Lutre Pty Ltd v Ellison, Barry

[1997] FCA 1474

FEDERAL COURT OF AUSTRALIA

CONTRACT - Breach of Corporations Law by vendor of prescribed interests - purported avoidance of contract by purchaser pursuant to statutory right to avoid - whether prior waiver of right to avoid and election to treat contract as subsisting - knowledge of facts entitling avoidance - knowledge of legal alternatives

CORPORATIONS - statutory right to avoid a contract

Corporations Law

Co-operative Building Society of South Australia v Australian Securities Commission
(1993) 113 ALR 244 referred
Stammers v Akron Securities Ltd (1997) 15 ACLC 1198 distinguished
Sargent v ASL Developments Limited (1974) 131 CLR 634 followed
Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 applied
Zucker v Straightlace Pty Ltd (1986) 11 NSWLR 87 followed
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1994-1995) 182 CLR 26 referred
Tropical Traders Ltd v Goonan (1964) 111 CLR 41 referred
Elders Trustee and Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1942) 65 CLR 603 applied

Drozd v Vaskas (1960) SASR 88 referred
Star Candy Store Pty Ltd v Chaniotis (1968) SASR 1 referred

Tiplady v Gold Coast Carlton P/L (1984) 8 FCR 438 referred
Latter v The Council of the Shire of Muswellbrook (1936) 56 CLR 422 distinguished

LUTRE PTY LTD (ACN 008 209 176) & DIRECTORS MANAGEMENT PTY LTD (ACN 050 020 856) v BARRY ELLISON

NO SG 3003 OF 1997

O’LOUGHLIN J
ADELAIDE
19 DECEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3003  of   1997

BETWEEN:

LUTRE PTY LTD (ACN 008 209 176)
FIRST APPLICANT

DIRECTORS MANAGEMENT PTY LTD (ACN 050 020 856)
SECOND APPLICANT

AND:

BARRY ELLISON
RESPONDENT

JUDGE:

O'LOUGHLIN J

DATE OF ORDER:

19 DECEMBER 1997

WHERE MADE:

ADELAIDE

THE COURT ORDERS THAT:

1. The applicants file and serve within twenty eight days of this date short minutes of order in terms consistent with the reasons of the Court as published this day.

1. Each party have leave to speak to the minutes.

1. The question of costs be reserved for argument on the resumed hearing.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3003 of 1997

BETWEEN:

LUTRE PTY LTD (ACN 008 209 176)
FIRST APPLICANT

DIRECTORS MANAGEMENT PTY LTD (ACN 050 020 856)
SECOND APPLICANT

AND:

BARRY ELLISON
RESPONDENT

JUDGE:	O'LOUGHLIN J
DATE:	19 DECEMBER 1997
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

Subsection 1073(2) of the Corporations Law (“the Law”) provides, as follows:

“(2)     Where:

(a)an offer of a prescribed interest for subscription has been made; or

(b)an invitation to subscribe for a prescribed interest has been issued;

in contravention of a provision of this Law, a contract entered into by any person (other than the management company) to subscribe for the prescribed interest as a result of the acceptance by the person of the offer, or the acceptance of an offer made by the person pursuant to the invitation, is voidable at the option of that person by notice in writing given to the management company.”

The short question for determination in this case is whether there are any, and if so what, restraints on such a person.  In particular, can that person loose the right to avoid a contract by electing to affirm it.

The respondent in these proceedings, Mr Barry Ellison, purported to give notice under subs 1073(2) in January 1997. The notice, which was dated 7 January, was served by ordinary post addressed to the second-named applicant, Directors Management Pty Ltd (“Directors Management”).  For the purpose of these proceedings, it has been accepted that Directors Management was relevantly the “management company”.

Subsection 1073A(1) of the Law provides that:

“Within 21 days after a person gives a notice under subsection 1073(2), the management company may apply to the Court for an order declaring the notice to have had no effect.”

The applicants, having received Mr Ellison’s alleged notice of avoidance, commenced these proceedings within that 21 day period when they filed their application and statement of claim on 29 January 1997. They have sought various declarations including a declaration that Mr Ellison was, by reason of his conduct, unable to give a notice under s 1073 of the Law. As the matter developed during the course of the hearing, the applicants’ case was refined into an issue of “election”. It was submitted that Mr Ellison, by his conduct, had elected to affirm his contract and, having done so, he was no longer entitled to avail himself of the provisions of subs 1073(2) of the Law.

The first-named applicant, Lutre Pty Ltd, (“Lutre”) had entered into a contract with Mr Ellison some five years earlier on 8 January 1992.  Under that contract, Lutre agreed to sell and Mr Ellison agreed to buy units 36 and 44 (“the units” or “Mr Ellison’s units”) in Stage II of a block of apartments situated at 259 Gouger Street, Adelaide.  Settlement was effected on 7 February 1992 and, as an aspect of settlement, title to the units was transferred into Mr Ellison’s name.

The apartments, which are known as “the Directors Apartments” and which are managed by Directors Management, had been built in two stages.  Stage I comprises 30 residential units numbered 1 to 30 in Strata Plan No 10159; it also incorporates provision for car parking, common areas, walkways, a storeroom and a reception area.  Stage II comprises 36 residential units numbered 1 to 36 and 18 car parking units numbered 37 to 54 in Strata Plan No 11649; it also incorporates provision for common areas, including an office and reception centre, a lift, stairwells and storerooms.

The Stage I units were sold by the original developer and purchased by their respective owners prior to any involvement in the project by either applicant.  The individual Stage I Owners had then entered into leases with Auslink Development Corporation Limited (“Auslink”) whereby each Stage I Owner leased his, her or their respective unit for use for letting as hotel accommodation.

On 1 September 1989, Auslink entered into a joint venture agreement (“the joint venture agreement”) with Co-op Financial Services Pty Ltd (“CFS”), a wholly owned subsidiary of Co-operative Building Society of South Australia Limited (now Adelaide Bank Limited).  The joint venture agreement contemplated the purchase of land adjoining Stage I on which would be built serviced apartments.  The land was duly acquired by Lutre which held it as trustee and agent for Auslink and CFS.  Thereafter, the units and other improvements comprising Stage II were duly built.  Some time after entering into the joint venture agreement, Auslink went into liquidation.  Subsequently, CFS acquired Auslink’s shareholding in Lutre with the result that Lutre became, and remains, a wholly owned subsidiary of Adelaide Bank Limited (“the Bank”).

Lutre, in its capacity as the then registered proprietor of all the Stage II residential and car park units, entered into Management and Letting Agreements (each of which is hereinafter included in the term “the agreements”) with Directors Management.  Each of the agreements commenced on 1 October 1991 (“the commencement date”) and were for an initial period of ten years but with rights of renewal.  The agreements are in substantially the same form.  Since the commencement date, six Stage II residential units and five car park units have been sold by Lutre to unrelated third parties.  Those third parties are, together with Lutre in its capacity as the registered proprietor of the remaining residential and car park units, called “the Stage II owners”.  The respondent, Mr Ellison is one such Stage II owner.  The rights and obligations of Lutre under each of the agreements have been assigned to the several third parties in respect of their units in accordance with the terms of the agreements.

Pursuant to the agreements, the management company was appointed to manage each of the Stage I as well as the Stage II residential and car park units.  Under the terms of each of the agreements, the management company acts as agent for the owner in managing and letting out an owner’s unit as part of the business known as “the Directors Apartments”.  Each owner is obliged to forego any right or entitlement to occupy his or her unit other than on the same terms as the management company lets the owner’s unit in the ordinary course of business.  Each owner grants the management company free and unfettered control of the owner’s unit with respect to the letting of the owner’s unit.

An owner’s share of gross revenue is ascertained by determining the proportion that the capital value of the owner’s unit bears to the total of the capital value of all the Stage I units and Stage II residential and car park units.  That value had been determined by an independent licensed valuer prior to the commencement date.  All revenue is banked in an account held by the management company on behalf of the owners and the management company is authorised, on behalf of the owners, to invest moneys to the credit of that account from time to time.  Within 21 days of the end of September, December, March and June in each year the management company is required to distribute to each owner that owner’s proportionate part of the revenue from the business for that quarter after first deducting all operating and other nominated expenses.  Accordingly, each owner shares in the pooled revenue and expenses of the business and does not rely on the revenue from the owner’s unit alone.

An assured income was guaranteed to a new owner of a Stage II residential unit for a period of three years.  A clause was inserted in each contract for the sale and purchase of a unit to the effect that Lutre would procure CFS to guarantee a minimum net annual income for a period three years after purchase.  Effectively, the guarantee amounted to a return on the purchase price of seven, eight and nine per cent successively in those years.  Mr Ellison has enjoyed the benefit of that guarantee as his proportionate share of the revenue from the business did not give him these returns.  In the three year period of the guarantee (which expired on 7 February 1995) Mr Ellison received payments under the guarantee totalling $15,551.97 and a further $4,423.11 was, by virtue of the terms of the guarantee, paid on his behalf to third parties.  Many of these payments were paid to or for the benefit of Mr Ellison after 23 September 1993, a date the significance of which will become apparent later in these reasons.  Those payments are in addition to payments totalling $30,010.70 which Mr Ellison received from the date of the settlement to the date of trial by way of his share of the pooled rent.

In their statement of claim, the applicants had originally denied that the “interest” that Mr Ellison had acquired as a result of his entry into the various agreements and his purchase of the units constituted a “prescribed interest” within the meaning of that term as it is defined in the Law. They also pleaded in the alternative the defence afforded by subs 1073A(3): that if “the interest” did amount to a “prescribed interest” in contravention of s 1018 of the Law, it was a contravention that was “minor or insubstantial” and that it had not “materially prejudiced” Mr Ellison’s interests.  Upon that premise, it was pleaded that “it is just and equitable to declare that the Notice [that Mr Ellison had served on the applicants] had no effect”.  Neither of these defences was pressed at trial.  Nevertheless, it is important to make at least passing reference to the relevant provisions of the legislation as they form the background to the action taken by Mr Ellison in his attempt to avoid his contract.

For the purpose of this trial, the applicants were prepared to concede that what had been acquired by Mr Ellison constituted a  “prescribed interest” within the meaning of the Law. During the course of his submissions, Mr Whitington QC, counsel for the applicants stated, on more than one occasion, that the concession so made was limited. Thus in their written submissions the applicants wrote:

“For the purposes only of this case the applicants say the scheme was a prescribed interest and a breach of Divisions 2 and 5 of Part 7.12 of the Corporations Law occurred. An approved deed (Div 5) and a prospectus (Div 2) were required. These requirements were not complied with.”

I am content to proceed upon the concessions that were made on behalf of the applicants but in so doing I would not want it thought that I accept the proposition that a concession of this nature, once made, might not be used against the applicants in other circumstances.  That point was not argued and it is not necessary for me to express a view on it.

In 1992, when Mr Ellison acquired his units, only a public corporation could offer a prescribed interest for subscription or purchase:  s 1064.  And no such offer nor any invitation could be made unless there was in force an approved deed:  s 1065.  An approved deed was one that had been approved by the Australian Securities Commission (“the ASC”) or its predecessor:  s 1066.  One essential term of an approved deed was that there be a trustee appointed, independent of the management company, who was charged with the responsibility of caring for the holders of the prescribed interests.  The applicants have conceded that there was no approved deed in existence with respect to the Directors Apartments.

In addition to the need for an approved deed, there was a need for a prospectus: s 1018. In 1992 subs 1018(1) was in the following terms:

“A person shall not offer for subscription or purchase, or issue invitations to subscribe for or buy, securities of a corporation unless:

(a)       a prospectus in relation to the securities has been lodged;

(b)the prospectus complies with the requirements of this Division; and

(c)if the prospectus is a registrable prospectus - the prospectus has been registered by the Commission under section 1020A.”

The word “securities” was then and still is defined to include “prescribed interests”:  ss 9 and 92.  The applicants have also conceded that no prospectus was lodged with respect to the Directors Apartments.

Section 1084 of the Law contains provisions that empower the ASC to exempt parties, either conditionally or unconditionally, from various provisions of the Law - including the provisions relating to approved deeds and prospectus. In fact, long after Mr Ellison acquired his units, the applicants lodged a prospectus and ultimately obtained exemption from the filing of an approved deed conditional upon the management company executing a deed that contained certain provisions favouring and protecting the holders of the prescribed interests. The applicants never attempted to seek exemption from the provisions of the Law requiring the lodgment of a prospectus.

The case for the defence did not raise an issue of illegality per se.  Although it was pleaded in par 6 of the defence that “the offer or invitation that led to the contracts being entered into contravened, inter alia, some or all of the provisions of Division 5 of Part 7.12 of the Corporations Law” that averment was used only for the twofold purposes of alleging:

• that the applicants were not entitled to rely upon s 1073A(3) of the Law; and

• that it would not be just and equitable to declare that the notice dated 7 January 1997 had no effect.

As events transpired, because the applicants have pitched the whole of their case on the claim of “election”, neither of these issues need be considered.  Furthermore, illegality not having been raised as a defence, there is no need to consider the application of the decision of the New South Wales Court of Appeal in Stammers v Akron Securities Ltd (1997) 15 ACLC 1198 to the facts of this case. In that case, the Court was of the view that an exemption would not have retrospective effect to remove an earlier taint of illegality.

The applicants no longer seek to argue that they are not caught by the provisions of the Law; they have acknowledged that there should have been an approved deed and a prospectus for the sale of prescribed interests in the Directors Apartments project. Rather, they have chosen to focus their case on Mr Ellison’s conduct since he first executed his contract to buy his units. It was claimed that Mr Ellison has deprived himself of the benefits that would otherwise have been available to him under subs 1073(2); it was claimed that he has deprived himself of the opportunity to avoid his contract of sale because, by his conduct, he has elected to affirm that contract. Mr Ellison has benefited, so it was claimed, from distributions of net income from the Directors Apartments and continues to so benefit; he also benefited in the initial three years after purchase from the Deed of Guarantee under which CFS had guaranteed him a minimum net return on his investment. The receipt and retention of those benefits are, so it is said, inimical to his claim that he can now avoid his contract. It is also timely to mention that it was not suggested by the applicants that Mr Ellison’s right to avoid was limited to a right to avoid the executory contract of sale and purchase which was lost when the executed contract represented by the memorandum of transfer was signed by the parties. That issue might arise on some later occasion.

In order to appreciate the case that has been advanced by the applicants it is necessary to have regard to the history of this matter during the last five years.

The evidence that was placed before the Court established that Mr Ellison was first made aware that there were difficulties with respect to the acquisition of his units about twenty months or so after he signed the contract to purchase his units.  This awareness came in the form of a letter dated 20 September 1993; the letter was written by the Bank:  not by Lutre or Directors Management.  However, it was not suggested that anything turns on the identity of the party who wrote the letter.  The matters of importance are first, the contents of the letter and secondly, that Mr Ellison became aware of those contents within a day or two of 20 September 1993.  In that letter, which tended to play down the seriousness of the situation, the Bank said:

“Following discussions with the Australian Securities Commission (“the ASC”) in relation to another apartments development using essentially the same investment structure as in the case of the Directors Apartments, the Co-op applied to the Federal Court seeking an indication from the Court as to whether the sale of units in that other development amounted to dealings in prescribed interests. The ASC was also a party to those proceedings.”

I find that the author of the letter was referring to the decision of this Court in Co-operative Building Society of South Australia v Australian Securities Commission (1993) 113 ALR 244. The Bank, under its former name, Co-operative Building Society of South Australia Ltd, had earlier been involved in the development and promotion of a similar scheme known as “West End Apartments” and that case had been the subject of litigation in this Court.  The Bank had argued that although what was being offered for sale included that which would be a prescribed interest, it was nevertheless an interest that had been declared by the Corporations Regulations to be an exempt interest.  That argument was unsuccessful.  The Bank therefore knew, as a result of the “West End apartments” litigation, that an approved deed and a prospectus were needed for the Directors Apartments.

In the letter of 20 September 1993, the Bank informed Mr Ellison that it would be seeking from the Australian Securities Commission (“the ASC”) an exemption in relation to the need to have an approved deed.  It was not suggested that an application had been or would be made to obtain an exemption from the prospectus provisions.  In fact the letter made it clear that a prospectus was still required.  It further stated that:

“The ASC has agreed that rather than individual unit owners having to prepare a Prospectus in relation to any dealings they may wish to entertain with their unit, the Co-op and the Manager can have in place a prospectus which may then be used by any unit holder.”

The Bank then added that a prospectus was being prepared “which may be used by you for this purpose”. Finally the letter concluded with the advice:

“It is very important for you to note that you may only offer for sale your interests in your apartment pursuant to a prospectus.”

Such a letter would be a most alarming piece of information to any unit owners who would otherwise have been entitled to think that they had relatively unrestricted rights to sell their properties - the more so in view of some of the promotional material that was given to Mr Ellison before his purchase of the units which included the statement:  “You can sell your apartment to a new owner at any time with a consequential transfer of the management agreement.” It is clear from the letter that the Bank was then proceeding upon the premise that the absence of an approved deed and of a prospectus meant that there could not be a secondary sale by a purchaser such as Mr Ellison. It is not necessary to examine that proposition now because the situation was altered with effect as from 5 September 1994 when s 1043B of the Law was introduced. The amendment permitted a person in the position of Mr Ellison to effect a secondary sale subject to some minor conditions - none of which are unduly onerous.

Following upon the Bank’s letter of 20 September 1993, the next matter of importance was the Annual General Meeting of Strata Corporation 11649 Incorporated.  That was held about six months later on 30 March 1994. The minutes of the meeting show that Mr Ellison was present and he confirmed that fact during his cross-examination. The following entry appears in those minutes:

“The members present expressed grave concerns regarding their investment in The Directors (Stage II) and indicated that they seek a meeting with representatives of the Adelaide Bank to discuss the following matters:

9.1What are the rights of the existing “owners” with respect to their legal ownership of units purchased?

9.2If the current “owners” have purchased units illegally, can they claim a refund of all the moneys advanced?

9.3When will Prospectuses be available?

9.4What are the proposed selling prices of remaining units?

9.5What is the intention of the Adelaide Bank with respect to offering guaranteed returns to prospective purchasers and with respect to continuation of the “guaranteed return” for existing owners?

Members discussed the possibility of obtaining independent legal advice with respect to their rights to ownership of their units, and agreed to arrange a meeting in four weeks’ time to determine what future action is to be taken.”

Under cross-examination, Mr Ellison conceded that the matters listed in this extract from the minutes were the matters that were of concern to him.  He also acknowledged that they were subjects that he had discussed with the other unit owners.  Yet, notwithstanding these concerns and the earlier letter from the Bank of 20 September 1993, Mr Ellison took no action to protect himself.

On 4 June 1994, a Mr Hugh Adamson wrote the Bank on behalf of the unit owners in the Directors Apartments.  Mr Ellison acknowledged that this letter had been written on his behalf and that it represented his concerns. The letter is important in two respects. First, it acknowledged that the unit owners were aware from “late 1993 that a prospectus was also needed by any owner wishing to sell a unit ...”. Secondly, it addressed in non-technical terms the question of avoiding the contract. Mr Adamson asked:

“If the current “owners” have purchased units illegally, can they claim a refund of all the moneys advanced?”

In cross-examination Mr Ellison was asked, after identifying Mr Adamson’s letter, whether he was then “of a mind to give the unit back and get (his) money back?”  He answered honestly and simply “Yes”, adding that he had “come around to that way of thinking” at about the time of the meeting when “we couldn’t get any answers from the bank that we didn’t have the prospectus and so forth and, did we legally own the units”.  It was also at about this time that he had decided that his purchase of the units had been a bad bargain.

On 16 June 1994, the Bank wrote a short, formal acknowledgment to Mr Adamson’s letter and the Bank’s solicitors, Messrs Piper Alderman, replied extensively by letter dated 7 July 1994. However, the author of that last mentioned letter did not answer the question from Mr Adamson’s letter that is quoted above; his comment on the question was:

“We note that the question as phrased is somewhat ambiguous - moneys advanced from whom? In any event it seems to our client that it would be inappropriate to respond in circumstances where, as you have indicated, you have already obtained your own legal advice.”

There was not, in my opinion, the slightest ambiguity about the question.  It was quite apparent what Mr Adamson meant:  he was asking whether the purchasers of units could get a refund of the moneys paid by them or on their behalf.  Although there was no obligation on the part of the Bank’s solicitors to tender legal advice - particularly advice that might have been adverse to the Bank’s interests, the attitude of the Bank and the applicants was contrary to the view of the ASC, who had written Messrs Piper Alderman three weeks earlier on 14 June 1994 saying:

“... the ASC considers that all persons who have invested in the scheme should be fully informed about the nature of the interest which they have purchased and their rights as far as rescission of the contract are concerned.”

Mr Adamson wrote a circular letter to unit owners dated 23 January 1995.  Although Mr Ellison did not recognise it, the letter had been tendered by counsel for the applicants during the course of his opening without objection.  Bearing in mind that there is other evidence (which I accept) that Mr Adamson had assumed a role as spokesperson for the owners I find, as a probability, that Mr Ellison received and read the circular letter of 23 January 1995.  It was addressed to “owners of Directors Units” and it contained the following passages:

“Please note that I have received notification from CLIVE HOSKING from the Adelaide Bank re the following - A form of prospectus which allows the sale of our units is now available.  A law change late last year has made this possible.  Contact MARK POCZMAN ... as he can tell you how to obtain the relevant paper work.”

Mr Poczman was a solicitor and a senior associate in the firm of Messrs Piper Alderman.

The “law change” to which Mr Adamson referred was explained by Mr Poczman in his subsequent letter of 25 January 1995 to Mr Adamson:

“We are pleased to announce however that as a result of changes in the Corporations Law which came into effect on 5 September 1994, it is no longer necessary for a prospectus to be prepared and registered in the case of secondary trading in unquoted securities. A sale by an Owner of his or her Unit would fall within that category. Instead, the Corporations Law now effectively provides that if an offer or invitation in respect of a Unit is made in writing then each copy of that offer or invitation must be attached to or accompanied by a copy of a notice which complies with the Law lodged at the Australian Securities Commission, or must include a statement to the effect that the Owner as the seller, will provide a copy of that notice free of charge to a person who asks for it.”

Little, if anything, seems to have otherwise happened in the first half of 1995.  Certainly, there is no evidence of Mr Ellison communicating with the applicants.  Although there is evidence that in this period the applicants’ solicitors were in contact with the ASC, the matter appears to have deteriorated as the ASC wrote Mr Ellison on 4 August 1995 telling him that it had formed the view that:

“... at the time you entered into the Management & Letting Agreement, you were “issued” a prescribed interest within the meaning of the Law.”

The letter stated that there should have been an approved trust deed in relation to the prescribed interest “and a current prospectus”. The letter went on to warn:

“One of the consequences of the Law not being complied with is that, until the prescribed interest scheme is structured so as to comply with the requirements of Division 5 of Part 7.12 of the Law (subject to any exemptions or modifications granted by the ASC), any attempt by you to sell your unit will be in breach of the Law”.

To emphasise the seriousness of the situation, the letter went on to advise that it was “the current intention of this office to recommend” against the application for exemption from the requirements of Div 5 of Pt 7.12 of the Law. The letter did not, however, address the rights of unit owners under s 1073 to avoid the relevant contract. At this stage, a period of almost two years had expired since Mr Ellison was first advised by the Adelaide Bank that there were restrictions on the sale of his units.

Mr Ellison said that when he received this letter from the ASC it “confirmed” that there was a problem; he decided then to consult a solicitor. By letter dated 22 August 1995, Mr Harley of Ward & Partners, solicitors, wrote Messrs Piper Alderman advising that his firm was acting for Mr Ellison.  Mr Harley, who was called as a witness for Mr Ellison acknowledged that he was aware that Mr Ellison “wanted out of the situation without suffering too much of a loss ...”.  He added that it seemed to him that “the only party who could take a transfer of the unit would be the vendor”. Yet, despite this, Mr Harley acknowledged in his evidence in chief that he had not brought the provisions of s 1073 to Mr Ellison’s attention. Little seems to have happened. Eventually, Messrs Ward & Partners wrote Mr Ellison on 8 November 1995 asking if they could be of further assistance. In that letter the solicitors alluded to the possibility of Mr Ellison approaching the vendor to “reverse the transaction” but without making any reference to s 1073 or explaining its effect. Mr Ellison agreed that he was interested in giving his unit back to the applicants and obtaining a refund of his purchase price when he consulted with Mr Harley. He also agreed that he told Mr Harley that he wanted to reverse the transaction. Mr Ellison suggested that Mr Harley had told him that he (Mr Ellison) would have to await the outcome of the application to the ASC for an exemption from the provisions of the Law that required an approved deed. This may or may not be the case; Mr Harley was not questioned on the subject. But his letter seeking further instructions from Mr Ellison and referring to a “reversal of the transaction” is not consistent with the proposition that Mr Harley’s advice was that Mr Ellison had to await the outcome of the application for an exemption.  Should it be that Mr Harley did give that advice, it was wrong advice but Mr Ellison cannot shield behind any faulty legal advice that he may have received.  See Mason J in Sargent v ASL Developments Limited (1974) 131 CLR 634 at 659:

“The solicitor is to be regarded as the alter ego of the client and the rights of the other party to the contract cannot be made to depend upon the diligence or lack of diligence exhibited by the solicitor in his dealings with his client.”

My reasons for concluding that Mr Ellison was not entitled to await the outcome of the application are set out in detail later in these reasons.

Mr Ellison changed solicitors. In February 1996 he consulted his present solicitor, Mr Michael King of Messrs Daenke O’Donovan. On 15 February 1996 Mr King wrote Messrs Piper Alderman in these terms:

“It appears to us that Lutre Pty Ltd in selling units to our client and assigning to our client its interest in respect to those units under the Management and Letting Agreement has issued to our client a “prescribed interest” without complying with Division 5 of Part 7.12 of the Corporations Law.

As such our client is considering his options under Section 1073(2) of the Corporations Laws. Our client is considering serving a notice as contemplated by that subsection.

As we assume that you act for Lutre Pty Ltd as well as the Bank, we inquire whether either you or your client wish to make any submission or proposal to our client before he makes a final decision regarding service of such notice.”

Messrs Piper Alderman did not reply in writing but Mr Poczman rang Mr King on 4 March 1996 informing him that he was hopeful that the ASC had changed its attitude.

Mr King was called by Mr Ellison as a witness for the defence.  Any issue of legal professional privilege was waived.  Mr King gave his evidence in a forthright and impressive manner and I have no hesitation in accepting what he said.  Indeed, his evidence was not challenged by the applicants.  In the main, Mr King relied on his file notes - expanding upon them in his oral evidence where necessary.  He said that he spoke to Mr Ellison on 8 March 1996 by telephone.  His file note in respect of that conversation revealed that Messrs Piper Alderman were expecting to receive an answer from the ASC within the next two weeks.  His note continued:

“If in fact ASC withdraw all their objections then he would be free to sell absolutely thereafter.

If they don’t withdraw all their objections then we will be told what conditions there are on a sale.  He will then have to decide whether those conditions are sufficient and significant to enable him to require Adelaide Bank to buy back.

Oddly, he would prefer that there were serious restrictions so he can require Adelaide Bank to buy back.”

This last sentence supports the proposition that Mr Ellison might have thought that his right to avoid his contract was somehow tied to such conditions as might be imposed by the ASC.

The next matter of importance is the letter of 12 March 1996 that Messrs Piper Alderman wrote to Mr Ellison.  A copy of that letter was also sent to his solicitors.  After reminding Mr Ellison that the ASC had earlier indicated that it was intending to recommend refusal to the exemption application, Messrs Piper Alderman continued:

“As a result of submissions made by owners in response to that circular letter, and discussions held with representatives of Adelaide Bank and this firm, the South Australian Regional Office of the ASC has prepared and submitted to the applicants a proposal seeking to resolve the present difficulties by granting exemptions from the relevant provisions of the Corporations Law (“the Law”) on certain conditions. That proposal, if implemented by the ASC, would avoid the need for amendment of the Management and Letting Agreement as well as avoiding the need for appointment of a trustee and the preparation of a trust deed (with all the attendant costs and complications that this would involve) whilst ensuring that owners of units in the Directors Apartments are able to sell their units at their discretion.

Adelaide Bank has through Lutre Pty Ltd accepted the latest version of the proposal put by the ASC on the 7 February 1996.  The Manager is still considering its position in respect of the latest version of the proposal.  We expect a response from the Manager will be forthcoming by the end of March 1996.”

However, nothing seems to have happened thereafter until the Annual General Meeting of Strata Corporation 11649 Incorporated on 6 May 1996.  Mr Ellison acknowledged that he was present at that meeting and that the meeting requested the “Strata Manager”, a Mr David Smith, to write the Adelaide Bank and the ASC “expressing the Corporation’s concerns regarding the amount of time taken to resolve this matter and requesting that all units owners are notified of the outcome in relation to the sale of their units ...”.

It is apparent that by this time - and indeed for quite some time beforehand - Mr Ellison was appraised of information that would have given him cause for concern.  He had known since September 1993 that there were restrictions on the sale of his units; through Mr Adamson, he had addressed the question of obtaining a “refund of all moneys advanced”; he sought and obtained legal advice but he delayed doing so until August 1995; he was informed of his rights under subs 1073(2) in February 1996 but it was almost a year later - in January 1997 - before he finally took action to avoid his contract.

Ultimately, on 18 September 1996, the ASC granted a series of exemptions with respect to the scheme that was represented by the Directors Apartments.  The ASC wrote Mr Ellison by letter dated 25 September 1996 informing him of its decision and Mr Ellison forwarded that letter to Mr King.  According to Mr King’s evidence, he received it on 15 October.  Later, on 24 October 1996, the Adelaide Bank also wrote Mr Ellison setting out in detail the nature of the exemptions and the nature of the conditions under which a unit owner such as Mr Ellison would thereafter be entitled to sell his or her apartment.  A copy of that letter was also sent by Mr Ellison to Mr King.  The final step in this narrative was Mr King’s letter of 7 January 1997 when he advised Messrs Piper Alderman that Mr Ellison was intending “to exercise his right to void the contracts pursuant to Section 1073(2) of the Corporations Law”.

In par 5 of his defence, Mr Ellison recited a series of events commencing with an extract from the Bank’s letter of 20 September 1993; he then alluded to the applicants and others informing him of “their endeavours to rectify the situation” and, in particular, “the attempts to obtain an exemption(s) from the Australian Securities Commission from the provisions of Division 5 of Part 7.12 of the Corporations Law”.  Next he referred to the letters of 25 September and 24 October 1996 from the ASC and the Bank in which he was advised of the decision of the ASC to grant an exemption subject to certain conditions.  Alleging that he was unaware of “the final outcome of the negotiations” between the ASC and the applicants prior to the receipt of that correspondence, par 5 of the defence concluded with the allegation that, upon becoming aware, Mr Ellison instructed his solicitors to serve a notice pursuant to s 1073(2) of the Corporations Law to avoid the contracts.

But, as I have said earlier, I am of the opinion that it was not open to a party in the position of Mr Ellison to assert that he was entitled to “sit back” and await the outcome of the application to the ASC for an exemption from the provisions of the Law. His right of avoidance existed because there had been an offer or an invitation that had been made in contravention of the Law. In other words, the right to avoid was not dependent upon or contingent upon, or in any way connected with the ASC granting or not granting an exemption from compliance with some provision of the Law. His right of avoidance stemmed back to the contravention of the Law and that contravention occurred on some unspecified date prior to his execution of the various documents in early 1992. That is not to say that time was running against him from that date but it serves to emphasise that his subsequent knowledge of the relevant facts was not in any way qualified by the applicants’ attempts to obtain the requisite exemption. Bearing in mind that an election to affirm need not be implemented quickly and bearing in mind also that any such election must be clear and unequivocal, it might well be that evidence that a person in the position of Mr Ellison was awaiting the results of an application for an exemption might be relevant in determining whether delay has been unreasonable or whether conduct has amounted to an election to affirm. But that is not the same as saying that there is an entitlement to avoid the contract after the outcome of the application has become known if, prior thereto, there has been an election to affirm the contract. An election once made and communicated, whether orally or by conduct, to the other party is final: c.f. Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 at 733 per Rich, Dixon and Evatt JJ; see also Zucker v Straightlace Pty Ltd (1986) 11 NSWLR 87 at 93 per Young J.

Mr King in his evidence said, and I accept, that Mr Ellison had told him that he (Mr Ellison) was of the view that there had been a substantial drop in the value of his units since the time of its purchase.  Mr Ellison acknowledged this in cross-examination saying that he thought his concerns about value may have started as early as September 1993 when he received the letter from the Bank.  Mr Ellison was an honest witness and I am satisfied that he gave his evidence to the best of his ability.  His memory was somewhat blurred about the date when the question of value first became a matter of concern; in fairness to him, it might have been later than September 1993, for elsewhere in his evidence he had suggested that this issue may have first been a cause of concern to him in mid 1994.  In my opinion it is not a matter of importance to determine when Mr Ellison first began to have concerns about the value of his unit; it is sufficient to find, as I do, that at the time when Mr Ellison gave his notice of avoidance he did so because he had come to the conclusion that there had been a substantial drop in the value of his units - perhaps as much as 30 per cent - and he was motivated by the drop in value when he made his decision to give his notice of avoidance.

Mr Ellison’s conduct during the period September 1993 (when he was first advised by the Bank that there were restrictions on him selling his unit) to January 1997 (when he purported to avoid the contract) is difficult to comprehend.  Prior to the ASC advising him in its letter of 25 September 1996 that he would thereafter be at liberty to sell - albeit subject to some minor conditions - one would have understood Mr Ellison seeking to set aside the contract so as to obtain a refund of his money, especially if, as he said, his investment had reduced substantially in value.  But within a little over three months of being told that the previous restrictions had been lifted so that he then had, virtually, that which he had expected to have had from the outset (in the form of the right to sell the property if and when he wanted), he purported to avoid the contract. Perhaps he was hoping that the ASC would not impose any restrictions at all; perhaps he regarded the restrictions that the ASC imposed as onerous.  I find myself unable to explain his conduct for no evidence was led on the affect that the restrictions had or might have had on Mr Ellison.

Counsel for Mr Ellison submitted that the application before the Court was misconceived; it was his claim that ss 1073 and 1073A of the Law operated as a comprehensive code with respect to the method and means by which contracts, that are within the umbrella of those sections, may be avoided. He claimed that this case involved a statutory right to avoid a contract - not a common law right. Thus, so it was submitted, a contract that was capable of being avoided under subs 1073(2) could not be affirmed. This last mentioned proposition is said to be derived from the premise that Div 5 of Part 7.12 the Law prohibits any sale of a prescribed interest unless an approved deed is in force: in the absence of an approved deed, as was the case here, the Law would not permit a party to affirm that which is prohibited. The immediate attraction of this argument cannot, however, be sustained on closer examination. If it be true, then it would mean that there would be no limitation whatsoever upon such a purchaser. He or she could give notice of avoidance years after the event notwithstanding, perhaps, that the rights of third parties may have intervened. That possibility alone, is enough to undermine such a broad interpretation.

But there is, in my opinion, a more cogent reason for rejecting the proposition. The language of s 1073(2) does not create an irreversible situation - it gives to the relevant person a choice. By stipulating that the contract is “voidable at the option of that person” the subsection is giving to that person the degree of freedom that is represented by the availability of the option of avoiding the contract on the one hand and by not avoiding it on the other. In deciding not to avoid the contract, there must, in my opinion, come a time when that person must be held to have affirmed it. The legislature could have chosen to manifest its condemnation of a breach of the Law by stating that the relevant contract would be void. But it wisely declined to be so dogmatic; rather, it left the final decision to the purchaser. But the benefit thereby given must be matched by an appropriate obligation when the time comes, either to avoid or affirm the contract.

Support for this view may be found in the judgment of Young J in Zucker v Straightlace Pty Ltd (1986) 11 NSWLR 87. That was a case where, by force of statute, a purchaser of real estate was given a right to rescind the contract of purchase “by notice in writing served on the vendor at any time prior to completion of the contract”.  It was submitted on behalf of the purchaser that the words “at any time prior to completion” meant that the legislature had displaced the doctrine of election.  It was submitted that it was not relevant to consider the application of the doctrine because of the statutory right to rescind “at any time prior to completion”.  In rejecting this argument Young J relied on an earlier decision of Helsham J in ACI Operations Pty Ltd v Manawaii Development Co No 7 Pty Ltd (1971) 25 LGRA 235 at 240 where his Honour noted (at 92) that the quoted clause “simply gives the right to rescind up to the very moment of completion provided that the right to rescind has not otherwise been lost”.

I am of the opinion that the language of ss 1073 and 1073A of the Law does not prevent a person in the position of Mr Ellison from affirming a contract that would have otherwise been voidable at his option. But it remains to be seen whether his conduct has, as a matter of fact, amounted to such an affirmation. Such an exercise is not always easy: see Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1994-1995) 182 CLR 26 at 42 per Deane, Toohey, Gaudron and McHugh JJ:

“The point is that where the right to rescind is a continuing one, it is not so readily concluded that the party entitled to rescind has abandoned that right completely as opposed to taking no action to exercise the right at the time in question.”

The application of the doctrine of election remains an objective exercise.  As Kitto J said in Tropical Traders Ltd v Goonan (1964) 111 CLR 41 at 55:

“Not that election is a matter of intention.  It is an effect which the law annexes to conduct which would be justifiable only if an election had been made one way or the other:”

The respondent submitted that no prejudice has been or will be suffered by the applicants if the Court concludes that the contract has lawfully been avoided.  There may be substance in this submission as the evidence on the subject of prejudice was sparse.  For the purposes of these reasons, I am prepared to proceed upon the premise that the applicants have not led any or any sufficient evidence to establish prejudice.  On the other hand, Mr Ellison did not attempt to lead evidence showing that he was in a position to restore the financial status quo.  Although prejudice can be an important factor in considering matters such as delay, its absence is not determinative one way or the other.  It still remains, therefore, to consider the conduct of Mr Ellison and its effect as a matter of law.

Absent prejudice to the other side, mere delay on the part of the party who has a right to avoid is not enough to amount to a waiver of rights:  Elders Trustee and Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1942) 65 CLR 603 at 618; Sargent v ASL Developments Limited (supra) at 656. Even though there are grounds for holding that the delay on the part of Mr Ellison was extreme, his counsel submitted that it should be evaluated against the following mitigating circumstances:

• the applicants never acknowledged that a breach of the Law had occurred;

• the applicants asserted through their solicitor, Mr Poczman, that the contract was valid;

• the applicants had the opportunity but declined to inform Mr Ellison of his right to avoid;

• the applicants, far from informing Mr Ellison and the other unit holders of the ongoing problems (caused by non-compliance with the provisions of Div 2 and Div 5 of Pt 7.12 of the Law) continually represented that the matter was in hand and would be resolved shortly.

In the particular circumstances of this case, I acknowledge that the extreme delay on the part of Mr Ellison was somewhat tempered by the conduct of the applicants:  they or their associates or their solicitors had offered assurances to the unit holders including Mr Ellison, that the matter was in hand and would be resolved shortly.  For example, Mr Ellison said in evidence, during the course of his evidence in chief and in cross-examination, that at the Annual General Meeting on 19 April 1995, a representative of the applicants addressed the meeting, saying that the problem was in hand and that there would be a “speedy resolution”.  I accept that evidence.  Nevertheless, I do not consider that any of these matters, individually or collectively, carry sufficient weight to have a material effect on the outcome of this case.  As factual assertions, they are correct, but it has not been suggested that they should somehow be converted into misrepresentations upon which Mr Ellison relied to his detriment.

It was claimed that Mr Ellison had been disadvantaged by having to hold his units when he wanted to dispose of them.  The evidence does not support that claim and I reject it.  I find that Mr Ellison knew, as from the time of his receipt of the Bank’s letter dated 20 September 1993 that some (to him) unspecified and unarticulated legal problem had arisen with respect to his ownership of his units and his right to sell them.  I further find that he was initially content to rely upon the applicants and the Bank in their attempts to resolve these problems.  I also find that over a period of time his concerns did not abate - rather they increased to the point where he was prepared to investigate whether he could “get his money back”.  But, notwithstanding these findings, and, in particular notwithstanding my finding that he was concerned about his investment, he did not take any action to avoid his contract until his solicitor’s letter of 7 January 1997.  Mr Ellison’s statements that he thought that the applicants had a “moral” duty to take back his units related not to a wish to avoid the contract but to an ultimate solution that would only arise for consideration when the ASC gave its answer to the application for exemption.

It being common ground that the foundation existed at law for avoidance, the only question that falls for determination is whether, having regard to the facts of this case, the provisions of subs 1073(2) continued to be available to Mr Ellison in January 1997. The problem can be expressed in various ways. For example, did Mr Ellison, by his earlier conduct elect to affirm the contract, thereby depriving himself of his right of avoidance? Or, having regard to the facts of the case, did the contract remain voidable at the option of Mr Ellison in January 1997? The applicants preferred to pose the problem by reference to the concept of “election”.  In their written submissions they said “The applicants say the notice served by the respondent is of no effect because the respondent has elected in point of law to affirm the contracts and his interest in the Units and is therefore precluded from avoiding the contracts”. The right of avoidance that is given by subs 1073(2) is expressed in general terms; it contains no words of limitation. The only condition is that the notice of avoidance must be conveyed in writing to the management company. If I am correct in concluding that a right to affirm the contract and the doctrine of election still applies then it seems to me that in the absence of any statutory provision placing a limit on the acts which may constitute election, the ordinary principles governing the matter must be applied: see Drozd v Vaskas (1960) SASR 88 at 100 per Reed J with whom Hogarth J agreed in Star Candy Store Pty Ltd v Chaniotis (1968) SASR 1 at 11.

Central to a resolution of the issues in this case is the decision of the High Court in Sargent v ASL Developments Limited (supra).

In that case three different owners of adjoining land agreed to sell their land to ASL Developments Ltd  (“ASL”).  Subsequently, as a result of each vendor purporting to rescind the relevant contract, ASL sued for specific performance.  Contracts had been exchanged between the parties in November/December 1969.  Clause 16 in each contract provided that:

“Should it be established prior to completion that at the date of this Agreement the property was affected by (various town planning and other restrictions) otherwise than as stated in the Fourth schedule hereto ... either party shall be entitled to rescind this Agreement by notice in writing to the other.”

The fourth schedule to each contract stated “The property is affected as shown in the copy certificate under Section 342AS of the Local Government Act 1919 annexed hereto.”  However, no certificate was annexed to any of the contracts.  At the times when the three contracts were entered into the subject lands were all zoned as “Non-Urban Zone No. 1(a) (Country Green Belt)”.  The learned trial judge found that the first and second vendors knew, when they entered into their contracts, that the lands carried this zoning.  He further found that, although the third vendor did not personally know of the zoning, it was known to the solicitor for the third vendor prior to the execution of the contract.  The primary judge then held that, although cl 16 conferred on each vendor a right of rescission on the ground that the properties were affected by a town planning scheme otherwise than as stated in the fourth schedule, the vendors had waived their rights to rescind by their conduct subsequent to their execution of their contracts.  That conduct was regarded as affirmation of each contract after the first and second vendors and the solicitor for the third vendor had acquired knowledge of the zoning of the land:  (the trial judge had found that the knowledge of the solicitor was deemed to be the knowledge of his clients).  On the other hand, there was a further finding that it was not until mid 1972, some two and a half years later, that the vendors were authoritatively informed and became personally aware, as a result of legal advice, that the contract gave them a right to rescind on account of the lands being affected by the town planning scheme.  However, in the Court below, the trial judge held that the acts affirming the contracts, committed when the vendors had knowledge (or, in the case of the third vendor, deemed knowledge) of the facts giving rise to a right of rescission, were sufficient to constitute waiver - even though the vendors were unaware, as a matter of fact and law, of the existence of their rights to rescind.  The acts that were held to constitute an affirmation included the acceptance by the vendors of payments by ASL on account of interest:  in one case, payments on account of the purchase price:  and the vendors’ participation in ASL’s application to have the land converted to the Torrens Title system.

The matter went on appeal direct to the High Court.  Stephen J, with whom McTiernan ACJ agreed, reviewed the authorities for the purpose of determining whether the vendors’ conduct and their right to rescind was to be assessed in late 1969 when they acquired knowledge (or deemed knowledge) of the town planning scheme or whether the matter was to be viewed in mid 1972 when they first acquired knowledge that cl 16 gave them the legal right to rescind.  Stephen J concluded that the material date was late 1969, the date when the relevant facts became known to the vendors.  His Honour treated the issue as one of election saying at 645:

“Where election is in question between contracting parties and, as in these appeals, the contract itself confers the inconsistent rights there can be no question whether a party had knowledge of his choice of rights.  He is deemed to know the terms of his own contract and the rights it confers, at all events he cannot take advantage of his own ignorance.”

Later on the same page, his Honour said:

“... all that need be established in order for the doctrine of election to apply is knowledge by the vendors of the facts giving rise to inconsistent legal rights; the appellants are to be taken to know of their rights of rescission conferred by cl. 16 and, of course, of their right to enforce the contracts according to their terms.”

Stephen J further explained that the words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is “consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other” (at 646).  Mere delay is not sufficient but there need not be an actual subjective intention to elect.

Mason J, the remaining member of the Court in Sargent v ASL Developments Limited also treated the issue as a case of election. He said at 655-656:

“A person is said to have a right of election when events occur which enable him to exercise alternative and inconsistent rights, i.e. when he has the right to determine an estate or terminate a contract for breach of covenant or contract and the alternative right to insist on the continuation of the estate or the performance of the contract.  It matters not whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach - in each instance the alternative right to insist on performance creates a right of election.

Essential to the making of an election is communication to the party affected by words or conduct of the choice thereby made and it is accepted that once an election is made it cannot be retracted.”

Mason J also came to a conclusion adverse to the vendors.  His opinion was to the effect that knowledge of the existence of alternative rights was not required; it will be sufficient if a party has knowledge of the facts giving rise to the rights.  His Honour said at 658:

“If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm.”

Later his Honour said at 658:

“The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon.  It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right.”

The views of Stephen J and Mason J have been followed by a Full Court of this Court in Tiplady v Gold Coast Carlton P/L (1984) 8 FCR 438 at 451-452 per McGregor and Spender JJ.

In my opinion, the letter from the Bank dated 20 September 1993 should have been sufficient to alert Mr Ellison to “the possibility of the existence of his alternative right”.  Later events, as earlier disclosed in these reasons, actually point to Mr Ellison having some such awareness.  It should not be expected of him that he would act immediately when he first became aware that there were difficulties concerning the Directors Apartments and the ASC.  He was entitled to reflect, to consider his position and to take advice.  There is no need, in my opinion, to convert that proposition into a period of time; each case must be considered individually so that the conduct of the electing party may be assessed against the background of all relevant facts.  It is sufficient, having regard to the facts of this case, to point out that Mr Ellison did not seek to avoid his contract until January 1997 - a period of three years and three months after his receipt of the letter from the Adelaide Bank.  In the intervening period of time he had enjoyed the benefits of ownership of the units, his share of the pooled rent and, until February 1995, the benefits of the guaranteed returns.  Mr Ellison’s conduct is better categorised as that of a unit owner pursuing his rights to hold and enjoy his units without restriction.  It was not the conduct of a party seeking to avoid a contract and obtain a restoration of the status quo.  In the words of Mason J he had “induced the other party to believe that performance of the contract (was) insisted upon.”

Counsel for Mr Ellison sought to distinguish the decision of the High Court in Sargent v ASL Developments Limited, submitting that there can be cases where it is essential that the electing party know of the existence of the competing rights.  The case of Latter v The Council of the Shire of Muswellbrook (1936) 56 CLR 422 is authority for the proposition that knowledge of the existence of the alternative rights, as distinct from knowledge of the facts giving rise to those rights, is essential to the making of a binding election. Latter’s case dealt with the provisions of the Workers’ Compensation Act 1926-1929 (NSW), (“the Act”) s 63 of which provided as follows:

“(1)Nothing in this Act shall affect any civil liability of the employer where the injury was caused by the personal negligence or wilful act of the employer or of some person for whose act or default the employer is responsible.

(2)In such case the worker may, at his option, proceed under this Act or independently of this Act, but he shall not be entitled to compensation under this Act, if he has obtained judgment against his employer independently of this Act.”

The widow of a deceased worker brought an action on behalf of herself and her infant children against her deceased husband’s former employer under the Compensation to Relatives Act 1897-1928 (NSW). It was pleaded that the widow had, after the death of her husband, made a claim against the employer under the Act on behalf of herself and her infant children and that, in pursuance of those last mentioned proceedings and with the consent of the plaintiff, the defendant employer had paid the full amount of the claim into the office of the Workers’ Compensation Commission. An allegation that the widow had full knowledge that she had an alternative right to proceed at common law was rejected. Latham CJ posed the question that had to be determined in these words:

“The question which arises is whether the worker must be deemed to have exercised this option if he in fact takes one of the possible alternative courses whether or not he was aware that he had the right to take the other course.”(at 432)

The learned Chief Justice went on to stress the presence of the words “at his option” appearing in subs 63(2) of the Act.  As to those words, his Honour concluded that they meant:

“... that the worker must exercise a choice between the two alternatives which the law allows to him.  The mere adoption of one alternative without knowledge that the law permits another alternative is not an act of choice between the two alternatives.”(at 433)

Latham CJ was of the view that any argument that knowledge of the deceased worker’s competing rights was irrelevant would ignore the words “at his option”.  Later in his judgment his Honour acknowledged the uniqueness of the workers’ compensation legislation by saying:

“In this case the provisions of the Act are such that in my opinion the proper conclusion is that Parliament dealt with the subject matter upon the basis that employers and workmen might not be aware of the provisions of the statute conferring rights upon them.  The special provisions of sec. 39 to which reference has already been made show that the Act does not assume that all persons know the law.”(at 434)

In my opinion those last mentioned remarks of the learned Chief Justice do not apply to the facts of the present case.  It seems to me that the presence of the words “at his option” took on a particular significance and emphasised the need for the relevant party to have knowledge of the existence of the competing rights.  Dixon J approached the problem from a different direction.  He said (at 439) that he was in agreement with the opinion expressed by Jordon CJ in Burnett v Union S.S. Co of New Zealand Ltd (1936) 36 SR (NSW) 119 at 123. Speaking of the effect of subs 63(2) of the Act, Jordan CJ had earlier said:

“It is manifest from the concluding words of sub-sec. 2 that the fact that a worker commences proceedings at common law does not amount to an act of election taking away his right to compensation under the Act and barring his right to institute proceedings to recover such compensation.  It is incredible that the Legislature should have said that a judgment in his favour should bar the right if it had intended that the writ should do so.”

As was the case with Latham CJ, Dixon J had recourse to the specific language of the relevant statute for the purposes of concluding his opinion on the issue of election.  In a joint judgment, Evatt and McTiernan JJ agreed with the judgment of the Chief Justice on the main part of the appeal.  The remaining member of the Court, Rich J, avoided the problem of “election” and decided the case on different grounds. But, as it seems to me, the language of ss 1073 and 1073A of the Law find no parallel in the language of subs 63(2) of the Act.

Counsel for Mr Ellison submitted that his client was entitled to await advice of the outcome of the application to the ASC before deciding whether he wanted to avoid or not.  As I have already said, it is my opinion that this submission misconceives the situation.  The time for election occurred after a reasonable interval of time subsequent to Mr Ellison’s acquiring knowledge of the facts that gave rise to the right to avoid the contract.  He was not bound to elect at once; he was entitled to keep the question open so long as he did not affirm the contract.  But that is not to say that he was entitled to wait for an indeterminate period of time.  Indeed, I am of the opinion that the longer he waited, the more he led the applicants into believing that he was adhering to his contract.  He was pressuring the applicants to clean-up the problems (that were exclusively of their making) but I find that he was doing that so that he could enjoy ownership of his units, freed of (or at least substantially freed of) restraints on alienation.  In waiting until January 1997 before he attempted to avoid his contract Mr Ellison, in my opinion, passed beyond the threshold.  Although Mr Adamson had earlier inquired about a “refund of all moneys advanced”, I find that at no time had Mr Ellison put the applicants on notice that he intended to avoid his contract either conditionally or unconditionally. It is not necessary for me to express a concluded view on an aspect that does not arise in the case, but it would seem to me, as a matter of practicality, that it would have been reasonably open to Mr Ellison to put to the applicants that unless they did all that was necessary to enable him to enjoy ownership of his units freed from all but reasonable constraints, he would avoid his contract.  There could have been written into that ultimatum a reasonable period of time, thereby putting the applicants on notice.  As I have said, it is not necessary to express a view on what would have been a reasonable period time:  that must depend on the individual circumstances of each case.  But, in this case, there was no ultimatum; there were complaints and inquiries but no question of avoidance arose until Mr King’s letter of 7 January 1997.  By that time, so it seems to me, the opportunity to avoid had long passed.  By that time the applicants were entitled to have regard to the fact that:

• the Bank had written Mr Ellison in September 1993 advising him that he could not sell his units;

• the ASC had written Mr Ellison by letter dated 4 August 1995 advising him that it was not minded to grant any exemption;

• Mr Harley wrote Messrs Piper Alderman on 22 August 1995 alerting the applicants, as a result, that Mr Ellison was obtaining legal advice;

• Mr King wrote Messrs Piper Alderman on 15 February 1996 making specific reference to Mr Ellison’s right to serve a notice under subs 1073(2) of the Law.

The inactivity that then followed could only amount to an affirmation of the contract.

During the course of his final submissions, counsel for Mr Ellison claimed that his client did not take action earlier than January 1997 because “he did not know he could”.  I am not prepared to accept that submission:  first, because of Mr King’s letter to Messrs Piper Alderman dated 15 February 1996 and secondly because of Mr Ellison’s evidence that as early as mid 1994 he was “of a mind to give the unit back and get (his) money back”. This latter passage in the evidence might not constitute knowledge of the existence or content of s 1073 of the Law but it does constitute knowledge on Mr Ellison’s part of facts that, so he thought, gave a right or perhaps, at least, an expectation that he would, by some method or means, be entitled to set aside the contract for the purchase of his units and obtain a refund of the moneys that he had paid to purchase his units.

I have therefore come to the conclusion that ss 1073 and 1073A of the Law do not constitute a Code: in giving to a person the right to avoid a contract, they do not take away that person’s right to affirm his contract. He or she is free to elect one way or the other. Having regard to the facts of this case, Mr Ellison by his conduct, elected to affirm his contract. That affirmation did not occur as a result of a discrete event - it was the result of a combination of events that commenced with him continuing to receive his share of the pooled income and moneys under the guarantee scheme. It continued as a result of the inquiries and submissions that were made by Mr Adamson and others on his behalf, all of which were directed to a perpetuation of the contractual relationship that subsisted between the applicants on the one hand and the unit owners on the other. By the time Mr Ellison consulted Mr Harley, if not before, the applicants were entitled to assume that he had elected to affirm his contract and that his concerns were concentrated upon removing the restriction on his right to sell. However, if I am wrong in coming to that conclusion, then, at the least, Mr Ellison must have lost his right to avoid within one or two months of consulting Mr King. At that stage he knew not only the facts that entitled him to avoid, but he also knew of his right at law to avoid. But still he did nothing for eleven months. That delay cannot be excused.

For the reasons set out above, I am of the opinion that the notice dated 7 January 1997 from Messrs Daenke O’Donovan addressed to Directors Management Pty Ltd was ineffective; it did not avoid the contract pursuant to the provisions of the Law nor did it amount to a lawful rescission at common law. But the applicants are not entitled to an order declaring the notice to have had no effect by force of the provisions of s 1073A of the Law for, as I have said, they abandoned that avenue in favour of the common law doctrine of election. I am however, satisfied that the applicants are entitled to an appropriate form of declaratory relief. I will therefore adjourn these proceedings, directing the applicants to file and serve within 28 days short minutes of order in terms consistent with these reasons. I grant leave to the parties to speak to the minutes and to address on the question of costs.

I certify that this and the preceding       (30) thirty pages are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin

Associate:

Dated:             

Counsel for the Applicant:	Mr R J Whitington QC and Mr G S Davis
Solicitor for the Applicant:	Messrs Piper Alderman
Counsel for the Respondent:	Mr S H Milazzo
Solicitor for the Respondent:	Messrs Daenke O'Donovan
Date of Hearing:	8-9 September 1997
Date of Judgment:	19 December 1997