New South Wales Supreme Court CITATION : Melic Pty Ltd v Lainson [2005] NSWSC 711 HEARING DATE(S) : 6 & 28 June 2005 JUDGMENT DATE : 14 July 2005 JURISDICTION : Equity JUDGMENT OF : Hamilton J DECISION : On true construction of contract purchaser not entitled to terminate by reason of supervening order under s 66G of Conveyancing Act 1919. Vendor entitled to terminate for non performance and to damages. Return of deposit refused. CATCHWORDS : CONVEYANCING [76] - Relationship of vendor and purchaser - Breach of contract - Deposit - Recovery or forfeiture - Other cases - Recovery of deposit - Statutory power to order - Circumstances in which order refused - INTERPRETATION [26] - Admissibility of extrinsic evidence in relation to instruments - Matters particularly relating to contract - In general - Relevant principles - Surrounding circumstances in aid of interpretation. LEGISLATION CITED : Conveyancing Act 1919 ss 55(1), 55(2A) & 66G Austin v Sheldon [1974] 2 NSWLR 661 Brooks v NSW Grains Board (2002) Aust Contract Reports 90-155; [2002] NSWSC 1049 Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 Eighth SRJ Pty Ltd v Merity (1997) 7 BPR 15,189 CASES CITED : Havyn Pty Ltd v Webster [2005] NSWCA 182 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268 Romanos v Pentagold Investments Pty Limited (2003) 217 CLR 367 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 Melic Pty Limited (P) PARTIES : Douglas Roy Lainson (D1) Ron Dean-Willcocks and Stanley Arthur Morrison (D2) FILE NUMBER(S) : SC 1582/05 V R W Gray (P) L Ellison (D1) COUNSEL : No appearance (D2) Malcolm Jones & Company (P) G M Ellison & Co (D1) SOLICITORS : Solari Legal (D2) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J THURSDAY, 14 JULY 2005 1582/05 MELIC PTY LIMITED v DOUGLAS ROY LAINSON & ORS JUDGMENT 1 HIS HONOUR: These proceedings arise from an unusual contract for the sale of land. It is unusual because it contains a provision which it is submitted compels the purchaser to complete the contract although an order was made for the appointment of trustees for sale of the land under s 66G of the Conveyancing Act 1919 ("the CA") between exchange of contracts and the time for completion. The purchaser declined to complete and purported to terminate the contract. The vendor subsequently purported to terminate for the purchaser's non completion. 2 The following issues arise: (1) Did the contract on its true construction require the purchaser to complete the contract although trustees for sale had been appointed? (2) Was the appointment of trustees for sale a defect in title which entitled the purchaser to terminate the contract? (3) Was the vendor entitled to terminate the contract for the purchaser's non performance? (4) Is the purchaser entitled to a return of the deposit under s 55(1) of the CA or alternatively should it have an order for the return of the deposit under s 55(2A)? (5) Is the vendor entitled to damages for breach of contract? 3 Contracts were exchanged on 17 February 2004 for the sale of part of the title to 27 Tonkin Street Cronulla. The price was $1,500,000. There were at least three unusual features of the contract. First, it was not for the sale of the whole but of "one 3/8 undivided share" in the land. Secondly, despite containing the usual provision in clause 16.3, that on completion the vendor must cause the legal title to the property to pass to the purchaser, the contract also contained the following provisions: "43 Completion 43.1 Completion of this Contract is to take place on the earlier of: 43.1.1 18 months after the Contract Date; or 43.1.2 21 days after the appointment of a liquidator/trustee in respect of the Property pursuant to section 66G Conveyancing Act 1919. …… 47 Payments 47.1 Subject to clause 43.1.2, the Purchase Price shall be paid by the Purchaser to the Vendor (to be held by the Vendors Solicitor in a trust account in joint names of Vendor and Purchaser) as follows: 47.1.1 $150,000 on the Contract Date; 47.1.2 $150,000 six (6) months after the Contract Date; 47.1.3 $150,000 twelve (12) months after the Contract Date; and 47.1.4 $1,050,000 to be paid on the date of completion." Thirdly, the contract made the following provision concerning the deposit of $150,000: "To be released to the Vendor and non-refundable." 4 In these proceedings the purchaser is the plaintiff and the vendor is the first defendant. The persons described as the second defendants were the trustees for sale appointed under s 66G of the CA. They played no part in the proceedings before me. The first defendant is in this judgment simply referred to as the defendant. The following were agreed by the plaintiff and the defendant for the purposes of these proceedings to be facts, but the plaintiff did not admit them to be relevant: 1 In respect of the contract for sale dated 17 February 2004 between the parties the wording of clause 43 of the further provisions was drafted by the solicitor for the plaintiff. 2 In respect to the contract for sale dated 17 February 2004 between the parties the wording of clause 47.1 of the further provisions was drafted by the solicitor for the plaintiff. 3 In respect to the contract for sale dated 17 February 2004 between the parties the wording of clause 47.2 of the further provisions was drafted by the solicitor for the plaintiff. 4 The plaintiff at all material times was aware of the Supreme Court proceedings 2129 of 2004 from a date on or about their commencement until their conclusion. 5 The plaintiff had no objection to the consent orders in Supreme Court proceedings 2129 of 2004 which were ultimately entered into on 11 June 2004. 6 The plaintiff at all material times had the effective conduct of the defence of Douglas Roy Lainson in Supreme Court proceedings 2129 of 2004. 7 The plaintiff briefed counsel of its own choosing for the purposes of appearing for the defendant in Supreme Court proceedings 2129 of 2004. 5 The deposit of $150,000 was paid and released to the vendor. On 26 March 2004 the other co-owner of the property applied to the Court for an order under s 66G of the CA and on 11 June 2004 the Court made an order in terms of s 66G(1) appointing the trustees for sale and vesting the property in them. On 12 July 2004 the vendor forwarded the certificate of title to the trustees at their request and thereafter the trustees had themselves registered as the proprietors of the property, as shown by a search of 30 November 2004. The trustees have now sold the property for $3,500,000, of which the proportion referable to the defendant's 3/8th interest is $1,350,000, or $150,000 less than the sale price under the contract for sale between the plaintiff and the defendant. 6 The purchaser as plaintiff has claimed by its amended summons the return of the deposit under s 55(2A) of the CA. The vendor as defendant has by his cross claim claimed an entitlement to retain the deposit and damages for breach of contract. 7 Before contracts were exchanged there were negotiations between the vendor and the purchaser in which the possibility of the appointment of trustees for sale was discussed and as a result of which clause 43.1 of the contract was formulated. These exchanges have been admitted into evidence as relevant to the issue under s 55(2A) of the CA. However, issue is taken by the defendant as to whether they can be used to assist in the construction of the contract or whether that use would contravene the parol evidence rule. Issue 1 – Did the Contract require the purchaser to complete although trustees for sale appointed? 8 The answer to this question appears to me central to the result of these proceedings between the plaintiff and the defendant. It requires the resolution of the apparent conflict between the vendor's promise in clause 16.3 to pass the legal title to the property on completion with the stipulation in clause 43.1 which, in the events that occurred set the time for completion "21 days after the appointment of a liquidator/trustee in respect of the Property pursuant to section 66G Conveyancing Act 1919." 9 The first matter that arises for decision on the path to answering this question is whether this conflict raises an ambiguity or uncertainty for the purposes of the well known exception to the parol evidence rule. The locus classicus in Australia in relation to this exception is the dictum of Mason J (as his Honour then was) in Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352: "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning." 10 A different formulation was enunciated by Lord Hoffman in the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 - 913. The relevant authorities were carefully examined by Palmer J in Brooks v NSW Grains Board (2002) Aust Contract Reports 90-155; [2002] NSWSC 1049. His Honour concluded at [65] that there was not in reality any inconsistency between the approaches in Codelfa and West Bromwich. However, there is no need for me to ponder his Honour's conclusion in the present context, since the High Court has made it plain in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 that, until any conflict is determined and resolved by the High Court, "other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa." 11 Turning to the contract, the reference to a "liquidator/trustee" in clause 43.1.2 is curious, as the word liquidator is inappropriate and has no work to do in relation to s 66G, or otherwise "in respect of the Property". However, it is clear enough that the provision is to operate on the appointment of a trustee under the section. 12 Mr Ventry Gray, of counsel for the purchaser, argued that the meaning of the contract, by reason of the certainty of the terms of clause 43.1.2, was clear, so that no extrinsic evidence needed to or could be taken into account in interpreting it. There is a good deal of force in this argument. 13 However, in my view, by reason of the apparent conflict between the terms of clause 16.3 and clause 43.1.2, the language of the contract taken overall is ambiguous or susceptible of more than one meaning, so that evidence of surrounding circumstances is admissible to assist in the interpretation. It is not, of course, admissible to prove the subjective intention of the parties, as these remain foreign to the basis on which contractual provisions are construed. It may be that extrinsic evidence is not of great importance in the present case, because it is intrinsic in the contract itself that the possibility of an application under s 66G of the CA by the other co owner was recognised and contemplated as a possibility and, furthermore, the consequence of such an appointment was stipulated. But material is admissible to show that the situation went beyond the legal possibility implicit in the fact that the property was held in co ownership and in the terms of s 66G itself. The evidence does show that there was an awareness that an actual application under s 66G by the other co owner was contemplated and in the offing at the time when the contract was entered into on 17 February 2004. 14 That evidence, as noted above, was in communications made in the course of negotiations. There was a telephone conversation between the solicitors on 2 February 2004, of which Mr Ellison, the solicitor for the defendant, made a note, in part as follows: "We discussed the situation and his understanding is that if the property is to be sold (by Section 66G order) then Doug would be paid out 14 or 21 days after the liquidator [sic] was appointed by the Court ie before the actual auction." Mr Ellison confirmed in oral evidence that s 66G was discussed in terms in that conversation. Mr Chalabian, the purchaser's solicitor, agreed in oral evidence that s 66G was mentioned in that conversation. Further communications took place between the solicitors in the course of negotiating the terms of clause 43.1.2. The communications referred to in this paragraph are adverted to as showing facts known to both parties which may be taken into account in resolving any ambiguity in the contract, but for no other purpose. 15 It should be noted that I have not taken into account for this purpose any of the agreed facts mentioned in [4] above. As to facts 1 - 3, it is not necessary to resort to the contra proferentem rule in construing this contract. As to 4 – 7, these events all occurred after the contract was entered into and I have not adverted to them for the purpose of construing the contract. 16 The terms of the order made on the s 66G application included an order vesting the property in the trustees upon their appointment. This flows from the terms of s 66G itself, which stipulates such vesting as an integral part of an order under the section. From the time of the order the former owners of the property in respect of which it is made, at least in equity, lose their rights in specie to the property in favour of the trustees, even though the title at common law, at least where the property is under the Torrens system, may not shift until some time later (in this case, between July and November 2004). 17 It is fairly plain that the making of such an order constitutes a defect in title for the purposes of the carrying out of the contract. The significance in this case is that, despite the generality of clause 16.3, the parties have agreed in the specific provisions of clause 43.1.2 that completion should take place 21 days after the making of a s 66G order, despite the existence and terms of that order. It is not that there would be nothing to be conveyed or transferred at that time. Certainly a perfect title to the property could not be conveyed once the s 66G order was made and no title could be conveyed once the legal title was transferred to the trustees. But the vendor would in either case retain the right to receive a 3/8th share of the net proceeds of the sale to be effected by the trustees and this right could be transferred or assigned in some appropriate way. 18 Bearing these facts in mind, it is my conclusion that the contract on its true construction did require the purchaser to complete the contract, even though trustees for sale had been appointed. Equally, it was not entitled to object to the defect of title constituted by the s 66G order, because it was plain that the contract compelled it to complete despite the existence of that defect. What the purchaser contracted to receive was an aliquot share of the fund into which the property would be transmogrified. 19 I should add that I do not accept the argument that the contract was brought to an end by the making of the s 66G order, based on the decision of Mahoney J (as his Honour then was) in Austin v Sheldon [1974] 2 NSWLR 661. There his Honour held that the contract was terminated by a resumption between contract and conveyance. But there the contract contained no such provision as clause 43.1.2. 20 It may not matter, but to any degree that this result may be thought curious, the quite unusual nature of this contract needs to be borne in mind. There also needs to be borne in mind that this was a substantial property being bought for purposes of development. But whatever the motives behind the contract, which are far from clear on the evidence, the obligations created by it are in my view clear. Issue 2 – Was the appointment of trustees for sale a defect in title which entitled the purchaser to terminate? 21 As I have already said, the s 66G order was a defect of title. However, on the true construction of the contract, the purchaser contracted to complete, even if that defect of title arose. Furthermore, clause 10.1.9 of the contract precludes termination in respect of "anything the substance of which is disclosed in this contract." In those circumstances, the fact that a s 66G order was made did not entitle the purchaser to terminate. Issue 3 – Was the vendor entitled to terminate the contract for the purchaser's non performance? 22 The answer to this question flows from what has been said above. The purchaser was not entitled to terminate the contract, but the vendor was entitled to terminate the contract for the purchaser's non performance. Issue 4 – Is the purchaser entitled to a return of the deposit under s 55(1) or should it have an order for the return of the deposit under s 55(2A) of the CA? 23 Section 55(1) of the CA provides as follows: "55 Right of purchaser to recover deposit etc (1) In every case where specific performance of a contract would not be enforced against the purchaser by the Court by reason of a defect in the vendor's title, but the purchaser is not entitled to rescind the contract, the purchaser shall nevertheless be entitled to recover his or her deposit and any instalments of purchase money he or she has paid, and to be relieved from all liability under the contract whether at law or in equity, unless the contract discloses such defect and contains a stipulation precluding the purchaser from objecting thereto." This subsection provides for the recovery of the deposit where the purchaser is not entitled to rescind the contract, but where specific performance would not be enforced against the purchaser "by reason of a defect in the vendor's title". In my view there is no reason why specific performance would not be ordered in this case, where the possibility of the defect of title is revealed in the contract, and on the construction I have placed on it the purchaser undertakes the obligation to complete despite the existence of that defect and to receive in lieu of title a share of the proceeds of the ordered sale. But in any event, it is important to note that s 55(1) applies only where specific performance is refused "by reason of a defect in the vendor's title", not on any of the other grounds on which that relief may be refused. Even if specific performance would, if applied for, have been refused in this case, it would not have been refused by reason of a defect in the vendor's title. In these circumstances neither an entitlement to a return of the deposit nor the other entitlements mentioned in s 55(1) arise in this case. 24 So far as the discretion under s 55(2A) is concerned, this is a proceeding for the return of a deposit and the discretion conferred by s 55(2A) is available for exercise. This situation is not altered by the fact that the deposit was described in the contract as non refundable. In my view, the effect of the use of that word is to encompass an agreement between the parties that, in consideration of the contract generally, it is agreed between the parties that the deposit will not in any circumstances be refunded, whatever the fate of the contract. This cannot deprive the Court of the discretion to order the return of the deposit, since to give it that effect would be to permit it to operate as an ouster of the jurisdiction of the Court, which is not permissible. However, the fact that the parties have made an agreement to that effect is a fact to be taken into consideration by the Court in the exercise of its discretion. 25 The generality of the discretion has been emphasised and of the considerations which may be taken into account on its exercise have been discussed many times over the years: see, for example, per Street CJ in Eq (as his Honour then was) in Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268 at 272 - 273. However, recent decisions have emphasised the importance of the deposit as an earnest to bind the contract and the necessity for a finding that it would be unconscionable for the vendor to retain it in order to found an exercise of the discretion in favour of the return of the deposit: see, for example, the decisions of Young J (as his Honour then was) in Eighth SRJ Pty Ltd v Merity (1997) 7 BPR 15,189 at 15,201; of the High Court in Romanos v Pentagold Investments Pty Limited (2003) 217 CLR 367 at [27], [52] - [54]; and of the Court of Appeal in Havyn Pty Ltd v Webster [2005] NSWCA 182 at [130], [155]. In this case, the purchaser, having paid the deposit, took an erroneous view as to the effect upon the contract of the s 66G order and purported to terminate the contract when it was not entitled to do so. It promised in the contract that the deposit should not be refundable. In those circumstances, I am unable to see that it is unconscionable that the vendor, having itself terminated the contract, should retain the deposit. I decline to order the return of the deposit under s 55(2A). Issue 5 – Is the vendor entitled to damages for breach of contract? 26 It also follows from the foregoing that the vendor is in principle entitled to damages for breach of contract. However, the retained deposit of $150,000 must be allowed against any damages assessed. It is not entirely clear to me whether damages are claimed or established beyond $150,000. This can be agreed or, if necessary, debated when short minutes are brought in. 27 Short minutes of order should be brought in to give effect to this decision. Questions of the quantum of damages and of costs may be raised at that time. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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