J&Z Holding (Aust) Pty Ltd v Vitti Pty Ltd

Case •

[2024] NSWCA 2

•

30 January 2024

Court of Appeal


Supreme Court


New South Wales

Medium Neutral Citation: J&Z Holding (Aust) Pty Ltd v Vitti Pty Ltd [2024] NSWCA 2
Hearing dates: 23 August 2023
Date of orders: 30 January 2024
Decision date: 30 January 2024
Before: Payne JA at [1];
Kirk JA at [2];
Griffiths AJA at [3]
Decision:

The appeal is dismissed, with costs.

Catchwords:

CONTRACTS — Construction — Principles –Significance of poor drafting – whether a sum payable under a contract should be characterised as a “conventional deposit”, repayable in the event of the vendors’ default and recoverable in a claim for restitution, or as an option fee that became and remained the property of the grantor

Cases Cited:

Amnico Holdings Ltd v Griese [2016] 2 Qd R 512

Blanco v Wan [2021] NSWSC 273; (2021) 20 BPR 41,223

BP7 Pty Ltd v Gavancorp Pty Ltd (2021) 104 NSWLR 359; [2021] NSWSC 265

CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232; (2005) ASAL 55-139

Iannello v Sharpe (2007) 69 NSWLR 452; [2007] NSWCA 61

J&Z Holding (Aust) Pty Ltd v Vitti Pty Ltd [2022] NSWSC 1718

Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504; 18 BPR 36,353

Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; (2006) 12 BPR 23,629

Manufacturers House Pty Limited v Ashington No 147 Pty Limited [2005] NSWSC 767; (2005) 12 BPR 23,913

Manufacturers House Pty Limited v Ashington No 147 Pty Limited [2005] NSWSC 767; (2005) 12 BPR 23,913

McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25

Newlander Development Pty Ltd v Jung Kyun Han [2023] QSC 94

O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; [1983] HCA 3

S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd (2022) 108 NSWLR 165; [2022] NSWCA 72

Seven Cable Television Pty Ltd v Telstra Corp Ltd [2000] FCA 350

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573

Category:Principal judgment
Parties: J&Z Holding (Aust) Pty Ltd (Appellant)
Vitti Pty Ltd (First Respondent)
Michael Patrick Hannah (Second Respondent)
Janet Lee Santwire (Third Respondent)
Representation:

Counsel:
M Condon SC (Appellant)
R Angyal SC (Respondents)

Solicitors:
Juris Cor Legal (Appellant)
Mills Oakley (Respondents)
File Number(s): 2023/15573
Publication restriction: Nil
 Decision under appeal 
Court or tribunal:
Supreme Court
Jurisdiction:
Equity
Citation:

[2022] NSWSC 1718

Date of Decision:
20 December 2022
Before:
Lindsay J
File Number(s):
2021/251393

HEADNOTE

[This headnote is not to be read as part of the judgment]

The parties entered into various contractual arrangements regarding the sale of land in Ultimo (the Property). The appellant was the prospective purchaser and the respondents were the registered proprietors of the Property. In issue was whether a disputed sum in the amount of $2,050,000, constitutes a “conventional” deposit notionally paid under the contract for the sale of the Property (the Contract) and is repayable to the appellant, or alternatively, an option fee that became the property of the respondents and credited against the purchase price.

On 17 August 2018 the parties entered into the “Put and Call Option Agreement” (Option Agreement). The respondents granted to the appellant an exclusive and irrevocable Call Option for a period of 22 months expiring on 17 June 2020 (Call Option Period). If the appellant failed to exercise the Call Option in this period, the respondents could exercise the Put Option within a further five business days, with the consequence that the appellant “irrevocably offers to purchase the Property for the purchase price stipulated in the Contract and in accordance with the terms of the Contract”.

The Option Agreement provided for the appellant to pay a fee equal to 20% of the purchase price of the property (i.e., $2,050,000), which was described as the Call Option Fee as quantified in Item 5 of the Schedule. In the event of either the Call Option or Put Option being exercised, the Agreement provided that the Call Option Fee, comprising the first two instalments (totalling $1,025,000) “shall be taken to form and constitute the Deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract” (cl 3.3(b) and 4.5(a)(2)). The Agreement further provided that if the Call Option was not exercised during the Call Option Period, “the [vendors] keep all amounts paid as the Call Option Fee” (cl 3.4).

An Amending Deed was executed on 17 June 2020, which operated to extend the Call Option Terminating Date from 17 June 2020 to 17 January 2021. Clause 2 provided that the Deed was conditional on payment of the Call Option Fee and stated that the parties agreed and acknowledged, “[i]n keeping with the Option Deed” that “clause 3.4(a) of the Option Deed applies and the Call Option Fee is and has been irrevocably and unconditionally forfeited and released to the [vendors]”. In effect, the Amending Deed operated to increase the amount of the “deposit” (or credit in the purchaser’s favour) from 10% to 20% by deleting cll 3.3(b) and 4.5(a)(2) of the Option Agreement and increasing the amount of the “deposit” by doubling the amount of the “deposit” to total $2,050,000.

The Call Option was not exercised by the appellant during the Call Option Period, as extended by the Amending Deed. On 22 January 2021, the respondents exercised the Put Option, thereby creating the Contract. The Contract was comprised of both standard printed form clauses and additional clauses. The standard printed form clauses provided that following termination, the purchaser may recover the deposit in the event of the vendor’s default (cl 8.2); the vendor may keep or recover the deposit in the event of the purchaser’s default (cl 9.1); and “on completion the deposit belongs to the vendor” (cl 16.10). Additional cl 41.1 stated “[t]he purchaser acknowledges that the deposit will be unconditionally and irrevocably released to the vendor immediately after exchange” and Additional cl 41.2 provided that cl 41.1 “operates despite any other provision of this contract, including any provision purporting to refund the deposit to the [purchaser] (sic)”. Additional cl 32.2 provided that the additional clauses prevail to the extent of any inconsistency with the printed form clauses.

It is common ground that the Contract came to an end no later than 23 August 2021. On the primary judge’s tentative finding, which was not challenged on appeal, termination occurred on 20 August 2021 when the appellant elected to terminate the Contract on the basis of the respondents’ repudiatory conduct.

On appeal, the issues were:

  1. Whether, upon the proper construction of the Contract, read in the context of the Option Agreement and Amending Deed, the disputed sum ($2,050,000) is to be characterised as a conventional deposit (i.e., an amount notionally paid by the appellant in earnest to provide security that it would perform the contract) or, alternatively, as an option fee that became the property of the respondents and was credited against the purchase price.

  2. If the disputed sum is held to constitute a conventional deposit, whether the appellant was entitled to recover such sum on a claim for restitution, arising from the alleged termination of the Contract or from the law governing penalties and relief against forfeiture.

The Court (Griffiths AJA, Payne and Kirk JJA agreeing) held, dismissing the appeal, with costs:

As to issue (i):

  1. The disputed sum of $2,050,000 has the character of an option fee (and not a conventional deposit), which was received by the respondents as a credit against the purchase price of the Property: [5], [60], [69]. On a proper construction of the Contract, read in the context of the Option Agreement and Amending Deed, the disputed sum remains the property of the respondents regardless of whether the Call Option is exercised and in circumstances where the Put Option is exercised: [54]-[60]. The disputed sum was paid in consideration for the grant of the Option Agreement, and not simply as a conventional deposit, which is strongly indicated by the use of the term “keep” in cl 3.4(a) of the Option Agreement: [56]; [69]. Clause 2(b) of the Amending Deed acknowledges cl 3.4(a) and supports this conclusion: [60]. The expression “released to the vendor” in cl 41.1 of the Contract is not indicative that the “deposit” was not the property of the vendors: [54].

  2. The reference to the disputed sum being “the deposit” in various parts of the documentation is not determinative of its true legal character, particularly considering the acknowledged poor drafting: [65]. Rather the use of the term “deposit” in the Option Agreement and Amending Deed was to “deem” the disputed sum as a deposit, rather than indicative of its character as a conventional deposit: [52], [59], [60].

    S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd (2022) 108 NSWLR 165; [2022] NSWCA 72; Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504; 18 BPR 36,353, considered.

As to issue (ii):

  1. It was unnecessary to resolve issue (ii) as the disputed sum was not a conventional deposit: [62], [70].

JUDGMENT

  1. PAYNE JA: I agree with Griffiths AJA.

  2. KIRK JA: I agree with Griffiths AJA.

  3. GRIFFITHS AJA: The central issue in the appeal is whether, upon the proper construction of a contract created by the respondents’ exercise of a put option on 22 January 2021, read in the context of an option agreement and amending option agreement, a disputed sum in the amount of $2,050,000 is to be characterised as a conventional deposit (i.e., an amount notionally paid by the grantee in earnest to provide security that it would perform the contract) or, alternatively, as an option fee that became the property of the grantor and was credited against the purchase price. The issue arises in the context of certain arrangements between the appellant and the respondents, in circumstances where the appellant was the prospective purchaser of land in Ultimo (the Property) and the respondents were the registered proprietors of the Property.

  4. It was common ground, both below and on the appeal, that the relevant documentation (which was prepared by the appellant’s previous solicitors) was poorly drafted.

  5. In J&Z Holding (Aust) Pty Ltd v Vitti Pty Ltd [2022] NSWSC 1718 (PJ or primary judgment), the primary judge (Lindsay J) held that the disputed sum was a call option fee which was received by the respondents as a credit against the purchase price of the Property. For reasons which follow, the appellant has failed to demonstrate any error in the primary judge’s construction of the relevant documentation. Accordingly, the appeal should be dismissed, with costs.

  6. It is convenient to outline the background facts and relevant documentation before summarising the primary judge’s reasons for rejecting the then plaintiff’s construction.

Summary of background matters

(a) Option Agreement

  1. The parties entered into a “Put and Call Option Agreement” (Option Agreement) on 17 August 2018. The respondents granted to the appellant an exclusive and irrevocable Call Option for a period of 22 months expiring on 17 June 2020 (Call Option Period). The Option Agreement provided for the appellant to pay a fee equal to 20% of the purchase price of the property (i.e., $2,050,000 being 20% of $10,250,000), which was described as the Call Option Fee as quantified in Item 5 of the Schedule. The Call Option Fee was payable by four equal instalments of $512,500 each, the first instalment being paid as at the date of the Option Agreement. The remaining three instalments were to be paid at six monthly intervals thereafter. This meant that all the Call Option Fee would, if duly paid, be paid four months before the Call Option Period expired on 17 June 2020.

  2. The Call Option could be exercised at any time during the Call Option Period. Accordingly, in contemplation of that contingency, the Option Agreement contained various provisions. They included cl 3.3, which stated:

3.3   Consequences of exercise of Option

If the Call Option is exercised:

(a)   the Owners and the Grantee are regarded as immediately bound under the Contract (regardless if counterparts are exchanged);

(b)   the Call Option Fee (being the First Instalment and the Second Instalment) shall be taken to form and constitute the deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract;

(c)   the Owners and the Grantee must each give the other a signed and completed counterpart of the Contract; and

(d)   the date of the Contract is the date when the Call Option Notice is regarded as given and received by the relevant party under clause 8.2.

  1. Furthermore, the Option Agreement contained provisions in contemplation of the possibility that the Call Option was exercised before the second instalment was paid (i.e., on or before 17 February 2019). Clause 3.1 stated (noting in particular cl 3.1(d)):

3.1   Exercise of Call Option

The Grantee may exercise the Call Option at any time during the Call Option Period up to the Call Option Terminating Date by delivering the following to the Owners’ Solicitor:

(a)   a Contract signed by the Purchaser, with all details completed;

(b)   a completed Option Notice signed by the Grantee;

(c)   a Nomination Notice signed by the Grantee and the Nominee (if applicable); and

(d)   a bank cheque for the balance of the Deposit (if applicable) as provided for in clause 3.5(c).

  1. Clause 3.5(c) (which is referred to in cl 3.1(d)) stated:

3.5   Amendment to Contract

…

(c)   The parties agree to complete the Contract by inserting the Deposit and balance price on the front page as follows:

(1)   The Deposit will be equal to the amount of the Call Option Fee paid to the Owner as at the Contract date; and

(2)   Despite anything else, the Deposit must be at least 10%; and

(3)   the balance price will be the purchase price less the Deposit, once determined.

  1. The effect of these provisions is that, if the Call Option was exercised before the second instalment had been paid, the grantee was required to provide a bank cheque “for the balance of the Deposit (if applicable)”. Presumably, the expression “if applicable” is a reference to the situation where the second instalment had not been paid. Because the deemed Deposit was the total of the amount of the first and second instalments (see cl 3.3(b)), the grantee was required to pay the second instalment upon exercising the Call Option so that the deemed Deposit could operate.

  2. It is desirable to now say something about the parts of the Option Agreement which relate to the Put Option. Clause 4.1 required the respondents to pay a Put Option Fee in the amount of $1. Under cl 4.2, the appellant “irrevocably offers to purchase the Property for the purchase price stipulated in the Contract and in accordance with the terms of the Contract”. The offer contained in cl 4.2 could only be accepted by the respondents during the Put Option Period (being five business days after the Call Option Terminating Date) if the appellant had not exercised the Call Option at that time (cl 4.3).

  3. Clause 4.5 of the Option Agreement provided as follows regarding the consequences of the Put Option being exercised:

4.5   Consequences of exercise of Put Option

(a)   If the Put Option is exercised:

(1)   the Owners and the Grantee are regarded as immediately bound under the Contract;

(2)   the Call Option Fee (being the First Instalment and the Second Instalment) shall be taken to form and constitute the Deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract;

(3)   the Owners and the Grantee must each give the other a signed and completed counterpart of the Contract; and

(4)   the date of the Contract is the date when the Put Option Notice is regarded as given and received by the relevant party under clause 8.2.

  1. The primary judge attached particular significance to the fact that the wording of both cll 3.3(b) and 4.5(a)(2) (i.e., “shall be taken to form and constitute the [deposit or Deposit] payable under the Contract” indicated that they were deeming provisions. No party suggested that any significance should attach to the contrasting use of lower and upper case with respect to the word “deposit” in these clauses.

(b) Contract

  1. The contract for the sale and purchase of land (Contract), which was in the form of the printed 2018 edition of the “Contract for the Sale and Purchase of Land” approved by the Law Society of NSW and the Real Estate Institute of NSW, was attached to the Option Agreement. On the cover page, the contract price was stated to be $10,250,000 and the amount of the deposit was left blank. Clause 16.10 provided that: “On completion the deposit belongs to the vendor”.

  2. The following additional printed clauses in the Contract should be noted:

  1. cl 8.2 (which was headed “Vendor’s rights and obligations”) stated (emphasis in original):

8.2   If the vendor does not comply with this contract (or a notice under or relating to it) in an essential respect, the purchaser can terminate by serving a notice. After the termination—

8.2.1   the purchaser can recover the deposit and any other money paid by the purchaser under this contract;

8.2.2   the purchaser can sue the vendor to recover damages for breach of contract; and

8.2.3   if the purchaser has been in possession a party can claim for a reasonable adjustment.

  1. cl 9.1 (which was headed “Purchaser’s default”) provided (emphasis in original):

9   Purchaser’s default

If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can—

9.1   keep or recover the deposit (to a maximum of 10% of the price);

…

  1. cl 16.10 (which was headed “Completion”) stated:

16.10   On completion the deposit belongs to the vendor.

  1. The Contract contained various “Additional Clauses”, as well as the Printed Clauses. Additional cl 32.2 stated:

If there is any inconsistency between the printed form and any additional clauses, the additional clauses prevail to the extent of the inconsistency.

  1. On the appeal, particular emphasis was placed upon the meaning and effect of Additional cl 41, which dealt with what was described as the “deposit”, and stated:

41   Deposit

41.1   The purchaser acknowledges that the deposit will be unconditionally and irrevocably released to the vendor immediately after exchange.

41.2   Clause 41.1 operates despite any other provision of this contract, including any provision purporting to refund the deposit to the vendor.

  1. It was common ground both below and on appeal that the reference to the “vendor” in cl 41.2 is in error and should read “the purchaser”. This is one of many examples of the poor drafting of the documentation.

(c) Amending Deed

  1. Clauses 3.3(b) and 4.5(a)(2) of the Option Agreement were deleted by cl 4 of the Amending Deed, which was executed on 17 June 2020, being the day on which the Call Option Period expired under the original Option Agreement.

  2. Clause 2 of the Amending Deed is important. It deals with the Call Option Fee and stated:

2.   Call Option Fee

(a)   This deed is conditional upon the [purchaser] paying the total amount of the Call Option Fee of $2,050,000 to the [vendors] before 5pm 17 June 2020.

(b)   In keeping with the Option Deed, the [purchaser] acknowledges that clause 3.4(a) of the Option Deed applies and the Call Option Fee is and has been irrevocably and unconditionally forfeited and released to the [vendors].

(c)   In keeping with the Option Deed, the parties agree and acknowledge that if the Contract is exchanged pursuant to the Option Deed, the Call Option Fee will comprise the Deposit payable under the Contract.

  1. Clause 4(a)(vi) of the Amending Deed stated:

4.   Amendments to the Option Deed

(a)   The parties agree to the following amendments to the Option Deed which are made in accordance with clause 9.1 of the Option Deed:

…

(vi)   The deposit and balance amounts stated on the front page of the Contract shall read:

(1)   Deposit: $2,050,000

(2)   Balance: $8,200,000

…

  1. The Amending Deed operated to extend the Call Option Terminating Date from 17 June 2020 to 17 January 2021 on condition that the appellant pay two “extension fees” totalling $220,000, in addition to paying the full amount of the Call Option Fee of $2,050,000. Implicitly, the Amending Deed also extended the Put Option Period for five business days after 17 January 2021.

  2. It was common ground that the appellant had to pay both the full amount of the Call Option Fee and the extension fees within the specified time and that the respondents were entitled to retain the “extension fees”. The dispute focusses entirely on the full amount of the Call Option Fee, being $2,050,000.

  3. The Call Option was not exercised by the appellant during the Call Option Period. Subsequently, the respondents exercised the Put Option on 22 January 2021. It is common ground that the Contract which was then created by the exercise of the Put Option came to an end no later than 23 August 2021, after each party had purported to terminate the Contract. On 20 August 2021, the appellant wrote to the respondents alleging that the respondents’ purported termination of the Contract on 19 July 2021 constituted wrongful repudiation of the Contract and elected to terminate the Contract. It is unnecessary to descend into any detail about those matters. The appellant’s position is that having rescinded the Contract because of the respondents’ alleged repudiatory conduct, it was entitled to recover the amount of $2,050,000 which it says was notionally paid as a “deposit” under the Contract. It separately contended that this deposit, being an amount equal to 20% of the purchase price, was a penalty which the respondents were not entitled to retain.

The primary judge’s reasons summarised

  1. The primary judge succinctly described the parties’ dispute at PJ[22]:

The dispute between the parties is confined to competing claims of entitlement to the sum of $2,050,000 which:

(a)   on the plaintiff’s case, must be characterised, in form and substance, as a deposit notionally paid by it under the contract; and

(b)   on the defendants’ case, must be characterised as an option fee at all material times vested in them; not to be characterised as a conventional deposit intended to bind the purchaser in earnest to complete the contract; and, in substance, no more than a credit to be allowed against the purchase price upon completion of the contract, should the contract be completed.

  1. The primary judge held that the disputed sum ($2,050,000) should be characterised as an option fee, paid by the then plaintiff as consideration for the Call Option granted to it by the then defendants, who were entitled to retain the Option Fee, and was not a conventional deposit paid by the plaintiff as purchaser to secure its completion of the Contract.

  2. The essential steps in his Honour’s reasoning may be summarised as follows:

  1. The parties’ contractual intention must be construed objectively, which requires consideration of the text and, as known to the parties, the context of the Contract, as well as the purpose and object of the underlying transaction. The subject of the Contract had to be read in the context of the Option Agreement (as amended), which formed part of the “surrounding circumstances” in construing what was meant by “the deposit”.

  2. The disputed sum was paid by the plaintiff as consideration for the Call Option granted to it by the defendants and not as payment made to the defendants as “an earnest to bind the bargain” and as security to the defendants for its performance of the Contract. The parties cannot objectively be found to have intended that, having borne the burden of the Option Agreement (as amended), the defendants would, by their exercise of the Put Option, have surrendered their absolute entitlement to the Call Option Fee which they were at such pains to have the plaintiff acknowledge as theirs. Rather, the focus of attention as to the disputed sum under the Contract was upon “the balance” of the purchase price fixed by the Contract.

  3. The terms of the Option Agreement (in particular, cll 2.1(a), 3.3, 3.4(a) and 4.5(2)) and the Amending Deed (particularly, cll 2, 4(a)(ii), 4(a)(iv) and 4(a)(vi)) provided for the disputed sum (as events unfolded, $2,050,000) to “vest” in the defendants (to use a compendious expression) as consideration for the Call Option and for it, upon completion of the Contract, to be credited against the balance of the purchase price ($10,250,000) payable by the plaintiff on completion ($8,200,000).

  4. The plaintiff’s reliance upon the reference to a “Deposit” in cll 2(c) and 4(a)(vi) of the Amending Deed must be read in the context of cl 2 as a whole, which confirms the character of the fee as a payment for the grant of an option.

  5. The Contract imposed on the plaintiff no obligation to pay the disputed sum, which can be characterised as penal or from which the plaintiff can be relieved upon an exercise of equity jurisdiction. Rather, the plaintiff paid that sum as the price for the grant, and extension, of the Call Option the operation of which was fully enjoyed by it.

  6. When the Put Option was exercised (which then created the Contract in accordance with cl 4.5(a)(1) of the Option Agreement as amended), and thereafter, the disputed sum belonged to the defendants, to whom it had been paid by the plaintiff as consideration for the Call Option granted to it by the defendants.

  7. The fact that the parties attached to the disputed sum the label “deposit” is not determinative of its legal character (citing O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 400; [1983] HCA 3; Iannello v Sharpe (2007) 69 NSWLR 452; [2007] NSWCA 61 at [31] and Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504; 18 BPR 36,353 at [26]).

  1. Thus, the plaintiff had no entitlement to recover the disputed sum on a claim for restitution, whether arising from termination of the Contract or from the law governing penalties and relief against forfeiture.

The Termination Issue

  1. The plaintiff also sought relief below that the defendants’ notice to complete was not valid; the defendants did not validly terminate the Contract and the Contract was validly terminated by the plaintiff, in aid of the first basis upon which the plaintiff contended that it has a right to recover “the deposit” under the law of restitution.

  2. Having concluded that the disputed sum was not to be characterised as a conventional deposit, the primary judge found it unnecessary to make findings regarding the validity of the termination of the Contract. In obiter observations, however, his Honour explained why the notice to complete was not valid and why the defendants’ purported termination of the contract on 19 July 2021 was repudiatory.

  3. It is not necessary to summarise his Honour’s reasoning underpinning those tentative conclusions because no issue is taken with them on the appeal.

The appeal

  1. The notice of appeal as filed could fairly be described as adopting a scattergun approach. It contained five grounds of appeal but when account was taken of the state of particulars, it raised far more grounds. Commendably, senior counsel for the appellant stated that ground 1 was not pressed. The appellant’s written submissions focused on key aspects of grounds 2 and 4 (relating to the issue of construction) and ground 3 (relating to the issue of penalty). The appellant’s submissions did not squarely address ground 5, presumably because it added nothing to the other grounds.

The appellant’s submissions summarised

(a) Grounds 2 and 4

  1. The appellant submitted that the disputed sum is a deposit, which was repayable in the event of the vendors’ default.

  2. The appellant submitted that the structure of the arrangement was one in which the Contract and option documentation assumed the existence of a deposit; the Call Option Fee was deemed to be the Deposit and this was to be released pursuant to Additional cl 41 under the Contract.

  3. The appellant advanced the following arguments in support of its position:

  1. Conceptually an option fee can become the deposit, as opposed to a non-refundable payment, citing for example: BP7 Pty Ltd v Gavancorp Pty Ltd (2021) 104 NSWLR 359; [2021] NSWSC 265 at [58]-[60]. Moreover, the parties did not expressly state that the sum of $2.05 million should merely be a credit against the purchase price – that would give no effect to Printed cl 16.10.

  2. The structure of the arrangement would have been unnecessary had the disputed sum merely been an option fee that the respondents became absolutely entitled to – Additional cl 41 could have no function in this scenario.

  3. The parties’ description of the disputed sum as a “deposit” has relevance and is an important consideration in interpreting the Contract.

  4. Legal terms of art are presumed to be used in their strict legal sense unless the document manifests a contrary intention. In support of this, the Contract was drafted by commercial entities advised by lawyers and the documents repeatedly referred to the deposit, but also contained provisions as to how it was to be dealt with in interpreting the Contract (citing Seven Cable Television Pty Ltd v Telstra Corp Ltd [2000] FCA 350 at [132]).

  5. The different outcomes in cll 2(b) and (c) of the Amending Deed are to be understood by reference to two different circumstances – namely whether the Contract is exchanged (thus enlivening cl 2(c)) or not (in which case, cl 2(b) operates). The concepts of forfeiture and release expressed in the former clause do not denote a permanent appropriation by the respondents of the disputed amount – otherwise, Additional cl 41.1 would be otiose.

  6. The mere release of the deposit, as expressed under Additional cl 41.1 of the Contract, does not preclude a purchaser's right to recover any money paid, and its equity to assert such a right and obtain restitution (citing McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 470; [1933] HCA 25).

  1. In reply, the appellant submitted that Additional cl 41.1 is concerned merely with the release of the deposit before completion and the fact that the parties contracted for the "release" of the deposit does not prevent a repudiating vendor from having to repay it in the event that the repudiation is accepted. The deposit is repayable pursuant to Printed cl 8.2, on default by the respondents and the right to restitution independent of the Contract for failed consideration.

  2. Moreover, the appellant submitted that other provisions of the Contract also assumed the continued existence of the deposit and its disposition and that these repeated references are of constructional significance. These provisions, including Printed cll 9.1 and 16.10, are not inconsistent with any additional clause that has primacy by operation of Additional cl 32.2 – it is not sufficient to show that additional clauses qualify or modify their effect. Direct inconsistency can be relevantly avoided where the expression "release" is defined to mean a payment in anticipation of completion, but subject (inter alia) to the purchaser's contingent right to recover the deposit.

  1. Printed cl 9.1 stipulated (alleged to be unamended by Additional cl 32.1) that upon termination for the purchaser's breach, the "vendor can keep or recover the deposit”, which is consistent with the essential characteristic of a deposit in a contract for the sale of land: namely that “it is susceptible to being forfeited by a buyer to a seller upon the buyer's breach”.

  2. Printed cl 2, which is not expressly amended by Additional cl 32.1 and is qualified only by Additional cl 41.1, requires the appellant to pay the deposit on exchange.

  3. Additional cll 41.1 and 41.2 are relevant only as aids to construction. Therefore, payment in this context – expressed to be non-refundable – may constitute a deposit repayable on the buyer's default.

  1. Further, the appellant submitted that in construing the Contract, it is improbable that the parties intended that the respondents should be able to keep what they called the deposit in the event that the latter refused to perform their contractual obligations, such that the appellant did not receive any consideration under the Contract.

  2. The appellant submitted that cl 2(b) of the Amending Deed and cl 3.4 of the Option Agreement only apply if the Contract is not entered into: see, by parity of reasoning, BP7 at [59].

(b) Ground 3

  1. On the issue of penalty, the appellant submitted that provisions such as cl 2(b) of the Amending Deed constituted a penalty, and was repayable in full because the deposit exceeded 10% and the respondents did not demonstrate special circumstances justifying its amount (citing Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573; Manufacturers House Pty Limited v Ashington No 147 Pty Limited [2005] NSWSC 767; (2005) 12 BPR 23,913 at [58]-[60]; Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; (2006) 12 BPR 23,629 at [24]; Iannello; Kazacos at 353 and Blanco v Wan [2021] NSWSC 273; (2021) 20 BPR 41,223 at [64]-[66]).

The respondents’ submissions summarised

  1. In support of their position that, upon entry into the Option Agreement, they were entitled to keep the entire Call Option Fee, the respondents advanced the following arguments:

  1. In respect of Additional cl 41.1 of the Contract, “Unconditionally” means that the appellant agreed that the release of the deposit to the respondents was not subject to any condition; and “Irrevocably” means that the appellant agreed that the release of the deposit to the respondents could not be revoked. The appellant’s construction is argued to have the effect that the release of the deposit to the respondents was subject to a condition and was revocable.

  2. The appellant did not exercise the Call Option. The word “keep” in cl 3.4(a) of the Option Agreement, headed “Consequences of non-exercise of Option”, means the owners were entitled to retain the Call Option Fee indefinitely, before any contract for sale could come into existence – it was their property. Under cl 3.4(a), the expression the “amounts paid as the Call Option Fee” is argued to include all four instalments, totalling $2.05 million.

  3. The Call Option Fee was consideration for the respondents’ grant of the 22 month option and the Option Agreement was fully performed such that the respondents were entitled to keep this fee.

  4. The reference to the Call Option Fee being treated as the deposit payable under the Contract in cl 4.5(a)(2) of the Option Agreement should not be construed as a conventional deposit because the respondents had already become entitled to the entire Call Option Fee upon entering into the Option Agreement.

  1. Further, the respondents submitted that, by entering into the Amending Deed, the appellant agreed by cl 2(b), before the Contract was entered into, that as at 17 June 2020, the respondents had already become entitled to keep the Call Option Fee.

  1. Clause 2(b) of the Amending Deed acknowledges that cl 3.4(a) of the Option Agreement applies. The expression “[i]n keeping with the option deed” suggests the balance of cl 2(b) confirms the meaning of “keep” in the Option Agreement, namely that the ownership by the respondents of the Call Option Fee was irrevocable and unconditional.

  2. The effect of the insertion of cll 2(c) and 4(a)(vi) and deletion of cl 4.5(a)(2) of the Option Agreement by the Amending Deed was that an additional half of the Call Option Fee was applied as a credit against the purchase price.

  3. The Call Option extended by the Amending Deed was not exercised by the appellant, which triggered cl 3.4(a) of the Option Agreement.

  1. Moreover, the respondents submitted that Additional cl 41.1 is consistent with and reinforces the above construction: namely that the “deposit would be unconditionally and irrevocably released to them”.

  2. The respondents further submitted that:

  1. Printed cl 16.10 of the Contract has no material operation. Further, Printed cl 9.1 is overridden by the force of Additional cl 32.2 (see PJ [31]) as the “deposit” provided for is 20%.

  2. The meaning of “irrevocably” and “unconditionally” does not encompass that a permanent appropriation was not intended.

  3. The “deposit” referred to was intended as a credit against the purchase price and not a conventional deposi­­­­t: citing Luu at [15] (Bryson JA, Handley and McColl JJA agreeing).

  4. With respect to the appellant’s submission that cll 2(b) and (c) of the Amending Deed deal with different scenarios, namely before/after exchange of contracts, the respondents submitted that the second scenario didn’t arise. This was because the Call Option Fee did not comprise the deposit under cl 2(c) of the Amending Deed given this applies only “if the Contract is exchanged pursuant to the Option Deed” (cl 4.5(a)(3)), which did not occur.

Consideration and determination

  1. Senior counsel for the appellant candidly and correctly acknowledged that the Court was dealing with a “badly worded contract” which contains “numerous errors”. He drew the Court’s attention to Leeming JA’s judgment in S&C Nicola Pty Ltd v Peter Holmes Investment Pty Ltd (2022) 108 NSWLR 165; [2022] NSWCA 72 which contains some helpful observations concerning the significance of poor drafting in the task of contractual construction. In brief, some of those observations which are relevant to this appeal are as follows:

  1. where errors are numerous or the drafter’s approach to grammar and syntax is “casual”, it is wrong to place great weight on considerations turning on the precise form of the clauses (at [30]); and

  2. “…sometimes the imprecision and indeed ignorance of a drafter may lead to a threshold question about what the literal or grammatical meaning of the words used actually is” (at [36]).

  1. The appellant did not challenge the primary judge’s view that, in construing the Contract objectively, regard must be had to relevant provisions of the Option Agreement and the Amending Deed. The relevant provisions have been identified and summarised above.

  2. Viewed as a whole, the contractual documentation addressed the following three potential scenarios:

  1. the purchaser exercised the Call Option during the Call Option Period, which period was extended by the Amending Deed, ultimately to 17 January 2021 upon the purchaser paying two extension fees in the amount of $110,000 each (cl 3(e) of the Amending Deed);

  2. the purchaser failed to exercise the Call Option before the Call Option Terminating Date (as extended by the Amending Deed); and

  3. the vendors exercised the Put Option within five days after the occurrence of the Call Option Terminating Date (as extended).

  1. It is desirable to say something more about each of those scenarios as they support the correctness of the primary judge’s analysis and conclusions.

(a)   Call Option is exercised

  1. By cl 2.1(a) of the Option Agreement, the respondents granted the appellant an exclusive right to purchase the Property during the Option Period, in consideration of the purchaser’s payment of the first instalment of the Call Option Fee as at the date of the Option Deed. The actual amount paid as the Call Option Fee depended upon the timing of any exercise of the Call Option.

  2. Clause 2.2 of the Option Deed plainly stated that the Call Option constituted “an irrevocable offer” by the respondents to sell the Property to the appellant in accordance with the terms of the Contract.

  3. Under cl 3.3(b), the Call Option Fee constituted the first and second instalments (or 10% of the purchase price) and that such instalments “shall be taken to form and constitute the deposit payable under the Contract and shall be subtracted from the purchase price payable at completion of the Contract”. I respectfully agree with the primary judge’s conclusion at PJ[16] that this provision amounts to a deeming provision in the sense that the first two instalments had the character of an option fee, but were then deemed also to have the character of a deposit. This is not unimportant, because it illustrates that, because of the deeming provision, the instalments had the dual character of being an option fee as well as a deemed deposit.

  1. Clause 3.3(a) also made plain that if the Call Option was exercised, the parties were immediately bound under the Contract regardless of whether or not counterparts had been exchanged. In contrast, however, Additional cl 41.1 of the Contract stated that it contained the purchaser’s acknowledgment that “the deposit will be unconditionally and irrevocably released to the vendor immediately after exchange” and cl 41.2 stated that cl 41.1 operated despite any other provision in the Contract, including any provision purporting to refund the deposit to the vendor.

  2. The better view is that the effect of these relevant provisions of the Option Agreement is that, if the Call Option is exercised, the “deposit” remains the respondents’ property, as is reflected in the terms of cl 41.1. I do not accept that the expression “released to the vendor” in cl 41.1 indicates that the “deposit” was not the property of the vendors. The looseness in language is manifest when reference is made to cl 2.1(a) of the Option Agreement, which refers to the appellant paying the First Instalment of the Call Option Fee “to the [respondents]”, albeit that the vendors then acknowledged in cl 2.1(b) that the First Instalment had been paid to the Deposit Holder, being their solicitor as identified in cl 1.1 of the Option Agreement.

  3. Similarly, the provisions in cll 2.1(c) to (e) refer to the second, third and fourth instalments being “paid to the [vendors]” (emphasis added).

(b)   Call Option is not exercised

  1. If the Call Option is not exercised, cl 3.4(a) of the Option Agreement states that “the [vendors] keep all amounts paid as the Call Option Fee”. I accept the respondents’ submission that the term “keep” is both significant and appropriate in circumstances where cl 2.1 states that the Call Option Fee “shall be paid to the [vendors]”. The vendors’ right to “keep” the Call Option Fee where the Call Option is not exercised strongly indicates that the relevant amount is consideration for the grant of the option, and not simply a conventional deposit.

  2. These provisions operate to permit the respondents to keep the Option Fee not only if the Option is not exercised, but also where, subsequently, the vendors exercise the Put Option so as to create the Contract.

(c)   Put Option exercised

  1. Significantly, the right to exercise the Put Option only arises after the Call Option Terminating Date has expired, at which time the respondents are entitled under cl 3.4(a) of the Option Agreement to “keep” the Call Option Fee in its entirety.

  2. As the primary judge pointed out at PJ[16], cll 3.3 and 4.5 (which deal respectively with the consequences of exercising the Call Option and the Put Option), each contemplates that the first two instalments are in the nature of deeming provisions. They are predicated upon a recognition that the payments the object of the deeming provision have the character of payments which constitute the option fee, rather than being a deposit per se. Hence there was a need to deem the payments to be a “deposit”.

  3. For the following reasons, I consider that the Amending Deed reinforces the meaning and effect of the provisions referred to above. It is acknowledged in cl  2(b) that cl 3.4(a) of the Option Agreement applies and that the Call Option Fee is “irrevocably and unconditionally forfeited and released to the [vendors]”. Moreover, I accept the respondents’ submission that cl 2(c) of the Amending Deed confirms that the appellant does not actually have to pay the “deposit” in the event that the Contract is exchanged pursuant to the Option Agreement. Rather, it was agreed that the Call Option Fee represented a credit in the appellant’s favour against the purchase price payable by the appellant at completion, as opposed to being a conventional deposit.

  4. As noted above, the Amending Deed operated to increase the amount of the “deposit” (or credit in the purchaser’s favour) from 10% to 20% by deleting cll  3.3(b) and 4.5(a)(2) of the Option Agreement and increasing the amount of the “deposit” by doubling the amount of the “deposit”. The consequence of these amendments was that the purchaser obtained a credit in the full amount of the Call Option Fee.

  5. As noted above, in the events that occurred here, the Put Option was exercised, with the consequence that the Contract was created. But that Contract was subsequently terminated and, on the primary judge’s tentative finding, this occurred on 20 August 2021 when the appellant accepted that the respondents’ repudiatory conduct brought the Contract to an end (see PJ[85]). As previously mentioned, this tentative finding is not challenged on the appeal. Nor does any party challenge the primary judge’s statement at PJ[55] that there was no utility in determining whether or not the Contract was validly terminated because that issue was predicated on an assumption that the disputed sum was a “deposit”, contrary to the primary judge’s conclusion. Ground 3 of the notice of appeal, which relates to penalties, depends upon the appellant succeeding concerning the primary judge’s construction of the documentation.

  6. I shall now explain why I do not accept the appellant’s other primary submissions in support of its claim that the primary judge erred in his analysis of the relevant documentation. First, senior counsel for the appellant relied upon Leeming JA’s observations in S&C Nicola at [36] (as referred to at [46] above) in support of his submission that the reference at the end of Additional cl 41.1 to the term “exchange” does not refer to the physical exchange of contracts, but simply refers to a contract coming into existence. The appellant was effectively driven to make such a submission in circumstances where there was no dispute that the parties had not in fact exchanged contracts. The appellant’s submission should be rejected having regard to the wording in cl 3.3(a) of the Option Agreement, which confirms that the term “exchanged” is used there in the sense of physically exchanging counterparts of the Contract.

  7. Secondly, I reject the appellant’s submission that, on the primary judge’s analysis, Additional cl 41 has no work to do. Additional cl 41 does have work to do, as the primary judge explained at PJ[31] and [32] (see also [67] below).

  8. Thirdly, I agree with the primary judge’s statement at PJ[48] that merely because the disputed sum is described in various parts of the documentation as “the deposit” is not determinative of its true legal character (see the authorities in support of that statement at PJ[48]). Indeed, that statement applies with particular force in the circumstances here, given the acknowledged poor drafting (which includes the fact that the disputed sum is sometimes described as the “deposit” and other times as the “Deposit”).

  9. The essential principle is captured in the following statements by White J in Kazacos at [26]:

…The question whether a payment made or required to be made has the character of a deposit is not determined by the description given in the contract to the payment made or required to be made. Whether the parties describe it as a deposit may be relevant, but the nature of the obligation to make the payment is more important in determining its character (Iannello v Sharpe (2007) 69 NSWLR 452; [2007] NSWCA 61 at [31]). The essential character of a deposit is that it is an “earnest” of the bargain or its performance. It was described by Jacobs J in Brien v Dwyer (1978) 141 CLR 378 at 401; [1978] HCA 50 as:

“An assurance to the vendor, a security to him pending completion. He can take his property off the market and not concern himself with other offers in case the sale should go off, with the comfort at least that the deposit is there for his security.”

  1. Fourthly, the appellant also relied upon Printed cl 16.10 of the Contract, which provides that on completion, the deposit belongs to the vendor. As the primary judge noted at PJ[32], this provision is inconsistent with Additional cl 41 if it is read as “on completion” and not “before completion” and it has no material operation unless it relates to a deposit for which Printed cl 2 provided and was not paid. If there is any inconsistency, primacy has to be given to Additional cl  41 by dint of operation of Additional cl 32.2. The primacy of the Additional clauses is given effect to by Additional cl 32.2, which also applies in respect of the appellant’s reliance on Printed cl 9.1 by providing for a “deposit” of 10%.

  2. Fifthly, I do not accept the appellant’s submission that Additional cl 41.2 refers only to contractual provisions and does not preclude the purchaser’s recovery of the deposit relying upon restitutionary principles. Additional cl 41.1 (to which Additional cl 41.2 relates) is expressed in very broad terms, as is reflected in the use of the expression “unconditionally and irrevocably” in relation to the release of the deposit to the vendor immediately after exchange.

  3. Cases such as Amnico Holdings Ltd v Griese [2016] 2 Qd R 512; CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232; (2005) ASAL 55-139 at [10] and Newlander Development Pty Ltd v Jung Kyun Han [2023] QSC 94, which were relied upon by the appellant, are distinguishable. Those cases recognise and apply the principle that a deposit paid in a conveyancing context which is transferred or released to the vendor may nevertheless be recovered by the purchaser on restitutionary principles where the contract is terminated by the purchaser for breach of contract by the vendor. This is because the consideration for which the deposit has been paid is for the vendor’s performance of the contract by conveying the land to the purchaser. That is not the consideration for which the disputed sum was paid here. Rather, as the primary judge correctly found, the consideration was for the grant of the option. It follows that grounds 2 and 4 should be rejected.

  4. As the appellant correctly recognised, ground 3 of the appeal (which relates to the issue of penalties) did not arise if the appellant failed on grounds 2 and 4.

Conclusion

  1. For these reasons, the appeal should be dismissed, with costs.

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Decision last updated: 30 January 2024

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