Kelly v Galafassi
[2013] NSWSC 680
•31 May 2013
Supreme Court
New South Wales
Medium Neutral Citation: Kelly v Galafassi & Anor [2013] NSWSC 680 Hearing dates: 13-15 May 2013 Decision date: 31 May 2013 Jurisdiction: Equity Division Before: Windeyer AJ Decision: Refer to para [53] of judgment.
Catchwords: CONTRACTS - general contractual principles - remedies for breach - availability of damages for repudiation when plaintiff has commenced and later abandoned suit for specific performance - mitigation - extent of plaintiff's obligation to act reasonably so as to mitigate loss
CONVEYANCING - breach of contract for sale and remedies - vendor's remedies - whether notice to complete required before vendor can terminate if purchaser has indicated it is unable to complete - measure of damages - election to claim loss on resale - availability of interest under contract for late completion when completion does not occur - availability of costs of sale and resaleLegislation Cited: Supreme Court Act 1970 Cases Cited: Holland v Wiltshire (1954) 90 CLR 409
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444
Carr v J A Berriman Pty Ltd (1953) 89 CLR 327
Jampco Pty Ltd v Cameron (No. 2) (1985) 3 NSWLR 391; (1986) NSW ConvR 55-275
Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103
Falcone v Mentyn [2003] TASSC 79
Bydand Holdings Pty Ltd v Pineland Property Holdings Pty Ltd [2009] NSWSC 1159
Karacominakis v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313
Carpenter v McGrath (1996) 40 NSWLR 39
Zografakis v McCarthy [2007] NSWSC 144
Hearse v Pallister [2008] NSWSC 504Texts Cited: J W Carter, Carter's Breach of Contract, LexisNexis, 2011
R P Meagher, J D Heydon and M J Leeming, Meagher Gummow & Lehane's, Equity: Doctrines & Remedies, LexisNexis, 2002, 4th edCategory: Principal judgment Parties: Susan Kelly (Plaintiff)
David Galafassi (1st Defendant)
Toni Galafassi (2nd Defendant)Representation: Counsel:
B A Coles QC with C G Carroll (Plaintiff)
J Stoljar SC with J C Hewitt (Defendants)
Solicitors:
Osbornes Lawyers (Plaintiff)
David Carr, Lawyer (Defendants)
File Number(s): 2012/21377
Judgment
Outline
HIS HONOUR: The plaintiff was the owner of property 40-42 Stewart Street, Paddington. She sold that property to Mr and Mrs Galafassi by contract of sale dated 30 September 2011 for a purchase price of $6,350,000. Settlement did not take place on the date fixed for settlement because the purchasers advised they did not have the funds necessary to enable them to complete. The vendor commenced proceedings for specific performance. The proceedings for specific performance were abandoned and the vendor purported to terminate the contract on the ground of repudiation by the purchasers. The vendor then resold the property and by an amended pleading seeks to recover the loss on resale and other expenses. The question is whether she can do so.
Facts
The contract provided for completion on 30 December 2011. The vendors were ready to complete, but the purchasers' solicitors advised on that day they "would not be able to proceed with the purchase". There was other correspondence making it clear that the purchasers would not (and having bought another property, could not) complete. Mr Osborne, the solicitor for Mrs Kelly wrote to the purchasers' solicitor on 3 January 2012 stating that the repudiation was not accepted and a claim for specific performance would be commenced. On 4 January 2012 the solicitor for the purchasers wrote advising that as they had not been able to sell their Bronte property, they were not financially able to purchase the Paddington home so that an order for specific performance would have no purpose. Notwithstanding this, a summons seeking an order for specific performance was filed on 20 January 2012.
On 24 January 2012 and again on 24 February 2012, the second defendant sent emails to Mr Kelly (the plaintiff's husband) which in effect apologised for the inability to complete and confirmed that inability.
The defendants had been warned by the plaintiff's agent, Mr Collier, that they were at risk of losing far more than the deposit. It is clear they understood this as Mr Galafassi in his email of 24 February 2012 said that if the property were sold for less than the contract price, that would be a problem for him.
Meanwhile Mr Collier had continued to show prospective purchasers through the property. Mr Collier did suggest a full new marketing campaign but Mr Kelly told him not to go ahead with this. While this was happening the case continued. At a directions hearing on 21 March 2012 an order was made for pleadings and a timetable set for evidence, with the statement of claim to be filed on 17 April 2012. The summons filed on 20 January 2012 had sought an order for specific performance and further or in the alternative, damages. The relief sought in the statement of claim was specific performance and in the alternative, damages pursuant to s 68 of the Supreme Court Act 1970 and further in the alternative "damages for breach of the agreement under the general law".
Mr Collier then continued to show prospective purchasers through the property. One of these was a Mr Ball who had been the underbidder on a property at 65 Goodhope Street, Paddington. Mr Collier was the agent on that sale. Between 19 April 2012 and 24 April 2012 there were various offers and counter offers until Mr Ball offered a purchase price of $5,500,000 for the property which was accepted. On 24 April 2012 the vendors served a notice of termination of contract on the defendants. On the same day the plaintiff entered into a contract to sell to Mr Ball which was completed on 30 May 2012.
On 6 June 2012 the plaintiff filed an amended statement of claim abandoning the claim for specific performance, seeking a declaration as to the repudiation by the purchasers and a declaration that the contract had been validly terminated by the notice and claiming damages pursuant to clause 9.3.1 of the contract. The relevant parts of clause 9 are as follows:
"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);
...
9.3 sue the purchaser either -
9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover -
the deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and
the reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale ..."
Under the amended claim the plaintiff seeks:
1. The deficiency arising on resale;
2. Costs and expenses arising by reason of non-completion;
3. Costs and expenses of the original sale;
4. Interest at 10 per cent per annum calculated on a daily basis on the purchase price, less half the deposit, from 31 December 2011 to 24 April 2012 pursuant to clause 34.2 of the agreement.
5. Payment of land tax for the 2012 tax year;
6. Interest on damages; and
7. An order that the defendants do all that is necessary to authorise payment of the deposit to the vendor.
The deposit was five per cent of the original purchase price, namely $317,500.
Apart from some relatively minor matters, there are two questions which arise for decision:
1. Whether having brought an action for specific performance the plaintiff is not entitled to rely on any acts said to amount to repudiation occurring before the date the summons was issued.
2. Whether the plaintiff failed to mitigate her losses.
Question 1
The amended statement of claim pleads the contract, the payment of the deposit, the completion date of 30 December 2011, the term that if completion did not take place by 30 December 2011 for any reason not attributable to the plaintiff, the defendants were to pay interest at 10 per cent on the balance purchase price less half of the deposit from 31 December 2011 until completion, and if completion did not take place by 30 December 2011 then the purchaser would pay the plaintiff's liability for land tax for the 2012 tax year calculated as if the land was subject to a special trust. Paragraphs 4A to 7B then proceed as follows:
"4A It was a further essential term of the agreement that the defendants would complete the agreement and would not renounce their obligations thereunder or evince any intention no longer to be bound thereby.
4B It was a further term of the agreement that:
i. In the event the defendants did not comply with the agreement in an essential respect, the plaintiff was entitled [to] terminate the agreement by serving a notice of the termination upon the defendants; and
ii. After that termination the plaintiff could inter alia:
a. Keep or recover the deposit (to a maximum of 10% of the purchase price); and
b. Sue the defendants (where the plaintiff has resold the property under a contract made within 12 months after the termination) to recover:
1. The deficiency on the resale (with a credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this claim); and
2. The reasonable costs and expenses arising out of the defendants' non-compliance with the agreement and or the resale or any attempted resale.
Particulars
Clauses 9, 9.1 and 9.3 of the agreement
5 In breach of the agreement the defendants failed to complete the sale by 30 December 2011 and thereafter have failed and refused to complete the purchase of the property.
6 On 30 December 2011 and thereafter the defendants have informed the plaintiff of their intention not to proceed to completion of the agreement.
Particulars
i. Email from David Carr (solicitor for the defendants) to Michael Osborne (solicitor for the plaintiff) sent at 10.12 am on 30 December 2011.
ii. Letter from David Carr (solicitor for the defendants) to Michael Osborne (solicitor for the plaintiff) dated 4 January 2012.
iii. Email from Toni Galafassi to Nick Kelly (the plaintiff's husband) sent at 8.13am on 24 February 2012. And
iv. In other correspondence.
6A Further the defendants have by their conduct disabled themselves from their performance of the agreement with the plaintiff by entering into an agreement for purchase of a residential property with another vendor.
Particulars
Email from Toni Galafassi to Nick Kelly (the plaintiff's husband) sent at 8.13am on 24 February 2012.
7A In the premises the defendants have by their conduct and in the circumstances pleaded in paragraphs 1, 2, 4A, 5, 6 and 6A of this Amended Statement of Claim, failed to comply with the agreement in an essential respect and repudiated the agreement and their obligations thereunder.
7B On or about 24 April 2012 and in reliance on the defendants' non-compliance with the agreement and continued, persistent and unretracted repudiation thereof, the plaintiff terminated the agreement."
In their defence the defendants, as to the interest and land tax provisions, state that the obligation was conditional upon completion taking place which it has not. In reply to paragraph 7A and 7B of the amended statement of claim the defendants plead as follows:
"7A The defendants deny paragraph 7A of the Amended Statement of Claim and say:
a) at no time did the plaintiff issue a notice to complete pursuant to clause 15 of the agreement or otherwise;
b) any failure by the defendants to complete the sale by 30 December 2011 was not a failure by the defendants to comply with the agreement in an essential respect;
c) if (which is denied) the plaintiff had a right to terminate the agreement at or prior to 17 April 2012, the plaintiff elected to treat the agreement as remaining on foot including by filing a Statement of Claim on 17 April 2012 seeking specific performance of the agreement;
d) after the plaintiff's election there was no basis for regarding the agreement as repudiated by the defendants where the plaintiff did not fix a further time that was of the essence of the agreement by issuing a notice to complete or otherwise;
e) further, or in the alternative, by filing a Statement of Claim on 17 April 2012 seeking specific performance of the agreement the plaintiff waived or abandoned its right to terminate based on conduct of the defendants prior to that date.
7B As to paragraph 7B of the Amended Statement of Claim the defendants:
a) admit that on or about 24 April 2012 the plaintiff purported to terminate the agreement;
b) repeat sub-paragraphs (a) to (e) of the previous paragraph and say that the purported termination by the plaintiff was wrongful and itself amounted to a repudiation of the agreement by the plaintiff;
c) admit that the agreement has been terminated by reason of the acceptance by the defendant of the wrongful repudiation by the plaintiff;
d) otherwise deny the paragraph."
It is not argued, or at least not strongly, that the commencement of proceedings for specific performance is an election which precludes a subsequent claim for damages for breach. It is perfectly clear that it does not. Cases such as Holland v Wiltshire (1954) 90 CLR 409 and Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 make that clear, as do the texts such as J W Carter, Carter's Breach of Contract, LexisNexis, 2011 at [10-57] to [10-58] and R P Meagher, J D Heydon and M J Leeming, Meagher Gummow & Lehane's, Equity: Doctrines & Remedies, LexisNexis, 2002, 4th ed at [20-265].
What is argued by the defendant is that while election to commence proceedings for specific performance does not prevent a subsequent claim for damages for breach of contract, the election amounts to a waiver of rights existing up to that time to terminate for repudiation, so that it is necessary for there to be further repudiatory conduct to bring about a right to terminate. I will come back to this but will say something about it now. While there are some passages in Ogle v Comboyuro Investments Pty Ltd which might support that conclusion, I do not think a complete reading of it does so. But in any event in this case the defendants made it quite clear, in correspondence after service of the summons claiming specific performance, that they could not, and therefore would not, complete. The fact the matter subsequently proceeded to pleadings is not I think some new act so as to preclude reliance on past repudiatory conduct, and Ogle v Comboyuro Investments Pty Ltd does not suggest that a continuing refusal to complete is not a continuing repudiation, particularly as in this case the purchasers after the summons was issued made it clear they could not complete and would give the letter advising of this in evidence if the claim were continued. I would have thought that the earlier statement of inability to complete, the stated continuation of this even after the specific performance proceedings were commenced, and the presumption of a continuing position that they remained unable to complete was a continuing repudiation which the vendor could accept and move to terminate. There is no evidence at all from the purchasers to counter this.
Next it is argued that no notice to complete was served and this was a pre-requisite of to a right to terminate. Clause 34 of the contract was as follows:
"34 COMPLETION, LIQUIDATED DAMAGES AND NOTICE TO COMPLETE
34.1 Completion must occur on or before 3.30 p.m. on the completion date.
34.2 If completion does not take place on or before the completion date for any reason not solely attributable to the vendor the purchaser must pay to the vendor interest at a rate of 10% per annum calculated on a daily basis on the price (less half the deposit actually paid) for the period from but excluding the completion date to and including the actual date of completion. It is an essential provision of this contract that any interest be paid on completion. The purchaser agrees any interest payable pursuant to this additional condition represents a genuine pre-estimate of the liquidated damages likely to be suffered by the vendor as a result of completion not taking place on or before the completion date. The vendor's right to the payment of interest is in addition to and does not restrict any other rights of the vendor under this contract.
34.3 A party entitled to serve a notice to complete may serve a notice requiring completion of this contract on a day being not earlier than 14 days after the date of service of the notice. The parties agree the period of 14 days after the date of service of the notice is sufficient to make time the essence of this contract.
34.4 If a notice to complete is served on the purchaser the purchaser must as an essential condition of this contract pay to the vendor on completion an amount of $220 on account of the vendor's costs in preparing and serving the notice."
In some circumstances it may be correct that a notice to complete is required, but I do not consider that special condition 34 requires this in all circumstances. Special Condition 34.3 sets out one means of bringing a contract to an end if termination follows non-compliance with the notice, but that does not mean that if there has been a clear repudiation by a party that cannot be accepted and relied on as a fundamental breach. The law does not require something to be done which is purposeless. For instance, it does not require the vendor to attend an appointment for settlement when the purchaser has indicated that he or she will not be attending and is unable to settle.
It is necessary to detail some further matters. Mr Carr, the solicitor for the purchasers, advised the plaintiff's solicitor on 30 December 2011 that the purchasers "will not be able to proceed with the purchase of the above". Mr Collier then sent an email on 31 December 2011 to the purchasers pointing out that the risk to them if the purchase was not settled. They sent an email back to him saying inter alia "we feel sick about this, you and vendors nothing but great and we apologise profusely". The vendor's solicitor sent a facsimile to the purchasers' solicitor on 3 January 2012 stating that the vendor did not accept the repudiation and proposed to apply for specific performance. The solicitor for the purchasers responded to this stating that the purchasers were not able to sell a property they owned so that completion was not possible and compliance with an order for specific performance would not be possible. The letter stated that it would be relied upon on any question as to costs and that it was incumbent on the vendor to "minimise damages and mitigate their position".
On 20 January 2012 a summons for specific performance was filed. On 24 January 2012 the purchasers sent an email to Mr and Mrs Kelly again apologising and making it clear that they did not have the money to complete, stating that their Bronte property had been sold for less than expected, that there was only one purchaser who would not exchange until she had sold her Bronte home, and that they had in effect swapped houses and made an additional payment to the purchaser of their house. Whether this sale happened before or after the letter of Mr Carr of 4 January 2012 saying the purchasers were unable to sell is not clear.
From about the middle of January 2012, Mr Collier began to show other potential purchasers over the property. I will come back to that when dealing with mitigation. As soon as the price was agreed with Mr Ball, the notice of termination was sent. That notice was in the following terms:
"In view of your failure to complete the contract for sale of land for the Property between Susan Kelly as vendor and you as purchaser dated 30 September 2011 ('contract'), and your advice on 30 December 2011 that you would not complete the contract, and your further advice in your letter dated 4 January 2012 that you could not specifically perform the contract, the vendor elects to treat your conduct as a repudiation. The vendor accepts that repudiation and hereby terminates the contract."
No defence was filed to the original statement of claim. An amended statement of claim was filed on 6 June 2012 seeking declarations as to repudiation and termination and damages for breach pursuant to clause 9.3.1 of the contract. In addition, interest was sought from 25 April 2012 together with an order that the defendants do whatever is necessary to authorise the agent to account for the deposit moneys. This last order is not opposed if there has been a valid termination by the vendor.
The question then is whether there has been a repudiation that continued up to termination and whether it is necessary for valid termination that some fresh act of repudiation has occurred after the commencement of the proceedings for specific performance. I should say that according to the texts I have mentioned, Professor Carter says that proceedings for specific performance and damages can be brought in the one action, and the court can hold that the plaintiff is entitled to succeed on either, namely, an order for specific performance or a declaration of a right to terminate for repudiation, and then the plaintiff must elect (Carter at [10-58]). The authors of the fourth edition of Meagher, Gummow & Lehane's Equity: Doctrines and Remedies do not go so far as that: rather, they say (at [20-265]) that it was held in Ogle v Comboyuro Investments Pty Ltd that a vendor having a suit for specific performance did not abandon legal rights to damages for breach if "the purchaser, after the institution of the proceedings, either commits a breach of an essential term of the contract, or otherwise evinced an intention no longer to be bound by the contract". I turn to this.
In Holland v Wiltshire the High Court was dealing with a situation where a vendor had pressed a purchaser to settle after a settlement date had passed. The vendor in that case had not accepted a clear repudiation of the contract conveyed by the purchaser's solicitor and had insisted on performance. The following appears in the judgment of Kitto J (at 420-421):
"A second opportunity for the vendor to determine the contract arose when the purchasers' solicitor informed him that Mr Holland (implying Mrs Holland also) would not go on with the contract. But the next step he took was to give the purchasers the notice of 17 March. This notice did not accept the repudiation; it ignored it and insisted upon the contract being performed. Beyond a peremptory demand for completion by 28 March, there was nothing in it but a warning that failure by the purchasers to complete by that date would be treated as a breach of contract for which a legal remedy would be sought. After this clear election, the right of the vendor to end the contract because of the repudiation conveyed by the solicitor was plainly gone.
The express repudiation however, was only one incident in a course of conduct by which the purchasers confronted the vendor with a clear and continuing refusal to perform the contract. Even if the refusal conveyed by the solicitor had never been given, it might well have been that the inference would have arisen from the whole course of the matter that the purchasers were in truth refusing to proceed. Delay or neglect without more, if continued long enough, may amount to a refusal; and the other party is not bound to allow an unlimited time after the day named for performance of the contract: De Soysa v De Pless Pol (1912) AC 194, at pp 202, 203; see also Forslind v Bechely-Crundall (1922) SC (HL) 173, at pp 179, 190, 191; Rhymney Railway v Brecon & Merthyr Tydfil Junction Railway (1900) 69 LJ Ch 813, at p 818. So here, the vendor might well contend, if he needed to do so, that in view of the delay of which the purchasers had been guilty before 17 March, their continued failure to complete within the time fixed by the notice of that date amounted to an intimation of their intention to have no more to do with the purchase, so that thereafter the vendor was in a position to put an end to the contract. But however that may be, it is at least clear that the express refusal through the solicitor to go on with the matter, though the vendor lost by his election the right to terminate the contract by reason of it, remained as a fact in the history of the matter and gave an unmistakeable colour to the continued inactivity of the purchasers after receiving the vendor's ultimatum. The only possible inference was that the purchasers were refusing, deliberately and finally, to complete the purchase. Consequently, when 28 March had gone by, the contract unquestionably stood repudiated by the purchasers, and the vendor, if his patience should become exhausted at any time while the repudiation continued, was entitled to treat the contract as no longer binding upon him: Cort v The Ambergate, Nottingham & Boston & Eastern Junction Railway Company (1851) 17 QB 127, at p 148 (117 ER 1229, at p 1237). The case was similar to that with which Lindley J was dealing when he said in Byrne v Van Tienhoven (1880) 5 CPD 344:
'It was contended that by pressing the defendants to perform their contract the plaintiffs treated it as still subsisting and could not treat the defendants as having broken it, and a passage in Mr Benjamin's book on Sales, p 454, was referred to in support of this contention. But, when the plaintiffs found that the defendants were inflexible, and would not perform the contract at all, they had, in my opinion, a right to treat it as at an end and to bring an action for its breach. It would indeed be strange if the plaintiffs by trying to persuade the defendants to perform their contract were to lose their right to sue for its nonperformance when their patience was exhausted. The authorities referred to by Mr Benjamin (viz, Avery v Bowden (1855) 5 El & Bl 714 (119 ER 647) and others of that class), shew that as the plaintiffs did not, when the defendants first refused to perform the contract, treat that refusal as a breach, the plaintiffs cannot now treat the contract as broken at the time of such refusal. But I have found no authority to shew that a continued refusal by the defendants to perform the contract cannot be treated by the plaintiffs as a breach of it by the defendants' (1880) 5 CPD 344, at p 350."
This passage was referred to and apparently approved by the majority of the High Court in Ogle v Comboyuro Investments Pty Ltd at 458. There is a similar statement in the judgment of Fullagar J in Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 at 349.
Ogle v Comboyuro Investments Pty Ltd makes it clear that a claim for specific performance is not an election against a right to sue for damages; that although the commencement of an action for specific performance and relying on breach of an essential term of a contract may prevent the subsequent termination (in the case called rescission) in reliance on such breach (at 457-458); if the failure to settle at all amounted to a repudiation of the contract, as distinct from breach of an essential term, then such continued long failure can amount to a refusal to be bound (at 458).
Thus, the joint judgment continues (at 458):
"In this particular context there is no difference in consequence between regarding the conduct subsequent to the actual breach as a further breach of the contract and regarding it as a refusal to be bound by the contract and consequently a repudiation thereof."
The judgment goes on to say that where there is a time fixed for completion which had become an essential term of the contract and the vendor elects to sue for specific performance rather than to terminate:
"...there will not usually be a basis for regarding the contract as repudiated by a purchaser until a further time has been fixed in a way that shows an intention on the part of the vendor to make that further time of the essence of the contract ...
Thus although mere delay will be no more than an omission to remedy the past breach which has been waived as a ground for rescission, there are cases where the purchaser by further unreasonable delay or by a further act expressly evinces an intention no longer to be bound by the contract. Either the further delay or the further act may constitute a repudiation of the contract."
I have come to the conclusion that there was a clear continuing act of repudiation by the purchasers who had indicated they could not complete, that they had no intention of completing, and they had in fact sold their property at Bronte and bought another property which, on the basis of their evidence, put it beyond their powers to complete. In those circumstances, I find that the purchasers repudiated the contract, that the vendor was entitled to terminate and did so, and thereupon is entitled to seek damages for breach.
Damages and mitigation
The original contract price was $6,350,000. The resale price was $5,500,000, thus the deficiency arising on sale is $850,000. I will deal with the interest claim later.
This is a claim in common law for damages arising through breach of contract pursuant to a particular condition of the contract. The common law duty of mitigation of loss applies. In such a case it is not some equitable duty akin to that imposed on mortgagees exercising power of sale that arises (Jampco Pty Ltd v Cameron (No. 2) (1985) 3 NSWLR 391; (1986) NSW ConvR 55-275). The latter report is more complete and it is that I refer to later on other matters when I refer to Jampco Pty Ltd v Cameron (No. 2).
There is some debate as to whether the duty is to resell without sacrificing the purchaser's interests or to act reasonably in respect of the resale pursuant to an implied term to do so which duty is "akin to the common law duty to mitigate loss": Hansmar Investments Pty Ltd v Perpetual Trustee Co Ltd [2007] NSWSC 103 and Falcone v Mentyn [2003] TASSC 79 at [56]. In Bydand Holdings Pty Ltd v Pineland Property Holdings Pty Ltd [2009] NSWSC 1159, Hammerschlag J considered the question, but said in the case before him it was not necessary to resolve it. I think that is the position in the case before me. In any event the position would appear to be established by Karacominakis v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313 where the following appears (at [187]):
"A plaintiff who acts unreasonably in failing to minimise his loss from the defendant's breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less. This is often misleadingly referred to as a duty to mitigate, although the plaintiff is not under a positive duty. The plaintiff does not have to show that he has fulfilled his so-called duty, and the onus is on the defendant to show that he has not and the extent to which he has not (TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130). Since the defendant is a wrongdoer, in determining whether the plaintiff has acted unreasonably a high standard of conduct will not be required, and the plaintiff will not be held to have acted unreasonably simply because the defendant can suggest other and more beneficial conduct if it was reasonable for the plaintiff to do what he did (Banco de Portugal v Waterlow and Sons Ltd (1932) AC 452; Pilkington v Wood (1953) Ch 770; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd (1976) 1 NSWLR 5)."
In response to a notice to admit served by the solicitor for the defendants, the plaintiff has admitted that for the purposes of resale the property was not put up for sale by auction, the property was not listed for sale on any real estate website, and it was not advertised for sale in any newspaper.
The defendants put into evidence a report of an experienced valuer, Mr Wotton, dated 2 November 2012. He valued the property as at 24 April 2012 at $6,250,000. At that stage Mr Wotton had not inspected the interior of the Stewart Street property, but he did so at a later date and only a further report dated 20 December 2012 confirmed his opinion as to value.
Although questions of reasonable action or mitigation of loss do not necessarily rely or depend upon valuation evidence, it is I think something which can be taken into account in determining whether the vendor acted reasonably. It does not however establish that the vendor acted unreasonably in selling below that valuation. Mr Wotton in his report said that he considered that to obtain the best price for this property, it needed to be extensively exposed to the market to make its availability known; to market the property properly would need a four to six week period followed by auction or by seeking expressions of interest; and that proper marketing would include extensive advertising in local and international press or magazines.
To qualify him for giving this evidence on sales procedures Mr Wotton gave evidence of three occasions when he had been asked not to value or not only to value prestige properties, but to give recommendations on sale. Those recommendations which related to very valuable properties in Woollahra and Point Piper were along the lines recommended for the property in question in this action. One of those properties where the marketing advice was implemented sold, although the evidence does not disclose the length of time this took or the price achieved. A second property where the advice was given in 2011 and followed has not yet sold, and in the third case the advice was given in 2011, but Mr Wotton did not know whether or not it was followed and did not know whether that property had been sold. For these reasons I do not think reliance can be placed on his evidence of the appropriate way to go about sale of the property in question.
Mr Wotton looked at sale of six properties to be considered as comparable, namely:
1. 167-171 Underwood Street, Paddington;
2. 65 Goodhope Street, Paddington;
3. 148 Glenmore Road, Paddington;
4. 41 Glenview Street, Paddington;
5. 86 Holdsworth Street, Woollahra; and
6. 90 Holdsworth Street, Woollahra.
He decided not to place much emphasis on the latter two as they were outside Paddington. He thought it difficult to rely on sales where the land area was far greater than that of the subject property as was the case in the Underwood Street property and so he concluded that the properties most comparable to the Stewart Street property were numbers 2, 3 and 4 as set out above.
Property no. 2 at 65 Goodhope Street, Paddington was sold on 24 February 2012 for $4,906,000. Its land area was 257 square metres. Property 40-42 Stewart Street, being the subject property in question here has a land area of 360 square metres and an improvements area of 457 square metres. Mr Wotton adjusted the Goodhope Street figures by considering location, building area and land area. Although paragraph 79 of his report is somewhat confusing, and the valuation seems to have an error, he considered the location of Stewart Street inferior by 2.5 per cent and the building size superior by 25 per cent and the land size superior by 7.5 per cent. He thus added 30 per cent to the purchase price achieved for the Goodhope Street property bringing about a total of $6,377,000. As I have said, I am not certain the variations are logical. The sale however was the closest in time to that of the subject property.
The property at 148 Glenmore Road, Paddington was sold on 18 September 2011 for $4,750,000. Using the same adjustment basis adjustments were made to its price having regard to its location and smaller building size. He considered the Stewart Street location as being 2.5 per cent inferior, building size and quality 20 per cent superior and an additional five per cent superior as Glenmore Road is a busy road. On this basis he added 22.5 per cent to the sale price of Glenmore Road to come to a comparable value. No adjustments appear to have been made for land size or for the time of sale. The resulting figure was stated to be $5,818,000.
The property at 41 Glenview Street, Paddington was sold on 21 September 2010, the sale price being $6,400,000. Mr Wotton made adjustments of -2.5 per cent because Stewart Street is considered an inferior location and a balancing positive adjustment of 2.5 per cent as Stewart Street was thought to have a superior layout. No time adjustment was made. The resulting figure was $6,400,000. I should add that those adjustments for the three properties do not appear to be mathematically correct as the percentages are combined additively rather than multiplicatively, as one would expect.
Having considered these sales and the other ones to a lesser extent, Mr Wotton concluded that a value of around $5,900,000 to $6,350,000 was reasonable as at 24 April 2012. Mr Wotton then set out a land area basis adopting rates of between $16,500 and $18,000 per square metre which would have produced a value of between $5,944,950 and $6,485,000. Thus he concluded that the lowest figure on either basis was $5,900,000 and the highest was $6,485,000. He then adopted a value of $6,250,000 for reasons not made clear, but valuation is not an exact science.
In his report Mr Wotton set out some figures of sales in the Paddington and Woollahra areas of house properties between $3 million and $8 million between 1 July 2011 and 30 June 2012. For that period the average price for sales of property in Paddington fell by 4.86 per cent, but those were not necessarily for sales within the price range. Figures for the Woollahra Council area which of course includes Paddington, for sales within the $3-8 million range over that period showed a reduction in price of 5.14 per cent.
One of the problems about the valuation of Mr Wotton is that while he gave evidence about these reductions and average sale prices, he did not in his report in considering comparable sales state he had made any reduction based on time. While Mr Wotton did say that in some way he took this into account, it does not appear that he did because he did seem to accept that there had been a reduction in sale prices over the period in question, yet in the two properties where the sale was not close in time to the Stewart Street property, he made no adjustment. As he accepted that a sale for $5,900,000 would have been reasonable reducing this by about five per cent would have brought about a sale price of something in the order of $5,600,000. The reduction would be substantially greater if the figures for only the three quarters ending 30 September 2011, 31 December 2011 and 31 March 2012 were taken into account.
Mr Collier gave evidence of comparable sales. He is not a valuer but is a very successful real estate agent operating in the Paddington and Woollahra area. In fact, he either sold or was co-agent of the sale of all eight properties considered by Mr Wotton. The most significant evidence he gave was that over the period from 2008 to 2012 there was a drop in the market prices of valuable homes in the area and a drop in those prices between September 2011 and April 2012. The details he gave for sales on 9 March 2011, 5 July 2011 and 26 April 2012 of properties at 86, 88 and 90 Holdsworth Street, Woollahra support that claim.
In his affidavit of 5 April 2013 Mr Collier 2013 gave evidence of this reduction in price, but also said that reports of the failed sale to the purchasers had been well publicised in media reports placed into evidence, and that in his opinion a failed sale resulted in a stigma attaching to the property making it difficult to sell with prospective purchasers expecting to use the failure as a bargaining point, particularly if the vendor had purchased another property as was the case here. Mr Collier did recommend and expected there would be a further marketing campaign, but Mr Kelly had rejected this. On the other hand, Mr Collier had sent to the vendors a report list of properties sold in Paddington and Woollahra from 1 July 2011, the highest price being 88 Holdsworth Street, Woollahra being sold for $6,250,000. He said there were only two properties in Paddington and four in Woollahra in any way similar to the Stewart Street property and that even with the limited stock, sales were very difficult and he considered that if Stewart Street were put back onto the market, he thought the likely result would be a sale of somewhere around $5 million. I thought Mr Collier a convincing witness and a very experienced salesman. That is important as it is the right of the vendor to resell which should be the subject of attention here. Mr Collier was in fact showing prospective purchasers through the property from January 2012. He had lists of people interested in such properties or who had been unsuccessful bidders at earlier auctions of similar properties.
Mr Donavan is a valuer who gave an expert opinion put into evidence by the plaintiff. His evidence did support that of Mr Collier about a decline in values of similar properties between March 2011 and mid-2012. He considered a number of properties as being the closest comparable, particularly 65 Goodhope Street, Paddington; 90 Holdsworth Street, Woollahra, as these had occurred in 2012. The Goodhope Street property was sold for $4,906,000 and the Holdsworth Street property was sold for $5,597,000. He said that these two properties had less land area, but were in a better location being north of Oxford Street. He agreed that a failed sale had a detrimental effect on a marketed property, particularly in a subdued market as then existed. He valued the property on 19 April 2012 at $5,600,000, but said that he considered a sale at $5,500,000 "a sound transaction for the property at that date and given the particular circumstances".
I thought Mr Collier the most reliable of these witnesses, not so much as to valuation but as to reasonable action of the vendor. I consider the value of the evidence of Mr Wotton was lessened by his failure to take into account a decline in the values over the relevant period when looking at comparable sales. I appreciate that he said he did this in some way but if he did, it was not apparent and the evidence in his report appears to be against it. I accept that Mr Collier said that the property might have sold for more had there been an advertising campaign, but it is certainly not established that this would have been the result and the evidence of Mr Wotton does not support it. I consider that the plaintiff made reasonable efforts to minimise her loss and took reasonable care in selling the property for the price which she did.
Additional items claimed
Interest
Special condition 34.2 of the contract between the parties is as follows:
"If completion does not take place on or before the completion date for any reason not solely attributable to the vendor the purchaser must pay to the vendor interest at a rate of 10% per annum calculated on a daily basis on the price (less half the deposit actually paid) for the period from but excluding the completion date to and including the actual date of completion. It is an essential provision of this contract that any interest be paid on completion. The purchaser agrees any interest payable pursuant to this additional condition represents a genuine pre-estimate of the liquidated damages likely to be suffered by the vendor as a result of completion not taking place on or before the completion date. The vendor's right to the payment of interest is in addition to and does not restrict any other rights of the vendor under this contract."
Interest from 30 December to 24 April 2012 calculated in accordance with this provision is $196,225. The vendor claims that amount in the amended statement of claim. Mr Stoljar SC for the defendants submits that there is no entitlement to interest under this clause because the contract has not been completed. Under the general conditions of the contract there is no specific entitlement to interest. If the vendor elects for damages pursuant to clause 9.3.2 then it might be possible to claim interest from the date of breach, but that does not apply here. In Carpenter v McGrath (1996) 40 NSWLR 39, Clarke JA said in obiter in dealing with the provision of a contract which provided for interest on the balance purchase moneys from the date fixed for completion until actual completion and where the claim was for damages, not loss on resale, as to the claim for interest (at 46):
"The loss claimed in this case would, arguably, have been claimable only if the respondents had sought to recover a deficiency on re-sale. If that had occurred the respondents may have been entitled to treat the purchase price as constituted both by the amount shown in the contract and the interest payable under cl 24(b) for the purposes of determining the deficiency on re-sale. That only means that, for the purposes of calculating the purchase price payable under the contract, it is [permissible] to treat the interest as part of the price payable. This is a contentious question and it is unnecessary to decide whether it is correct."
Hamilton J referred to this paragraph in Zografakis v McCarthy [2007] NSWSC 144 where the contract included a special condition in very similar terms to clause 3.4. He held that interest could be obtained as being part of deficiency on resale because had the contract been completed on the day of or before termination the vendor would have received interest up to that date. Hall J came to a similar decision in Hearse v Pallister [2008] NSWSC 504. I consider that correct. Interest should be allowed.
Land tax
Special condition 38 of the contract was as follows:
"38 LAND TAX
38.1 If completion does not take place on or before 30 December, 2011 (and in this respect time is of the essence) for any reason not solely attributable to the vendor, then the purchaser must on completion by unendorsed bank cheque, pay the vendor's liability for land tax for the 2012 year, calculated as if the land was subject to a special trust.
38.2 The obligation to pay land tax in accordance with this additional condition is an essential term of this contract."
The same argument as to completion was put forward here. The land tax figure was an additional amount payable if settlement did not take place by the fixed date. I conclude for the same reasons as for the claim for interest that this amount should be added to the amount which should have been paid under completion under the aborted contract. In Jampco Pty Ltd v Cameron (No. 2) Young J held that amounts paid for rates and outgoings between the prescribed date for completion and date of resale were recoverable under clause 9.3.1. I consider the same would apply to land tax if I were otherwise incorrect. As the resale contract did not provide for land tax to be adjusted, there would be no double recovery. That being so, I consider that the vendor can recover the land tax amount of $43,516 payable because the purchasers did not complete.
Costs and expenses of sale or resale
No claim is made for the costs and commission on resale. The question arises whether costs and expenses of the aborted sale are recoverable. These are claimed as follows:
a) agent's commission under a special clause in the agency agreement as to entitlement if contract not completed - $11,462;
b) marketing costs - $24,429;
c) legal costs - $7,277.
There is no challenge to these figures if they are recoverable. The only basis upon which they could be recoverable if they are "the reasonable costs and expenses arising out of the purchasers' non-compliance with this contract". Although the claim under clause 9.3.1 is generally referred to as a claim for liquidated damages, in ordinary terms damages for breach of contract are awarded so as to put the plaintiff, Mrs Kelly, in the position that she would have been had the contract been performed. Thus in the present case performance of the aborted contract would have resulted in the vendor paying legal costs, marketing expenses and agent's commission on the sale. The costs and expenses of the aborted sale are not incurred or do not arise out of non-compliance as they would have been paid on compliance. The fact that the costs and expenses on resale can be recovered supports that conclusion as it would not be possible to recover costs of both the aborted sale and the resale. The expenses of the aborted sale should be deducted when establishing loss on resale.
Interest on damages
The vendor plaintiff claims interest under s 100 of the Civil Procedure Act 2005 from 25 April 2012. The correct date is the date of resale (Jampco Pty Ltd v Cameron (No. 2) at 56-587). I have calculated the interest as follows. Interest is payable on the amount of $729,173 set out in the table in the following paragraph plus the deposit of $317,500 still held by the agent. The interest is as follows:
25 April 2012 - 30 June 2012
8.25% p.a.
67 days
$15,850.64
1 July 2012 - 31 December 2012
7.5%p.a.
184 days
$39,572.84
1 January 2013 - 31 May 2013
7%p.a.
151 days
$30,310.50
Resulting figures
As it is accepted that I will order the purchaser to authorise the agent to account for the deposit to the vendor, the figures should be based on the fact that the vendor will be entitled to the deposit and this is to be set off against the loss on resale. The figures are therefore as follows:
Purchase price under contract
$6,350,000
Less Deposit
$317,500
$6,032,500
Add interest to termination
$196,225
Add land tax
$43,516
$239,741
Amount due on termination
$6,272,241
Less costs and expenses of aborted sale
$43,168
$6,229,173
Less resale price
$5,500,000
Clause 9.3.1 entitlement
$729,173
Add interest under s 100 of the Civil Procedure Act 2005 from 25 April 2012
$85,374
TOTAL
$814,907
Orders
I make the following orders:
1. Judgment for the plaintiff against the defendants for the sum of $814,907.
2. Defendants to pay the plaintiff's costs.
3. Order the defendants to authorise the agents to account to the plaintiff for the deposit.
4. Liberty to apply on calculations in paragraph [52].
Decision last updated: 31 May 2013
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