McFarlane v Reffold
[2013] SASCFC 31
•24 April 2013
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
MCFARLANE v REFFOLD
[2013] SASCFC 31
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Gray and The Honourable Justice Vanstone)
24 April 2013
CONVEYANCING - FROM CONTRACT TO COMPLETION - PURCHASE MONEY - INTEREST ON PURCHASE MONEY - EFFECT OF DELAY
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - REPUDIATION AND NON-PERFORMANCE - ELECTION AND RESCISSION - GENERALLY
CONVEYANCING - BREACH OF CONTRACT FOR SALE AND REMEDIES - VENDOR'S REMEDIES - RESCISSION OR TERMINATION - ENTITLEMENT TO
CONVEYANCING - THE CONTRACT AND CONDITIONS OF SALE - GENERALLY - OTHER MATTERS
Appeal from dismissal of the appellant’s claim for damages in the District Court – appellant and respondent entered into contract for sale of house and land – contract included a warranty that no improvements had been carried out on the property without all necessary consents and approvals – after entering into the contract the appellant noticed a septic tank that had been installed without required approvals – appellant did not settle on settlement date – respondent served a Notice to Complete – at new settlement date, appellant tendered purchase price but refused to pay interest for delayed settlement – respondent refused to accept tender of the purchase price and settlement failed – appellant sought damages for wrongful refusal to settle.
Whether the respondent was in breach of the contract and therefore the appellant was not required to pay interest – whether the warranty was a term or condition to be performed by the vendor.
Held (per Kourakis CJ & Vanstone J): Appeal dismissed – the warranty was not a term of the agreement “to be performed by the vendor” – the respondent was therefore not in breach of the contract and was entitled to charge interest – the appellant was in breach of the contract.
Held per Gray J (in dissent): Appeal allowed - Mr Reffold was in breach in refusing to accept the amount tendered by Mr McFarlane - Mr Reffold's conduct in refusing to settle and then purporting to terminate the contract was unlawful - Mr McFarlane's approach to damages was flawed from the outset - the generalised assertions advanced on appeal did not lead to any entitlement beyond that allowed by the Judge.
Public and Environmental Health Act 1987 (SA), referred to.
United Australia Ltd v Barclays Bank Ltd [1941] AC 1; Ciavarella v Balmer (1983) 153 CLR 438; Equuscorp Pty Ltd v Wilmoth Field Warne (2007) 18 VR 250; MLW Technology Pty Ltd v May [2005] VSCA 29; Peter Turnbull & Co Pty Ltd v Mundus Trading (1954) 90 CLR 235; Foran v Wight (1989) 168 CLR 385; K & K Real Estate Pty Ltd v Adellos Pty Ltd [2010] NSWCA 302; Payzu Ltd v Saunders (1919) 2 KB 581; Sotiros Shipping Inc v Sameiet Solholt (the Solholt) [1983] 1 Lloyd’s Rep 605; Ayling v Wade [1961] 2 QB 228; Baltic Shipping Company v Dillon (1993) 176 CLR 344, considered.
MCFARLANE v REFFOLD
[2013] SASCFC 31Full Court: Kourakis CJ, Gray and Vanstone JJ
KOURAKIS CJ: The appellant and respondent were, respectively, the purchaser and vendor of a house and land on the southern edge of the Andamooka township. The contract of sale (the Contract) included a term that the respondent warranted that no improvements had been erected on the land without having obtained all necessary consents and improvements (the warranty). Contrary to the warranty, the house was serviced by a septic tank which had been constructed, and at all relevant times remained, without the approval required under the Public and Environmental Health Act 1987 (SA).
The appellant became aware that the septic tank had not been approved after execution of the Contract but before settlement. He notified the respondent that he did not intend to settle on the settlement date appointed by the Contract and settlement did not in fact take place. The respondent served a Notice to Complete under the provisions of the Contract and fixed another settlement date and time.
At the newly appointed settlement time, the appellant tendered payment of the purchase price under the Contract but refused to pay the interest demanded by the respondent by reason of the delay. The respondent in turn refused to accept the tender of the purchase price and the settlement failed.
The appellant brought an action in the District Court seeking specific performance. He subsequently amended the relief he sought in order to claim damages for the respondent’s wrongful refusal to settle instead of specific performance. Contrary to the respondent’s submission, the appellant did not irrevocably elect to keep the Contract on foot by making his equitable claim for specific performance. The appellant was entitled subsequently to accept the respondent’s repudiation, if it was repudiation, as a ground for termination and to claim damages.[1]
[1] Thomson Reuters, The Laws of Australia (15 July 2012) [7.6.1320]; United Australia Ltd v Barclays Bank Ltd [1941] AC 1 per Lord Atkin at 30; Ciavarella v Balmer (1983) 153 CLR 438 at 449; Equuscorp Pty Ltd v Wilmoth Field Warne (2007) 18 VR 250 at [35]-[50]. But see MLW Technology Pty Ltd v May [2005] VSCA 29 per Gillard AJA at [70] (Winneke P and Buchanan JA agreeing).
The Judge dismissed the appellant’s claim. His Honour held that the appellant had not been entitled to defer settlement and that the respondent was not precluded from claiming interest by the terms of the Contract. It followed that the respondent had not breached the Contract by refusing to settle for less than the purchase price plus interest and that the appellant was not entitled to damages. The Judge indicated that if he had been called on to assess damages he would have awarded the appellant $20,000 for the physical inconvenience he suffered as a result of the loss of the house and land. His Honour rejected the appellant’s claim for loss of profit flowing from the lost opportunity to redevelop the land.
The appellant contended that the respondent was in breach of the contract and that he was therefore not required to pay interest. Clause 21 of the Contract precludes the respondent from demanding interest if he was “in default in the observance or performance of any of the terms and conditions in this agreement to be performed by the vendor” of the Contract. I would hold that the warranty was not a term of the agreement “to be performed by the vendor”. I would therefore dismiss the appeal. My reasons follow.
The relevant events
The approval given by the Development Assessment Commission for the building of the house was subject to the approval of the septic system under the Public and Environmental Health Act 1987 (SA). It was common ground that the septic tank had been installed without that approval and that the respondent had not subsequently obtained the necessary approval.
The parties executed the Contract in December 2007. The contract price was $250,000. No deposit was payable. The Contract provided for settlement to take place on 11 February 2008 “at such time as the vendor specified by notice given not less than two business days before the settlement date”. The subject of the Contract was the whole of the land known as Lot 102 Government Road, Andamooka together with all fixtures.
Clause 17 of the Contract provides:
Approval of Improvements
17. The Vendor warrants that, since the Vendor became the registered proprietor of the Land, no improvements have been erected, and no alterations or repairs have been carried out, on the Land without all necessary consents and approvals having been obtained and, to the best of the knowledge, information and belief of the Vendor, no such improvements were erected and no such alterations or repairs were carried out without such approval or consent before the Vendor became the registered proprietor of the Land.
The appellant and respondent both engaged the same conveyancer. When the appellant discovered that the construction of the septic tank had not been approved he sent a fax to the conveyancer in the following terms:
Due to the vendors (sic) reluctance to negotiate in any way on the subject of the waist (sic) water system i (sic) am forced to give notice to the vendor of clause; 22 default by vendor; in relation to clause; 17 approval of improvements; That the settlement date is adjusted to the 18th of feb (sic) 2008. The waist (sic) water system does not follow regulations and part is outside block 102. If I was aware of this problem I would not have allowed the leasing of the property when asked by the vendor. This has increased the time and cost of relocating the system now being in use. (sic)
Also the maintenance and repairs done to prepare the home for lease as instructed by the vendor to be deducted from the perchase (sic) price;
Ducted aircon; replace bearings, v belt, water pump, stop valve and pads. $240
Labour on aircon, leaking toilet cistern and leaking Plumbing 13 hours at $40 per hour $520
Total $760
Thanking you
Brian. (signed)
The conveyancer telephoned the appellant in response to the fax. There was conflicting testimony about that conversation. The Judge found that the conveyancer did not agree, on behalf of Mr Reffold, to defer settlement. His Honour found that she did no more than acknowledge that because the appellant was refusing to settle, another date would have to be arranged. On that factual finding the Judge found that the appellant’s refusal to settle on 11 February 2008 was a breach of the Contract.
No issue was taken at trial as to whether the respondent had notified the appellant of the particular time for settlement on the 11th in accordance with his obligation to do so pursuant to clause 7 of the Contract. Not surprisingly there was therefore no evidence one way or another on whether the respondent had given notice. For that reason, the issue cannot be agitated on this appeal. If an issue had been taken on compliance with clause 7, a real question would have arisen as to whether the respondent was relieved of his contractual obligation to specify a particular time when the appellant had expressed a clear intention not to attend on the day fixed for settlement.[2]
[2] Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235; Foran v Wight (1989) 168 CLR 385; K & K Real Estate Pty Ltd v Adellos Pty Ltd [2010] NSWCA 302.
On 15 February 2008 the conveyancer, who at that time was acting for the respondent alone, sent a Notice to Complete to the appellant. The Notice to Complete recited the appellant’s failure to complete settlement on the due date and required the appellant to complete settlement at 11.30 am on Tuesday 4 March 2008. The Notice to Complete demanded, in addition to the purchase price, interest at the rate of $92.21 per day.
Both the appellant and respondent attended at the nominated time. The appellant tendered the purchase price but refused to make any payment of the interest claimed. The respondent refused the tender. The settlement failed.
The respondent engaged a solicitor. The solicitor caused a Notice of Termination to be served on the appellant. The Notice of Termination recited the service of the Notice to Complete and asserted that the appellant failed to comply with the requirements of the Notice to Complete by failing to tender payment of the interest. The Notice of Termination then purported to terminate the Contract pursuant to clause 21(3)(d) of the Contract.
The terms of the Contract
The Notice to Complete served by the conveyancer purported to be given pursuant to clause 21 of the Contract which relevantly provides:
Default by Purchaser
21.(1) If –
(a)the purchase is not completed on or before the settlement date or if the Purchaser makes default in the payment or the purchase price or any part of the purchase price, and
(b)the Vendor is not in default in the observance or performance of any of the terms and conditions contained in this agreement to be performed by the Vendor, the Purchaser shall pay interest at the prescribed rate on the full amount of the purchase price from the settlement date to either the day on which settlement is effected or the day on which this agreement is terminated (as the case may be).
…
(3) (a) If the Purchaser makes default in the observance or performance of any term or condition contained in this agreement to be observed or performed by the Purchaser at settlement, and the default continues for a period of not less than three days the Vendor may at any time thereafter give notice to complete to the Purchaser.
(b)A notice to complete shall require the Purchaser to complete the purchase of the Land and the included property at the Lands Titles Registration Office at Adelaide at a time appointed in the notice.
(c)The time for settlement appointed in a notice to complete shall be a time between 10.00am and 4.00pm on a business day not less than fourteen days after the service of the notice.
(d)If the Purchaser fails to comply with the requirements of a notice to complete at the time appointed for settlement in the notice, the Vendor may terminate this agreement by notice in writing to the Purchaser.
(e)If a notice to complete is waived, or the time for completion appointed in a notice to complete is extended by agreement express or implied, a further notice to complete may be given under this clause which shall apply as if “seven days” was substituted for “fourteen days” in sub-clause (c).
Clause 22 deals with default by the Vendor but it provides an important part of the contractual context in which clause 21 must be construed and relevantly provides:
Default by Vendor
22.(1) If the Vendor makes default in the observance or performance of any term or condition contained in this agreement to be observed or performed by the Vendor at or before settlement, the Purchaser may give to the Vendor notice in writing (in this clause called “the Purchaser’s notice”) requiring the Vendor to remedy the default within the period of five business days after the service of the notice or such longer period as is specified in the notice.
(2) The Purchaser’s notice shall state either:
(a)that if the default is not remedied within the period stated in the notice, this agreement shall terminate, or
(b)that the Purchaser will require the Vendor to pay interest on the purchase price and either:
(i)that settlement will be postponed until the expiration of a period not exceeding ten days specified in the notice after the default is rectified and the Vendor has given notice thereof to the Purchaser, or
(ii)appointing a time for settlement being a time not less than seven days after the service of the notice.
Clauses 21 and 22 of the Contract regulate the consequences of any failure by the parties to take the steps necessary to complete the Contract. The clauses are replete with references to obligations which are to be observed or performed “on or before”, or “at”, or “at or before” settlement.
There is a necessary connection between the “default in the observance or performance of any of the terms and conditions” of the Contract referred to in clause 21(1)(b) of the Contract and the “default in the observance or performance of any term or condition [of the Contract] to be observed or performed by the vendor at or before settlement” referred to in clause 22 of the Contract. That is because it would be anomalous to allow a vendor who was in default under clause 22 to be able to claim interest pursuant to clause 21 for a delay in settlement for which he or she was responsible. The phrases should be given the same construction.
The defaults contemplated by both clauses are defaults in taking the steps necessary to complete the Contract. They refer to obligations imposed by the Contract which are still to be performed and on which the settlement is contingent.
Those obligations are found in clauses 3, 5, 6, 8 and 13 of the Contract. Beside the two default clauses, clause 8 is the only clause in which the expression “terms and conditions” appears. Clause 8 clearly contemplates that the observance and performance of the terms and conditions of the agreement will occur at or before settlement. The clauses containing those obligations use the language of command. For example, clause 3 stipulates that the purchaser “… shall pay the deposit …”; clause 5 requires that the purchaser “shall deliver” to the vendor various documents; clause 6 requires that rates, taxes and other outgoings “shall be adjusted”. Clause 13 stipulates that the vendor “shall purchase or complete the purchase of any of the included property …” All these terms are executory, in the sense that they require performance by the parties between the time of execution and settlement.
The default provisions, clauses 21 and 22, appear to respond to these “executory” clauses. They provide for notice of a default to be given and for the default to be remedied within a period of a few days or a longer period as specified. This presupposes that the default occurred after execution and is capable of (speedy) remedy. It is unlikely (though not impossible) that where the sort of improvements, alterations or repairs contemplated by clause 17 had not been carried out with the necessary approvals, this could be remedied within a short period.
The question of construction is whether clause 17 imposes a contractual obligation “to be performed by the vendor”.
It should be noted that clause 17 does not expressly impose an obligation to obtain approvals for the improvements erected on the land prior to settlement. Nor does it impose an obligation to perform any work on those improvements to bring them within the terms of an existing approval. Clause 17, in terms, does no more than warrant a pre-existing state of affairs. No implication can be drawn from those terms imposing a positive obligation on the vendor to perform a future act. A mandatory injunction to obtain approvals or perform work could not be founded on the terms of clause 17. Indeed, even if the vendor were to obtain some sort of ex post facto approval for an improvement which was previously lacking, he would still be in breach of the warranty. (No doubt the late approval of such an improvement would affect the damages available for breach of the warranty.)
The warranty given by clause 17 is to pay damages for any loss which is sustained as a result of the state of affairs being different to that warranted. It is a warranty of the kind which may be given as to quality in a sale of goods. It is a promise to pay damages for loss if the property transferred is not in the state expressly or impliedly warranted. No occasion to perform, or observe,[3] clause 17 of the Contract arises unless and until the purchaser suffers damage as a result of the non-existence of an approval, the existence of which, the vendor had warranted.
[3] In my view nothing in this case turns on the different meaning those words may bear in some contexts.
Moreover, clause 17 is a mere term and not a condition of the Contract. The subject matter of the Contract is the sale of the land and fixtures. The manifest purpose of clause 17 is to sound in damages if, at any time after settlement, the warranty is shown to have been false. It will not be common for non‑compliance with statutory approvals in the construction of improvements to go to the root of a contract for the sale of land. Generally, an award of damages for the costs of achieving compliance will be a sufficient remedy. The position taken by the statutory authority in this case illustrates the point. It gave the respondent time to remedy non-compliance before commencing enforcement proceedings. The appellant would have been entitled to damages for those costs of compliance if the appellant had settled on the contract.
The construction of clause 17 in the preceding paragraphs sits consistently with clause 12 which regulates the rights of parties over the condition of the land, including all improvements on the land.
By clause 12(1) the appellant acknowledges that he entered into the agreement relying, apart from any express warranty or representation, on his own inspection and investigation of the land.
By clause 12(2) the appellant agrees that he will accept the land in the condition it is in at the time possession is given and that, save for exceptions not presently relevant, the vendor would be under no liability in respect of the state of the land. I think it an improbable construction that a purchaser would be entitled to refuse to accept land which included an improvement of good quality for which approval had not been obtained but obliged to accept land with a defective improvement for which approval had been obtained.
It follows that the respondent was not in default for the purposes of clause 21(1)(b). The settlement was not completed on the date specified by the Contract. The appellant was therefore in default in failing to complete on the specified date. It follows that the respondent was entitled to charge interest. The Contract failed because the appellant failed to tender payment for interest. It follows that it was the appellant who was in breach of the Contract and not the respondent. The Judge was correct to dismiss the appellant’s claim.
Damages
Having dismissed the appellant’s appeal on liability, it is unnecessary to consider the appellant’s complaints that the Judge’s award was inadequate. I simply observe that the appellant faced the following substantial difficulties. First, in my view, the award of $20,000 for inconvenience, which was approximately eight per cent of the Contract price, was a substantial award. Secondly, the further evidence which the appellant tendered on the appeal did not materially alter the weight of the evidence at trial.
On the other hand, the question of whether the appellant should have mitigated his loss by paying the interest demanded by the respondent under protest is more difficult. If the respondent had not been entitled to claim interest, it is difficult to see why the appellant should have been required to compromise his legal right to purchase the land for the Contract price and no more.[4]
[4] Payzu Ltd v Saunders (1919) 2 KB 581; Sotiros Shipping Inc v Sameiet Solholt (the Solholt) [1983] 1 Lloyd’s Rep 605.
GRAY J.
This is an appeal against the dismissal of a claim for damages following a trial in the District Court.
Introduction
On 7 December 2007, the plaintiff and appellant, Brian David McFarlane, as purchaser entered into a contract for the sale and purchase of real estate at Andamooka, South Australia. The vendor, Danny Stuart Reffold, is the defendant and respondent. The property concerned was a house and land located on the Andamooka town boundary and provided access to an adjacent opal field. The property had the potential for subdivision.
The contract of sale was in writing. The parties utilised a standard form contract for the sale and purchase of land published by the Australian Institute of Conveyancers South Australia Division Inc. Several provisions in the standard form were irrelevant to the transaction and had no application.
Following entry into the agreement, Mr McFarlane noticed that a septic system had been installed without required approval. He approached Mr Reffold and attempted to renegotiate the price. Mr Reffold refused to renegotiate. He said that he was selling the property “as is”.
The contract nominated 11 February 2008 as the settlement date. Mr McFarlane, having failed to resolve the issue concerning the septic system, wrote to the conveyancer, who at that time acted for both parties, advising that the septic system was not as warranted, giving notice in respect of Mr Reffold’s claimed breach and further deferring settlement until 18 February 2008. Mr Reffold treated this notice, and in particular the deferral of settlement, as a breach of the agreement by Mr McFarlane. Mr Reffold gave notice, by his agent, claiming that Mr McFarlane was in breach, claiming default interest and advising of a new settlement date of 4 March 2008. Mr Reffold’s notice made time of the essence.
At the time for settlement on 4 March 2008, both parties attended through their separate conveyancers. Mr McFarlane tendered the amount sought by Mr Reffold, save for an amount claimed for interest as a consequence of Mr McFarlane’s alleged breach in delaying in settlement. The contract price was $250,000.00. The amount of the disputed interest was a little more than $2,000.00. Mr McFarlane declined to pay this amount. This led Mr Reffold to refuse to settle, asserting that he did so on the basis that Mr McFarlane had not tendered the amount due under the contract. Mr Reffold then terminated the contract on the claimed basis that Mr McFarlane had breached the contract in failing to settle.[5]
[5] The notice of termination provides: “You failed to comply with the requirements of the Notice to Complete at the time appointed for settlement on the Second Settlement Date as you did not tender payment of the Interest.” The Notice to Complete provided: “You are in default in the due observance or performance of an obligation to be observed or performed on your part in that you have failed to complete settlement on the due date and you have failed to make adequate preparation to ready yourself for settlement and such default has continued unremedied for a period of not less than three days.”
The Judge concluded that Mr Reffold was in breach of his contractual obligations provided by clause 17. Clause 17 of the contract provides:
Approval of Improvements
The Vendor warrants that, since the Vendor became the registered proprietor of the Land, no improvements have been erected, and no alterations or repairs have been carried out, on the Land without all necessary consents and approvals having been obtained and, to the best of the knowledge, information and belief of the Vendor, no such improvements were erected and no such alterations or repairs were carried out without such approval or consent before the Vendor became the registered proprietor of the Land.
The Judge found that Mr Reffold had installed a septic system without the approval required pursuant to the Public Environment and Health legislation and regulations. The Judge further concluded that approval of the septic system was precisely the kind of approval covered by clause 17 of the contract. As a consequence, the Judge found that Mr Reffold was in breach of the warranty given to Mr McFarlane and that he had installed the septic system without the required approvals. These findings were not challenged on appeal.
The Judge then considered whether the breach of clause 17 was such that Mr McFarlane was entitled, pursuant to clause 22 of the contract, to give Mr Reffold notice requiring the breach to be remedied. Clause 22 of the contract provides:
If the Vendor makes default in the observance or performance of any term or condition contained in this agreement to be observed or performed by the Vendor at or before settlement, the Purchaser may give to the Vendor notice in writing (in this clause called “the Purchaser’s notice”) requiring the Vendor to remedy the default within the period of five business days after the service of the notice or such longer period as is specified in the notice.
The Judge observed:
In such event, clause 22 also provided that the purchaser could terminate if the default was not remedied, or could appoint a new time for settlement or could postpone the settlement until the breach is remedied.
The Judge considered that a clause 17 breach did not enliven Mr McFarlane’s rights under clause 22. The Judge reasoned that clause 17 did not require Mr Reffold to do anything prior to settlement and that, accordingly, clause 17 was not a term or condition within the meaning of clause 22. The correctness of this conclusion was in issue on the appeal.
The Judge further considered that in the event that Mr McFarlane was entitled to act under clause 22, the question arose as to whether his notice complied with the terms of the contract.
The Judge concluded that Mr McFarlane’s notice was wholly deficient as it failed to address a number of material requirements of clause 22. This conclusion was not challenged on appeal.
Having regard to the foregoing, the Judge reasoned that Mr McFarlane was in breach of his obligations under the contract in failing to settle on 11 February 2008 and that, as a consequence, Mr Reffold was entitled to default interest. Notice was given by Mr Reffold of the new settlement date and Mr McFarlane’s failure to settle by paying the amounts due provided a proper basis for Mr Reffold to terminate the agreement.
Mr McFarlane pursued a claim for damages. Two heads of damage were identified. Mr McFarlane claimed that Mr Reffold’s refusal to sell the property caused him financial losses, including loss of the profit he would have made on redevelopment and through renting the property. Mr McFarlane also claimed disappointment damages in accordance with the High Court decision in Baltic Shipping Company v Dillon.[6]
[6] Baltic Shipping Company v Dillon (1993) 176 CLR 344.
The Judge rejected the loss of profits claim as he took the view that no probative evidence of loss had been led. The Judge assessed disappointment damages at $20,000.00. In the event, the Judge dismissed Mr McFarlane’s claim as he found that Mr Reffold was entitled to terminate the contract. The issues of loss were the subject of complaint on appeal by Mr McFarlane.
The Contract
Settlement on 11 February 2008
As noted above, the contract provided for settlement to take place on 11 February 2008. Clause 7 of the contract addressed the time and place of settlement and was in the following terms:
Settlement shall be effected on the settlement date at the Lands Titles Registration Office at Adelaide or such other place within the City of Adelaide as the parties may agree at such time as the Vendor may notify to the Purchaser not less than two business days before the settlement date.
The Judge concluded that Mr McFarlane’s notice of 8 February 2008 in which he purported to defer settlement until 18 February 2008 was ineffective and did not validly defer the settlement date. The Judge concluded that the notice amounted to a statement to all concerned that Mr McFarlane would not settle on 11 February 2008.
On receipt of Mr McFarlane’s notice of 8 February 2008, the conveyancer acting at that time for both parties advised Mr McFarlane that she had a conflict and that she would not act for him anymore. According to her evidence, the conveyancer said that she would refer Mr McFarlane to another conveyancer. However, the original conveyancer continued to act for Mr Reffold. According to the conveyancer’s evidence, a clerk from her firm attended to settle on 11 February 2008 on behalf of Mr Reffold, dropping off Mr McFarlane’s papers to another conveyancer on the day of settlement.
It would appear that no attempt was made by Mr Reffold to strictly comply with the terms of clause 7. There was an obligation under clause 7 for Mr Reffold to give Mr McFarlane two clear business days notice of the time at which settlement was to take place. Dropping off Mr McFarlane’s papers to another conveyancer on the day of settlement on 11 February 2008 was not adequate compliance with clause 7. In these circumstances, the Judge’s conclusion that Mr McFarlane was in breach of the contract by not settling on 11 February 2008 is difficult to sustain.
Clause 17 – Breach of Warranty
As noted above, the finding of the Judge that Mr Reffold was in breach of the warranty in clause 17 was not under challenge. This breach was a breach of a condition and term of the contract. Mr Reffold was obliged to observe the obligations under clause 17. It is apparent both from the Judge’s findings and from the evidence given in the trial that Mr Reffold, prior to entering the contract, was on notice that the septic system lacked the necessary consent or approval.
Clause 22 of the contract, as earlier extracted, addresses the topic of “Default by Vendor”.
It is to be noted that the clause uses the phrase “observance or performance” and then the phrase “observed or performed”. As a matter of construction, it might be expected that the words “observance” and “performance” carry different meanings and that “observed” and “performed” also carry different meanings.
The Judge noted that the Oxford online dictionary defined “observe” as having several meanings including “[f]ulfil or comply with … a … legal … obligation”. Another reputable dictionary defined “observe” in terms of “to keep or maintain in one's action, conduct, etc.: you must observe the formalities.”[7]
[7] MacQuarie Dictionary Online, Observe (2013) at 2 January 2013.
There are authorities that address the phrase “observe or perform” and the meaning of “observe”. The authorities have arisen in landlord and tenant disputes. In that context, it has been recognised that the words have a different operation and in particular, that the word “observe” concerns negative covenants and the word “perform” concerns positive covenants.
In Ayling v Wade, Danckwerts LJ relevantly observed:[8]
We were referred to Stroud's Judicial Dictionary (3rd ed., vol. 3 (1953), p. 1948), where there is some discussion of the relative meaning of the words "observe" and "perform" in respect of negative and positive covenants; but it seems to me that that discussion has really no relation to the problem with which we have to deal in this case. The word "observe" is not a purely negative word. It cannot, I think, mean that the covenantor may simply sit by, noticing what is happening and doing nothing. What it means, I think, is "to comply with the obligation" and, therefore, it has a positive and not merely a negative meaning. It plainly must have a positive as well as a negative meaning in the present case because, without that, the indemnity part of the covenant would be useless, and the indemnity part of the covenant refers to the same covenants as these referred to in the earlier part of the clause. …
[Emphasis added.]
To my mind, this reasoning has direct application to the contract of sale and, in particular, in relation to the use of the words “observance” and “performance” appearing in clauses 21 and 22.
[8] Ayling v Wade [1961] 2 QB 228, 235-236.
The clause 17 warranty in the present case was a warranty that the septic system on the property had been the subject of all necessary consents and approvals. Mr Reffold was under an obligation to comply with his warranty. In this context, the phrase in clause 22 “observance or performance” does not, to my mind, mean that Mr Reffold may, being aware that the septic system had not been the subject of consent or approval, do nothing. Mr Reffold was required to comply with his contractual obligations. In this sense, the words “observance or performance” have a positive meaning and required some action by Mr Reffold.
To adopt the wording of Danckwerts LJ, in the present case, Mr Reffold had undertaken to carry out the obligations implicit in his warranty; that is, to take steps to see that the necessary consents and approvals were obtained.[9] At the very least, Mr Reffold had an obligation to inform Mr McFarlane of the lack of consent or approval of the septic system, so that Mr McFarlane could exercise his rights under the contract.
[9] See, Ayling v Wade [1961] 2 QB 228, 236.
This approach to the construction of the phrase “observance or performance” gains support when one considers the reach of a clause 17 warranty. Such a warranty may relate to issues of fundamental importance and of a nature that would lead to an entitlement, in the event of a breach, to the termination of the agreement for sale. For example, non-compliance with the need for consent or approval to the building of a house may be of great importance. The need for a properly constructed and located septic system is also an important matter in regard to the use of a residence. Serious issues concerning public health may arise.
Once the phrase “observance or performance” is construed as discussed above, it is apparent that Mr Reffold was in default in the observance or performance of a term or condition of the agreement. This was a term or condition to be observed or performed. Mr Reffold was not entitled, knowing of the breach, to do nothing. Mr Reffold was not entitled to take the position that he was contracting to sell the property “as is”. Mr McFarlane was entitled to be informed of the true state of affairs and was entitled to his rights under clause 22(1).
Clause 21(1) addresses default by a purchaser and provides:
If –
(a)the purchase is not completed on or before the settlement date or if the Purchaser makes default in the payment or the purchase price or any part of the purchase price, and
(b)the Vendor is not in default in the observance or performance of any of the terms and conditions contained in this agreement to be performed by the Vendor, the Purchaser shall pay interest at the prescribed rate on the full amount of the purchase price from the settlement date to either the day on which settlement is effected or the day on which this agreement is terminated (as the case may be).
In the circumstances of the present proceeding, assuming there had been compliance with sub-clause (a), Mr McFarlane was not liable to pay interest as Mr Reffold was in default in the observance or performance of a term and condition of the contract, namely the clause 17 warranty. The phrase “observance or performance” is to be construed in the same manner as discussed above. Mr Reffold was required to carry out his contractual obligations pursuant to clause 17.
In my view, a breach of clause 17 is a breach of a term and condition of the contract of sale and, in particular, a default by Mr Reffold in compliance with clause 17 is a “default in the observance or performance of any of the terms and conditions contained in this agreement”.
In my view, Mr Reffold failed to observe or perform his obligations under clause 17. He was well aware at the time of entry into the contract that he was in breach of warranty. Mr Reffold was, in my view, obliged at all times to ensure that he complied with his warranty and that his failure to do so was a breach of a condition and term of the agreement of sale. In accordance with the contract, Mr McFarlane was not obliged to pay interest at the prescribed rate on the full amount of the purchase price from the settlement date to either the day on which settlement was effected or the day on which this agreement was terminated. In these circumstances, notwithstanding any default on the part of Mr McFarlane, Mr Reffold was not entitled to claim interest.
The above reasoning allows the conclusion that at settlement on 4 March 2008, Mr McFarlane tendered the correct amount due under the contract. He was not in breach. It also follows that Mr Reffold in refusing to accept the amount tendered was in breach and that his conduct in refusing to settle and then purporting to terminate the contract was unlawful. In these circumstances, Mr McFarlane was entitled to recover damages in accordance with the findings of the trial Judge.
Damages
Mr McFarlane’s amended statement of claim provided no particularity in regard to damages. It was simply asserted that “[b]y reason of the Breach the plaintiff has suffered loss and damage. Proper particulars of the plaintiff’s loss and damage cannot be provided until the plaintiff obtains an expert’s report.”
At trial, Mr McFarlane’s claim for damages was addressed during his counsel’s opening. The Court was informed that evidence would be led about arrangements that Mr McFarlane had made about the use of the property. He proposed to move from his then accommodation to live on part of the property and to lease out his former residence as well as part of the property to be acquired. Apparently there was a proposal to negatively gear the property. A second head of damage was identified. The Court was informed that Mr McFarlane intended to subdivide the property, retain part of the property and dispose of the balance. The Court was informed that there would be no expert evidence led to support the claim for damages. Mr McFarlane indicated that he would seek disappointment damages.
The Judge rejected Mr McFarlane’s claim for financial loss. The Judge reasoned:[10]
Mr McFarlane claims two kinds of loss. He says Mr Reffold’s refusal to sell him the property has caused him financial loss, essentially loss of the profit he would have made from redeveloping and/or renting the property. He also says he has suffered disappointment.
Firstly I consider the claim for redevelopment profit. Mr McFarlane was offered standard variable rate loans to enable him to purchase the property.[11] He also produced a bundle of notes and calculations reflecting his estimate of the cost of renovating and improving the property, a quote to power the property, his subdivision plans, the expected rent, and his assessment of the resulting value of the developed property.[12] Mr McFarlane concluded that he could renovate the property for $75,212, which when subdivided would be worth between $610,000 and $680,000.
There was no expert evidence to support these conclusions. There was no independent valuation of the property either in its existing state or in its proposed redeveloped state. There was no reliable evidence of how long the redevelopment would take or whether there would be planning or development or other problems or impediments and the cost of obtaining relevant approvals and overcoming likely hurdles. Most importantly, there was no independent evidence of what the property would be worth, even if the redevelopment and subdivision could occur exactly as anticipated, and even if it could occur at the cost estimated by Mr McFarlane.
Evidence was given that Mr McFarlane did instruct a valuer who accessed the property, however no report was produced.
In the final analysis I cannot find proven on the balance of probabilities that either the property could have been subdivided and redeveloped at the cost Mr McFarlane says it could, nor that the resulting development would have any proven value over and above the cost of the property and its redevelopment.
Secondly I consider the claim for loss of rental profit. Mr McFarlane called two witnesses who said that they would have been prepared to rent the property for a total of $370 a week[13]. A report from actuaries estimated the present value of future rental profits at $5000 for the period ending 31 October 2027 when the property would be paid off, and $98,000 over the course of Mr McFarlane’s then remaining life[14].
Unfortunately, many of the report’s basic assumptions were not proven. I give several examples. There was no proof that the anticipated property outgoings, assumed at 20%, would be any particular figure. Outgoings are a major element of whether a rental property will be profitable. There was no proof of the assumption that the rental would continue unabated until June 2040. Indeed, common sense says that there will likely always be some unoccupied time when tenants vacate and rental properties stand vacant. It assumed that interest rates would remain unchanged into the future, itself an obviously untenable assumption. There was no allowance for contingencies such as natural disaster or tenant or other damage resulting in extended rental loss.
Given the significance and range of the assumptions basing the report that were not satisfactorily proven, I find that no reliance can be placed on the report’s conclusions[15]. There was no other evidence sufficient to establish a net loss of future rental profits. Accordingly no loss of rental profits has been proven.
[10] McFarlane v Reffold (No 2) [2011] SADC 129, [58]-[65].
[11] Exhibit P10 comprises two ANZ loan offer documents dated 14 January 2008.
[12] Exhibit P9
[13] Mr Kendrick gave evidence he was prepared to rent the transportable home on the property for $150 per week. Mr Godden said he was prepared to rent the house on the property for $220 a week.
[14] Exhibit P22.
[15] A further potential problem with the report is that the $98,000 estimate of rental for the period when the property is paid off does not recognise that in paying off the principal owing on the property, capital has also been invested which would otherwise be invested in something else, giving a return. The plaintiff’s loss is the profit it would have received over and above whatever else it would have done with that capital.
On the appeal, Mr McFarlane complained about the assessment of damages. He asserted that he was entitled to damages for disappointment of $235,000.00 and damages for other losses of $30,360.00, leading to a total claim of $265,360.00 in lieu of the assessment of the Judge of $20,000.00.
Mr McFarlane submitted that his claim in respect of disappointment related to physical inconvenience. His submissions were made in the most general of terms. He characterised this claim as being “a missed window of opportunity, being a major steping [sic] stone in his life”. At trial, Mr McFarlane advanced his claim in respect of loss of profits of his proposed redevelopment of the property. On the appeal, he appears to have reformulated his claim as part of disappointment damages.
This claim for $20,000.00 related to Mr McFarlane’s assertion that Mr Reffold wanted to terminate the contract to sell the property to another purchaser for an extra $20,000.00. There was no evidence, or any satisfactory evidence, before the Court to support the assertion that such another offer did in fact exist in terms that were comparable to the offer made by Mr McFarlane. No evidence of valuation was placed before the Court. There is no substance to this claim.
Mr McFarlane also claimed an amount of $10,360.00 which he asserted is based on having spent 240 hours on planning development and 13 hours on doing work for Mr Reffold to prepare the property for rental. Again, there is no substance to this claim.
Mr McFarlane’s approach to damages appears to have been flawed from the outset. A claim for damages was not properly pleaded or particularised. The opening on damages was in the most general of terms and bordered on the unintelligible. Mr McFarlane’s evidence consisted of many unsubstantiated assertions. No detailed evidence of assessable losses was led. No attempt was made to lead expert evidence on topics that plainly called for such evidence. The findings and conclusions of the Judge as set out above were open to his Honour.
I do not consider that the generalised assertions advanced on appeal lead to any entitlement beyond that allowed by the Judge. I consider the allowance of $20,000.00 for disappointment to be a generous allowance having regard to the evidence led in the trial.
Mr McFarlane’s claim for damages may be tested in another way. He was in a position to settle on the property on 4 March 2008. During the course of the appeal, he acknowledged that he could have paid the disputed interest under protest and he could have reserved his right to claim damages in respect of the breach of warranty. This would have involved an outlay of a little more than $2,000.00. Instead of having a dispute over an amount of about $2,000.00 and damages for breach of warranty, on any view a modest amount, Mr McFarlane elected not to proceed with the settlement and then to claim damages of more than $250,000.00. There is an implausibility about Mr McFarlane’s claims.
Conclusion
In accordance with these reasons, I would allow the appeal, set aside the judgment entered in the District Court and enter judgment for Mr McFarlane in the sum of $20,000.00.
VANSTONE J: For the reasons given by Kourakis CJ I would dismiss this appeal.
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