McRoss Developments Pty Ltd v Caltex Petroleum Pty Ltd

[2004] NSWSC 183

CITATION:	McRoss Developments Pty Ltd v Caltex Petroleum Pty Ltd [2004] NSWSC 183
HEARING DATE(S):	2 December, 2003
JUDGMENT DATE:	22 March 2004
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Defendant ordered to repay deposit under frustrated contract.
CATCHWORDS:	CONTRACT - CONSTRUCTION - OPTION - Whether obligation to perform remediation work on land survived exercise of option - whether obligation to complete contract for sale conditional on completion of remediation work - FRUSTRATION - Whether damages for loss of bargain may be awarded when one party to contract fails to complete at stipulated time and contract is thereafter frustrated by operation of law but before innocent party rescinds - DEPOSIT - UNJUST ENRICHMENT - Whether vendor would be unjustly enriched if it retained deposit under a frustrated contract - PENALTY - Who has onus of proof.
LEGISLATION CITED:	- Contaminated Land Management Act 1997 (NSW) - Part 3, Div 3 - Conveyancing Act 1919 (NSW) - s.55(2A) - Frustrated Contracts Act 1978 (NSW) - s.7, s.8, s.12, s.15 - Land Acquisition (Just Terms Compensation) Act 1991( NSW) - s.47 - Supreme Court Act 1970 (NSW) - s.94
CASES CITED:	- BP Refinery (Westernport) Pty Ltd v Shire of Hastings ((1977) 180 CLR 266) - Carpenter v McGrath (1996) 40 NSWLR 39 - DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 - Foran v Wight (1989) 168 CLR 385 - Heyman v Darwins Ltd [1942] AC 356 - Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214 - Lombok Pty Ltd v Supetina Pty Ltd (1987) 14 FCR 226 - Lucantonio v Ciofuli [2003] NSWSC 1058 - Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 - Summers v The Commonwealth (1918) 25 CLR 144 - Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 - Upper Hunter Timbers Pty Ltd v Forestry Commission of New South Wales [1999] NSWCA 125
PARTIES :	McRoss Developments Pty Limited - Plaintiff Caltex Petroleum Pty Limited - Defendant
FILE NUMBER(S):	SC 2829/02
COUNSEL:	B.A.J. Coles QC and D.F. Villa - Plaintiff I.G. Harrison SC and A. Leopold - Defendant
SOLICITORS:	Minter Ellison - Plaintiff Freehills - Defendant

Introduction

1    The Defendant (“Caltex”) (formerly called Ampol Petroleum Pty Ltd) was the registered proprietor of a substantial parcel of land at Ballast Point, Birchgrove (“the Land”) which had been used for many years for the storage of petroleum products. By an agreement in writing dated 2 September 1997, Caltex granted to Walker Group Pty Ltd (“Walker”) an option to acquire the Land for $16,500,000 (“the Call Option Agreement”)

2    On 19 April 2002, the Call Option was duly exercised by the Plaintiff (“McRoss”) which had been nominated as purchaser by Walker in accordance with the Call Option Agreement. A Contract for Sale between Caltex as vendor and McRoss as purchaser thereupon came into existence and an amount of $825,000, which had been paid to Caltex by Walker pursuant to the Call Option Agreement, was deemed to be the deposit paid by McRoss to Caltex under the Contract for Sale.

3    Walker and McRoss intended to develop the land for residential purposes and the Call Option Agreement provided that Caltex was required to carry out remediation work to the Land prior to the Call Option expiry date so as to permit it to be used for residential purposes. The Contract required completion within six weeks, i.e., by 31 May 2002, but time was not expressly made of the essence.

4    Caltex did not effect remediation work to the Land by 31 May 2002 but it asserted that McRoss was nevertheless required to complete the Contract by that date. McRoss asserted that remediation of the Land was a condition precedent to its obligation to complete the Contract. The dispute was carried on in the context that the parties were well aware that New South Wales Government was about to resume the Land. It did so on 26 September 2002.

5    Caltex received $14,375,000 by way of compensation for the resumption. The amount of compensation was calculated by deducting from the purchase price under the Contract the amount which Caltex would have had to spend in carrying out remediation work to the Land.

6    Whether McRoss is entitled to substantial compensation for any loss suffered by it as a result of the acquisition of the Land had not been determined at the date of the trial.

7 By its Amended Statement of Claim, McRoss seeks an order that Caltex repay to it the sum of $825,000 under the general law or pursuant to s.55(2A) of the Conveyancing Act 1919 (NSW), or s.12 of the Frustrated Contracts Act 1978 (NSW). McRoss claims compound interest on the sum of $825,000 in reliance on a term of the Contract for Sale requiring Caltex to invest the deposit pending completion of the Contract.

8    By its Defence, Caltex admits that the Contract for Sale was frustrated on 26 September 2002 by the compulsory acquisition of the Land. However, it says that McRoss was in breach of the Contract by failing to complete it on 31 May 2002. Had that breach not occurred, Caltex says, the Contract would have been completed prior to the compulsory acquisition of the Land and no frustration could have arisen. Accordingly, Caltex asserts that McRoss should not be entitled to rely upon its own breach of contract in order to obtain repayment of the deposit.

9    In response, McRoss says that its obligation to complete the Contract on 31 May 2002 was conditional on Caltex having completed the remediation work to the Land by that date, which Caltex failed to do. Caltex rejoins that its obligation pursuant to the Call Option to carry out remediation work did not survive the exercise of the Call Option and the entry by the parties into the Contract for Sale.

10 By way of further defence, Caltex says that even if McRoss is otherwise entitled to repayment of the deposit under the Contract for Sale, it would be unjust to require Caltex to repay it because McRoss will receive compensation for the loss of the benefit of the Contract under s.47 of the Land Acquisition (Just Terms Compensation) Act 1991( NSW) which will be calculated on the basis that it has paid $825,000 by way of deposit under the Contract. If it receives this amount back as part of the compensation payment and in addition receives repayment of the deposit by Caltex under s.12 Frustrated Contracts Act or s.55(2A) Conveyancing Act, it will have been “unjustly enriched”.

11    Caltex concedes that if the deposit under the Contract is repayable, interest thereon is payable and is to be calculated as if the deposit had been invested in accordance with the Contract.

12 By its Cross Claim, Caltex seeks an order under s.15 Frustrated Contracts Act that the Contract for Sale be excluded from the operation of Divisions 1 and 2 of the Act or, alternatively, an order that a nil amount be substituted for the amount otherwise payable to McRoss under s.12 of the Act. In addition, it seeks damages for McRoss’ breach of contract in failing to complete the Contract by 31 May 2002, together with interest thereon.

13    There is no dispute between the parties as to the facts.

Questions for determination

14    The questions for determination may be summarised thus:

i) Did the obligation of Caltex under the Call Option Agreement to perform remediation work on the Land survive the exercise of the Call Option and the execution of the Contract for Sale?

ii) If the answer to question (i) is ‘yes’, was the obligation of McRoss to complete the Contract on 31 May 2002 conditional on performance by Caltex of its obligation to perform remediation work, or has McRoss committed a breach of contract in failing to complete by 31 May 2002?

iii) If the answer to question (i) is ‘no’, or if McRoss committed a breach of contract in failing to complete by 31 May 2002, is Caltex entitled to damages for breach of contract in an amount equal to interest on the balance of purchase price payable under the terms of the Contract from 31 May 2002 to the date of frustration, i.e., 26 September 2002, together with an amount equal to the notional cost of remediation work to the Land deducted from the amount of compensation paid to it under the Land Acquisition (Just Terms Compensation) Act .

iv) Is McRoss entitled to repayment of $825,000 under the general law or pursuant to s.55(2A) Conveyancing Act or s.12 Frustrated Contracts Act ?

v) Is McRoss entitled to damages for breach by Caltex of its obligation to invest the deposit under the Contract pending completion and, if so, is McRoss entitled to interest on the amount of such damages?

Whether obligation to remediate survived

15    Clause 6.1(b)(iii) provides that

“ [Caltex] must carry out the Remediation Works as expeditiously as practicable, but in any case, prior to the Call Option Expiry Date.”

16    The “Call Option Expiry Date” is defined to mean whichever is the later of “three years from the date of this Agreement (i.e. 27 September 2000) and thirty days from the date of Completion”. “Completion” is defined to mean “completion of the Remediation Works”.

17    The Remediation Works had not been completed by 27 September 2000 so that the “Call Option Expiry Date” was “thirty days from the date of completion of the Remediation Works”.

18    Substituting the definition of “Call Option Expiry Date” for those words in Clause 6.1(b)(iii) produces the following: “[Caltex] must carry out the Remediation Works as expeditiously as practicable, but in any case, prior to thirty days from the date of completion of the Remediation Works”. In other words, Caltex must complete the Remediation Works within thirty days after it completes the Remediation Works.

19    Most of the difficulties which this error of drafting could have produced have been bypassed because the parties agree that Caltex had not even commenced carrying out the Remediation Works by 19 April 2002 (when the Call Option was exercised), by 31 May 2002 (the date for completion specified in the Contract for Sale), or by 26 September 2002 (the date when the Land was compulsorily acquired).

20    Caltex accepts that the Call Option was validly exercised, that the Contract for Sale came into existence between it and McRoss upon exercise of the Option, and that immediately prior to exercise of the Option it was still bound by its obligations under Clause 6.1(b)(iii) of the Call Option Agreement. The question upon which the parties have joined issue is: what became of Caltex’s obligation under Clause 6.1(b)(iii) when the Call Option was exercised?

21    Clause 11.8 of the Call Option Agreement provides:

“ Non-Merger

(a) A term or condition of, or act done in connection with, this Agreement does not operate as a merger of any of the rights or remedies of the parties under this Agreement and those rights and remedies continue unchanged.

(b) Each term of this Agreement that has not been carried into effect at the termination of this Agreement survives the termination.

(c) Each term of this Agreement survives the exercise of the Call Option.”

22    Clause 3.1 of the Call Option Agreement provides that Caltex may, by a Nomination Notice, appoint a Nominee to purchase the Land upon exercise of the Call Option. Caltex concedes that, pursuant to this clause, Walker validly appointed McRoss as its Nominee. Clause 3.3 of the Call Option Agreement provides:

“ Nominee to be Bound

If [Walker] appoints a nominee under clause 3.1, the Nominee:

(a) will have the full benefit of all covenants and agreements by [Caltex] ; and

(b) will be bound by all the obligations of [Walker] ,

contained in this Agreement in substitution for [Walker] as if the Nominee had originally been named as the grantee of the Call Option in this Agreement.”

23    Mr Coles QC, who appears with Mr Villa of Counsel for McRoss, submits that the provisions of the Call Option Agreement are clear: by Clause 3.3(a) McRoss, as Walker’s Nominee, is to have the benefit of all of Caltex’s covenants under the Call Option Agreement and by Clause 11.8(c) all of those covenants, including Clause 6.1(b)(iii) survive the exercise of the Call Option.

24    Mr Harrison SC, who appears with Mr Leopold of Counsel for Caltex, submits that Clause 6.1(b)(iii) does not survive exercise of the Call Option because Special Condition 9(a)(iii) of the Contract for Sale, as a matter of construction, superseded the obligations to remediate under Clause 6.1(b)(iii) of the Call Option Agreement.

25    Special Condition 9 of the Contract provides:

“ SITE REMEDIATION

(a) The Purchaser acknowledges it is aware that:

(i) the property was previously used for the storage and distribution of petroleum products;

(ii) the property has had various levels of hydrocarbon contamination; and

(iii) the Vendor has undertaken necessary remediation work at the property.

(b) The Purchaser indemnifies and agrees to keep indemnified the Vendor against any:

(i) claim, loss or damage the Vendor may suffer; and/or

(ii) any penalty or fine under any law relating to the environment the Vendor may incur,

arising out of the use of the property following completion. This special condition will not merge on completion of this Contract.”

26    Mr Harrison submits that Special Condition 9(a)(iii) operates as a contractual agreement or acknowledgement that as at the date of the Contract, i.e., 19 April 2002, all necessary remediation work had been already completed by Caltex whether or not this was in fact the case. Further, Mr Harrison relies on Clause 10.1.5 of the printed Conditions in the Contract and on Special Condition 2(a).

27    Clause 10.1.5 is in the following terms:

“a promise, representation or statement about this contract, the property or the title, not set out or referred to in this contract”

Special Condition 2(a) provides:

“ STATE OF REPAIR ETC. OF PROPERTY

(a) The property and the services to the property is sold in their present condition and state of repair, subject to reasonable wear and tear and to all faults and defects, both latent or patent. The Purchaser will not make any objection, requisition or claim for compensation relating to the state of repair or condition of the property and the Vendor will not be required to make any renovation alteration or repair to the property.”

28    I am unable to accept this submission for the following reasons.

29    It must be remembered that the Contract, including Special Condition 9, had been annexed as a draft to the Call Option Agreement when it was executed in September 1997. No doubt the parties then thought that by the time the Call Option came to be exercised Caltex would at least have started on Remediation Work pursuant to Clause 6.1(b)(iii) of the Call Option Agreement. But it is clear, in my opinion, that the parties did not proceed either in the Call Option Agreement or in the annexed draft Contract for Sale on the footing that Remediation Work would have been completed either by the time that the option was exercised or by the time that the resulting Contract for Sale had to be completed.

30    This is evident from:

– the provisions of Clause 11.8(c) of the Call Option Agreement, which has the effect of preserving the covenant in Clause 6.1(b)(iii) beyond the coming into existence of the Contract for Sale;

– the provisions of Special Condition 10(b) of the Contract for Sale, namely:
“ [Caltex] must allow [McRoss] or its representatives or consultants, reasonable access to the property unless impracticable or unsafe due to the remediation works at the property .” [Emphasis added.]

31    In my opinion, it is clear from the underlined words in Special Condition 10(b) that the Contract expressly contemplates that Caltex may still be carrying out remediation work between the time of exercise of the Call Option and the time for completion of the resulting Contract for Sale. Caltex can only be carrying out remediation work at that time if its obligation to do so under Clause 6.1(b)(iii) of the Call Option Agreement survives exercise of the Call Option.

32    Special Condition 9 is not concerned with relieving Caltex from its contractual liability under Clause 6.1(b)(iii) of the Call Option Agreement to carry out Remediation Work. Rather, it is concerned with relieving Caltex of any liability which it might otherwise incur to third parties or to McRoss arising by reason of the residential use to which McRoss may put the Land after it becomes the owner: Special Condition 9(b). Such liability on the part of Caltex could arise if residents or others using the Land suffered injury from contamination which Caltex had negligently failed to remediate. Special Condition 9(a) contains an express acknowledgement by McRoss of the nature and origin of that liability so as to fix McRoss with knowledge of the scope of the indemnity which it is providing to Caltex under Special Condition 9(b). Seen in that context, subparagraph 9(a)(iii) is no more than an acknowledgement by McRoss that Caltex “has undertaken” the necessary Remediation Work in the sense of “has taken on”, “has committed itself to perform” or “has begun”. It would be stretching the language of subparagraph 9(a)(iii) beyond its natural meaning and beyond its intended purpose to read “has undertaken” as meaning “has completed”, so as to discharge Caltex’s obligation to remediate under Clause 6.1(b)(iii) in the face of the express provisions of Clause 11.8(c).

33    I do not think that Clause 10.1.5 of the Standard Form has any bearing on this question. That clause is concerned with promises, representations or statements which are contained neither in the Contract for Sale nor in any other contract between the parties. A printed clause in the Standard Form contract can hardly have been intended by the parties to have the effect of terminating their obligations under the Call Option Agreement, contrary to their express intention as stated in Clause 11.8(c) of that Agreement.

34    Neither do I think that Special Condition 2(a) of the Contract for Sale is relevant. As the references in that provision to “state of repair”, “wear and tear”, “fixtures, plant or equipment” and “services” clearly indicate, the clause is concerned with the condition of buildings or other structures on the Land and with their contents and the services connected to them, not with the Remediation Works referred to in Special Conditions 9 and 10(b) of the Contract for Sale.

35    For these reasons I conclude that the obligations of Caltex under Clause 6.1(b)(iii) of the Call Option Agreement to perform Remediation Work survived exercise of the Call Option.

Whether completion of Contract conditioned on Remediation

36    McRoss submits that Caltex’s obligation under the Contract for Sale was to convey to McRoss title to the land on which the Remediation Works had been performed. Caltex was not able to do so by 31 May 2002 so that it follows, says McRoss, that McRoss was entitled to refuse to complete the Contract until Caltex had performed the Remediation Work in full. I am unable to accept this submission for the following reasons.

37    Special Condition 4 of the Contract for Sale relevantly provides:

“ COMPLETION

(a) Completion of this Contract must take place on the date which is 6 weeks after the date of this Contract (‘Due Date’).

(b) It is expressly agreed by the Vendor and the Purchaser that:

(i) 14 days between (but excluding) the date of service of the notice and (and including) the date for completion specified in the notice will be reasonable and adequate time for the insertion in any notice served by one party upon the other requiring completion of this Contract. The period may include days which are not business days; and

(ii) either party may at any time withdraw the notice without prejudice to the continuing right of that party to give any further such notice.”

38    There is no other term of the Contract for Sale which expressly qualifies the obligation of McRoss under Special Condition 4(a).

39    The submission of McRoss does not depend on any term of the Contract for Sale which, it says, properly construed makes completion of the Contract conditional upon performance by Caltex of its obligations under Clause 6.1(b)(iii) of the Call Option Agreement. Rather, McRoss points to terms of the Call Option Agreement which, it submits, lead to this result.

40    Clause 6.3 of the Call Option Agreement provides:

“ Grantee to exercise Call Option

If [McRoss] does not:

(a) exercise the Call Option within 30 days of Completion; or

(b) exercises the Call Option but does not complete the Contract within 12 weeks of Completion then [sic] otherwise than due to default by [Caltex] ,

[Caltex] may terminate this agreement and the provisions of clauses 4.1(b) and (c) will apply.

Clause 4.1(c), which relates to the provision of a bank guarantee or performance bond, does not apply. Clause 4.1(b) provides:

“ PAYMENTS BY GRANTEE

4.1 First Tranche
…
(b) In addition to [Caltex’s] rights under clause 2.2(a) [which requires payment of the Call Option Fee and the First Tranche on the date of the agreement, and immediately vests the Call Option Fee, but not the First Tranche, in Caltex] if:

(i) [Caltex] terminates this Agreement as a result of the default of [McRoss] ;

(ii) [McRoss] does not exercise the Call Option within 30 days after Completion; or

(iii) [McRoss] exercises the Call Option but does not complete the Contract within 12 weeks of Completion otherwise than due to default by [Caltex] ,

the First Tranche will not be repayable to [McRoss] and will immediately vest in [Caltex] .”

In Clauses 6.3 and 4.1(b) of the Call Option Agreement “complete the Contract” means complete the Contract for Sale and “within 12 weeks of Completion” means within twelve weeks of the certified completion of the Remediation Works.

41    The effect of Clauses 6.3 and 4.1(b) of the Call Option Agreement, McRoss says, is that if the Call Option has been exercised and if McRoss fails to complete the resulting Contract for Sale within twelve weeks after the Remediation Works have been concluded, Caltex may terminate the Call Option Agreement and forfeit the sum of $825,000 paid under the Call Option Agreement but treated as the deposit under the Contract for Sale. This implies, it submits, that the obligation on the part of McRoss to complete the Contract for Sale arises only when the Remediation Works are concluded.

42    There are a number of difficulties with this submission. The first is that Clauses 6.3 and 4.1(b) of the Call Option Agreement are not incorporated as terms of the Contract for Sale: they are terms of a separate contract which may continue to exist side-by-side with, but independent from, the Contract for Sale. The second is that the rights conferred by Clauses 6.3 and 4.1(b) are rights conferred on Caltex: nothing is said about whether or not McRoss is obliged to complete the Contract for Sale before the Remediation Works are concluded. The third is that these clauses expressly deal only with Caltex’s rights or McRoss’ obligations under the Call Option Agreement, not with Caltex’s rights under the Contract for Sale.

43    For example, what would happen if McRoss exercised the Call Option, Caltex completed the Remediation Work but McRoss failed to complete within twelve weeks thereafter? Clause 4.1(b)(iii) of the Call Option Agreement provides that the First Tranche, which has become the deposit under the Contract, vests in Caltex. The clause does not say that the Contract for Sale is terminated and the deposit is forfeited to Caltex under the Contract. It may be, in such a case, that McRoss would go on to complete the Contract, although later than twelve weeks from completion of the remediation works. In that event, there could be no claim by McRoss to return of the deposit.

44    It may be, however, that although McRoss fails to complete the Contract within twelve weeks of completion of the Remediation Works it is not thereby in breach of Special Condition 4(a) of the Contract because McRoss has exercised the Call Option less than six weeks prior to completion of the Remediation Work. In that circumstance, could Caltex terminate the Contract and forfeit the deposit in reliance on Clause 4.1(b)(iii) of the Call Option Agreement when McRoss has not committed any breach of the Contract for Sale. I do not think so.

45    It seems that the interaction between Clauses 6.3 and 4.1 of the Call Option Agreement and the terms of the Contract for Sale have not been fully worked out and provided for in those two documents. In some factual circumstances which could arise, there may be irreconcilable conflict between the two agreements but not in other circumstances. The factual situation provided for in Clauses 6.3 and 4.1(b)(iii) of the Call Option Agreement has not arisen in the present case. For all of the foregoing reasons, I do not regard these clauses as permissible aids to the construction of the terms of the Contract for Sale in the events which have happened.

46    Further, I do not think that the term for which McRoss contends can be implied in the Contract for Sale in accordance with the principles discussed in BP Refinery (Westernport) Pty Ltd v Shire of Hastings ((1977) 180 CLR 266). Firstly, such a term is contradicted by the express provisions of Special Condition 4(a) of the Contract. If the parties had intended that completion of the Contract for Sale should be conditional upon performance by Caltex of its remediation obligations under the Call Option Agreement, one would have expected them to qualify expressly the obligation in Special Condition 4(a) of the Contract accordingly.

47    Secondly, I cannot see how the implication of the term is necessary to give business efficacy to the Contract for Sale. Clause 2.1 of the Call Option Agreement, read with the definitions of “Call Option Period”, “Call Option Commencement Date” and “Call Option Expiry Date”, entitled McRoss to exercise the Call Option at any time after three months from the date of the Call Option Agreement until the “Call Option Expiry Date”, i.e. from 2 December 1997 until the later of 2 September 2000 or thirty days after completion of the Remediation Works. As the Remediation Works would undoubtedly have taken more than three months to complete and there is no obligation upon Caltex in the Call Option Agreement to undertake the Works forthwith and to complete them by 2 December 1997, it was quite possible for McRoss to exercise the option and thereby enter into the Contract for Sale with Caltex on 2 December 1997, well before the Remediation Works had even commenced. The Contract for Sale undoubtedly provided, nevertheless, for completion within six weeks. It must, therefore, have been in the contemplation of the parties that McRoss could become bound to complete the Contract for Sale well before Caltex had finished carrying out Remediation Work in accordance with its obligation under the Call Option Agreement. By Clause 11.8 of the Call Option Agreement that obligation was made to survive the coming into existence of the Contract for Sale, so that McRoss would have had a remedy in damages for breach of contract if Caltex had breached Clause 6.1(b)(iii) even though McRoss itself had already completed the Contract for Sale in accordance with Special Condition 4(a).

48    For these reasons, I am of the opinion that McRoss was not entitled to defer completion of the Contract for Sale until Caltex had carried out all necessary Remediation Work to the Land. Accordingly, the failure of McRoss to complete the Contract for Sale by 31 May 2002 was a breach by it of Clause 4(a) of that Contract.

Whether Caltex entitled to damages for breach of contract

49    Caltex claims damages for McRoss’ breach of contract in failing to complete the Contract for Sale by 31 May 2002. Although Special Condition 4(b) entitled Caltex to give to McRoss at any time after 31 May 2002 a Notice to Complete within fourteen days, Caltex never gave such a Notice nor did it otherwise purport to rescind the Contract before the Contract was frustrated on 26 September 2002.

50 Section 7 of the Frustrated Contracts Act provides:

“ Promise not performed

(1) Where a promise under a frustrated contract was due to be, but was not, performed before the time of frustration, the promise is discharged except to the extent necessary to support a claim for damages for breach of the promise before the time of frustration.

(2) Subsection (1) does not affect a promise due for performance before frustration which would not have been discharged by the frustration if it had been due for performance after the time of frustration.”

Section 8 provides:

“ Damages assessed after frustration

Where a contract is frustrated and a liability for damages for breach of the contract has accrued before the time of frustration, regard shall be had, in assessing those damages after that time, to the fact that the contract has been frustrated.”

51 Caltex submits that if McRoss had completed the Contract for Sale on 31 May 2002 in accordance with Special Condition 4(a), Caltex would have had the full benefit of the purchase price prior to frustration of the Contract on 26 September 2002: it would have retained the deposit of $825,000 and would have received the balance of the purchase price, $15,675,000, on 31 May 2002. Instead, Caltex has received the deposit of $825,000 plus $14,375,00 in compensation following the compulsory acquisition of the Land, resulting in a shortfall to it of $1.3M between what it would have received had Special Condition 4(a) of the Contract been performed and what it has actually received by way of compensation. It claims this amount as common law damages for breach of contract on the basis that its right of action had accrued prior to frustration of the Contract within the meaning of s.7(1) Frustrated Contracts Act.

52    In response, McRoss submits that:

– Caltex’s claim is for damages for loss of its bargain under the Contract for Sale;

– as a matter of law, the vendor in a contract for sale of land cannot recover damages against the purchaser for loss of the vendor’s bargain unless and until the vendor has validly brought the contract to an end for the purchaser’s breach;

– as at 26 September 2002, when the Land was compulsorily acquired, the Contract for Sale was still on foot, Caltex never having purported to terminate it in accordance with the mechanism provided by Special Condition 4(c);

– Caltex cannot, therefore, claim damages for the loss of its bargain;

– the only damages to which Caltex would be entitled are damages for delayed performance of McRoss’ obligation to complete on 31 May 2002;

– the right to damages for delayed performance had accrued prior to frustration of the Contract for Sale but frustration did not convert that right of damages for delayed performance into a right to damages for non-performance;

– Caltex has not proved any loss resulting from delayed performance of the Contract so that it is entitled only to nominal damages for McRoss’ breach of Special Condition 4(a).

53    In my opinion, the submissions of McRoss are correct. In Upper Hunter Timbers Pty Ltd v Forestry Commission of New South Wales [1999] NSWCA 125, the appellant and the respondent had entered into an agreement whereby the respondent permitted the appellant to harvest timber from a State Forest. The appellant harvested timber for some time but the respondent later refused to permit it to continue to do so. While the contract was still on foot, further performance of it was frustrated by the coming into effect of legislation whereunder the State Forest became a National Park. The appellant claimed loss of bargain damages. Sheller JA, with whom Priestley and Stein JJA agreed, held that loss of bargain damages are only recoverable if the contractual obligation of the innocent party has been brought to an end by the wrongful conduct of the guilty party. This is so because there is no loss of bargain while the contract remains on foot. Further, where a contract is brought to an end by frustration, neither party is guilty of wrongdoing which brought about the loss of the bargain for both of them so that neither party is liable to the other for any damages that may ensue from the loss of the bargain: see his Honour’s discussion at paras.48 to 50; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245, at 260 per Mason CJ, and at 273 per Gaudron J; Heyman v Darwins Ltd [1942] AC 356, at 399.

54    In the present case, the Contract for Sale did not come to an end because of McRoss’ breach of Special Condition 4(a): it came to an end because the Land was compulsorily acquired and further performance was thereby frustrated. At that time, Caltex’s cause of action for damages for loss of bargain had not accrued. Yet, in its Cross Claim, Caltex seeks such damages because it claims the difference between what its bargain under the Contract for Sale would have given it and what it has received in compensation for the Land. In accordance with the law as stated in Upper Hunter Timber and in the authorities therein cited, Caltex is not entitled to such damages.

55    Caltex is, however, entitled to damages for any loss which it has suffered by reason of the delay by McRoss in performing its obligations under Special Condition 4(a). Caltex must prove such damages but it has not done so. It is, therefore, entitled only to nominal damages for breach of contract.

Whether Caltex entitled to interest

56    Caltex claims liquidated damages for breach of Special Condition 4(a) in accordance with Special Condition 4(c), which provides:

“ COMPLETION

(c) If completion does not take place on or before the Due Date for any reason not attributable to the Vendor, then without prejudice to all other remedies of the Vendor:

(i) the Purchaser must pay on completion to the Vendor by way of liquidated damages interest on the balance of the purchase money at the rate of 12% per annum calculated from (but excluding) the Due Date until the date of completion ; and

(ii) the Purchaser will not be entitled to require the Vendor to complete this Contract unless such interest is paid to the Vendor on completion and it is an essential term of this Contract that the interest is paid.”

57    As Mr Coles QC rightly submits, interest under Special Condition 4(c) is payable only upon completion of the Contract for Sale. If completion does not occur and cannot occur because the Contract has been frustrated, then the liability of McRoss to pay interest on the balance of the purchase price never arises.

58    A somewhat similar situation arose in Carpenter v McGrath (1996) 40 NSWLR 39. The purchasers failed to complete a Contract for Sale of Land after time had been made of the essence by a Notice to Complete. The vendors rescinded and claimed damages, including interest under a clause of the contract which provided that “the purchaser will either on prior demand by the vendor or on completion pay to the vendor interest on the balance of purchase moneys payable hereunder as and from the date fixed for completion (at a stipulated rate)”.

59    Clarke JA said at p.45:

“In principle the interest would not, in my opinion, be allowable. Once the contract had been rescinded the respondents could not have sued for the contract price. They were relegated to a claim in damages for loss of their bargain and consequential expenses. The interest payable under cl 24(b) operates to increase the amount payable on completion and, as the whole of the purchase money is not claimable, it is difficult to see upon what basis the interest payable on the purchase money could be claimable.”

The reasoning of Sheller JA at pp.59-60 was to the same effect.

60    Accordingly, in my opinion, Caltex’s claim for interest under Special Condition 4(c) of the Contract fails.

61    Although the foregoing is sufficient to dispose of Caltex’s claim for interest, I should add for the sake of completeness that McRoss asserted that, even if Caltex was otherwise entitled to interest under Special Condition 4(c), that provision was unenforceable as a penalty.

62    McRoss tendered tables showing interest rates prevailing at various times but not at the time when the Call Option Agreement was executed, which was when the terms of the Contract for Sale were settled. No matter when the Call Option was exercised, McRoss was bound to enter into a Contract for Sale in the terms which had been annexed to the Call Option Agreement.

63    The party asserting the invalidity of a contractual provision as being a penalty rather than a genuine pre-estimate of liquidated damages bears the onus of proving that assertion: Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 at 1447; Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214, para.106. McRoss has not discharged that onus. Accordingly, I would not have held that Special Condition 4(c) is unenforceable as a penalty.

Whether deposit should be refunded

64    The submissions of Mr Coles QC may be summarised thus:

– upon frustration of the Contract for Sale on 26 September 2002, the consideration for which the deposit had been paid, i.e. the transfer of the title to the Land, failed totally. The deposit is, therefore, repayable under the general law: Foran v Wight (1989) 168 CLR 385 at 438 per Deane J;

– there is no stipulation in the Call Option Agreement or in the Contract for Sale which requires the deposit to be forfeited to Caltex except where the Contract for Sale is terminated for breach by McRoss – and that did not occur;

– the position of McRoss is analogous to the position of a purchaser under a contract for sale which has been mutually abandoned: Mr Coles relies on cases such as Summers v The Commonwealth (1918) 25 CLR 144, at 153; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, at 434; and Lombok Pty Ltd v Supetina Pty Ltd (1987) 14 FCR 226;

– alternatively, McRoss is entitled to repayment of the deposit in accordance with s.12 Frustrated Contracts Act ;

– alternatively, the Court should exercise its discretion under s.55(2A) Conveyancing Act in favour of ordering a return of the deposit;

– if Caltex is ordered to repay the deposit, McRoss is entitled to interest thereon from the date of exercise of the Call Option until 26 September 2002 when the Contract was frustrated, in accordance with the provisions of Special Condition 6 of the Contract for Sale.

65    By its Defence, Caltex:

– denied that the deposit was refundable to McRoss upon frustration of the Contract for Sale;

– did not admit that the deposit was a payment of money to Caltex in return for the performance of the Contract within the meaning of s.12 Frustrated Contracts Act ;

– alleged that McRoss should not be entitled to the benefit of s.12 Frustrated Contracts Act when its own breach of Special Condition 4(a) of the Contract for Sale led to frustration;

– alleged that return of the deposit to McRoss would unjustly enrich it.

66 By its Cross Claim, Caltex claimed an order under s.15 Frustrated Contracts Act that the Contract for Sale be excluded from the operation of s.12 Frustrated Contracts Act.

67    Mr Harrison SC did not, either in his written submissions or in his oral submissions, seek to support the allegations in Caltex’s Defence and Cross Claim as to return of the deposit with any substantial argument.

68    In my opinion, the Contract for Sale having been frustrated, the deposit has been paid for a consideration which has totally failed. In Foran v Wight the purchasers under a contract for sale of land validly rescinded for breach by the vendors. Deane J said at 438:

“Upon rescission, the purchasers were entitled to obtain restitution of the deposit which they had paid. Their claim for the return of the deposit was not founded on the rescinded contract. Nor did it represent a claim for damages for the vendors’ breach of its terms. It was a claim founded in the equitable notions of fair dealing and good conscience which require restitution of a benefit received as, or as part of, the quid pro quo for a consideration which has failed (cf per Lord Wright, Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at 64–6; Muschinski v Dodds (1985) 160 CLR 583 at 618–20; 62 ALR 429). If it be necessary to clothe that claim in a nomenclature, the appropriate one in a modern context is ‘restitution’ for, or of, ‘unjust enrichment’.”

See also per Brennan J at 432, Dawson J at 455 and Gaudron J at 459, all of whom preferred to found the claim to return of the deposit on quasi-contract rather than restitution. While the nomenclature of the basis in law for repayment in such circumstances has been much discussed in the authorities and in academic circles, there has been no dissent as to the correctness of the result in Foran v Wight .

69    Cases such as Summers v The Commonwealth, DTR Nominees Pty Ltd v Mona Homes Pty Ltd and Lombok Pty Ltd v Supetina Pty Ltd show that the principle applied in Foran v Wight applies not only where the purchaser has rescinded a contract for the vendor’s breach, but also where the contract has been brought to an end by mutual abandonment. In my opinion, there is no reason why the principle should not be applicable when the contract has been brought to an end by frustration.

70 Although the foregoing reasons are sufficient to determine McRoss’ claim to return of the deposit in its favour, I should add that I see nothing in the circumstances of the case which would have moved me to exercise the discretion under s.55(2A) Conveyancing Act against ordering repayment of the deposit by Caltex. As Bryson J said in Lucantonio v Ciofuli [2003] NSWSC 1058 at para.81, s.55(2A) Conveyancing Act “… confers on the Court, using the words ‘the Court may, if it thinks fit,’ a wide but not unlimited discretion to order repayment of a deposit. There must be some substantial ground or good reason, relevant to the parties’ contractual relationship, for the Court to think fit to order repayment.”

71 In the exercise of discretion under s.55(2A) I have had regard to the following circumstances.

72 First, the Contract for Sale was not brought to an end through breach by McRoss. Caltex could have served a Notice to Complete after 31 May 2002 but it did not. Second, Caltex has received compensation for the compulsory acquisition of the Land on the basis that it was the owner of the land and, as such, liable to carry out Remediation Work under Part 3 Div.3 of the Contaminated Land Management Act 1997 (NSW). Caltex agreed to accept the amount of compensation calculated on this basis.

73    Compensation was determined by valuing Caltex’s interest in the Land at an amount equal to the purchase price under the Contract for Sale ($16,500,000), deducting therefrom an amount of $1,700,000 as the notional cost of Remediation Work which Caltex was obliged to carry out, and a further sum of $425,000 as a risk allowance on the cost of Remediation Work, resulting in an amount paid to Caltex of $14,375,000. It will be seen that, in effect, Caltex has received by way of compensation the full purchase price of the Land under the Contract for Sale (including the deposit) less the notional cost of Remediation Work which it would have had to carry out, either under the Call Option Agreement, or under its statutory obligations. In those circumstances, I do not see why it would be just or equitable to permit Caltex to retain the deposit paid under the Contract for Sale.

74    Third, I take into account that McRoss has made a claim to compensation in consequence of the resumption of the Land on the basis that it has been deprived of the benefit of the Contract for Sale. As at the date of the trial, that claim had not been determined by the Land & Environment Court. This Court cannot know upon what basis the Land & Environment Court will award compensation, if any, to McRoss. It may be that if this Court orders Caltex to repay the deposit to McRoss, the Land & Environment Court will take that matter into account in assessing whatever compensation may be payable to McRoss.

75 The circumstances which I have recounted above are sufficient, in my view, to deny Caltex the relief under s.15 Frustrated Contracts Act which it claims in its Cross Claim. Section 12 Frustrated Contracts Act would, therefore, apply to require Caltex to repay the deposit.

76    For these reasons, the deposit paid under the Contract for Sale must be repaid by Caltex to McRoss.

77 Caltex does not dispute that, if it must repay the deposit, it must pay interest thereon from the date of the Contract for Sale until the date of frustration, in accordance with Special Condition 6. Caltex has made no submission as to why it should not pay interest on the amount payable under s.94 of the Supreme Court Act 1970 (NSW) at Supreme Court rates until the date of judgment.

Orders

78    The orders which I propose to make are as follows:

(1) There will be judgment for McRoss on its Amended Statement of Claim in the amount of $825,000 together with a sum equal to the interest payable under Special Condition 6 of the Contract for Sale from 19 April 2002 until 26 September 2002.

(2) There will be an order for interest on the amount referred to in Order (1) under s.94 Supreme Court Act from 27 September 2002 until the date of judgment, calculated in accordance with the Supreme Court rates.

(3) There will be an order that McRoss pay to Caltex nominal damages in the sum of $1.00 for McRoss’ breach of Special Condition 4(a) of the Contract for Sale.

(4) The Cross Claim of Caltex will otherwise be dismissed.

79    I will stand the proceedings over for a short time to enable the parties to bring in Short Minutes of Order reflecting these reasons. I will then hear argument, if any, as to costs.

– oOo –

Last Modified: 03/23/2004