vendor exercised great forbearance towards the purchaser which could not raise the necessary finance to complete the sale in a timely way. 29. The plaintiff submitted that the defendant was not entitled to rescind the contract as at 1 June 2005 as time was not then of the essence of the contract. The plaintiff submitted that while it might have been in breach of the contract, any breaches were not such as to entitle the defendant to rescind. 30. The plaintiff further submitted that after the notice to complete had been served on 18 February 2005 and prior to 7 March 2005, the last day fixed for completion the parties entered into negotiations and extended "the time under the notice to complete to 21 March 2005 upon payment of an additional $10,000 by way of deposit to be released to the vendor forthwith. There was a consequential amendment to Condition 45. 31. The plaintiff relied on Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 which involved a building contract containing a provision that the works were to be completed by a specified date or within any extended time fixed under the contractual conditions and the architect certified in writing that in his opinion the same ought reasonably to have been completed. If the works failed to be so completed the builder had to pay the owner liquidated damages (calculated at a nominated rate) for the period during which the works remained incomplete. 32. Fullagar J, with whom the other justices agreed, said at 348-349 (omitting citations): "Where a contract contains a promise to do a particular thing on or before a specified day, time may or may not be of the essence of the promise. If time is of the essence, and the promise is not performed on the day, the promisee is entitled to rescind the contract, but he may elect not to exercise this right, and an election will be inferred from any conduct which is consistent only with the continued existence of the contract. If time is not of the essence of the promise, the promisee is not entitled to rescind for non-performance on the day. If either (a) time is not originally of the essence, or (b) time being originally of the essence, the right to rescind for non-performance on the day is lost by election the promisee can, generally speaking, only rescind after he has given a notice requiring performance within a specified reasonable time and after non-compliance with that notice." 33. Time was not originally of the essence but it was made of the essence on service of the notice to complete. 34. The plaintiff submitted that by agreeing to the date for completion being extended from 7 to 21 March 2005 the defendant had elected to affirm the continued existence of the contract. 35. At 349 Fullagar J said: "… the effect of the builder's election not to rescind was to leave it open to the building owner to remedy his breach. If he did remedy it, the builder would be bound to accept the late performance, though entitled, of course, to sue for any damage suffered by him through the delay." 36. Fullagar J at 349 pointed out that a promise even if essential to begin with (and I would add if made essential) may become non essential by reason of the election of the promisee. 37. The true effect of what was done by the parties as evinced by the correspondence was to extend by agreement the date by which completion was to take place. The amended date was of the essence of the agreement. That is permissible. It might be compared with a provision in a contract which states that the date of completion specified in the contract is of the essence of the contract. It could not be suggested that the parties could not, by agreement, extend the date for completion and provide that the extended date was of the essence of the contract. 38. The position does not differ in substance where the mechanism of a notice to complete is used to make time of the essence and the parties agree to extend the completion date but treat completion by the extended date as being of the essence of the contract. That is the effect of the correspondence. 39. The plaintiff correctly submitted that service of a Notice to Complete does not change the terms of the contract. It is a mechanism. Non-compliance with the requirements of a notice to complete fixing a reasonable time for completion evidences a fundamental breach or renunciation of the contract. See Ciavarella v Balmer (1983) 153 CLR at 446. 40. Hitherto I have dealt specifically with the extension of the date for completion from 7 March 2005 to 21 March 2005, but similar considerations apply to the subsequent extensions. The correspondence as to the extensions prior to that of 18 May 2005 make it reasonably clear that the completion date under the notice to complete which made time of the essence is being extended. That does not mean that time is no longer of the essence. At the request of the plaintiff the date for completion has been extended to a later agreed date. The letter of 18 May 2005 from the vendor's solicitors extending the time under the notice to complete to 31 May 2005 specifically records that time is of the essence. 41. The plaintiff relied upon the observations of Kitto J in Tropical Traders Limited v Goonan (1964) 111 CLR 41 at 55 (omitting citations: "Time being of the essence the appellant became entitled, as soon as 6th January 1963 had passed, to elect for or against rescinding the contract. Any act done by it and consistent only with the continuance of the contract on foot the law would hold to constitute an election against rescinding; and an election once made could not be retracted. But the appellant was not bound to elect at once. It might keep the question open, so long as it did nothing to affirm the contract and so long as the respondents' position was not prejudiced in consequence of the delay. Clough v London & North Western Railway Co. By telling the respondents it would not rescind before Monday, 14th January, and that they would have to pay £50 for the additional accommodation to cover interest, costs and expenses, the appellant did no more than promise that it would not elect to rescind the contract before 14th January and that if the £17,500 and the additional £50 should be paid before that date the contract would stand affirmed. In the language of Fry L.J. in Howe v Smith ' this was not a stipulation postponing the time for completion generally, but merely limiting the exercise of a consequential power.' " 42. At 53 Kitto J referred with evident approval to the approach taken by Jessel MR in Barclay v Messenger (1874) 43 Ch 449 in which he held "a mere extension of time, and nothing more is only a waiver to the extent of substituting the extended time for the original time, and not an utter destruction of the essential character of the time." Taylor J and Menzies J agreed with Kitto J, with Taylor J expressing separate reasons on a point that is not presently material. I do not think that the payment of further moneys by way of deposit makes any difference. These were moneys which had to be paid on completion. 43. All extensions of time were agreed and in the correspondence the purchaser's solicitors accepted that the purchaser was being granted an indulgence for which they were grateful. 44. I do not accept the contention that as at 31 May 2005 time was not of the essence and that a fresh notice to complete had to be served. I do not agree that the notice to complete issued on 18 February 2005 was "dead" once the time for completion was extended from 7 to 21 March 2005. 45. I am conscious that the extensions of time covered the period from 7 March-31 May 2005. It is not uncommon for vendors to extend for short periods the date fixed for completion in notices to complete. I would not wish to place hurdles in the way of vendors granting such extensions by holding that a fresh notice to complete had to be given. The vendor should not be prejudiced because it was prepared to grant so many extensions. On each occasion a definite date was agreed for completion. 46. In my opinion the defendant validly rescinded the contract by its letter of 1 June 2005. Relief Against Forfeiture of Deposit 47. The defendant sought relief against forfeiture of the whole of the deposit paid, that is $56,750. Alternatively it sought the repayment of $3,250 being the amount by which the deposit paid exceeded $53,500 being 10 per cent of the purchase price on the ground that this was a penalty. 48. The plaintiff's application for the return of the deposit was primarily based on s 55(2A) of the Conveyancing Act: "In every case where the court refuses to grant specific performance of a contract, or in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon." 49. The plaintiff relied on these matters in support of its application (a) Time was not initially of the essence of this contract (b) there were several extensions of time – about seven in all (c) the letters agreeing to the extension (except that of 18 May 2005) did not expressly state that time was of the essence, they referred to the time to complete being extended. In such circumstances it was not unreasonable for the plaintiff to take the view that time was no longer of the essence (d) the purchaser was not totally unable to complete the contract; the plaintiff intended to complete the contract and made substantial efforts to obtain finance (e) a deposit of more than 10 per cent of the purchase price was paid (f) the unreasonable conduct of the vendor in refusing to grant a further extension of time after mortgage finance had been approved and the mortgages executed. Only a short period was required to complete. 50. It was expressly stated in the letter of 18 May 2005 from the vendor's solicitors that no further extension of time would be granted. The vendor had exhibited a great degree of patience and tolerance in granting the seven extensions of time to 31 May 2005. There was no unconscionable conduct on the vendor's part and there are no circumstances surrounding the contract or arising out of the contract or the subsequent events which would justify an order for the return of a deposit of 10 per cent. I was referred to Romanos v Pentagold Investments (2003) 217 CLR 367 at 376. 51. The prime reason for the failure of the purchaser to complete was its inability to raise enough finance over many months. The contract date was 19 October 2004 and the purchaser had until shortly prior to 7 March 2005 to obtain finance. The purchaser was unable to raise money in the prime money market, that is from first tier lenders. It resorted to the sub-prime market and second (if not third) tier lenders. From the outset there was a considerable risk that it would not be able to raise finance and that proved to be the case. 52. The plaintiff has established no case for the return of a deposit of 10 per cent either in equity or pursuant to s 55(2A) of the Conveyancing Act. 53. As to the amount of $3,250 being the amount by which deposit moneys exceeded 10 per cent the vendor accepted the Court had power to order the return of the excess of $3,250 but submitted that it should not do so. The vendor did not develop that submission or make any other submission on that point. 54. The purchaser relied on the decision of the Privy Council in Workers Trust& Merchant Bank Ltd v Dojap Investments Ltd (1993) AC 573. The contract for the sale of land provided for a deposit of 25 per cent of the purchase price with payment of the balance within 14 days and that the deposit would be forfeited to the bank if the purchaser failed to comply with its contractual obligations, time being of the essence. The purchaser failed to complete in time and the bank rescinded the contract and forfeited the deposit. It was not unusual in Jamaica for banks selling property at auction to require deposits of between 15 and 50 per cent. The bank fixed the deposit at 25 per cent. 55. In delivering the judgment of the Board, Lord Browne-Wilkinson said at 578-579: "In general, a contractual provision which requires one party in the event of his breach of contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10 per cent. of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract. … Ever since the decision in Howe v Smith [1884] , the nature of such a deposit has been settled in English law. Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser's failure to complete in accordance with the terms of the contract the deposit is forfeit, equity having no power to relieve against such forfeiture. However, the special treatment afforded to deposits is plainly capable of being abused if the parties to a contract, by attaching the label 'deposit' to any penalty could escape the general rule which renders penalties unenforceable. There are two authorities which indicate that this cannot be done." and at 579: "It is not possible for the parties to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as earnest money." 56. At 580 his Lordship said: "In order to be reasonable a true deposit must be objectively operating as 'earnest money' and not as a penalty." 57. His Lordship pointed out that the practice of a limited class of vendors cannot determine the reasonableness of a deposit. At 580 he said: "… the correct approach is to start from the position that, without logic, but by long continued usage both in the United Kingdom and formerly in Jamaica, the customary deposit has been 10 per cent. A vendor who seeks to obtain a larger amount by way of forfeitable deposit must show special circumstances which justify such a deposit." 58. In New South Wales the customary deposit has by long continued usage been 10 per cent. There have been some instances where as a result of negotiations between the parties the deposit has been 5 per cent. A deposit above 10 per cent in a contract for the sale of land is very rare. 59. In the present case there are no special circumstances which would justify a deposit in excess of 10 per cent of the purchase price. None were suggested in argument. I do not regard the amounts paid for extensions of time to complete as constituting special circumstances. 60. Although I am not bound to follow Workers Trust I have found its reasoning persuasive and I intend to apply the principles which it states. 61. I propose to order that the defendant repay to the plaintiff the sum of $3,250. 62. As to costs the defendant has succeeded on the major points argued but it opposed repayment of $3,250. I think that the correct order is that the plaintiff pay three-quarters of the costs of the defendant of these proceedings. 63. I make the following orders: 1. Order that the defendant repay the plaintiff the sum of $3,250; this sum to be set off against the plaintiff's liability for the costs of the defendant. 2. Otherwise summons dismissed. 3. Order that the plaintiff pay three-quarters of the costs of the defendant of these proceedings. ********** 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.