Ethnic Earth Pty Ltd v Quoin Technology Pty Ltd (Receivers and Managers Appointed) (in Liquidation) - [2004] SASC 257

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
ETHNIC EARTH PTY LTD v QUOIN TECHNOLOGY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS
Judgment of The Honourable Justice Bleby
26 August 2004
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - ILLEGAL AND VOID CONTRACTS - CONTRACTS ILLEGAL BY STATUTE
Contract for sale of business - payment of deposit - variations to contract - provision for additional payments before settlement - whether contract void - s 6 Land and Business (Sale and Conveyancing) Act 1994 - whether payments constituted a "deposit" as defined - effect of payments to a third party - whether vendor beneficially entitled at time of payment - whether trust for purchaser created - whether payments were to a stakeholder - whether payments were payments of part of the purchase price - conrtract as varied held to be void.
Land and Business (Sale and Conveyancing) Act 1994 s 6; Property Law Act 1974 (Qld) s 71; Land and Business Agents Act 1973 s 89; Corporations Act 2001 (Cth) s 471B, referred to.
Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1991) 58 SASR 184; Burt v Claude Cousins & Co Ltd [1971] 2 QB 426; Harrington v Hoggart (1830) 1 B. & Ad. 577; 109 ER 902; Wiggins v Lord (1841) 4 Beav 30; 49 ER 248; Hastingwood Property v Saunders Bearman Anslem [1991] Ch 114, applied.
Howe v Smith (1884) 27 ChD 89; Mehmet v Benson (1963) 81 WN (NSW) 188; Coates v Sarich [1964] WAR 2; Brien v Dwyer (1978) 141 CLR 378; Wacal Developments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503, distinguished.
Potters v Loppert [1973] Ch 399, discussed.
Fullston v Dignan (1999) 75 SASR 367, considered.

ETHNIC EARTH PTY LTD v QUOIN TECHNOLOGY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS
[2004] SASC 257
BLEBY J:
The actions

There are two actions before the Court. The first is brought by Ethnic Earth Pty Ltd (“Ethnic Earth”) against Quoin Technology Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (“Quoin”), Messrs Smith and Burfield, the receivers and managers of Quoin, and Ernst & Young, a firm of chartered accountants. Ethnic Earth sues as the purchaser named in a contract for the sale of a business previously carried on by Quoin. The contract was entered into on 15 February 2002.
By its statement of claim, Ethnic Earth claims declarations to the effect that the contract of sale was rendered void on 28 March 2002 or on 13 May 2002, that the sum of $150,000 paid to an Ernst & Young trust account is held on trust for Ethnic Earth and that the sum held by Ernst & Young was wrongfully transferred to an account in the name of the receivers and managers. It seeks orders for the return of the money and interest, or alternatively an order for account and equitable damages.
In those proceedings Quoin opposes the orders sought and counterclaims against Ethnic Earth for declarations that the contract of sale was at all material times binding and enforceable, that it was lawfully terminated by Quoin on 26 June 2002 and that Quoin is entitled to retain the monies paid by Ethnic Earth. It claims the balance of the purchase price and damages for the alleged default of Ethnic Earth under the sale contract. In the alternative, Quoin claims the balance of the purchase price by way of restitution and in the further alternative, restoration of the assets of the business and damages for conversion and in detinue.
The second action is brought by Quoin against a number of individuals as guarantors under a deed of guarantee entered into on 15 February 2002. Pursuant to that deed the guarantors guaranteed performance by Ethnic Earth of the contract. Under the guarantee it claims the balance of the purchase price and interest.
The contract
Prior to 15 February 2002 Quoin conducted a business of website services, delivery of online documentation services and products, content management services, electronic learning and interactive media products and services, and design and development of training material for business and system purposes. On 6 February 2002 Messrs Smith and Burfield, partners of Ernst & Young, were appointed as receivers and managers of Quoin. I am told that Quoin has since been placed in liquidation.
On 15 February 2002 Quoin and the receivers and managers entered into a contract with Ethnic Earth whereby Quoin agreed to sell and Ethnic Earth agreed to purchase the “assets” of Quoin. The assets were defined by clause 1.2 of the contract to mean “collectively, the plant and equipment, the computers, the stock, the contractual rights, the intellectual property, the goodwill, the Vendor’s shares and the business names”. Each of those terms was defined in clause 1 of the contract. It is not necessary to repeat those definitions.
The purchase price stated in the contract was $396,000 which was apportioned in the contract as follows:
Plant and equipment and computers  $385,000
Intellectual property  $    8,800
Goodwill  $    1,100
Remainder of the assets  $    1,100
Total:  $396,000
The purchase price was payable “to the Vendor” (clauses 4 and 6). The sum of $100,000 was to be paid as a deposit on the date of the contract. The balance of the purchase price ($296,000) was to be paid on the completion date, which was 28 March 2002.
Clause 7 of the contract provided that the purchaser was to pay the sum of $100,000 deposit “by telegraphic transfer of cleared funds to Ernst & Young Trust Account held at Westpac Banking Corporation (Grenfell Street branch), BSB 035 002, Account Number 35 0020”. The balance of the purchase price ($296,000) was to be paid “to the Vendor” by a bank cheque payable to the vendor, Quoin (clause 8).
Clauses 62-64 provided what was to happen if Ethnic Earth was in default, and clause 65.2 provided that upon termination for default by Ethnic Earth, the deposit “is absolutely forfeited to the Vendor by the Purchaser”.
Clause 9 provided for the payment of interest on any part of the unpaid purchase price at the rate of 12% per annum between the required payment date and the actual date of payment.
Clause 10 provided that the whole of the vendor’s right, title and interest to and in the assets would pass to the purchaser but not until the purchaser had paid the whole of the purchase price together with any interest payable. Clause 11 provided that, subject to some later provisions in the contract, the purchaser had no right, title or interest of any nature to or in the assets unless and until the purchaser paid the whole of the purchase price and any interest.
Clauses 19-22 provided as follows:
“19.The Vendor shall permit the Purchaser to obtain possession of the assets on the date of this contract. The Vendor shall do all such things as are reasonably required by the Purchaser to facilitate the Purchaser obtaining possession, including access to the premises in order to remove the assets, provided that the removal of the assets from the premises shall be at the Purchaser’s own expense and nothing in this clause creates an obligation on the part of the Vendor to make any payment or give any other consideration to any person.
20.As from the date of this contract, the Vendor gives to the Purchaser permission to approach the contracting parties with a view to obtaining the consent of the contracting parties to the Purchaser performing the obligations of the Vendor under the contracts from the date of this contract to the completion date.
21.Subject to the Purchaser obtaining the consent of the contracting parties, pursuant to clause 20, the Purchaser shall be entitled to perform the obligations of the Vendor under the contracts from the date of this contract to the completion date.
22.If the Purchaser performs the obligations of the Vendor under any contract pursuant to clause 21, it shall perform those obligations in its own capacity for its own benefit and not as an agent, or otherwise on behalf of, the Vendor.”
The contracting parties referred to in those clauses were defined as meaning each of the parties, other than Quoin, to certain contracts described in a schedule to the contract of sale. One of those parties was described as “LINZ”.
Clauses 26 and 27 provided for the assignment of Quoin’s rights under the existing contracts with effect from the day of completion, subject to the written consent of each contracting party to such assignment.
Clause 83 provided that the governing law of the contract was South Australian law.
There were many other provisions of the contract to which it is not necessary to refer. It will be noted that the amount of the deposit was unusually substantial, but equally unusual were the provisions of clauses 19-22 inclusive, allowing Ethnic Earth to undertake work under the existing contracts immediately upon the signing of the contract.
The deposit was duly paid. Ethnic Earth took possession of some, but not all, of the physical assets and began performing work for some of the contractors, particularly LINZ engaged through the firm of PricewaterhouseCoopers (“PwC”).
The first variation
On 28 March 2002, the contractual date of completion, Ethnic Earth, through its solicitor Mr Challen, requested an extension of the settlement date until 1 May 2002. The purchaser offered to pay interest on the balance of monies due until settlement in accordance with the requirements of the contract and said that it was willing to make “a further part payment” in the sum of $50,000 if the request for an extension was agreed. Mr Challen was a Queensland solicitor and was not then aware of the provisions of s 6 of the Land and Business (Sale and Conveyancing) Act 1994 (SA) (“the Act”) relating to instalment contracts. Queensland legislation (s 71 Property Law Act 1974) did provide for instalment contracts. However, unlike the South Australian legislation, the Queensland legislation did not render instalment contracts void but rather provided that they were not determinable by reason of default on the part of the purchaser in payment of an instalment until the expiration of a period of 30 days after service of the default notice contained in the schedule to the Act.
There were some telephone discussions concerning the proposed extension of time for completion, and Quoin’s Adelaide solicitors wrote to Mr Challen on 28 March 2002 in the following terms:
“We are instructed that our clients agree to extend the settlement date under the Contract for Sale and Purchase dated 15 February 2002 (the Contract) to Wednesday, 1 May 2002 on the following conditions:
1.Ethnic Earth pays to Quoin the sum of $50,000.00 on or before 4 April 2002, by telegraphic transfer of cleared funds to the following account:
Account Name: Ernst & Young Trust Account
Bank:Westpac Banking Corporation
Branch:2 Grenfell Street, Adelaide SA 5000
Account No: 35 0020
BSB:035 002
This is a non refundable payment which will be forfeited by Ethnic Earth in the event of default.
2.Ethnic Earth will pay interest on the unpaid part of the purchase price from 29 March 2002 until the date of payment in accordance with clause 9 of the Contract.”
Mr Challen indicated his acceptance of those terms on behalf of Ethnic Earth by signing and returning a copy of the letter.
It will be noted that the additional sum in that variation was described as a “non refundable payment”, and was to be paid to the same bank account as that for which the deposit of $100,000 had been paid. The additional sum of $50,000 was paid on the due date.
The second variation
Ethnic Earth was having difficulty raising the necessary finance to complete the purchase. On 24 April 2002 Mr Challen sent an email to Quoin’s solicitors requesting a further extension of the completion date to 31 July 2002. He also proposed that payments to be made under the PwC LINZ contract should be made direct to Quoin in reduction of the purchase price.
1 May 2002 was the extended settlement date under the first variation. By that time, Mr Challen had not had a response to his proposal. He believed that under Queensland legislation his client had an instalment contract by virtue of the additional payment made under the first variation. He was anxious that the contract could not be cancelled by Quoin by virtue of his client’s failure to settle on 1 May. He believed that, if South Australian legislation was anything like the Queensland Act, his client would be protected by the requirement to give one month’s notice before cancelling the contract. He arranged for someone in his office to ascertain the position under South Australian legislation. His initial advice, subject to confirmation from a South Australian source, was that an instalment contract was void. That surprised him. He arranged for South Australian solicitors to give him advice as to the effect of the Act.
Mr Challen did receive a response from Quoin’s South Australian solicitors on 1 May. That response proposed an extension of the settlement date to 31 May 2002 if Ethnic Earth’s then current application for finance to Westpac Banking Corporation was successful and funds were available by that time or to 31 July 2002 if Westpac declined the application or did not otherwise approve it by 31 May. Other conditions were specified, one of which was as follows:
“8.         That Ethnic Earth acknowledges that:
8.1    Quoin is the absolute owner of the deposit paid under the sale contract to date, comprising the sum of $150,000.00;
8.2    Quoin will be the absolute owner of all additional amounts referred to in paragraph 7 above immediately upon those amounts being paid to it; and
8.3    Ethnic Earth has no further right, title and interest to or in any of such moneys.”
On 3 May Mr Challen responded seeking clarification of a number of points and asserting that the further sum of $50,000 paid on 4 April 2002 “was never a further deposit payment but always a further instalment payment of the purchase price. Your client did not request nor did our client agree that the deposit was to be extended from $100,000 to $150,000”. On his own evidence, Mr Challen was by then aware of the possibility that the additional payment of $50,000 rendered the contract an instalment contract and that it was possibly void under South Australian law. By asserting in his facsimile letter of 3 May that the payment of $50,000 was not part of the deposit, it might be thought that he was wishing to assert that the contract was void. However, that would be inconsistent with his actions at that time in impliedly asserting the validity of the contract and in pursuing a further variation to the contract involving the payment of additional instalments. Furthermore, the assertion that the $50,000 was not part of the deposit can be seen as an attempt to protect his client’s interest in the event that the contract was terminated by Quoin in circumstances involving forfeiture of the deposit.
On 7 May 2002 the sum of $150,000 standing to the credit of the Ernst & Young trust account was transferred, without reference to Ethnic Earth, by Ernst & Young to an account styled Quoin Technology Pty Ltd Trust Account.
In the meantime, Westpac Banking Corporation approved Ethnic Earth’s finance application. Quoin’s solicitors were informed of this, and on 8 May and they replied in the following terms:
“In view of Westpac’s approval, we set out the revised conditions on which Quoin is prepared to extend the completion date under the sale contract:
1.That the new completion date will be 14 June 2002.
2.That interest at the rate of 12% per annum will continue to accrue on the unpaid portion of the purchase price until the date of payment, as stipulated by clause 9 of the sale contract.
For the avoidance of doubt, the unpaid portion of the purchase price is the sum of $246,000.00 as at today’s date. This amount comprises the purchase price of $396,000.00 specified in clause 4 of the contract, less the deposit of $100,000.00 and the additional sum of $50,000.00 paid to Quoin on 4 April 2002.
3.That Ethnic Earth will immediately authorise and direct PricewaterhouseCoopers to pay to Quoin (to the credit of the nominated account of Quoin’s receivers and managers) all moneys which are now, or which become, payable to Ethnic Earth in connection with PricewaterhouseCoopers’ project with Land Information New Zealand (including, without limitation, the moneys referred to in the schedule of payments attached to your e-mail of 24 April 2002) until completion under the sale contract.
4.That the amounts referred to in paragraph 3 above:
4.1    will be received by Quoin on account of the unpaid portion of the purchase price, and (without limiting the general extent of the preceding part of this paragraph 4) will reduce the unpaid portion of the purchase price for the purpose of the accrual of interest under paragraph 2 above, with effect when those amounts are deposited to the credit of the nominated account; but
4.2    will be retained in the nominated account of Quoin’s receivers and managers pending completion under the sale contract.
5.That the conditions set out in paragraphs 1 to 4, both inclusive, above will take effect as a variation to the sale contract with effect on 1 May 2002.
Please provide us with written confirmation that Ethnic Earth accepts the conditions set out in paragraphs 1 to 5, both inclusive, above set out above (sic) prior to the close of business on 10 May 2002.
Quoin’s receivers and managers have opened a new trust account, details of which are as follows:
Account name:            Quoin Technology Pty Ltd (receivers and managers appointed) (administrator appointed) Trust Account
Bank:Westpac Banking Corporation
Branch:2 Grenfell Street, Adelaide SA 5000
BSB:035002
Account number:        165087
Please ensure that the amounts referred to in paragraph 3 above are deposited to the credit of this account.”
Paragraph 3 of that letter and reference to the new bank account were subsequently replaced, but a number of points need to be made about the balance of the letter. In paragraph 2 the solicitors for Quoin were now describing the additional amount not as a deposit but in the rather neutral language of “the additional sum of $50,000.00”. Secondly, the amounts to be received in respect of the PwC LINZ project were to be “retained in the nominated account of Quoin’s receivers and managers pending completion under the sale contract” (paragraph 4.2). Thirdly, the solicitors for Quoin were proposing payment to an account which was not that to which previous payments had been made.
On 10 May 2002 Mr Challen wrote proposing a variation to paragraph 3 in the following terms:
“3.That Ethnic Earth will pay to Quoin to the credit of the nominated account of Quoin’s Receivers & Managers comprising:
Account Name:         Ernst & Young Trust Account
Branch BSB:             035 002
Account Number:     35 0020
such amounts which are the same as those amounts paid now or at any time in the future by PricewaterhouseCoopers either to Ethnic Earth or to Quoin Technology Services Pty Ltd ACN 091 967 672 (“QTS”) in connection with PricewaterhouseCoopers project with Land Information New Zealand prior to the settlement of this contract being effected. These payments from PricewaterhouseCoopers shall comprise payments of invoices rendered by Ethnic Earth or QTS in compliance with the Schedule of Payments agreed with PricewaterhouseCoopers project comprising the following:
Invoice Date Invoice number    Description      Amount AUD     Payment date
8/03/02      Invoice 1 of 9      Completion of        9,269.50         02/04/02
fully functional
prototype
22/03/02     Invoice 2 of 9      First drop of 4-5    18,539.00        16/04/02
review topics
12/04/02     Invoice 3 of 9      Second drop 7       13,904.25        30/04/02
review topics
26/04/02     Invoice 4 of 9     Third drop 7          13,904.25        08/05/02
review topics
10/05/02     Invoice 5 of 9      Fourth drop         13,904.25        22/05/02
7 review topics
24/05/02     Invoice 6 of 9        Fifth drop 7         13,904.25        04/06/02
review topics
07/06/02     Invoice 7 of 9        Sixth drop            13,904.25        18/06/02
remaining review
topics
14/06/02     Invoice 8 of 9         Final edits            23,173.75        28/06/02
28/06/02     Invoice 9 of 9         Warranty Support   18,539.00         16/07/02
Agreement
$139,042.50
Ethnic Earth agrees to make the payments to Quoin by telegraphic transfer within three banking days of the payments from PricewaterhouseCoopers being cleared in the bank accounts of either Ethnic Earth or QTS as the case may be.”

Quoin Technology Services Pty Ltd (“QTS”) was a company formed at the instance of and controlled by Ethnic Earth. It will be noted that Mr Challen was proposing a scheme of instalments for payment by Ethnic Earth rather than PwC, and that he was proposing payment to the same account as that into which the earlier payments had been made.
By letter dated 13 May 2002 Quoin’s solicitors accepted proposed condition number 3 and confirmed that this second variation comprised paragraphs 1, 2, 4 and 5 of their letter of 8 May and condition number 3 in Mr Challen’s letter of 10 May.
Subsequent conduct
Payment of the first three invoices referred to in paragraph 3 of the second variation was made to QTS on 13 May 2002. No further payments were made by Ethnic Earth to Quoin.
On 17 May 2002 Mr Challen wrote to Quoin’s solicitors asserting that the contract, as varied on 28 March (the first variation), became an instalment contract for the purchase of the business and was therefore void, and that the second variation could therefore not be given effect.
Further correspondence followed with Quoin asserting that the contract remained on foot.
Certain of the furniture, the subject of the sale agreement, was arranged to be sold by Quoin. A proposal involving that sale and the disposal of the proceeds depending on the outcome this litigation was put to Mr Challen on 29 May 2002 and agreed by him on behalf of Ethnic Earth on 30 May. The proceeds of that sale ($660) were credited to the Quoin account on 24 June 2002.
On 20 June 2002 Quoin issued a notice of default and intention to terminate the contract. This was followed on 25 June by a notice of termination of the contract issued by Quoin.
On 28 June 2002 the receivers requested Westpac Banking Corporation to close the Quoin Technology Pty Ltd Trust Account and to transfer the balance to a cheque account in the name of Quoin Technology Pty Ltd (receivers and managers appointed) (administrator appointed). I infer from that that Quoin regarded the contract of sale as having been terminated and that it was beneficially entitled to all monies that had been paid by Ethnic Earth under the contract and to the proceeds of sale of the furniture.
Section 6 Land andBusiness (Sale and Conveyancing) Act 1994
Central to the resolution of the various claims and counterclaims is whether or not the contract of sale was avoided by s 6 of the Act. That section relevantly reads:
“6.(1)           A contract for the sale of land or a business that provides for the payment of part of the purchase price of the land or business (except a deposit) before the date of settlement is void.
(2)  Money paid under a contract that is void under subsection (1) may be recovered by action in any court of competent jurisdiction.
(3)  In this section –
“deposit” means an amount paid by a purchaser in a lump sum, or in not more than three instalments, towards the purchase price of land or a business before the date of settlement.
(4)  …”.
Section 6 does not differ materially from its predecessor, s 89 of the Land and Business Agents Act 1973. The object and purpose of that section was identified by King CJ in Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1991) 58 SASR 184 at 188:
“It is plain that the mischief aimed at is the loss to purchasers who pay the whole or part of the purchase price of land without obtaining title, and then find that the vendor is unable to make title and to give an effective transfer. An appreciation of that problem seems to me, however, to throw little light upon the extent to which the legislature was prepared to restrict the contractual freedom of parties to contract in order to remedy it. It would have been possible, of course, for the legislature to have prohibited absolutely the payment of any moneys prior to settlement and thereby given complete protection to purchasers against the risk of loss of money from this cause. It plainly did not take that course because it exempted deposits. The extent to which the legislature was prepared to go to remedy the mischief can only be ascertained by a consideration of the language used.”
See also Fullston v Dignan (1999) 75 SASR 367, Debelle J at 371. As Zelling AJ said in Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd, at 211, the section is “draconian in form. Any contract caught by it is void. … In accordance with accepted principles of construction, s 89 will be read down to cover what it expressly covers and nothing else”.
In the present case it was accepted that this was a contract for the sale of a business. It was, therefore, a contract to which s 6 could have application. It was also acknowledged that the two variations were effective and binding on the parties as variations to the contract of sale.
What constitutes a deposit
Much of the argument in this case turned on what constituted a “deposit” for the purposes of s 6 and in particular whether the payment of $50,000 on 4 April 2002 formed part of the deposit. I was referred to a number of cases including Howe v Smith (1884) 27 ChD 89 at 101, Mehmet v Benson (1963) 81 WN (NSW) 188 at 191; Coates v Sarich [1964] WAR 2 at 6 and 15; Brien v Dwyer (1978) 141 CLR 378 at 386, 398, 401 and 406. There is no doubt that at common law the word, when undefined, usually means something in the nature of an earnest given by a purchaser to bind the bargain as security for its performance. However, that is not necessarily its meaning in this case.
For the purpose of s 6 the word is defined as meaning “an amount paid by a purchaser in a lump sum, or in not more than three instalments, towards the purchase price … before the date of settlement”. It does not matter whether the contract concerned treats it as an earnest or as a non-refundable sum in the event of default. It does not matter to whom the payment is made, whether to a stakeholder, a trustee or beneficially to the purchaser. To qualify as a deposit for the purpose of s 6 it need only be paid by the purchaser towards the purchase price. Provided that it is an amount also paid before settlement in one, two or three instalments, it will qualify as a deposit for the purpose of s 6. In most cases, it will be able to be inferred from the terms of the contract that the deposit is treated as an earnest or that, as in this case, it is non-refundable in the event of default by the purchaser. However, it is not necessary that that qualification apply to the payments which may constitute a deposit for the purpose of s 6.
It is not difficult to understand why Parliament may have chosen a rather simplistic definition of “deposit” for the purpose of the section. It avoids difficult questions, of which the payment of $50,000 in this case is a good example, of what may or may not constitute a deposit at common law.
In this case, the payment of the initial $100,000 upon signing of the contract of sale, standing alone, was clearly a deposit. It was described as such in the contract, and it fell within the definition of “deposit” in s 6.
The payment of $50,000 on 4 April 2002, following the first variation, also formed part of the deposit for the purpose of s 6. The contract as varied then provided for the payment of an amount by the purchaser in two instalments towards the purchase price. Both payments were to be made before settlement. Together they constituted a deposit for the purpose of the section. Whatever may have been the contractual rights attaching to the payment of $50,000 upon a default by one party or the other is a matter for the construction of the contract. However, that cannot affect the interpretation of s 6. Accordingly, at the time of the first variation, both the payments to be made before settlement together constituted a deposit, and the contract was not avoided by the first variation.
The contract, as varied by the first and second variations, then provided for payment by Ethnic Earth of a number of instalments. First was the payment of $100,000 on signing of the contract. The second was the payment of $50,000 on 4 April 2002. The third and subsequent payments were those identified in paragraph 3 of the second variation, namely the payments by Ethnic Earth contingent upon payments received by QTC in respect of the PwC LINZ contract.
According to the contract of sale as then varied, Ethnic Earth was required to make a number of additional payments dependent upon PwC making payments to QTS. They were not payments governed by the due date of the latter payments as set out in paragraph 3 of the variation, but were contingent upon PwC actually making the payments.
At that time there had been inconclusive negotiations between Ethnic Earth and PwC for the novation of the PwC LINZ contract to Ethnic Earth, and work in fulfilment of PwC’s requirements had continued to be carried out by QTS. It is clear that, at least by 10 May 2002, Mr Challen had negotiated an arrangement with PwC to pay the first three QTS invoices to QTS, and that at that time he knew that payment was imminent. I infer that that arrangement was also known and approved by Quoin, as PwC had, on 22 April, sought a direction from the receivers and managers of Quoin as to whom the fees should be paid.
In fact, the first of such payments was received by QTS on 13 May, thereby giving rise to the obligation of Ethnic Earth to make a further payment under the sale agreement if Quoin agreed to the second variation, as it did on that same day.
At that time there was also at least one further unpaid invoice from QTS to PwC which was due for payment on 8 May. Therefore, notwithstanding the contingent nature of the payments due by Ethnic Earth under the second variation, the parties were aware at the time of the second variation that, by a combination of contractual arrangements, obligations would arise on the part of Ethnic Earth to make at least two more additional payments, and probably more, before settlement would take place under the varied contract of sale.
It is clear from the second variation that all those instalments were to be paid by Ethnic Earth towards the purchase price. The contract as varied therefore provided for payment by the purchaser before settlement of an amount in more than three instalments towards the purchase price. That meant that none of the payments made or to be made by Ethnic Earth could then constitute a deposit for the purpose of s 6. They were no longer covered by the definition of “deposit” in s 6(3).
Whether the payments were part of the purchase price
The question then arises whether the payments made or to be made by Ethnic Earth or any of them constituted “payment of part of the purchase price of the … business … before the date of settlement” for the purposes of s 6(1) of the Act.
Quoin argues that because the contract provided for payments to a trust account operated by Ernst & Young, they did not constitute payments in the relevant sense of part of the purchase price. As I understood it, the argument was that, consistent with the object and purpose of s 6, payments had to be made to Quoin beneficially or in Quoin’s exclusive control before they would qualify as payments of part of the purchase price.
In respect of the payments of $100,000 and $50,000 there is a simple answer to that argument. By virtue of clause 6 of the contract, payment of the $100,000 was to be to “the Vendor”. Clause 7 then specified that that sum was to be paid to the Ernst & Young trust account. The fact that the account was styled a trust account without more did not imply, in favour of Ethnic Earth, any trust or restriction in how that money could be dealt with. There could be many reasons why Quoin would want the money paid to a trust account. They include reasons dictated by its relationships with and obligations to third parties not connected with this contract. Subject to any of those relationships and obligations, Quoin was beneficially entitled to the money when it was paid.
The first variation, as contained in the letter of 28 March 2002, also provided for $50,000 to be paid to Quoin, with a similar direction to pay that amount to the Ernst & Young trust account.
There can be no doubt that, as varied, the contract provided that both those payments were to be made by Ethnic Earth to Quoin or at Quoin’s direction, and were to be payments of part of the purchase price to which, as between Ethnic Earth and Quoin, Quoin was beneficially entitled. If those payments no longer constituted a deposit, they were payments of part of the purchase price before the date of settlement, thus rendering the contract void.
However, the situation in respect of the subsequent payments provided by the second variation is a little different. Clause 3 of the variation provided that the monies were to be paid to Quoin to the credit of the nominated account, being the Ernst & Young trust account. However, subclause 4.2 of the variation provided that those monies would be retained in that account “pending completion under the sale contract”. That suggests a possible form of stakeholding on the part of Ernst & Young and a restriction on the immediate application of those monies for the benefit of Quoin. It is therefore necessary to consider the effect of that subclause.
The effect of a stakeholding – payments under the second variation
It seems to me that although clause 4.2 of the second variation does not mention the word “stakeholding” or “stakeholder”, the effect of that clause was to create, in this case, Ernst & Young as a stakeholder for those additional payments to be made by Ethnic Earth consequent upon the second variation.
In Burt v Claude Cousins & Co Ltd [1971] 2 QB 426 the question was whether the amount of a deposit was received by a land agent as a stakeholder or as the agent of the vendor. Nothing was said about the terms on which the money should be held. By a majority, Lord Denning MR dissenting, the Court of Appeal held that the money was received as agent of the vendor. Lord Denning’s dissent was on the basis that if nothing was said, the agent was acting as a stakeholder. What he said about the role of a stakeholder generally is not affected by his dissent. He said, at 435-436:
“If an estate agent or a solicitor, being duly authorised in that behalf, receives a deposit “as stakeholder” he is under a duty to hold it in medio pending the outcome of a future event. He does not hold it as agent for the vendor, nor as agent for the purchaser. He holds it as trustee for both to await the event: see Skinner v Trustee of the Property of Reed (a Bankrupt) [1967] Ch. 1194, 1200, per Cross J. Until the event is known, it is his duty to keep it in his own hands: or to put it on deposit at the bank: in which case he is entitled to keep for himself any interest that accrues to it: see Harrington v Hoggart, 1 B. & Ad. 577. If the purchaser should become entitled to the return of his deposit, he must sue the estate agent or solicitor for it: see Eltham v Kingsman (1818) 1 B. & Ald. 683; Hampden v Walsh (1876) 1 QBD 189. He cannot sue the vendor, because the vendor has never received it, or become entitled to receive it.”
The effect of paragraph 4.2 of the second variation is to require Ernst & Young to hold the monies pending a particular event, namely completion under the contract of sale. Accordingly, so long as the contract remained on foot they could not part with the money. That seems to be effect of what was said in Harrington v Hoggart (1830) 1 B. & Ad. 577; 109 ER 902 by Lord Tenterden CJ at 586; 109 ER at 905 and Parke J at 588; 109 ER at 906. See also Wiggins v Lord (1841) 4 Beav 30; 49 ER 248, Lord Langdale MR at 32; ER at 249, and Hastingwood Property v Saunders Bearman Anslem [1991] Ch 114.
In Potters v Loppert [1973] Ch 399 Sir John Pennycuick V-C acknowledged that in some circumstances a stakeholder may be a trustee but that money may equally be paid to a stakeholder “as principal upon a contractual or quasi-contractual obligation to pay the like sum to one or other of the parties according to the event”: ibid at 405. Absent agreement to the contrary, he considered that money was not paid to a stakeholder as trustee but upon a contractual or quasi-contractual liability.
In this case it is not necessary to resolve the question whether the money was to be held as trustee or pursuant to a contractual or quasi-contractual obligation, as the money was never paid. What is important for present purposes is that the money could not be paid to Quoin before completion without the consent of Ethnic Earth. The question is whether that fact means that such payments did not constitute payments of part of the purchase price for the purpose of s 6(1) of the Act.
Second variation payments – payments of part of the purchase price
Given the draconian nature of the section, if there is a way in which the section can be read down to give effect to the bargain this should be done. This is so particularly in respect of a bargain reached between two commercial entities negotiating at arms length, both with legal advice, with neither being at any apparent commercial disadvantage to the other. Could the contract be saved if the third or subsequent payments were not regarded as payments of the purchase price at all because they were not beneficially received by the vendor, thus leaving the first two payments standing alone and therefore returning them to the shelter of a “deposit”?
There are two reasons why, in my opinion, that cannot be done in this case. The first relates to the proper interpretation of the section. The distinct emphasis in the definition of “deposit” in subsection (3) is on the fact of payment by the purchaser of an instalment or instalments towards the purchase price. As has already been observed, it does not matter, for the purposes of that definition, to whom the payment is made or whether the vendor becomes beneficially entitled to it upon payment. It would lead to absurd consequences and possibly to an ability to avoid the beneficial operation of the section if a payment were treated as a payment of part of the purchase price for the purpose of a deposit, but if an identical payment, not falling within the definition of deposit because there were too many instalments, was not so treated. The section should be construed consistently with the same emphasis being placed on the fact of payment, rather than its destination, in both subsections (1) and (3). Neither subsection refers to the payee or destination of the money but only to the payment – an act of the purchaser. In that case, as long as the payment is a payment by the purchaser of part of the purchase price, the identity of the payee and the fact that the vendor may not be immediately beneficially entitled to the payment does not matter. The protection afforded by the Act is a protection to the purchaser against loss of the benefit of the instalments paid, whether such loss is brought about by the act or default of a stakeholder, a trustee or the vendor.
The second reason relates to a consideration of the nature of the payments as contemplated by the contract, as varied, itself. In Wacal Developments Pty Ltd v Realty Developments Pty Ltd (1978) 140 CLR 503 it was said that payments made to a third party could not bring a contract within the meaning of “instalment contract” in s 71 of the Property Law Act 1974 (Qld); Gibbs J at 507, Stephen J at 515 and Aickin J at 532. However, the definition in that case was very different from that in the Act and has no direct application to s 6 of the Act. That case decided that a payment of interest on the outstanding purchase price constituted a “payment” for the purposes of the definition of “instalment contract” in that section. However, that definition did not, as does s 6(1), relate the payment to a payment of “part of the purchase price”. As King CJ observed in Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (supra) at 188:
“I agree that the scope of the concept of “purchase price” embodied in the section must be ascertained independently of any characterisation in the contract. The Court must look at the substance rather than the form of the contract in order to determine which of the obligations imposed by the contract fall within the statutory concept of “purchase price”. Any purported characterisations of financial obligations which are not in conformity with their true nature ascertained as a matter of substance and reality, must be disregarded. Nevertheless, the true nature of the financial obligations can only be ascertained by a consideration of the substance and effect of the contractual provisions. When their true nature is ascertained in that way, it is necessary to determine whether those financial obligations fall within or without the concept of purchase price in the section.”

This makes relevant not only subparagraph 4.2 of the second variation but also subparagraph 4.1. By that subparagraph, the payments were to be “received by Quoin on account of the unpaid portion of the purchase price, and, … will reduce the unpaid portion of the purchase price for the purpose of the accrual of interest under paragraph 2 above, …”.
The parties therefore intended that the payments, whoever received them, should be treated as payments of part of the purchase price. They were to reduce the amount payable by Ethnic Earth at completion and to discharge any obligation to pay interest on those amounts as part of the purchase price.
Therefore, given the emphasis in s 6 on the making of the payment and the intention of the parties in this case manifested by the terms of the variation, I do not consider that the fact that the payments were to be to a stakeholder takes them outside the operation of s 6(1).
Conclusion
It follows that, by virtue of the second variation, the contract became a contract for the sale of a business that provided for the payment of part of the purchase price of the business before the date of settlement. The contract provided for too many payments for the amount of those payments to constitute a deposit, and the contract was therefore void.
It follows that Ethnic Earth is entitled to a declaration that the contract was rendered void on 13 May 2002. However, given that Quoin was beneficially entitled to the payment of $100,000 and $50,000 made by Ethnic Earth, I would refuse the declaration that the monies were held by Ernst & Young on trust for Ethnic Earth. By virtue of s 6(2) of the Act, Ethnic Earth would normally be entitled to an order for payment by Quoin of the monies paid by Ethnic Earth pursuant to the terms of the contract. However, I am conscious that there are other outstanding issues to be resolved. These include the effect on the proceedings of the liquidation of Quoin and whether such a claim is stayed by s 471B of the Corporations Act. There are also unresolved questions concerning Quoin’s counterclaim against Ethnic Earth and whether any claim for damages or restitution can be set off against the claim by Ethnic Earth. It would also seem to follow that the second action should be dismissed.
Therefore, without making any orders at this stage, it is appropriate that I should hear the parties further as to the future course these proceedings should take and as to any orders that should be made in the light of these reasons.