Geeveekay Pty Ltd v Director of Consumer Affairs Victoria

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 6531 of 2006

GEEVEEKAY PTY LTD, GEOFFREY KEOGH AND VERONICA KEOGH	Appellants
v
DIRECTOR OF CONSUMER AFFAIRS VICTORIA	Respondent

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JUDGE:	BELL J
WHERE HELD:	Melbourne
DATES OF HEARING:	23, 24, May; 31 July and 1 August 2007
DATE OF JUDGMENT:	28 February 2008
CASE MAY BE CITED AS:	Geeveekay v Director of Consumer Affairs Victoria
MEDIUM NEUTRAL CITATION:	[2008] VSC 50

CONSUMER CREDIT – terms contract for the sale of land – buyer’s obligation to pay instalments of price and interest – buyer’s obligation to observe terms of seller’s mortgage – “mortgage wrapping” arrangements - legal character of buyer’s obligations – whether “debt” – whether definite present obligation to make unavoidable future payment – whether debitum in praesenti, solvendum in futuro - whether contract a “credit contract” under the Consumer Credit Code - whether “payment of debt owed… is deferred” – whether buyer “incurs deferred debt” – regulatory purpose of consumer credit legislation – statutory interpretation to give effect to – appeal on question of law from Victorian Civil and Administrative Tribunal - Consumer Credit (Victoria) Act 1995, ss 1, 5 – Consumer Credit Code, ss 4(1)(a) and (b) and (2), 5, 6, 8, 10-12, 15, schedule 1 - Sale of Land Act 1962, s 6.

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SALE OF LAND – terms contract for the sale of land – buyer’s obligation to pay instalments of price and interest – buyer’s obligation to observe terms of seller’s mortgage – “mortgage wrapping” arrangements - whether contract provides “credit” and is a “credit contract” under the Consumer Credit Code – Consumer Credit (Victoria) Act 1995, ss 1, 5 – Consumer Credit Code, ss 4(1)(a) and (b) and (2), 5, 6, 8, 10-12, 15, schedule 1- Sale of Land Act 1962, s 6.

APPEARANCES:

Counsel

Solicitors

For the appellants

Mr C Macaulay SC
with Mr M Gronow

Lewis O’Brien, solicitor

For the respondent

Mr P Bingham

Stephen Devlin,

General counsel to Consumer Affairs Victoria

HIS HONOUR:

INTRODUCTION

Geoffrey and Veronica Keogh are in the business of buying and selling land under the trading name “Great Australian Dream Providers”. The business is financed by a method known as “mortgage wrapping”. Mr and Mrs Keogh buy property with funds loaned to them by a bank at a discounted rate of interest and secured by a mortgage over the property concerned, which they sell, at a higher price and a significantly higher interest rate. The buyers pay a small deposit and the balance by moderate instalments over, say, 30 years. As required by the applicable legislation in Victoria, the buyer must assume their mortgage obligations.

Under that legislation, this kind of contract for the sale of land is called a “terms contract”. Sometimes it is called buying on the “vendor’s terms”. Terms contracts may be used in many different situations and may take on a variety of forms. They are often used for the sale of property in cheaper locations. In such cases, while the interest on the sale price may be high, the sale price itself may be relatively low, the deposit may be minimal and the monthly repayments may be relatively small. Therefore buying on terms has been one way – for many, the only way – that people on low incomes, with limited capacity to save, have been able to buy a home.

Tania Rand was one such person. Her great Australian dream was a modest property in Morwell in country Victoria. She bought it on 1 August 2002 from Mr and Mrs Keogh, on terms, for $82,280, repayable with interest starting at 14.69% per annum by monthly instalments of $915.51 per month for 30 years. She agreed to observe the terms of their mortgage. Mr and Mrs Keogh had bought it, in 2002, for some $54,400, with funds from a bank loan secured by the mortgage, repayable with interest starting at 5.72% per annum by instalments of $317 per month for the same period.

The Director of Consumer Affairs is responsible for the administration of the Consumer Credit Code, which regulates the provision of consumer credit in Victoria. It is national uniform legislation. He examined the terms contract between Mr and Mrs Keogh and Ms Rand and the scores of others like it. He thought the contracts involved the provision of credit, as do bank loans to domestic borrowers secured by a mortgage. He also thought Mr and Mrs Keogh’s contracts of sale, and those of their company Geeveekay Pty Ltd, and the many others in the same category, did not comply with the Code. He issued proceedings in the Victorian Civil and Administrative Tribunal for civil penalties to be imposed on them and it.

At the Tribunal, the parties agreed it was first necessary to determine whether the terms contracts of sale came within the Code. Using the contract between Mr and Mrs Keogh and Ms Rand as a typical example, the Tribunal decided that contract, and therefore all of the others, involved the provision of credit by the seller to the buyer, which brought the contracts within the Code.

Mr and Mrs Keogh (and Geeveekay) now appeal to this Court on a question of law[1] under s 148(1) of the Victorian Civil and Administrative Tribunal Act 1998. They submit the Tribunal erred in the way it characterised the legal obligations created by the contract. The contract did not provide credit. It was just a terms contract for the sale of land to which Ms Rand would receive title when all of the instalments were paid in (probably) 2032. A district court judge and a specialist tribunal in two other states, considering the contracts at issue on those cases, have decided the same point against Mr and Mrs Keogh. But, surprisingly, it has not previously been properly determined by a superior court. So it is that I must now determine whether the Tribunal erred in law in deciding the terms contract for the sale of the Morwell property by Mr and Mrs Keogh to Ms Rand came within the Code.
[1]The questions of law specified in the notice of appeal dated 13 July 2006 are:
“1Whether as a matter of law the entry into and giving effect to terms contracts for sale of land in the form of the 46 contracts listed in the annexures to the application in VCAT proceeding number M213/2004 involves the provision of ‘credit’ within the meaning of s.6 and other provisions of the Consumer Credit (Victoria) Code.
2Whether the Tribunal has as a matter of law jurisdiction to hear and determine an application relating to terms contracts for the sale of land in the form of the 46 contracts annexed to the application in VCAT proceeding number M213/2004 pursuant to the provisions of the Consumer Credit (Victoria) Code.”

THE TERMS CONTRACT OF SALE BETWEEN MR AND MRS KEOGH AND MS RAND

The Director’s application for civil penalties to be imposed on Mr and Mrs Keogh and Geeveekay involved 46 contracts of sale, including Ms Rand’s. The documents said to constitute the credit contract were identified in an earlier ruling of the Tribunal.[2] At the Tribunal, it was agreed by the parties that, if Ms Rand’s documents constituted a contract under which credit was provided, the same would be so for the other transactions, and the Code would apply to all of them.
[2]Director of Consumer Affairs Victoria v Geeveekay Pty Ltd [2006] VCAT 106.

By the earlier ruling, the Tribunal declared that these were the documents containing the terms and conditions of the putative credit contract between Mr and Mrs Keogh and Ms Rand:

· the contract of sale between Mr and Mrs Keogh and Ms Rand dated 1 August 2002

·the disclosure document concerning the “credit facility” offered to Ms Rand
·the memorandum of common provisions of mortgage AA670
·the document entitled “You and Your Loan” dated March 2002
·the undated mortgage between Mr and Mrs Keogh and Westpac Banking Corporation concerning the Morwell property, which incorporated the memorandum of common provisions AA670
·the letter from the Bank of Melbourne to Mr and Mrs Keogh dated 27 May 2002 containing the loan offer and conditions in respect of the Morwell property

I say putative because the Tribunal identified those documents as constituting the credit contract on the basis that, if the Tribunal were later to decide it was that kind of contract, it was so constituted.[3] From now on I will describe the documents as the contract documents. In doing so I am not using that expression to describe the contract documents referred to in s 15 of the Code which was the subject of a separate declaration of the Tribunal.[4]
[3]Ibid, par 1 of the order dated 8 February 2006.
[4]Ibid [58].

The Tribunal also made three other declarations of importance. First, it declared that, to the extent of any inconsistency, the contract of sale would prevail over the memorandum of common provisions AA670, Table A of the seventh schedule of the Transfer of Land Act 1958, the “You and Your Loan” document and the Bank of Melbourne letter.[5] Second, it declared that the credit contract was wholly in writing.[6] Third, it declared that “subject to any other reason that a particular borrower might not be so bound, the borrower was bound by the provisions of the Contract of Sale, the Memorandum of Common Provisions AA670, Table A, the ‘You and Your Loan’ document and the Letter …”[7]
[5]Ibid, par 2(e) of the order.
[6]Ibid, par 2(b) of the order.
[7]Ibid, par 2(d) of the order.

The Tribunal’s declarations were not appealed and formed the basis of the subsequent proceedings in which the Tribunal made the orders now appealed to this Court. The parties in the proceedings before me did not dispute the Tribunal’s declarations.

The contract documents are complex and interlocking, much more so than an ordinary contract of sale for cash financed by a bank mortgage. They would be quite beyond the comprehension of a typical buyer of low-priced properties in the country, although most contracts of sale would fall into that category. I agree with the Tribunal that the contract documents contain a number of drafting inadequacies.[8] In the appeal before me, the parties did not dispute the Tribunal’s decision that the contract was not void for uncertainty.[9] From what I can see, I do not think it can be disputed.
[8]Ibid [32].
[9]Ibid.

These were the main features of the transaction between Mr and Mrs Keogh and Ms Rand:

·Mr and Mrs Keogh were the registered proprietors of the property and would remain so until final settlement, probably in 30 years (2032)
·Mr and Mrs Keogh had mortgaged the property to Westpac
·by the terms contract of sale, Mr and Mrs Keogh sold the property to Ms Rand for a price plus interest payable by 360 monthly instalments unless additional payments were made
·Ms Rand was entitled to possession of the property (which was to be her home) shortly after signing the contract
·under the terms contract, Mr and Mrs Keogh agreed to use the instalments in the first instance to meet their payments under the Westpac mortgage and to discharge the mortgage before final settlement, and Ms Rand agreed to be bound by the terms of that mortgage

Let me now look at the contract documents more closely.

By cl 1.1 of the contract of sale, Ms Rand bought the Morwell property, with its chattels. The particulars of sale specified the price to be $82,280. She had paid a deposit of $2,000 by the time the contract was signed. By special condition 13, Ms Rand was obliged to pay the balance by instalments:

The purchaser agrees to pay the instalments under this terms contract (360 payments of $915.51 per calendar month as at the date hereof but subject to variation as provided herein) three working days before the date the payments are due by the vendor under the vendor’s mortgage and shall arrange for payment to the vendor’s solicitors by direct credit to the bank account nominated by the vendor solicitors from time to time.[10]

[10]Clause 24(g) also requires the buyer to “pay all sums due under this contract of sale”. By clause 26, time is of the essence in the contract generally.

The particulars specified the date of possession to be 5 August 2002. They specified the settlement date to be the day the purchaser paid all the monies due under the contract. If the contract ran its full term, that would be in 30 years (2032). However, special condition 14 allows Ms Rand to make additional payments:

The purchaser may at any time a payment is due hereunder (‘the ordinary payment’), pay to the vendor a lump sum in reduction of the amount owing PROVIDED THAT the lump sum shall be a multiple of the amount of the ordinary payment due pursuant to the terms hereof.

Clause 9.1 of the contract incorporated Table A of the seventh schedule of the Transfer of Land Act. By general condition 12 of that Table, when Ms Rand pays all of the instalments and any other money due under the contract, Mr and Mrs Keogh are obliged to give her whatever registrable instruments are needed to enable her to become the registered proprietor of the property.

So that the remainder of this description of the contractual arrangements can be fully understood, it is necessary to say something about the Sale of Land Act 1962, which regulates terms contracts for the sale of land in Victoria.

Section 2(1) defines a terms contract:

terms contract means an executory contract for the sale and purchase of any land under which the purchaser is—
(a)obliged to make two or more payments to the vendor after the execution of the contract and before he is entitled to a conveyance or transfer of the land; or
(b)entitled to possession or occupation of the land before he becomes entitled to a conveyance or transfer of the land; …

The contract of sale between Mr and Mrs Keogh and Ms Rand was a terms contract so defined. Therefore, for Ms Rand’s protection as the terms buyer, certain legislative requirements and restrictions applied to it.

In particular, s 6(1) prevented Mr and Mrs Keogh from selling their mortgaged land to Ms Rand unless, among other things, the contract contained a provision that -

the consideration for the sale of the land shall be satisfied, to the extent of any mortgage money owing at the date upon which the purchaser is entitled to possession or receipt of the rents and profits of the land sold, by the purchaser assuming as from that date the obligations of the mortgagor under the mortgage.

Special condition 8 of the contract of sale contained that condition. To give effect to it, the contract also contains a series of provisions which, as between Ms Rand and Mr and Mrs Keogh, bind her to observe the Westpac mortgage.

To begin, item (1) of the schedule of the particulars of sale specified the Westpac mortgage as an “[encumbrance] to be assumed by the Purchaser”. By paragraph 1 of item (2), Ms Rand covenanted and agreed that she “shall be bound by the terms of the vendor’s mortgage” except those relating to interest. Item (2) specified a special formula for calculation of the buyer’s interest from time to time to ensure it always remained 8.97% per annum above the interest specified in the Westpac mortgage which, as we have seen, began at 5.72% per annum.

Next, special condition 10 defined the expression “bound by the terms of the vendor’s mortgage”:

Where the expression ‘shall be bound by the terms of the vendor’s mortgage’ is used in paragraph 1 of item 2 of this schedule, this shall mean that the purchaser, for himself, his heirs, executors and assigns covenants and agrees that as between himself and the vendor, all of the terms (except those relating to the interest rate and those excluded in paragraphs 11 and 12 herein) as set out in the documents mentioned in paragraph 9 hereof as annexed hereto that bind the vendor are applicable to, and enforceable and bind the purchaser as between the purchaser and vendor in all respects as if any reference therein to ‘You’ refers to the purchaser and any reference therein to ‘Lender’ refers to the vendor.

Next again, special condition 9 required Ms Rand to do all things necessary to comply with the requirements of Mr and Mrs Keogh’s mortgage with Westpac as specified in the memorandum of common provisions AA670 and the “You and Your Loan” document (excluding specified exceptions).

Finally, cl 4(a) required Mr and Mrs Keogh to arrange for the discharge of the mortgage by the date of completion and cl 4(b) required all money payable under the contract, which includes Ms Rand’s instalment payments, to be paid to an estate agent or legal practitioner “to be applied towards discharging the mortgage”.

Special condition 27 of the contract of sale contains a default provision which makes the general conditions in Table A applicable. Clauses 4-6 of Table A specify a regime which involves, among other things, the giving of notice to the defaulting party for the remedy of the default. Clause 5 specifies that the requirement to give notice applies in the exercise of the innocent party’s rights “other than his right to sue for money then owing”. As you will see, this is important because it preserves the seller’s right to sue the buyer for any unpaid instalments as a debt. Under special condition 27, if the default is not remedied, Mr and Mrs Keogh “shall be immediately entitled to” take possession of the property and forfeit as their own money the amounts paid by Ms Rand under the contract. This entitlement does not exclude the seller’s right to elect to recover overdue instalments as debts rather than end the contract and take possession of the property.

Turning to the memorandum of common provisions AA670, it sets out Mr and Mrs Keogh’s obligations as mortgagor under the Westpac mortgage and specifies obligations that Ms Rand has assumed under the contract of sale. It was Mr and Mrs Keogh’s obligation to pay all money owed to the lender under the secured arrangements, which include the Bank of Melbourne loan.[11] As the Bank of Melbourne letter and the mortgage particulars annexed to the contract of sale make clear, the obligation involves making monthly payments for 30 years. The former specifies the amount to be $317.[12] Among other things, the memorandum also requires them to maintain the property, pay all rates and charges and insure the improvements.
[11]Clause B(1)(a).
[12]The Bank of Melbourne letter specifies monthly payments of $317, the last being $223.60. The contract particulars specify the monthly payments to be $308.

The “You and Your Loan” document has many provisions which relate to the loan arrangements between Mr and Mrs Keogh and the Bank of Melbourne.

The mortgage is a single page document in standard form, which incorporates the provisions of the memorandum of common provisions AA670.

The letter from the Bank of Melbourne to Mr and Mrs Keogh sets out the details of the loan obtained by them from the bank to buy the Morwell property. The credit provided was $54,400, at an initial discounted interest rate of 5.72% per annum, repayable by instalments, from 5 September 2002 to 5 July 2032, of $317 per calendar month (the last being $223.60) and secured by the Westpac mortgage.

Thus the provisions of the Westpac mortgage incorporated the memorandum of common provisions AA670, the provisions of that memorandum required Mr and Mrs Keogh to pay amounts due to the Bank of Melbourne under the security arrangements and those arrangements included the variable rate investment property loan described in the Bank of Melbourne letter. Under that loan, Mr and Mrs Keogh were obliged to repay the amount of principal and interest by instalments of $317 per calendar month from 5 September 2002 to 5 July 2032. It is that obligation, among others, that Ms Rand has assumed, and which is contractually enforceable against her by Mr and Mrs Keogh.

Turning now to the disclosure document, it was given by “Great Australian Dream Providers GV and V Keogh” to Ms Rand. It was presumably given to meet the disclosure requirements of s 15 of the Code on the assumption that it applied. The document describes the “credit facility” offered by Mr and Mrs Keogh to Ms Rand to be “CONSUMER CREDIT CODE REGULATED”. Mr and Mrs Keogh are described as “Credit Provider[s]” via their loan with the Bank of Melbourne and they are also defined as the “Lender”. The document describes the offer of credit in these terms:

The Lender offers You a Loan (being a terms contract for the purchase of land) on the terms and conditions of this Loan Offer and by virtue of the Contract of Sale that you may enter into, you will be bound by the terms of the Mortgage between the lender and their mortgagees contained in the MCP No.[AA670] copy of which is attached.

The document then sets out the details of the “loan” (in terms mirroring the provisions of the contact of sale) relating to price, instalment payments, interest and settlement date that I have already described. Ms Rand accepted the terms of the “offer” by signing the document before a witness. Parts of the contract are similarly expressed in the language of borrowing. For example, special condition 12 refers to “the purchaser’s loan hereunder” and the “Uniform Credit Code” prevailing in the event of conflict.

As we shall see, the definition of “credit” in s 4(1) of the Code turns on whether, under a contract, there is the deferred payment of a debt owed or the incurring of a deferred debt. The definition does not say a credit contract is one for which a disclosure statement has been given, one that declares itself to be a credit contract or one that describes the contractual relations in terms of borrower and lender. Parties cannot, by their own description, make something a credit contract when it does not provide credit that answers the statutory description. Certainly the contract of sale in the present case must be read with the disclosure document. Regard should be paid to the terms of the contract, including terms that refer to the Code. While this may shed light on the legal relations created by the contract, the question is and at all times remains whether the contract provides “credit” as defined in s 4(1) of the Code.

WHAT IS “CREDIT” UNDER THE CODE?
History and purpose of the definition of credit

The coverage of the Code is based on the general definition of “credit” in s 4(1), which operates with the definition of “credit contract” in s 5, subject to the additional requirements of s 6 and (among other provisions) the exclusions specified in s 7. In the present case, the application of ss 6 and 7 are not in issue. The only question is whether the terms contract between Mr and Mrs Keogh and Ms Rand is a “credit contract” within s 5. That turns entirely on the application of the general definition of “credit” in s 4(1).

Here is s 4(1) of the Code:

For the purposes of this Code, credit is provided if under a contract –
(a)payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred; or
(b)one person (the debtor) incurs a deferred debt to another (the credit provider).

Therefore, credit is, and only is, the contractual deferment of payment of a debt owed (paragraph (a)) or the incurring of deferred debt (paragraph (b)). Under s 4(2), the amount of the debt is the amount of debt actually deferred, not including certain specified amounts. The explanatory memorandum is short, to the point and accurate:

Section 4 defines ‘credit’ as the deferral of the payment of debt or the incurring of deferred debt and defines the ‘amount of credit’ as the amount of debt actually deferred.[13]

[13]Explanatory Memorandum to Consumer Credit (Victoria) Bill, Notes on sections of the Code, s 4.

This definition makes a significant departure from the Credit Act 1984, which defined “credit” to include “any form of financial accommodation”.[14] “Financial accommodation” was not defined, so I can agree the definition was “not particularly helpful.”[15]
[14]Section 5(1).
[15]AJ Duggan, Simon Begg and Elizabeth Lanyon, Regulated Credit: The Credit and Security Aspects (1989) 44.

The definition also significantly departs from the approach adopted in the money lenders legislation. For example, the Money Lenders Act 1958 defined “loan” to include various kinds of payment or advance, the forbearance to require payment and “every contract (whatever its terms or form may be) which is in substance or effect a loan of money”.[16] The latter component of the definition gave rise to its own complex jurisprudence. The review of that jurisprudence in the principal Australian text[17] is proof positive that a different approach had to be adopted.
[16]Section 3(1).
[17]Clifford L Pannam, The Law of Money Lenders in Australia and New Zealand (1965) Chapter 2.

The definition of “credit” in the Code was adapted from the one used in the United States’ truth in lending legislation. The influence of that legislation on the introduction and improvement of uniform national consumer credit laws in Australia has been described in detail by Neave JA in Australian Finance Direct Ltd v Director of Consumer Affairs Victoria[18] and Kirby J in the decision in the same case on the appeal to the High Court of Australia.[19] This is the definition in the United States legislation:

The term ‘credit’ means the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.[20]

There is an expanded definition in the associated regulations:
The right granted by a creditor to a debtor to defer payment of debt, incur debt and defer its payment or purchase property and services and defer payment therefor.[21]

[18](2006) 16 VR 131, 161-162.

[19]Australian Finance Direct Ltd v Director of Consumer Affairs Victoria (2007) 241 ALR 67, 84.

[20]Truth in Lending Act 1968 (US), 15 USC, s 1602(e). According to Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) 40, the source of the definition was s 1.301(7) of the 1968 version of the Uniform Consumer Credit Code. They also say the 1974 version of that Code incorporates a similar extended definition after the one now specified in Regulation Z (see below).

[21]Truth in Lending Regulations (Regulation Z), 12 CFR, s 226(2)(a)(14).

Having regard to what the High Court said in CIC Insurance Ltd v Bankstown Football Club Ltd about “the modern approach to statutory interpretation”,[22] the object and purpose of the Code are relevant when interpreting “credit” in s 4(1). That object and purpose form part of the context in which the words of the definition must be interpreted in the first instance. The history of the legislation described by Kirby J and Neave JA also form part of that context.[23] Clause 8 of schedule 2 of the Code expressly allows the court to refer to the extrinsic materials specified in sub-s (1) when interpreting a provision as mentioned in sub-s (2). That does not exclude or qualify the wider and more open attention that is given to context and purpose, and the identification of the materials that may assist in that regard, according to the “modern approach” adumbrated in CIC Insurance Ltd.
[22](1997) 187 CLR 384, 408.
[23]As the differences in approach between Gleeson CJ, Gummow, Hayne and Crennan JJ, on the one hand, and Kirby J on the other, in Australian Finance Direct Limited v Director of Consumer Affairs Victoria ((2007) 241 ALR 67, 74, 76 ff) would indicate, minds may differ on the assistance that may be obtained from such contextual material in a given case, but that concerns the application and not the context of the principle.

The Code was adopted in Victoria by the Consumer Credit (Victoria) Act 1995 (Vic). Section 1 states the purpose of that Act “is to regulate the provision of credit.” The Code is an appendix to the Consumer Credit (Queensland) Act 1994 (Qld). The second reading speech emphasised the legislation was intended to “regulate by substance and not by form” and to apply to “all consumer credit lending” and “all forms of consumer credit.”[24] In giving that speech to the Queensland Parliament, the late Honourable TJ Burns made it quite clear that the legislation was intended to have a broad scope. From the time of the earliest reports, [25] this policy of regulating by substance and not by form, of avoiding artificial distinctions and of writing legislation in comprehensive terms has been a consistent theme in modern consumer credit law. As Kirby J said in Australian Finance Direct Ltd v Director of Consumer Affairs Victoria:

During the twentieth century, developments in the variety and significance of consumer credit contracts led to instances of abuse, obfuscation and unfairness, demands for amendments, public enquiries and reforming legislation.[26]

[24]Queensland, Parliamentary Debates, Legislative Assembly, 4 August 1994, 8828-8829 (Tom Burns, Deputy Premier and Minister for Consumer Affairs).

[25]Committee of the Law Council of Australia, Report on Fair Consumer Credit Laws to the Attorney-General of the State of Victoria (the Molomby Report) (1961-1962) 11.

[26](2007) 241 ALR 67, 82-32.

The provisions of the Code on the meaning of “credit” prescribe the scope of the latest such “reforming legislation” and should be interpreted in that light.

“Under a contract”

By s 4(1), the Code only covers credit provided “under a contract”. The requirement applies to both of the stipulated forms of credit: deferring payment of a debt owed (paragraph (a)) and incurring a deferred debt (paragraph (b)).

Clause 1(1) of schedule 1 of the Code defines “contract” to include “a series or combination of contracts, or contracts and arrangements.” The plural here includes the singular.[27] A contract therefore includes a contract and arrangement. I have added the emphasis to highlight that an arrangement is included only if there is a contract to begin with. By including arrangements that run with contracts, the Code is wider in this respect than was the Credit Act 1984, which did not extend to a “separate … arrangement”.[28] But even under the Credit Act, a payment made under one contract (a mortgage) was regarded as made under another contract (a loan) if the link between the two made them not mutually exclusive.[29]
[27]Section 37(d) of the Interpretation of Legislation Act 1984.
[28]Avco Financial Services Ltd v Abschinski [1994] 2 VR 659, 697.
[29]Australia and New Zealand Banking Group Ltd v R & D Bollas (1999) ASC ¶155-031; [1999] VSCA 50, [46].

The scope of the expression “under a contract” is ascertained by reference to the context in which the expression appears.[30] According to Gummow J in Commissioner of Taxation v Energy Resources of Australia Ltd,[31] depending on that context, the expression may require the payment or gain to be made “in exercise of a right or discharge of an obligation conferred or imposed… by the terms of the eligible contract.”[32]On the other hand, it might encompass payments or gains that have come about not necessarily by reason of the exercise of a right under the contract but “by reason of the existence of the contract or the performance of the contract”.[33] His Honour considered the other provisions of the statute as part of the context in which the particular provisions before him had to be construed.
[30]Thurn v Federal Commissioner of Taxation (1965) 112 CLR 432, 437; Chan v Cresdon Pty Ltd (1989) 168 CLR 242, 249; Commissioner of Taxation v Energy Resources of Australia Ltd (1994) 54 FCR 25, 53, 70.
[31](1994) 54 FCR 25, 53.
[32]Ibid.
[33]Ibid.

In Elmslie v Commissioner of Taxation[34] Wilcox J had to determine when an asset acquisition or disposal had taken place “under a contract” as specified in s 160U(3) of the Income Tax Assessment Act 1936 (Cth). His Honour decided the contract had to be “the means by which the asset was actually acquired.”[35] One reason he gave for doing so was that “the word ‘under’ usually imports a direct connection between the relevant act and the instrument.”[36]
[34](1993) 46 FCR 576.
[35]Ibid 590.
[36]Ibid 592.

This need for a direct connection was the basis of the decision in Chan v Cresdon Pty Ltd.[37] Guarantors agreed to guarantee performance of the lessee’s obligations “under the lease”. The lessee went into possession, not under that lease (which was ineffective as such for statutory reasons) but under a common law tenancy. It was held that the rent payable under the tenancy was not paid under the lease:

The word ‘under’, in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description.[38]

[37](1989) 168 CLR 242.

[38]Ibid 249.

The word “under” is a word “commonly used to describe the relation between a right and the root of the title from which the right is derived”. Those words were spoken by Kitto J in Thurn v Federal Commissioner of Taxation.[39] The High Court had to decide whether payments made under an assigned policy of life assurance were, in terms of s 8(4)(f) of the Estate Duty Assessment Act (1914)-(1957) (Cth), made “under a policy of assurance” or under the assignment. For reasons that are presently irrelevant, the Court (by a majority) gave a negative answer to that question. But there was no doubt that the right to the payments arose under the policy even though the right was exercised through the medium of the intervening assignment.[40]
[39](1965) 112 CLR 432, 437.
[40]Ibid 437, 440, 442.

Section 160U(3) of the Income Tax Assessment Act was considered again, this time by the High Court, in Federal Commissioner of Taxation v Sara Lee Household and Body Care (Australia) Pty Ltd.[41] The case concerned the disposal of assets. The Court described the connection required in terms of the source of the obligation to dispose: “The words ‘under a contract’, in s 160U(3), direct attention to the source of the obligation which was performed by the transfer of the assets which constituted the relevant disposal.”[42] It held the disposal occurred under the relevant agreement because it was the source of the obligation to dispose, even though the price and certain other terms and conditions had changed.
[41](2000) 201 CLR 520.
[42]Ibid 537 (footnote omitted).

This reasoning was applied to the Code by Kaye J in Australian Finance Direct Ltd v Director of Consumer Affairs Victoria.[43] His Honour held the expression “under the contract” in s 15(C), (D) and (E) required the contract to be the source of the relevant payment or obligation,[44] with the result that payments made under a separate contract between the lender and a third party were not included.[45] The Court of Appeal agreed.[46] The construction of “under the contract” did not arise in the High Court appeal.[47]
[43](2005) ASC ¶155-073; [2004] VSC 526.
[44]Ibid [91].
[45]Ibid [97].
[46]Australian Finance Direct Ltd v Director of Consumer Affairs Victoria (2006) 16 VR 131, 140, 155 and 156 (the point was raised in the Director’s cross-appeal, which was dismissed).
[47]See Australian Finance Direct Ltd v Director of Consumer Affairs Victoria (2007) 241 ALR 67.

The context in which we must interpret “under a contract” is the meaning of credit in s 4(1) of the Code. As it specifies the credit to which, under a credit contract,[48] the Code applies, s 4(1) is central to the scope and operation of the Code. For the reasons I have already given, the provisions of s 4(1) must be interpreted with the object and purpose of the Code in mind.
[48]See s 5.

Paying due regard to that consideration, the Code, in s 4(1), uses “under a contract” in a reasonably specific sense. The subject‑matter of s 4(1) is the deferring of the payment or the incurring of the legal obligation of debt or deferred debt. The section speaks of credit of that kind being “provided” under the contract, which means the deferring or incurring must be something for which the contract makes provision. Where such credit is provided under a contract, the contract is a credit contract, which is regulated in quite specific terms, including its form.[49] Certainly “contract” has been broadly defined to pick up a series of contracts and arrangements.[50] But “under a contract” in s 4(1) requires the contract to be the source of the right – the root of the title of the right - to defer payment of the debt owed or to incur the deferred debt. This interpretation is fully consonant with the object and purpose of the legislation and the effective operation of the regulatory scheme; it was the one adopted in Australian Finance Direct Ltd v Director of Consumer Affairs Victoria by Kaye J at first instance[51] and the Court of Appeal.[52]
[49]Section 12(1).
[50]Clause 1(1) of schedule 1.
[51](2005) ASC ¶155-073; [2004] VSC 526.
[52](2006) 16 VR 131, 140, 155, 156.

The present case concerns the legal character of the buyer’s obligation to pay instalments of price under a terms contract for the sale of land. It also concerns the legal character of the buyer’s assumption, in such a contract, of the obligations of the seller’s mortgage. It is necessary to characterise the rights and obligations created by the contract to see if they constitute the deferring of payment of a debt or the incurring of deferred debt. The source of all of the relevant legal rights and obligations concerned is the contract of sale. If those rights and obligations amount to deferring payment of debt or incurring deferred debt, as specified in s 4(1)(a) or (b) of the Code, then credit has been provided “under a contract”, and that necessary component of the definition of credit is satisfied.

The two parts of the definition of “credit” in paragraphs (a) and (b)

The definition of credit in s 4(1) of the Code has been deliberately written in plain English and should be interpreted sensibly and reasonably, respecting the choice of the legislature to so express it, with the object and purpose of the legislation in mind.

The first component is paragraph (a), which covers the deferring of payment of debts already owed, which is a significant but limited field. The second component is paragraph (b), which covers incurring deferred debts, which is a very wide field indeed.

As to paragraph (a), deferring the payment of a debt owed covers at least the case of forbearance.[53] It may not cover much else, but that will be revealed through the decided cases over time. What is deferred is the time for the payment (see below). Such a transaction is not a loan as such, and creates no new amount of debt, because the debt is already owed. Paragraph (b) does not include such a case, because there is no incurring of debt. The deferring of the payment of an existing debt, if contractual, comes within paragraph (a).
[53]See generally Clifford L Pannam, The Law of Money Lenders in Australia and New Zealand (1965) 21-22.

It has been suggested that paragraph (a), looked at alone, might also cover credit sales and loans, that is, if “debt” is read as including a debt created by the contract itself.[54] But s 4(1)(a) and (b) has to be read as a whole. The scheme is clear enough from the language used. The debt referred to in paragraph (a) is described in the past tense. It picks up cases where payment “of a debt owed… is deferred”. By contrast, the debt referred to in paragraph (b) is described in the present tense. It picks up cases where the debtor “incurs” a deferred debt. If the intended coverage of the Code with respect to credit sales and loans depended on it, I could see how paragraph (a) might be widely interpreted to encompass debts created and payments deferred in the one document, but it does not. Paragraph (b) is perfectly apt to pick up such transactions. It seems to me to be an unnecessary complication, and a distraction, to ponder whether such cases can be squeezed into paragraph (a) as well. I will leave further discussion of that subject for cases, if any, where it actually matters.
[54]Anthony Duggan and Elizabeth Lanyon, Consumer Credit Law (1999) 41-42.

As to paragraph (b), it applies where the debtor “incurs a deferred debt” to another. That triangulated concept is robust and (in Australia) new. It is amply strong enough to carry the main weight of the definition of “credit” in s 4(1), which is so important to the achievement of the regulatory objectives of the Code. Each element of the concept must have an interpretation put on it that gives best effect to the purpose so assigned to it by the legislation, which must then be applied in a practical and common-sense manner. It picks up all cases where a contract creates a definite present obligation to pay an unavoidable and ascertainable amount in the future. The contractual creation is the incurring. The unavoidable obligation to pay the ascertainable amount is the debt. Specifying in the present an obligation to pay that amount in the future is the deferring. I say “definite” because paragraph (b) does not pick up something less than a present obligation unavoidably to pay the amount in the future. I have arrived at that interpretation of paragraph (b) on the basis of the analysis that follows.

The concept of incurring deferred debt in paragraph (b)
“Incurs”

You can look up the dictionaries and find “incur” is defined to mean suffering, experiencing or becoming subject to something unpleasant as a result of one’s own behaviour. In short, it is bringing something on yourself. As the courts have found in other contexts,[55] that is a good start but the particular legislation must be carefully examined. At least in one respect, the word has a more specific meaning in s 4(1)(b) of the Code. The credit, and so the incurring, must be “under a contract”. So the definition is talking about contractual and not other kinds of incurring. That will be important in the present case, which requires a close consideration of this question: from whence does the buyer’s obligation to pay instalments arise? Before considering that question, let me first lay the groundwork.
[55]See eg Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 221; Versteeg and Versteeg (1988) 36 A Crim R 68, 81.

Gleeson CJ and Kirby P wrote extensively on “incurs” in Hawkins v Bank of China.[56] The context was s 556(1) of the Companies (NSW) Code, which made it a criminal offence for a company director to allow the company to “incur a debt”[57] when (to summarise) there were reasonable grounds to expect the company would not be able to pay its debts when they became due. Gleeson CJ said “[t]he words ‘incurs’ and ‘debt’ are not words of precise and inflexible denotation”; therefore “they are to be applied in a practical and commonsense fashion, consistent with the context and with the statutory purposes.”[58] The Chief Justice, as did the President,[59] accordingly gave “incurs a debt” a wide construction as encompassing the incurring of a contingent debt by entering a guarantee. This approach to interpreting the meaning of “incurs” and “debt” has been frequently applied, not only to the Companies Code and its successor legislation in New South Wales[60] but also in other States,[61] including Victoria.[62]
[56](1992) 26 NSWLR 562.
[57]Section 556(1)(a).
[58](1992) 26 NSWLR 562, 572.
[59]Ibid 576-578.
[60]Bans Pty Ltd v Ling (1995) 16 ACSR 404, 408; Shepherd v ANZ Banking Corporation Ltd (1996) 41 NSWLR 431, 433-434.
[61]Re Beckwith; Ex parte Power and Power (1993) 43 FCR 256, 270 (Corporations Law, s 592 (Qld)); Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 233 (Companies (WA) Code, s 556(1)(a)); Fryer v Powell (2001) 159 FLR 433, 444 (Full Court of Supreme Court of South Australia; Corporations Law, s 588G).
[62]Harrison v Lewis (2001) 19 ACLC 566, 572 (Corporations Law, s 588G) and Australian Securities Investment and Commission v Plymin (2003) 175 FLR 124, 243-249 (Corporations Law, s 588G).

The same approach should be adopted when considering “incurs” in s 4(1)(b) of the Code. The word is to be interpreted in a way that is “consistent with the context and with the statutory purposes.”[63] As to the context, the requirement that the credit be provided “under a contract” means the source of the incurring must be the contract (see above). As to the purpose, we have seen the purpose of the Code is “to regulate the provision of credit.”[64]
[63]Hawkins v Bank of China (1992) 26 NSWLR 562, 572.
[64]Section 1.

In an individual case, the word “incurs”, and the other elements, must then be applied, so interpreted, in a “practical and commonsense”[65] fashion. Generally speaking, the act of incurring happens when the debtor “so acts as to expose itself contractually to an obligation to make a future payment of a sum of money as a debt.”[66] In the context of s 4(1)(b) of the definition of “credit”, this directs attention to the terms of the individual contract, express or implied, examined in the context of the circumstances of the case.
[65]Hawkins v Bank of China (1992) 26 NSWLR 562, 572.
[66]Ibid 576 per Kirby P; see also Woodgate v Davis (2002) 55 NSWLR 222, 226 per Barrett J: “’Incurring’ is the act or omission of the company through which exposure of it to a monetary obligation arises.”

How a present obligation to make a future payment may be “incurred” under a contract may be illustrated by reference to the cases decided under the insolvent trading provisions of the corporations legislation. The issue usually arises in that context because it is necessary for statutory reasons to say not just whether, but when, a debt liability was incurred by the corporation. The analysis in the cases assists us here to appreciate the nature of the liability more generally. What the cases show is that, where the contract creates a present and unavoidable obligation to make a future payment in an ascertainable amount, then there is the incurring of debt.

I can begin with the leasing cases. In Russell Halpern Nominees Pty Ltd v Martin[67] the question was whether the obligation to make rental payments under a lease was incurred when the lease was entered into or when the time for payment arrived. Burt CJ held that no “relevant act on the part of the tenant beyond his entering into the lease in the first instance can be identified.”[68] Similarly, in Bans Pty Ltd v Ling[69] Bryson J held the obligation to pay ascertainable rent, but not unascertainable and contingent interest, was incurred when the tenancy was entered into. By contrast, no debt was incurred in Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (No 2)[70] when the company became exposed to a claim for unliquidated damages for breach of a covenant in a lease not to damage the premises.
[67][1987] WAR 150.
[68]Ibid 153; Smith (153) and Olney JJ (156) agreed. Burt CJ has not been understood to decide that the whole of the rent was due when the lease was entered into: see Hussein v Good (1990) 1 ACSR 710, 717.
[69](1995) 16 ACSR 404, 406.
[70](1996) 21 ACSR 157, 159.

Other cases have involved ordering goods or services. The same principle has been applied with different results, depending on the circumstances. In Versteeg and Versteeg[71] the submission that the company incurred a debt when it engaged a contractor to do work was rejected. This was because the latter only became present and ascertainable when the work was done.[72] Similarly, in Hussein v Good[73] the company was held to have incurred a debt when the goods were delivered, not when the order was placed, for that was what the parties agreed.[74] In both of these decisions the leasing cases were distinguished because the latter involved a definite present obligation to pay the ascertainable rent in the future. I think Hussein v Good was a clear case, for the seller’s remedy was an action for unliquidated damages, not debt for the price, as held in the analogous case of Hamilton v Abbott.[75] The other side of the coin, of more value in the present case, is where a seller takes an order on the basis that the buyer must make a prepayment. As we shall see, the seller can sue the buyer for the prepayment in debt if it is not paid as agreed, but does not incur a debt to the buyer by accepting that amount just because the prepayment, if consideration totally fails, may later have to be repaid.
[71](1988) 36 A Crim R 68.
[72]Ibid 82.
[73](1990) 1 ACSR 710.
[74]Ibid 719.
[75](1980) 5 ACLR 391, 394; see also Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251, 258.

The basis of the decisions that various kinds of taxes and duties become, at a certain point, incurred as debts is that, at that point, they involve present obligations unavoidably to pay ascertainable amounts.[76]
[76]See eg Commissioner of State Taxation (WA) v Pollock (1993) 12 ACSR 217, 231 (liability for pay-roll tax incurred when capable of ascertainment at end of month); approved Sands and McDougall Wholesale Pty Ltd v Commissioner of Taxation (Cth) [1999] 1 VR 489, 504 and Fryer v Powell (2001) 159 FLR 433, 444.

Returning to the present case, our focus is on the nature and origin of the buyer’s obligation to make an instalment payment under the terms contract between Mr and Mrs Keogh and Ms Rand. In my view, a buyer who enters such a contract – at least one having the features of that contract – thereby “incurs” a deferred debt under that contract. I will give later my reasons for concluding the obligation has the character of a deferred debt. It is sufficient at this stage to say that the obligation is a contractual one, and that it constitutes a present obligation to make an unavoidable future payment of a sum certain – a debt owing but not due. It must follow, I think, that the debt is incurred under a contract, for it is by entering the terms contract that a buyer in the position of Ms Rand brings upon themselves the obligation unavoidably to make the instalment payments. In the words of Kirby P cited earlier, the buyer has so acted “to expose itself contractually to an obligation to make a future payment of a sum of money as a debt.”

“Deferred”

The dictionaries define “defer” to mean putting off something to a later date, to postpone or to delay the doing of something.

In paragraph (a) of the definition of “credit”, it is payment of a debt owed that is deferred. This component of the definition therefore catches payments of debts owed that, under a contract, are put off to a later time, postponed or delayed.

The subject of paragraph (b) of the definition is the incurring of deferred debt. This component captures the incurring, under a contract, of debts that are put off to a later time, postponed or delayed. At least usually, “incurs a deferred debt” covers the creation of debts that are incurred at the same time that payment is deferred. That this is so is supported by the two considerations mentioned by the Commercial Tribunal of New South Wales in McKenzie v Smith.[77] The first is that “incurs a deferred debt” is coupled with the requirement that it be “under a contract”. The second is that “incurs a deferred debt” is expressed as a single concept. I would add a third: “incurs a deferred debt” is expressed in the present tense. But there may be cases where a credit contract creates different points of time in which a debtor incurs deferred debts, as with a credit contract that is a continuing credit contract under which multiple advances of credit may be provided from time to time.[78] That may be why s 5 defines a “credit contract” to be one under which credit is “or may be” provided.

“Debt”

[77](1998) ASC ¶155-025, 148,590.

[78]See the definition of “continuing credit contract” in cl 1(1) of schedule 1.

In general terms, a “debt” is what can be claimed in an action for debt. According to Sholl J in Alexander v Ajax Insurance Co Ltd that action, for some time, has covered, among other things, claims for money under contracts, express or implied, whether verbal or written, “whenever the demand is for a sum certain, or is capable of being readily reduced to a certainty.’”[79] Thus debt is a broad conception. Perhaps the simplest form of debt is the obligation to repay on the due date a fixed term loan, with or without interest.[80] Beyond that, we should note what Gleeson CJ said in Hawkins v Bank of China: “debt” is not a word of “precise and inflexible denotation.”[81] To the same effect was Ormiston J in Re Elgar Heights Pty Ltd: “In truth there is no universal definition which can be given to the word ‘debt’.”[82] “Debt” in s 4(1)(b) of the Code, therefore, is open to interpretation. As with the other components of “incurs a deferred debt”, the interpretation that must be put on it is one that gives best effect to the objects and purposes of the Code, which must then be applied in a “practical and commonsense fashion”.[83]
[79][1956] VLR 436, 445, citing Chitty on Pleadings (1831, 5^th ed) vol 1, 123-124.
[80]McKenzie v Smith (1998) ASC ¶155-025, 148,587.
[81]Hawkins v Bank of China (1992) 26 NSWLR 562, 572.
[82][1985] VR 657, 664.
[83]Hawkins v Bank of China (1992) 26 NSWLR 562, 572; Re Elgar Heights Pty Ltd [1985] VR 657, 665.

It is helpful to draw attention to the fundamental distinction between a debt and damages. A debt is an obligation to pay an ascertained or ascertainable amount, which the law sometime calls a liquidated amount. Damages is what a court orders one party to pay to the innocent party in compensation for, say, the former’s breach of contract. The amount cannot be ascertained in advance because it is assessed by the court.

It is equally helpful to examine the principles governing contracts for the sale of goods, for that will lead to our later analysis of terms contracts for the sale of land. Since contracts of the second kind are executory contracts, not executed contracts, I will focus on contracts of the first kind that are also executory.

A contract for the supply of goods for a price to be paid on delivery is an executory contract. It is a contract in which the buyer has agreed to pay the price in return for the goods, not for the seller’s promise to supply the goods. I will put aside the sale of goods legislation.[84] At common law, the buyer’s obligation to pay does not arise until the goods are delivered, because only then does property in the goods, which is the true consideration, pass to the buyer. Consequently, where the buyer refuses delivery and fails to pay the price, the seller’s remedy is to sue for unliquidated damages for breach of contract, not for the liquidated amount of the price as a debt. As Isaacs and Rich JJ said in Martin v Hogan:

The common law says, however strictly a man may have promised to pay the price on any given event, his failure to pay on that event is to be compensated for by ascertaining the amount of damage the promisee has sustained.[85]

Accordingly, in Plaimar Ltd v Waters Trading Co Ltd, Rich, Dixon and McTiernan JJ criticised a judgment which “ought not to have been given for the price but only for unliquidated damages. The property in the goods had not passed.”[86] It is this general principle that Dixon J summarised in Automatic Fire Sprinklers Pty Ltd v Watson,[87] on which Mr and Mrs Keogh placed reliance. This will be relevant to my later analysis of what his Honour meant when he went on to deal with prepayments made under terms contracts for the sale of land.

[84]See, for example, s 23 of the Goods Act 1958, which states the rules for ascertaining when the parties intend property to pass to the buyer.

[85](1917) 24 CLR 234, 262.

[86](1945) 72 CLR 304, 318. In Bot v Ristevski [1981] VR 120, 129-130, Brooking J said the same thing about Dewar v Mintoft [1912] 2 KB 373. See further Re Beckwith; Ex parte Power and Power (1993) 43 FCR 256, 270. See also Minister for Supply and Development v Servicemen’s Co-operative Joinery Manufacturers Ltd (1951) 82 CLR 621, 636; Rema Industries and Services Pty Ltd v Coad (1992) 7 ACSR 251, 258.

[87](1946) 72 CLR 435, 463-464.

Let us now move to the kind of case in which the contract requires the buyer to make payments before consideration or full consideration has passed. Such a contract displaces the position I have just described. The rule that applies is of considerable antiquity and is an aspect of the general principles I am here discussing. The position was clear by 1669 when it was laid down as Rule 1 at the end of the judgment in Pordage v Cole:

If a day be appointed for payment of money, or part of it, or for doing any other act, and the day is to happen, or may happen, before the thing which is the consideration of the money, or other act, is to be performed, an action may be brought for the money, or for not doing such other act before performance; for it appears that the party relied upon his remedy, and did not intend to make the performance a condition precedent: and so it is where no time is fixed for performance of that, which is the consideration of the money or other act.[88]

Rule 1 still represents the common law. In Martin v Hogan, Isaacs and Rich JJ, consistently with the Rule, were able to say:
If, again, there has been agreement to pay the money on a day fixed by the contract, irrespective of the consideration passing – then, again, the sum can be recovered.[89]

Similarly, in Plaimar Ltd v Waters Trading Co Ltd, Rich, Dixon and McTiernan JJ said it was wrong for judgment to be given for the price because “[t]he contract did not provide for payment for the goods on a day certain.”[90]

[88](1669) 85 ER 449, 451-452 (footnotes omitted).

[89](1917) 24 CLR 234, 262.

[90](1945) 72 CLR 304, 318; see further Minister for Supply and Development v Servicemen’s Co-operative Joinery Manufacturers Ltd (1951) 82 CLR 621, 636.

Let us now look at the matter from the perspective of the buyer under a contract for the purchase of goods. On the principles just discussed, a buyer who fails to make agreed prepayments may be sued by the seller in debt, once the time for payment has passed, even if consideration has not yet been given, for that is what the parties agreed. That means the legal character of the buyer’s obligation to make the prepayment is a present debt to make a future payment (a debitum in praesenti, solvendum in futuro) that matures into a debt due and payable (a debitum in praesenti) when the time for making payment arrives. That is so even though the contract is an executory contract. We shall see the same is so with Ms Rand’s obligation to pay the instalments under her terms contract with Mr and Mrs Keogh.

What if the buyer makes the payment when it falls due, but the consideration is not subsequently provided? The buyer has a right of recovery both at law and in equity.[91]
[91]See generally Lexane Pty Ltd v Highfern Pty Ltd [1984] 1 Qd R 446, 455.

The basis of the right of recovery at law can be stated in a short sentence: when the contract is at an end, “the whole idea of payment falls to the ground…”[92] Lord Denman CJ wrote that oft-cited[93] sentence in 1839 in Palmer v Temple when giving judgment against the seller who wanted to retain the payment after the contact was at an end. From “that moment”, the Chief Justice said, “the vendor holds the money advanced to the use of the purchaser”.[94]
[92]Palmer v Temple (1839) 112 ER 1304, 1309.
[93]See eg McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 470.
[94](1839) 112 ER 1304, 1309.

So in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd[95] the buyer paid a sum of money with the order but the seller failed to supply the machinery because World War Two broke out. The House of Lords held the buyer could recover the prepayment as money had and received because the consideration had totally failed. The war had made delivery of the machinery impossible, which dissolved the contract for frustration. This defeated the seller’s entitlement to retain the prepayment, which the buyer could recover. In the words of Lord Wright:

The right in such a case to claim repayment of money paid in advance must in principle, in my judgment, attach at the moment of dissolution. The payment was originally conditional. The condition of retaining it is eventual performance. Accordingly, when that condition fails, the right to retain the money must simultaneously fail.[96]

[95][1943] AC 32.

[96]Ibid 65.

The right of recovery in equity was described by Starke J in McDonald v Dennys Lascelles Ltd as an entitlement “to take proceedings in equity to assert his right and secure restitution”.[97]
[97](1933) 48 CLR 457, 470.

I do not think a buyer’s right of recovery alters the character of their obligation to make the original prepayment or its enforceability at the suit of the seller as a debt. The past does not change. The buyer’s right of recovery at law depends on a total failure of consideration happening after, and therefore not affecting, the original character of the obligation to make the payment. The right of recovery in equity rests on a restitutionary obligation imposed by law, not on the agreement of the parties. By contrast with the case of mistake, the right arises not on making the payment, but only when the consideration totally fails.[98] It follows that the seller does not incur a contingent debt to the buyer in respect of the prepayment.[99]
[98]David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 389.
[99]Shephard v ANZ Banking Corporation Ltd (1996) 41 NSWLR 431, 435; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 477-478; Lexane Pty Ltd v Highfern PtyLtd [1984] 1 Qd R 446, 455.

Three things of importance to the present case emerge from this analysis. First, under an executory contract for the sale of goods, the obligation of the buyer to make agreed payments to the seller before the goods are delivered can be enforced by the seller as a debt recoverable from the buyer when the time for payment arrived. Second, the seller’s right to retain the payment can be defeated, for example, where subsequently consideration totally fails, so that the buyer may reclaim the prepayment from the seller, both at law and in equity. Third, the character of the buyer’s obligation to make the agreed prepayment as a debt enforceable by the seller is not altered by the buyer’s subsequent right, at law or in equity, to reclaim the payments from the seller in the event that consideration totally fails. To those general principles I shall later return.

I have expressed the view that this obligation to make a future payment is a present debt for which payment is not yet due (a debitum in praesenti, solvendum in futuro) that matures, when the time for payment arrives, into a present debt for which payment is due (a debitum in praesenti). These legal categories of debt emerge from the decided cases and, I repeat, are equally applicable when determining whether a terms contract for the sale of land is a credit contract under the Code. Of the countless cases on the subject, I will deal with just four.

The first is Webb v Stenton.[100] The Court of Appeal had to decide whether income from a trust fund was a debt “owing or accruing” and therefore liable to attachment under the applicable legislation. It held “owing or accruing” encompassed a debt debitum in praesenti, solvendum in futuro. Brett MR gave this reason:

There again it is obvious that in 1875 that learned judge construed the words ‘accruing debt’ to mean a debt debitum in presenti, solvendum in futuro. Now that is a debt known to the law and which the law has always recognised. The law has always recognised as a debt two kinds of debt, a debt payable at the time, and a debt payable in the future, and unless the legislature intended to invent a new kind of debt not known to the law, ‘accruing debt’ can only be what the judges have so stated.[101]

Lindley LJ was equally explicit:
I should say, apart from any authority, that a debt legal or equitable can be attached whether it be a debt owing or accruing; but it must be a debt, and a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation, debitum in presenti, solvendum in futuro. An accruing debt, therefore, is a debt not yet actually payable, but a debt which is represented by an existing obligation.[102]

[100](1883) 11 QBD 518.

[101]Ibid 524.

[102]Ibid 527.

This decision has been frequently followed. For example, in Re Australia and New Zealand Savings Bank Ltd; Mellas v Evriniadis[103] the question for the Full Court of the Supreme Court of Victoria was whether the bank’s obligations to make payments to a customer from his savings account were “debts owing” and therefore liable to garnishee under the applicable legislation. It was a condition of withdrawal that the customer attend personally before a teller with the correctly completed form and passbook. Citing Webb v Stenton,[104] Winneke CJ, Pape and Crockett JJ held there was no debt owing or accruing. The judgment of the Full Court was delivered by Pape J, who said: “a debt ‘accruing due’ must be a debt based upon a present obligation but which is payable at a definable approachable future date“.[105] So a debt that arose only on the performance of a condition precedent was not an accruing debt, that is, not a debitum in praesenti, solvendum in futuro, and could not be garnisheed.[106] Personal production of the withdrawal form and passbook before a teller were conditions precedent to the Bank’s obligation to meet a customer’s withdrawal request.
[103][1972] VR 690.
[104](1883) 11 QBD 518.
[105][1972] VR 690, 693.
[106]Ibid 692, 693.

Next we can return to the carefully considered decision of the Tribunal in McKenzie v Smith,[107] which concerned the Code itself. The Tribunal held instalment contracts for the sale of land were credit contracts under the Code. I will return to the decision on that question later. For present purposes I will focus on what the Tribunal said about “incurs a deferred debt” in s 4(1)(b) of the Code. I am in substantial agreement with the Tribunal’s very useful analysis of the subject of debt and in total agreement with its conclusion that, in s 4(1)(b), “incurrs a deferred debt” means –

an existing debt incurred under the contract payable under the contract at a defined future date. The words ‘incurs a deferred debt’ point to an immediately incurred deferred debt. Although payable in the future, it is an existing debt represented by an existing obligation … The words ‘incurs a deferred debt’ are apt to describe the act of exposing oneself contractually to an obligation to make a future payment.[108]

[107](1998) ASC ¶155-025.

[108]Ibid 148,590.

I say substantial agreement in relation to the analysis because the Tribunal stated unequivocally that “incurs a deferred debt” does not include contingent or conditional debts.[109] If, by a contingent or conditional debt, the Tribunal means a debt that might never mature into an actually payable debt, so it is not a definite present obligation to make an unavoidable future payment, I can agree. The Tribunal mentioned Re Australia & New Zealand Savings Bank Ltd; Mellas v Evriniadis[110] in this connection, suggesting it was that kind of contingent or conditional debt that it had in mind. But, speaking of minds, they are apt to differ on what debts are contingent or conditional. To some, a debt payable on a certain date is contingent or conditional on the arrival of that date, yet the Code captures debts of that kind. I would prefer to say s 4(1)(b) of the definition of “credit” applies to the contractual incurring of a definite present obligation unavoidably to pay an ascertainable monetary amount in the future, which does not include an obligation to make a payment that may or may not arise.
[109]Ibid.
[110][1972] VR 690.

Lastly there is Rafiqi v Wacal Investments Pty Ltd,[111] which was decided only two months before McKenzie v Smith.[112] With respect, I must disagree with the analysis, although not the result.
[111](1998) ASC ¶155-024.
[112](1998) ASC ¶155-025.

Wacal had agreed to sell land to the applicants for $21,950. The deposit was $3,500 and the balance was to be paid within 30 days. The contract provided that, if the balance was not so paid, Wacal could require payments by instalments instead, which it did.

A judge of the District Court of Queensland decided the creation of the buyer’s obligation to pay instalments by the exercise of the seller’s election represented the incurring of a deferred debt, because that concept included an obligation to make a future payment which, though not due, was a probable future debt.[113] His Honour reached that conclusion by reference to the decision of the High Court in Australian Guarantee Corporation Ltd v Balding.[114] But the decision in that case was that the relevant hire-purchase payments, though not debts due or to become due, came within the extended definition of debts in s 181 of the Instruments Act 1915 (Vic), namely “debts which might become due or owing…”[115] As the Tribunal said in McKenzie v Smith,[116] s 4(1)(b) embraces present debts which definitely become payable in the future, which “excludes an inquiry into probabilities or improbabilities”.[117]
[113]Ibid 148,572.
[114](1930) 43 CLR 140.
[115]See ibid 157 per Starke J.
[116](1998) ASC ¶155-025.
[117]Ibid 148,592.

It think the result in Rafiqi was correct, not on the basis given, but because the exercise of the seller’s right of election was a forbearance coming within s 4(1)(a), or because the new contract was a terms contract for the sale of land which, in my view, provided credit to the buyer within s 4(1)(b).

Returning to the present case, it follows from my analysis that the terms contract between Mr and Mrs Keogh and Ms Rand will be a credit contract if it is the source of a definite present obligation on the part of Ms Rand to make an unavoidable payment of money in an ascertainable amount to Mr and Mrs Keogh in the future. It is therefore necessary to identify the legal character of Ms Rand’s obligation to pay instalments under her terms contract with Mr and Mrs Keogh.

IS THE TERMS CONTRACTS BETWEEN MR AND MRS KEOGH AND MS RAND A “CREDIT CONTRACT” UNDER THE CODE?
The submissions of the parties

The parties have made submissions to me, by reference to the decided cases, about the obligation of a buyer to make instalment payments under a terms contract for the sale of land. I am conscious that such contracts vary in their terms and conditions, although they do share certain essential features which makes it possible to consider them a general class. For example, in Victoria, terms contract as a general class are defined and regulated by the Sale of Land Act. That fact should not be allowed to displace the attention that every such contract requires in an individual case.

In this case I have only one contract before me, being the one between Mr and Mrs Keogh and Ms Rand. The Tribunal found, and the parties agreed, that contract was typical of the 45 others at issue in the proceedings before the Tribunal. But I am not in a position to say what features may be possessed by other terms contracts for the sale of land, or what analytical difference that may make to the potential application of the Code to them. I will be proceeding in this case on the basis of the contract before me, remembering that it is a terms contract within the definition of that expression in s 2(1) of the Sale of Land Act, which itself specifies the essential features of such a contract, at least in Victoria.

Mr and Mrs Keogh submitted the Tribunal erred in law in deciding the terms contract of sale to Ms Rand was a “credit contract” as defined in s 5 of the Code. Their basis for doing so was that the contract did not provide “credit” as defined in s 4(1).

The Director did not submit s 4(1)(a) of the definition of credit was applicable. Because the contract did not involve the deferring of payment of an existing debt, I think it was not. The appeal therefore turns on whether s 4(1)(b) applies.

The Tribunal, in a carefully considered decision, decided the contract provided credit as defined in the Code for two reasons. The first related to Ms Rand’s obligation to pay the price, which is the one I will focus on here. The second related to Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage obligation, which I will deal with later.

As to Ms Rand’s obligation to pay the price, the Tribunal decided the contract made the purchase price, less the deposit, immediately owing at the date of execution of the contract. The Tribunal found this to be indicated by the use of the words “owing” in respect of the balance in various parts of the contract, and by the buyer’s obligation to pay interest on the unpaid balance. The Tribunal concluded “the immediate payment of the whole of the balance is deferred so that it is payable by 360 instalments.”[118]
[118][2006] VCAT 106, [38].

The Director submitted to the Tribunal that the contract provided credit because Ms Rand’s obligation to pay instalments was a present obligation to pay a future debt which came within the concept of “incurs a deferred debt”. Mr and Mrs Keogh submitted the contract did not create any such debt. They relied on the judgment of Dixon J in McDonald v Dennys Lascelles Ltd.[119] The Tribunal’s decision was given for the two reasons I have mentioned. It said it was not necessary to resolve the competing submissions put forward by the parties. With respect, I think it was.
[119](1933) 48 CLR 457, 475-6.

In the proceeding before me, Mr and Mrs Keogh submitted the Tribunal’s decision was wrong in law on the general basis that the contract between the parties was a terms contract, under which, if the buyer complies with the obligation to pay the monthly instalments, no monies are owed by the buyer at any time. If the buyer fails to make those payments, the seller’s remedy is to exercise the rights conferred by the provisions of special condition 27, read with Table A.

Mr and Mrs Keogh submitted a buyer’s obligation to make an instalment payment did not become a debt until the time for making the payment arrived. That time may never arise because, for example, the contract may be repudiated or rescinded prior to completion, which would destroy both the buyer’s obligation to make future payments and, potentially, the seller’s entitlement to retain payments already made. As a terms contract of sale is an executory contract, the buyer incurred no obligation to pay the purchase price until the seller provided (or perhaps tendered) title to the buyer at final settlement, for that was the true consideration under the contract. It followed that, Mr and Mrs Keogh submitted, McKenzie v Smith[120] was wrongly decided.
[120](1998) ASC ¶155-025.

The Director supported the decision of the Tribunal, but not exactly on the reasoning it adopted. He submitted to me, as he did to the Tribunal, that the contract, as a terms contract, involved the incurring of a present obligation unavoidably to pay the future instalments, which represented the incurring of a deferred debt. Alternatively, the Director submitted Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage obligations involved incurring deferred debt. The Director submitted McKenzie v Smith[121] was correctly decided and invited me to approve it.
[121]Ibid.

The Director also submitted, in reliance on s 11(1) of the Code, that the Code presumptively applied to the contract between the parties, unless Mr and Mrs Keogh established otherwise.

The Director also submitted the appeal was not on a question of law, to which it must be confined under s 148(1) of the Victorian Civil and Administrative Tribunal Act. I must reject that submission. The appeal raises questions about the character of the legal relations created by the terms contract between the parties and how those relations may bring the contract within the scope of ss 4(1) and 5 of the Code, properly interpreted. The appeal is therefore on a question of law.

Characterising the obligation of a terms buyer to make instalment payments

Under an ordinary contract for the sale of land for cash payable at settlement in exchange for conveyance, the seller’s right against the buyer who refuses to pay the purchase money sounds in damages and not in debt. That is because the intention of the parties is usually taken to be that the price will be paid for the true consideration represented by conveyance of the property itself and not for the seller’s promise to convey. So, in 1841, when deciding Laird v Pim, Parke B said this:

The measure of damages, in an action of this nature, is the injury sustained by the plaintiff by reason of the defendants not having performed their contract. The question is, how much worse is the plaintiff by the diminution in the value of the land, or the loss of the purchaser-money, in consequence of the non-performance of the contract? It is clear he cannot have the land and its value too. A party cannot recover the full value of a chattel, unless under circumstances which import that the property has passed to the defendant, as in the case of goods sold and delivered, where they have been absolutely parted with, and cannot be sold again.[122]

[122](1841) 151 ER 852, 854.

Thus the buyer’s obligation to pay the sale price is seen to be contingent on the conveyance of the seller’s title at settlement and is not enforceable by the seller against the buyer as a debt.[123] The obligation of the seller therefore cannot be understood, in the relevant sense, to be unavoidable. Unlike the day for payment of a monthly instalment of price that must definitely come as the cycle of the moon must definitely turn, the conveyance of the title may not. That is why, in my view, an ordinary cash contract for the sale of land by the payment of a deposit, with the whole balance due at the settlement date when title is to be handed over, does not provide “credit” under s 4(1) of the Code and is not a “credit contract” under s 5.[124] Of course the situation is different as regards a loan to the buyer of the price secured by a mortgage, for both of these would be credit contracts, the first under s 5 and the second under s 8(1), if the other requirements of the Code are satisfied.
[123]The special position concerning the forfeiture and recovery of the deposit is dealt with in Bot v Ristevski [1981] VR 120.
[124]See further Denise McGill and Lindy Willmott, Annotated Consumer Credit Code (1999) 69-72. With respect I cannot agree with the contrary view expressed by David Darzins, “Land Contracts and the Consumer Credit Code” (1996) 6 Butterworths Consumer Credit Bulletin [66], 11.

But the parties are free to make whatever bargain they like to give effect to a different intention. A buyer’s obligation to make instalment payments under a terms contract for the sale of land is taken to indicate such a different intention. The legal character of a buyer’s obligation to make such payments was authoritatively determined by the Full Court of this Court in Reynolds v Fury.[125] The issue could not have been more squarely raised. The plaintiff was a seller of land under a terms contract that provided for payments of part of the purchase price to be made by instalments on fixed dates. The contract made the final payment payable on a later date, when title was to be transferred. When the defendant buyer defaulted in payment of an instalment, the plaintiff sued for that instalment plus interest as a debt, and moved for final judgment.
[125][1921] VLR 14.

The Full Court, constituted by Irvine CJ, Cussen and Schutt JJ, unequivocally decided the seller could sue for the instalment as a liquidated demand (which, in this context, is not relevantly distinguishable from a debt based on a promise to pay an agreed sum)[126] and gave the final judgment sought. It reached that conclusion after an exhaustive analysis of the early English authorities, which led it to overrule earlier decisions of this Court to the contrary.[127] Laird v Pim[128] was expressly distinguished[129] by the Full Court in Reynolds v Fury because the former was not a case where the contract required the buyer to pay by instalments, as was Reynolds v Fury, and as is the present case.
[126]See Alexander v Ajax Insurance Co Ltd [1956] VLR 436, 445.
[127][1921] VLR 14, 22.
[128](1841) 151 ER 852.
[129][1921] VLR 14, 22.

[159]Ibid 463-4 (citation omitted).

[160]Ibid 464.

[161]Ibid 464-5.

Mr and Mrs Keogh relied on this latter passage, in particular, in support of the proposition that a buyer’s obligation to make instalment payments did not constitute a debt deferred. The payment, if made, was “provisional… [and] defeasible by the subsequent failure, for any cause, of the real consideration.”

It is quite impossible to accept those submissions for the same reasons I have already given. Dixon J was here again concerned with the connection between the payment of the instalment and the ultimate consideration of conveyance, given that the seller’s right to retain the former may be defeated upon the failure of the latter. When his Honour said performance of the obligation represented “a payment of a debt in advance”, he was not saying that, when the due date arrived, the obligation to make the prepayment or part-payment was not then enforceable as a debt. That the obligation to make such a payment, at that point, was presently enforceable as a debt was, at the time Dixon J was speaking, as it is now, deeply entrenched in the law. We can see his Honour’s analysis was not intended to run against that law, for he described the buyer’s obligation to make the payment as an enforceable “promise to pay money”. That, by another name, is a debt.[162] It was the obligation to make that precise kind of payment that, in McDonald v Dennys Lascelles Ltd, decided only thirteen years earlier, Dixon J had described as “a debt immediately recoverable by the vendor”.[163]
[162]See Alexander v Ajax Insurance Co Ltd [1956] VLR 436, 445.
[163](1933) 48 CLR 457, 476.

In a number of cases since, the High Court of Australia has applied these principles. For example, in Legione v Hateley[164] the question was whether the seller was estopped from treating a contract of sale as rescinded. Citing Automatic Fire Sprinklers Pty Ltd v Watson,[165] Brennan J said this:
[164](1983) 152 CLR 406.
[165](1946) 72 CLR 435, 465.

Where conveyance is the real consideration for payment of the price, it would be a penalty for the vendor to exact the price without conveying. Ordinarily a vendor who does not convey is denied the right to recover or retain the price or instalments of the price in excess of a reasonable deposit…[166]

That principle is undoubted, but it does not alter the character of the buyer’s obligation to make the payment as a debt. In Sunbird Plaza Pty Ltd v Maloney[167] the vendor sued the buyer’s guarantor for the unpaid sale price. But the guarantee only extended to monies payable under the contract. The High Court held the seller could not sue the guarantor for the price because the buyer itself was not liable in debt for that price, but only in damages. That was because, said Mason CJ, the contract was not one where “the price is expressed to be payable on a fixed day, not being the day fixed for completion.”[168] Gaudron J cited McDonald v Dennys Lascelles Ltd[169] for the same proposition. In respect of Dixon J’s statement in that case that the contract might make a part-payment “a debt immediately recoverable”,[170] Gaudron J said this:
It is unnecessary in the present case to consider the nature of the debt thus recoverable, and the precise circumstances in which a debt thus recovered may be retained by a vendor who does not give a conveyance of the property: see McDonald v Dennys Lascelles Ltd (1933) 48 CLR at pp 477-478; Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 at pp 464-465 and Legione v Hateley (1983) 152 CLR 406 at pp 456, 458.[171]

For the final time I make the point: her Honour did not, by that statement, doubt that the obligation to make the payment was “a debt then recoverable”.

[166](1983) 152 CLR 406, 456.

[167](1988) 166 CLR 245.

[168]Ibid 253.

[169](1933) 48 CLR 457, 476.

[170]Ibid.

[171](1988) 166 CLR 245, 268.

It is clear from this review of the authorities that the legal character of Ms Rand’s obligation as the buyer to pay instalments of price under her terms contract for the sale of land with Mr and Mrs Keogh is a debt enforceable by them as the sellers once the time for payment arrives. The fact that the instalments might include a component of interest does not alter the character of the payment in that respect; it is derived from the same contractual obligation of Ms Rand as the buyer to make payment of an ascertainable sum on a specified day.

Ms Rand’s obligation to make the instalment payments was created by the contract and has been carried by her as the buyer from that moment on. Since the obligation, though presently existing, is to make a payment on a day that has yet to come, but definitely will come, it is a debt constituted by a present obligation to make an unavoidable payment in the future – a debitum in praesenti, solvendum in futuro. The amount in ascertained. The principles according to which the obligation to make the payment is a debt of that kind are general in nature. They apply to executory contracts, including terms contracts for the sale of land like the one between the parties here, under which part-payments or instalment payments must be made on a specified day or days in advance of the actual consideration being passed. The creation, by the terms contract between the parties, of Ms Rand’s obligation to make instalment payments to Mr and Mrs Keogh was the creation, under a contract, of a definite present obligation to make an unavoidable payment of an ascertained amount in the future and constitutes the incurring of deferred debt within the definition of “credit” in s 4(1)(b) of the Code. That is the character of a buyer’s obligation to pay instalments of price and interest created by a terms contact for the sale of land like the one between Mr and Mrs Keogh and Ms Rand. Therefore, by that terms contract, Mr and Mrs Keogh provided credit to Ms Rand, which makes it a “credit contract” as defined in s 5.

The Tribunal reached the same conclusion by a somewhat different route. There is much in its careful analysis with which I can agree. But I cannot agree with the premise that the terms contract between Mr and Mrs Keogh and Ms Rand made the sale price, less the deposit, immediately owing at the date of the execution of the contract.

I accept that the contract required interest to be paid on the balance owing from the beginning. I can see the force of the argument that the contract thereby treated the balance owing as immediately payable. That interest was payable on the balance owing may be loosely seen as the price payable by Ms Rand for the deferring of the debt constituted by her immediate liability to pay the whole balance.

My difficulty with that analysis is that, in legal terms, it does not properly reflect the terms of the contract. The nature of the legal relations created by the contract must be identified by reference to what the parties agreed and not by reference to an intention that might be attributed to them. Such expressions as “owing” and “amount owing” were used in the terms contract between the parties as drafting devices. They do not suggest the whole of the outstanding price was immediately owing from the beginning. Under the terms contract between Mr and Mrs Keogh and Ms Rand, as would be so with most if not all contracts of that kind, the sale price was not rendered immediately owing from the beginning. Indeed the opposite is the case. The instalment payments of price and interest, however unavoidable they are, only become immediately owing by Ms Rand when the time for making the payments arrives. But the creation by the contract of the present obligation to make those unavoidable payments constituted the incurring of deferred debt, which is providing “credit” within s 4(1)(b) of the Code.

Mr and Mrs Keogh submitted the only way a terms contract for the sale of land could be brought within the Code was by a deeming provision like the one in s 10, which relates to hire-purchase agreements. Further, they submitted the omission of such a deeming provision for terms contracts for the sale of land indicated the Code was not intended to cover such contracts.

I reject that submission. Under hire-purchase agreements, the hirer may have the right, but not the obligation, to continue with the hire, or to purchase the goods, and instalments of hire are seen to be payable in respect of the immediate period for which the goods are retained. The obligation of the hirer to pay instalments of hire is therefore not usually that of a present obligation to pay a future debt.[172] Section 10 is therefore necessary to give effect to the legislative intention to bring hire-purchase contracts into the Code. No such provision is necessary in the case of terms contracts for the sale of land like the one here, as Ms Rand’s obligation to pay instalments represents a present obligation to pay an unavoidable future amount, which makes her contract with Mr and Mrs Keogh a “credit contract” under s 5. That is consistent with s 15(B)(c) of the Code, which assumes a contract for the sale of land by instalments may involve the provision of credit as defined in s 4(1).
[172]Australian Guarantee Corporation Ltd v Balding (1930) 43 CLR 140, 157; HJ Wigmore and Co Ltd v Rundle (1930) 44 CLR 222, 229.

It remains to deal with the Director’s submissions under s 11(1) of the Code, which provides this:

In any proceedings (whether brought under this Code or not) in which a party claims that a credit contract, mortgage or guarantee is one to which this Code applies, it is presumed to be such unless the contrary is established.

The Director submitted s 11(1) required Mr and Mrs Keogh to establish their terms contract with Ms Rand was not a credit contract. That is not how the presumption created by the provision operates.

The presumption applies where a party makes the specified claim in “any proceedings (whether brought under this Code or not)…” The Director’s application to the Tribunal gave rise to a proceeding. The commencement of this appeal also gave rise to a proceeding; by the words in parenthesis, it matters not that it was commenced under s 148(1) of the Victorian Civil and Administrative Tribunal Act and not the Code.

The presumption applies where the party claims that “a credit contract… is one to which this Code applies…” Where such a claim is made, the provision operates to impose the presumption that the Code applies to the “credit contract” unless it is established otherwise. What must be established is that, although the contract is a “credit contract” as defined in s 5, it is not one to which the Code applies. For example, it may be established that, although the contract is a credit contract because it provides “credit” as defined in s 4(1), no charge is or may be made for that credit (see s 6(1)(c)).

In the present case, the claim of the Director is that the terms contract between Mr and Mrs Keogh and Ms Rand is a “credit contract”. That is not a claim of the kind specified in s 11(1). The presumption does not apply at that level in the analysis. It only applies where the claim is that a contact that is a credit contract is one to which the Code applies. Having established that the contract is a credit contract, the Director would logically then go on to contend that it was one to which the Code applied, which would invoke the presumption in s 11(1). Mr and Mrs Keogh would then have to establish the contrary, if that was their contention. The issue does not arise. Their contention is that the contract is not a credit contract. They do not contend that, if it is a credit contract, it is not one to which the Code applies.

I therefore conclude that the Tribunal committed no error of law in deciding that the terms contract for the sale of the Morwell property by Mr and Mrs Keogh to Ms Rand was a credit contract under the Code. I will go on to consider the implications of Ms Rand’s acceptance of Mr and Mrs Keogh’s obligations under the Westpac mortgage, but my conclusion will have to be qualified.

THE ASSUMPTION BY THE BUYER OF THE SELLER’S MORTAGE OBLIGATIONS

The contractual arrangements

To repeat, Ms Rand bought the Morwell property from Mr and Mrs Keogh, on terms, for $82,280, repayable with monthly interest starting at 14.69% by monthly instalments of $915.51 per month for 30 years. She agreed to observe the terms of their mortgage with Westpac. Mr and Mrs Keogh had bought the property, in 2002, for some $54,400, with funds supplied by a loan from the Bank of Melbourne secured by the mortgage, repayable with interest starting at 5.72% by instalments of $317 per month for the same period. I was told that such arrangements are known as “mortgage wrapping”.

Mr and Mrs Keogh’s obligations under their loan and mortgage arrangements with Westpac and the Bank of Melbourne, especially the obligation to make the monthly payments just mentioned, were not, in the relevant sense, avoidable.

The condition that Ms Rand agreed to observe Mr and Mrs Keogh’s mortgage was made necessary by s 6(1) of the Sale of Land Act, which prevented Mr and Mrs Keogh from selling their mortgaged land to Ms Rand on terms unless, among other things, the contract contained a provision that the buyer assumed the seller’s obligations under an existing mortgage over the land. I have already set out the full terms of s 6(1), and the condition, which was cl 8 of the terms contract between Mr and Mrs Keogh and Ms Rand.

To give effect to that condition, the contract included a series of provisions which, as between Ms Rand and Mr and Mrs Keogh, bound her to observe the Westpac mortgage. I have already set those out in detail. In summary, and working backwards for the mortgage, the Westpac mortgage incorporated the memorandum of common provisions AA670, that memorandum required Mr and Mrs Keogh to pay amounts due to the Bank of Melbourne under their loan arrangements and those arrangements included the variable rate investment property loan described in the Bank of Melbourne letter. Under that loan, Mr and Mrs Keogh were obliged to repay the amount of principal and interest by instalments of $317 per calendar month from 5 September 2002 to 5 July 2032. It was that obligation, among others, that Ms Rand assumed, and which is contractually enforceable against her by Mr and Mrs Keogh.

Before examining the legal affect of these arrangements, it is necessary to say something about the Sale of Land Act.

The Sale of Land Act

The Sale of Land Act was passed in 1962 to protect terms buyers like Ms Rand. Their precarious position under the common law was well recognised. The problem had many facets and arose especially out of the power of the terms seller to sell mortgaged land on terms or to mortgage land already sold on terms. Perhaps the worst problem was that a terms buyer had to keep making instalment payments to a bankrupt seller who could not convey title to the buyer at completion because the mortgagee had exercised its remedies against the land.[173]
[173]See generally PN Wikrama-Nayake, The Sale of Land (5^th ed, 1995) [4110].

The need for reform was fully examined in two reports of the Statute Law Revision Committee.[174] Reform was not the only option. South Australia abolished the sale of land on terms.[175]
[174]Statute Law Revision Committee, Sale of Land on Terms (2 May 1962) and the Sale of Land Bill 1962 (20 November 1962).
[175]Land and Business Agents Act 1973 (SA), s 89(1), now the Land and Business Agents (Sale and Conveyancing) Act 1994 (SA), s 6(1). See Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd (1991) 58 SASR 184, 188; Fullston v Dignan [1999] SASC 452, [10].

The proposal adopted in Victoria was the enactment of the Sale of Land Act. The general plan of the Act was described in the second reading speech which, for the present case, is still relevant today:

1. A person is not to sell land under a terms contract unless he is the registered proprietor or presently entitled to become the registered proprietor of the land.

2. Where a person buys land under a terms contract he is to be entitled to call at any time for a transfer on his giving a mortgage back.

3. A person is not to sell land on terms if the land is subject to a mortgage unless he sells only his interest and transfers the mortgage liabilities to the purchaser. Furthermore, where the land is mortgaged the contract must set out full particulars of the mortgage.

4. After land has been sold under a terms contract the vendor is not to mortgage the land. This is perhaps the most important provision of all.[176]

[176]Victoria, Parliamentary Debates, Legislative Assembly, 24 October 1962, 1057-1058 (Arthur Rylah, Attorney-General).

So it is that we see in s 3(1)(b) a prohibition on selling land under the Transfer of Land Act unless, for example, you are the registered proprietor of the land (sub-paragraph (i)). Section 4(1) gives the terms buyer the right to call for a transfer on giving a mortgage back for the full amount owing under the contract. Section 6 sets out restrictions, relevant to the present case, on selling land on terms that is already mortgaged, and which I have already mentioned. Section 7(1) prohibits the seller from mortgaging land sold on terms.

The submissions of the parties

As you know, the Tribunal gave two reasons for deciding the terms contract of sale between Mr and Mrs Keogh and Ms Rand was a credit contract under the Code. We are here concerned with the second.

The second reason was that, by requiring Ms Rand to observe Mr and Mrs Keogh’s mortgage with Westpac, the contract of sale, as between them and her, operated “as if the Keoghs were the lender and mortgagee and Ms Rand was the mortgagor or borrower.”[177] Those arrangements, in the Tribunal’s view, “clearly involve credit”.[178] It did not elaborate.
[177]Director of Consumer Affairs Victoria v Geeveekay Pty Ltd [2006] VCAT 106, [41].
[178]Ibid [43].

Mr and Mrs Keogh submitted to me that the Tribunal erred in concluding the assumption by Ms Rand of Mr and Mrs Keogh’s obligations as mortgagors under the Westpac mortgage involved the provision of credit. They submitted this condition was included in the terms contract to comply with s 6(1) of the Sale of Land Act, which was designed for the protection of the terms buyer. The statutory inclusion of the condition was just a method of protecting the buyer against the seller not discharging its loan obligations. Moreover, the mortgage did not create a debt obligation as between Mr and Mrs Keogh and Westpac, but merely secured their repayment obligations under the loan with the Bank of Melbourne.

The Director supported the decision of the Tribunal.

The legal affect of Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage obligations

The Westpac mortgage that secures the financial arrangements between Mr and Mrs Keogh and the Bank of Melbourne is a security that is registered on the title of the Morwell property and is enforceable as such against the whole world. But otherwise those financial arrangements are personal to Mr and Mrs Keogh and the Bank of Melbourne (which is a division of Westpac). The only parties to the loan provided by the Bank of Melbourne are the bank and Mr and Mrs Keogh. The only parties to the mortgage given to Westpac are the bank and Mr and Mrs Keogh. Ms Rand is not a party to either of those transactions. There is no privity of contract and, it appears on the facts of this case, no equitable relationship between Ms Rand and the banks.

Under s 6(1) the Sale of Land Act, land cannot be sold on terms unless “the contract provides”, among other things, that the buyer assumes the obligations of the seller’s mortgage. There is no prescribed way for making provision in those terms or for carrying the provision through in the other terms of the contract. I am not aware of any standard form provision used generally in conveyancing in this regard. Where the terms contract includes the specified condition and other consequential provisions, I think enforceable legal relations are created as between the buyer and the seller but, at least in the way it was done in the present case, they are personal to those contracting parties, and they are contractual in nature. The seller’s mortgagee is external to the contract, and is not a necessary party, speaking both in legal and practical terms. Compliance with s 6(1) does not operate as a novation or assignment of the seller’s obligations under the mortgage and, of itself, creates no legal relationship between the buyer and the seller’s mortgagee. No doubt other circumstances may create equitable obligations enforceable by the buyer against the mortgagee, but that is another matter. Under the provisions of the terms contract in the present case, the buyer, Ms Rand, is simply bound as between herself and the seller, Mr and Mrs Keogh, to observe the terms of the latter’s mortgage.

It follows that, if the condition and other provisions inserted in the contract bring it into the Code, it will be because the contractual relations so created come with the definition of “credit” in s 4(1). Again, only paragraph (b) of the definition is relevant.

Mr and Mrs Keogh submitted that, as a matter of statutory interpretation, the reference in s 6(1) to the buyer assuming “the obligations of the mortgagor under the mortgage” was a reference only to the mortgage and not to the loan that it secured. Nothing could be more destructive of the protective objectives of the legislation which, in this regard, are to ensure that the interests of the seller in the mortgage would, in effect, be sold to the buyer.[179] This notion of there being a kind of sale of the seller’s interests in the mortgage to the buyer is reflected in the statutory language. Section 6(1) specifies the required condition in terms of the contract providing that “the consideration for the sale of the land shall be satisfied [in the specified respects] by the purchaser assuming”, from (say) the buyer becoming entitled to possession, the seller’s mortgage obligations. The assumption in the provision is that, from that time, the buyer’s instalments will be applied in payment of the seller’s loan repayments, which the mortgage secures, which payments are for the buyer’s ultimate benefit, for they will ensure the mortgage will be discharged by the completion date. I think that is encompassed in what s 6(1) means when it speaks of the buyer assuming “the obligations of the mortgagor under the mortgage”.[180]
[179]See paragraph 2 in the general plan in the second reading speech set out above.
[180]See also Australia and New Zealand Banking Group Ltd v R & D Bollas (1999) ASC ¶155-031; [1999] VSCA 50, [46].

The terms contract between Mr and Mrs Keogh dealt with this subject accordingly, for the contract documents, which you have already seen described, are all interlocking (see above). Consequently, the obligation cast on Ms Rand to “be bound by the terms of the vendor’s mortgage” is an obligation to be bound, as between the parties to the terms contract, by Mr and Mrs Keogh’s loan from the Bank of Melbourne, which forms part of the mortgage arrangements. The contract very properly gives effect to the requirement in s 6(1) in all necessary practical respects. For example, cl 4(b) requires all money payable under the contract, which includes Ms Rand’s instalment payments, to be paid to an estate agent or legal practitioner “to be applied towards discharging the mortgage”.

I have concluded that, quite apart from Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage obligations, the terms contract between her and them provides credit as defined by s 4(1)(b), and is a credit contract as defined in s 5, of the Code. That conclusion was given for reasons which are in no way connected with or affected by the additional considerations that are raised by Ms Rand’s assumption of those mortgage obligations. In particular, my conclusion that Ms Rand’s contractual obligation to make instalment payments was a present obligation to make an unavoidable future payment, one that comes within the concept of incurring deferred debt in s 4(1)(b), is in no way connected with or affected by her assumption of Mr and Mrs Keogh’s mortgage obligations. My conclusion in that regard would have been the same if Ms Rand had not assumed those mortgage obligations.

The additional question is whether Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage obligations, as that expression is to be understood under the terms contract between the parties, involved the provision of “credit” as defined in s 4(1)(b) of the Code. For the reasons I have given, a person incurs deferred debt when they become contractually subject to a definite present obligation to make an unavoidable payment of an ascertainable amount in the future. In the present context, that test falls to be applied to the obligations created by the mortgage and loan arrangements made as between Mr and Mrs Keogh on the one hand and Westpac and the Bank of Melbourne on the other, as those obligations have been assumed by Ms Rand under her separate contractual relationship with Mr and Mrs Keogh.

As the Tribunal found, the relationship between Mr and Mrs Keogh on the one hand and Westpac and the Bank of Melbourne on the other is one of mortgagor/debtor and mortgagee/creditor. In particular, their obligation to Westpac and the Bank of Melbourne to make the monthly repayments on their loan has the character of a definite present obligation to make an unavoidable payment of an ascertained amount in the future.[181] By entering into the terms contract with Mr and Mrs Keogh, Ms Rand bound herself to observe the terms of their mortgage with Westpac and their loan with the Bank of Melbourne. She thereby became subject to such an obligation, as between herself and them. In becoming contractually bound by that obligation, Ms Rand incurred deferred debt under s 4(1)(b) of the Code. On this additional basis, the terms contract between her and Mr and Mrs Keogh is a credit contract under s 5, and the Tribunal was legally correct to so decide.
[181]There was no consumer credit involved so, as between Mr and Mrs Keogh and the banks, it is not covered by the Code: s6(1).

As I forecast, I do impose qualifications to that conclusion. In the present case, for reasons I have given, the underlying terms contract between the parties is a credit contract under s 5 of the Code. The additional question is raised by the buyer’s assumption of the seller’s mortgage obligations in that context. I have not examined the additional question in the context of a terms contract that is not a credit contract under the Code. Also, I have already said I have analysed the additional question on the basis of the provisions through which the present parties have sought to comply with and carry through the requirements of s 6(1) of the Sale of Land Act. I do not know if the same conclusion, on the additional question, would follow in the case of an underlying terms contract that was not a credit contract under the Code or of a contract that gave effect to the requirements of s 6(1) in a different manner, although the principles identified in this judgment would still be applicable.

CONCLUSION

Tania Rand bought land with a house in Morwell in country Victoria from Geoffrey and Veronica Keogh trading as “Great Australian Dream Providers”. She did not have to borrow money for the purchase because Mr and Mrs Keogh sold the property to her under a terms contract. The sale of land legislation in Victoria defines a terms contract to be one by which the buyer pays the sale price to the seller by instalments over time (in Ms Rand’s case, 30 years) but the buyer is entitled to possession before actually obtaining title. If the property is bought as a home, as it was in Ms Rand’s case, this means the buyer can start living in it soon after signing the contract.

The Director of Consumer Affairs is responsible for the administration of the Consumer Credit Code in Victoria. He formed the view that, by selling the Morwell property under the terms contract, Mr and Mrs Keogh had provided “credit” to Ms Rand, which made the contract a “credit contract” under the Code. As the Director was also of the view that Mr and Mrs Keogh had failed to comply with certain requirements of the Code, he issued an application in the Victorian Civil and Administrative Tribunal for the imposition of civil penalties on them. There were, in fact, 46 contracts involved. In some cases Mr and Mrs Keogh were the sellers. In other cases their company, Geeveekay Pty Ltd, was the seller.

The first issue before the Tribunal was whether the contracts came within the Code. Using Ms Rand’s contract as a typical example, the Tribunal decided that they did. Mr and Mrs Keogh and Geeveekay have appealed to this Court against that decision on a question of law. They contend a terms contract for the sale of land, in the form of Ms Rand’s contract and, indeed, in any form, does not provide credit and is not a credit contract as defined in the Code.

There was an important additional feature to the terms contract between Mr and Mrs Keogh and Ms Rand. Mr and Mrs Keogh had themselves bought the Morwell property with funds borrowed from a bank and secured by a mortgage over the property. As required by the Victorian legislation, the terms contract between the parties required Ms Rand, for her own protection, to comply with Mr and Mrs Keogh’s obligations under the mortgage. It also required Mr and Mrs Keogh to apply Ms Rand’s instalment payments to meeting their mortgage and loan payments, which meant the mortgage would definitely be discharged by the time Ms Rand’s contract was completed in 30 years, at which point she would be entitled to receive unencumbered title to the property from Mr and Mrs Keogh. This kind of contractual arrangement between a seller and buyer of land under a terms contract is called “mortgage wrapping”. The Tribunal upheld the Director’s submission that this additional feature of the arrangements also brought the terms contract between Mr and Mrs Keogh and Ms Rand within the Code. From this aspect of the Tribunal’s decision there has also been an appeal on a question of law.

The Code is national uniform legislation that regulates the provision of consumer credit. Contracts that provide “credit” are “credit contracts” under the Code. “Credit” under the Code means the contractual deferring of the payment of debt or the incurring of deferred debt. It is a standing controversy whether a terms contracts for the sale of land provides credit and constitutes a credit contract for the purposes of the Code.

The appeal in this Court concerns the terms contract between Mr and Mrs Keogh and Ms Rand, which the parties accepted was typical of the 45 other contracts involved. I am conscious that terms contracts for the sale of land may take on a variety of different forms, and I have an imperfect knowledge of their exact form elsewhere in Australia. I can only address the legal questions raised in the appeal by reference to the content of the contract between the parties before me. However, the terms contract between Mr and Mrs Keogh and Ms Rand does have the general features of a terms contract for the sale of land, both as that kind of contract is understood in Victoria, and as it is defined in the sale of land legislation here.

Likewise, the additional questions raised by the assumption by Ms Rand of Mr and Mrs Keogh’s mortgage and loan obligations – the “mortgage wrapping” arrangements – can only be addressed by reference to the particular provisions of the contract between the parties before me. For certain other reasons given in this judgment, I can only answer those questions on a qualified basis.

The legal question in the appeal turns on whether the terms contract between the parties is a “credit contract” within s 5 of the Code. That question itself turns entirely on the meaning of “incurs deferred debt” in the definition of “credit” in s 4(1)(b) of the Code. If, by entering the terms contract to buy the Morwell property, Ms Rand incurred deferred debt to Mr and Mrs Keogh, then they provided credit to her and the contract is a credit contract under the Code.

I have considered the submissions of the parties on the proper interpretation of the provisions of the Code. In my view, someone incurs deferred debt under s 4(1)(b) of the Code when a contract imposes on them a definite present obligation to make an unavoidable payment of money in the future in a ascertained or ascertainable amount to another person.

Under the terms contract concerning the Morwell property, Ms Rand accepted the obligation to pay instalments of price and interest to Mr and Mrs Keogh every month for thirty years. That answers the description of incurring deferred debt in s 4(1)(b) of the Code.

I have rejected Mr and Mrs Keogh’s submission that a buyer under a terms contract for the sale of land does not incur a debt until the time for payment arrives, and therefore does not incur deferred debt on entering into such a contract. For the detailed reasons given in this judgment, I am of the view that the obligation of the buyer under a terms contract, like the one between Mr and Mrs Keogh and Ms Rand, to make instalment payments is a definite present obligation to make an unavoidable payment of an ascertained amount in the future. Therefore, as regards the terms contract between Mr and Mrs Keogh and Ms Rand, creating the definite present obligation to make those payments resulted in Ms Rand incurring a debt to Mr and Mrs Keogh, and doing so in terms that specified future dates for the making of the payments resulted in her incurring deferred debt to them. In short, contractually specifying in the present Ms Rand’s obligation to pay the instalments in the future meant she incurred deferred debt to Mr and Mrs Keogh.

I have also concluded the terms contract between the parties is a credit contract under the Code on the additional basis of Ms Rand’s assumption of Mr and Mrs Keogh’s mortgage and loan obligations. As between those parties, the assumption of those obligations also answers the description of Ms Rand incurring deferred debt. However, I have imposed certain qualifications on that conclusion, which are dealt with fully in the judgment, and which arise out of the individual features of the case.

For those reasons, I have concluded the Tribunal made no error of law in deciding the terms contract for the sale of the Morwell property was one by which Mr and Mrs Keogh provided credit to Ms Rand and therefore was a credit contract under the Code. The appeal by Mr and Mrs Keogh and Geeveekay against that decision will be dismissed.

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[2008] VSC 50

28 February 2008