Ruthol Pty Ltd v Mills

[2003] NSWCA 56

NEW SOUTH WALES COURT OF APPEAL

CITATION:     RUTHOL PTY LTD v MILLS & ORS [2003]  NSWCA 56

FILE NUMBER(S):
40387/02

HEARING DATE(S):    3 February 2003

JUDGMENT DATE:      26/03/2003

PARTIES:
Ruthol Pty Limited - Appellant
Brian Mills - First Respondent
Elaine Mills - Second Respondent
Tricon (Aust) Pty Ltd - Third Respondent

JUDGMENT OF:        Meagher JA Sheller JA Cripps AJA   

LOWER COURT JURISDICTION:       Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):     2101/99, 4858/01

LOWER COURT JUDICIAL OFFICER:   Palmer J

COUNSEL:
B W Walker SC/R P L Lancaster - Appellant
N A Cotman SC/G B Colyer - First and Second Respondents
M W Young - Third Respondent

SOLICITORS:
David Landa Stewart Lawyers - Appellant
McCabe Terrill Lawyers - First and Second Respondents
Grahame Jackson & Associates - Third Respondent

CATCHWORDS:
Equity - Priority - Equitable interests - Maxim that no party may take advantage of its own wrong - Third party - Purchaser of equitable interest for value without notice
Leases and tenancies - Options - Options to renew - Options to purchase - Whether option to renew had been exercised
Contract - Options - Options to purchase property - Exercise of option - Conditions - Misrepresentation - Priority between holder of option and third party acquiring equitable interest bona fide for value and without notice

LEGISLATION CITED:
Fair Trading Act 1987

DECISION:
1  Appeal allowed
2  Judgments and orders of Palmer J of 19 April 2002 set aside except as to costs
3  The appellant to pay the costs of first and second respondents of the appeal
4  The second and third respondents to pay the third respondent's costs of the appeal but to be indemnified in respect of the amount of those costs by the appellant
5  In both matters No 2101/99 and No 4858/01, order that the parties bring in short minutes of order in accordance with these reasons for judgment.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40387/02
SC 2101/99;  4858/01

MEAGHER JA
SHELLER JA
CRIPPS AJA

RUTHOL PTY LTD v MILLS & ORS

Ruthol leased a property to Alphega for a term of five years with an option to renew.  Alphega had difficulty keeping up with rent increases and it seemed unlikely that it would exercise the option.  Ruthol granted Mr and Mrs Mills an option to purchase the property for $490,000.  This option was conditional on Alphega not exercising its option.

In discussions with Alphega it was signalled that Alphega were also interested in purchasing the property and a figure of $610,000 was mentioned.  Ruthol then entered into a series of discussions with Alphega aimed at convincing Alphega to exercise the option to renew, despite Alphega's reluctance to do so because of certain conditions contained in the lease.

Alphega purported to exercise the option but the renewed lease was never executed.  Nevertheless, Ruthol's solicitors wrote to Mr and Mrs Mills's solicitors telling them that Alphega had exercised its right to renew under the lease.  Mr and Mrs Mills did not exercise the option to purchase within the option period.    Alphega complained to Ruthol about the handling of the negotiations to renew the lease and asserting that they were on a month-to-month lease.  Mr Manoy, a director of Ruthol, disputed that Alphega were on a monthly tenancy.

Three months later, Ruthol served on Alphega a notice to quit, which asserted that Alphega was "holding over on a month to month tenancy".  Ruthol then leased the property to Tricon.  This lease contained an option to purchase.  On various dates in 2001, Tricon gave notices of the exercise of its option to purchase, most of which were rejected as invalid but the fifth of which was accepted and as a result of that notice contracts were exchanged between Ruthol and Tricon.  Tricon had become aware of the Millses' option only after it had entered into the lease with Ruthol but before it exercised the option contained therein.

HELD (per Sheller JA; Meagher JA and Cripps AJA agreeing):

1. That a trial Judge required to make a choice between acceptance of the evidence led on behalf of one party and the evidence led on behalf of another as to the truth of a fact should pay regard to the form of jury direction approved in Jones v Dunkel (1959) 101 CLR 298. However, in this case, the failure of the trial Judge to pay such regard did not undermine the reasoning that led him to make the findings he did.

2. That the evidence did not point to a conclusion contrary to the one that Palmer J came to at first instance, viz. that Alphega had not exercised its option to renew the lease.

3. That Alphega did not give to Ruthol notice of its desire to take a renewal of the lease upon the same terms and conditions as in the original lease and the Millses' option was accordingly not terminated at any time prior to the expiry of the option period.

4. That the maxim that a party may not take advantage of its own wrong does not apply so as to affect the rights or interests of an innocent third party.  The trial Judge erred in applying this principle to give priority to the Millses' equity over Tricon's equitable interest: Latec Investments Limited v Hotel Terrigal Pty Limited (In liquidation) (1965) 113 CLR 265 followed; Hooper v Lane (1859) 6 HL Cas 443 approved. Tricon's equitable interest therefore took priority over Mr and Mrs Mills's equity to proceed against Ruthol for breach of contract in reliance on their late exercise on their option to purchase.

Legislation:
Fair Trading Act 1987
Cases cited: 

Alghussein Establishment v Eton College [1988] 1 WLR 587
Allesch v Maunz (200) 203 CLR 172
Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) FCA 183
Burns Philp Trustee Co Limited v Viney [1981] 2 NSWLR 216
Butler v Fairclough (1917) 23 CLR 78
Cabal v United Mexican States (2001) 108 FCR 311
Green v Woodroffe (1828) Dowling Select Cases Vol 1
Hooper v Lane (1859) 6 HL Cas 443;  10 ER 1368
Houldsworth v City of Glasgow Bank (re London Celluloid Company (1888) 39 CH D 190
Jones 1880) 5 App Cas 317
In v Dunkel (1959) 101 CLR 298
Lapin v Abigail (1930) 44 CLR 166
Latec Investments Limited v Hotel Terrigal Pty Limited (In liquidation) (1965) 113 CLR 265
Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57
Mitchell v Pattern Holdings Pty Ltd (2002) NSWCA 212
Oakes v Turquand & Anor (1867) LR 2 HL 325
P Samuel & Co Ltd v Dumas [1924] AC 431
Phillips v Phillips (1861) 4 De G F & J 208;  45 ER 1164
S and Y Investments (No 2) Pty Ltd (In Liquidation) v Commercial Union Assurance Company of Australia Ltd (1986) 44 NTR 14
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
The New Zealand Shipping Company Ltd v The Societe des Ateliers et Chantiers de France [1917] 2 KB 717
White v Garden (1951) 10 CB 919

ORDERS

1.            Appeal allowed;

2.Judgments and orders of Palmer J of 19 April 2002 set aside except as to costs;

3.The appellant to pay the costs of first and second respondents of the appeal;

4.The second and third respondents to pay the third respondents’ costs of the appeal but to be indemnified in respect of the amount of those costs by the appellant;

5.In both matters No 2101/99 and No 4858/01, order that the parties bring in short minutes of order in accordance with these reasons for judgment.

**********

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40387/02
SC 2101/99;  4858/01

MEAGHER JA
SHELLER JA
CRIPPS AJA

Wednesday, 26 March 2003

RUTHOL PTY LIMITED v MILLS & ORS

Judgment

1. MEAGHER JA:  I agree with Sheller JA.

2. SHELLER JA: 

   Introduction

   By a registered lease E542841 (the lease) dated 28 May 1992 Ruthol Pty Limited (Ruthol) leased to Alphega Management Services Pty Limited (Alphega) land known as 258-260 Condamine Street, Manly Vale (the Manly Vale property) for a term of five years from 1 July 1992.  The amount of the yearly rent and a formula for annual increases of the rent after the first twelve months of the lease were stipulated.  Clause 4.01 of the lease was in these terms:

   “OPTION:  If the Lessee shall desire to take a renewed Lease of the Demised Premises for a further term of five (5) years from the expiration of the term of this Lease and shall give to the Lessor not less than three (3) months and not more than six (6) months previous notice in writing thereof and shall in the meantime duly and punctually pay the rent reserved by this Lease and all other moneys payable pursuant to this Lease at the times and in the manner herein appointed for payment thereof and shall not at the date of the notice nor at the expiration of the term hereof be in breach of any of the covenants conditions provisos and agreements by and on the part of the Lessee expressed or implied in this Lease except to the extent to which any breach non-observance or non-performance may have been waived or excused by the Lessor in writing the Lessor shall at the cost and expense of the Lessee lease to the Lessee (and the Lessee shall take as tenant) the Demised Premises for a further term of five (5) years at the yearly rentals to be determined in accordance with the First Schedule hereto and otherwise on the same terms and conditions as are herein contained subject to clause 4.02 hereinafter appearing.”

   I shall refer to this as Alphega’s option.  The terms of cl 4.02 are not material to this appeal.

3. On 25 February 1997, by an option deed, Ruthol granted Brian Mills and Elaine Mills (Mr and Mrs Mills) an option to purchase the Manly Vale property.  The grant of option was in the following terms:

   “2.          GRANT OF OPTION

   In consideration of the payment of the Option Fee by the Grantee to the Grantor, the receipt of which the Grantor acknowledges, the Grantor grants to the Grantee the option to purchase the Property for the Purchase Price subject to the provisions of this Deed.

   3.            OPTION PERIOD

   The Option may be exercised by the Grantee at any time during the Option Period unless terminated earlier by the Grantor in the event of a breach by the Grantee of the terms of this Deed.

   4.            EXERCISE OF OPTION

   This Option may be exercised by the Grantee at any time during the Option Period by delivery to the Grantor (or its solicitors) at the same time of:

   (a)(notice) a notice in writing in the form attached to this Deed and marked ‘A’ that the Grantee exercises the Option;

   (b)(Deposit) a cheque for the Deposit, drawn in favour of the person named as depositholder in the Contract;  and

   (c)(Contract) a counterpart of the Contract:

   (i)duly executed by the Grantee personally;  and

   (ii)          completed by the insertion of:

   A.the name, facsimile number and address of the solicitors  for the Grantee as the Grantee’s solicitor;  and

   B.the Exercise Date as the date of the Contract.

   5.            CONTRACT

   5.1          Existence of Contract

   Upon the Exercise Date there shall come into existence between the Grantor and the Grantee an agreement for the sale and purchase of the Property upon the terms and conditions set out in the Contract.”

   “Contract” meant the contract attached to the Deed of Option.  “Purchase Price” meant $490,000.  “Option Period” was defined to mean a period commencing on and from 7 April 1997 and expiring at 5 pm (Sydney time) on 30 June 1997 (or as extended in accordance with cl 9).  The period was never extended.  I shall refer to this as the Mills option to purchase.

4. In the option deed “lease” was defined to mean the lease E542841 to Alphega.  Clause 11 of the option deed provided:

   “LEASE

   Despite anything in this Deed, the parties acknowledge that:

   (a)(non-exercise of option to renew) the Option shall be subject to and conditional upon the non-exercise, by the lessee under the Lease, of the right to renew contained in the Lease (‘Right to Renew’) by 7 April 1997;

   (b)(refund of Option Fee and Application Fees) if the Right to Renew is exercised on or before 7 April 1997, then:

   (i)the Option shall be of no effect and any rights under this deed vested in either party shall be at an end:  and

   (ii)the Option Fee paid by the Grantee to the Grantor pursuant to this Deed, together with any council fees paid to the Council in relation to the Grantee’s Application, shall be refunded to the Grantee by the Grantor within 21 days of the Grantors’ notification by the lessee under the Lease that it is exercising its Right to Renew.”

5. On 21 March 1997 Ruthol’s solicitors, David Lander, Stewart & Co (DLS) wrote to Mr and Mrs Mills’s solicitors, McCabe Brown, telling them that Alphega had exercised its right to renew under the lease.  Mr and Mrs Mills did not exercise the option to purchase within the option period. 

   Proceedings by Mr and Mrs Mills

6. Mr and Mrs Mills began proceedings against Ruthol in the Equity Division by a statement of claim dated 19 May 1999 which was later amended.  In its amended form Mr and Mrs Mills claimed that on 2 July 1998 Ruthol’s solicitor (Barry Milch of DLS) had made a statutory declaration in which he declared that Alphega had not exercised its option to renew.  A director of Ruthol, Colin Manoy (Mr Manoy), had arranged, so Mr and Mrs Mills alleged, to send to Mr and Mrs Mills a copy of a letter executed by a director of Alphega, Nicole Blakeman (Mrs Blakeman), in which she purported to exercise the option “as proof of the representation that the option to renew had been exercised in accordance with cl 4.01 of the lease”.  Mr and Mrs Mills alleged that this representation was false.  They said further that until about late January 1999 they accepted the truth of the facts contained in the representation and as a consequence and in reliance upon this reasonably believed that they were not entitled to exercise the option.  For that reason they did not seek to exercise it during the option period.  They claimed to be entitled to an extension of the period within which they could exercise the option. 

7. On or about 3 March 1999 Mr and Mrs Mills purported to exercise the option out of time by paying the deposit of $49,000 under the contract and otherwise complying with the terms of the deed with the exception of the term regarding time.  On 5 March 1999 DLS wrote back to Mr and Mrs Mills’s solicitors, now McCabes, denying that Ruthol had any liability to them under the terms of the deed of option or otherwise, not accepting the purported exercise of the option and returning the attached contract, deposit cheque and notice of exercise of option to them.  Amongst other things they sought an order for specific performance of the deed of option between themselves and Ruthol.

8. By its defence Ruthol alleged that on 18 March 1997 Alphega had purported to exercise the option to renew and that on 21 March 1997 Ruthol had advised Mr and Mrs Mills that Alphega had exercised its option to renew.  In short, Ruthol claimed that the condition of non-exercise of Alphega’s option contained in cl 11 (a) of the option deed was not satisfied and accordingly under cl 11 (b)(i) the option was of no effect.

   Tricon’s proceedings

9. In addition to the proceedings begun by Mr and Mrs Mills, Tricon (Aust) Pty Limited (Tricon) took proceedings by summons dated 3 October 2001 against Ruthol and Mr and Mrs Mills, claiming an order that Ruthol transfer the Manly Vale property to it and an order that a caveat lodged on behalf of Mr and Mrs Mills be withdrawn.  Alternatively, Tricon claimed damages against Ruthol for breach of contract.

10. On 6 May 1998 Ruthol had leased the Manly Vale property to Tricon for a term of five years from 1 July 1998.  On 30 June 1998 Alphega vacated the Manly Vale property.  The Tricon lease contained an option to purchase exercisable during the first three years of the term.  The purchase price increased from $615,000 if the option was exercised during the first year of the term, to $625,000 if it was exercised during the second year, and to $640,000 if it was exercised during the third year.  The statutory declaration made by Mr Milch that Alphega’s option had not been exercised was attached to the Tricon lease.  Tricon entered into the lease and went into occupation with no knowledge of Alphega’s option and of the facts and circumstances giving rise to the claim by Mr and Mrs Mills.  In late 1998 and early 1999 Tricon spent a little over $250,000 in improving, extending and fitting out the property in order to make it suitable for carrying on its business.  On various dates in 2001 Tricon gave notices of the exercise of its option to purchase the Manly Vale property.  These notices were rejected as invalid.  But on 30 May 2001 Tricon forwarded a fifth notice of exercise as a result of which contracts were exchanged on 7 June 2001.  A caveat lodged on 3 March 1999 by Mr and Mrs Mills prevented completion of this contract and explains the proceedings taken by Tricon.

    Hearing

11. The proceedings were heard together in March 2002 by Palmer J who gave judgment on 15 April 2002 for Mr and Mrs Mills entitling them to specific performance or damages for breach of contract at their election and for Tricon entitling it to specific performance or damages for breach of contract according to the election of Mr and Mrs Mills.

12. At the trial the principal issues were:

    (a)whether Alphega validly exercised its option to renew the lease;

    (b)if not, whether Mr and Mrs Mills effectively exercised the Mills option to purchase, although out of time.

13. Satellite issues about whether Mr and Mrs Mills retained an equitable interest in the Manly Vale property and if so whether it ranked in priority to Tricon’s equitable interest were also agitated. 

14. In the proceedings brought by Mr and Mrs Mills, Palmer J made an order for specific performance of a contract of sale dated 3 March 1999 between Mr and Mrs Mills and Ruthol and ordered Ruthol to pay their costs.  In the proceedings begun by Tricon, his Honour gave and made the following declarations and orders:

    “DECLARE THAT:

    1.[Mr and Mrs Mills’s] prior equitable interest in the real property described in Folio Identifiers 1/126256 and B/369309 (‘the real property’) prevails over the [Tricon’s] subsequent equitable interest in the real property.

    2.Upon registration as registered proprietors of the real property, [Mr and Mrs Mills] will hold their legal title to the real property subject to [Tricon’s] registered lease numbered 5110834G.

    3.[Tricon] is entitled to retain the deposit of $64,000.00, plus all of the interest earned thereon, paid to [Ruthol] pursuant to the Contract for the sale of the real property between [Tricon] and [Ruthol] dated 7 June 2001.

    ORDER THAT:

    4.[Ruthol] pay [Tricon] damages in the sum of $431,275.86 within 28 days.

    5.[Ruthol] pay [Tricon’s] and [Mr and Mrs Mills’s] costs of these proceedings.”

15. Ruthol appealed in both the proceedings begun by Mr and Mrs Mills and the proceedings begun by Tricon.  The notice of appeal sought an order that Palmer J’s judgment be set aside but did not stipulate any alternative declarations or orders. 

    Factual background

16. According to Mrs Blakeman’s evidence by the early part of 1997, Alphega had been experiencing difficulties in paying the rent for the property.  She claimed that the annual rent increases led to a situation where Alphega was continually in arrears.  In early March 1997, Dr Graeme Harris, who had been a director of Alphega until disqualified by reason of his bankruptcy, and was a guarantor together with Mr Steve Gracie of Alphega’s due performance of the terms and conditions of the lease, Mrs Blakeman’s husband Kerry and Mrs Blakeman met with Mr Manoy.  At that meeting Dr Harris said words to the effect:

    “There is no way that we will be entering into a new lease unless you get rid of the automatic annual rent increases and we will need to review the rent levels.”

17. Dr Harris and Mrs Blakeman raised the possibility of Alphega buying the property from Ruthol.   $610,000 was discussed on terms of a small deposit with a postponed settlement date.  Mr Manoy said words to the effect:

    “We will talk about selling you the property.  But you have to execute the option and sign the lease first.”

1. Mrs Blakeman deposed that she again met with Mr Manoy on or about 18 March 1997 to discuss the possibility of Alphega taking a further five year lease of the premises.  Also present at the meeting were Alphega’s then solicitor, Richard Legg (Mr Legg), and Mr Blakeman.  Mrs Blakeman’s recollection was that at the time of the meeting Alphega owed approximately $12,000 to $15,000 in outstanding rent for the premises.  Ruthol asserted the figure was even higher.  At the meeting, according to Mrs Blakeman, discussion took place in the following terms:

   “At some stage during the meeting I recall saying words or words to the effect of:

   ‘Alphega cannot afford to exercise the option if it means having to pay the arrears of rent and having the same level of annual rent increases as the original lease.  As we have previously told you, there is no way that Graeme will guarantee a lease unless this is fixed.  Mr Gracie is also out as a guarantor.’

   Colin Manoy said words to the effect:

   ‘It is very important for us that you sign a document which can be used as an option for renewal.’

   I then said words to the following effect:

   ‘Alphega will not exercise the option to renew if it means having to pay the arrears of rent and being subject to the same rent reviews.’ ”

2. Mrs Blakeman deposed that, after she had made this statement, Mr Manoy made a telephone call to someone.  Mrs Blakeman understood it to be his solicitor, Mr Singer.  She heard Mr Manoy say words to the following effect:

   ‘What can I write and how can I write it?  How can I do this so that they are seen to be exercising an option that we can get them to sign.”

3. Mrs Blakeman saw Mr Manoy write something apparently dictated to him.  She annexed to her affidavit a document described as a true copy of notes that Mr Manoy produced at the meeting while he was on the telephone.  It was in the following terms:

   “We confirm that the Rent for the first year is to be the same Rent as is currently payable for current year of our lease and then as provided in the lease.

   We are prepared to wave [sic] any arrear [sic] of Rent and Out Going [sic] owing as at this date provide [sic]

   1.You exercise the option to renew your lease at a Rent not less than $69,436.20 for the first year.

   2.You do not fault [sic] in payment of any further Rent and Outgoings as from this date.  If you do then the above arrear will become immediately due and payable.”

4. Mr Manoy said words to the effect:

   “If you sign a document in the form we need which states that you are renewing the option, we will make sure that you do not have the automatic rent increases and will also address the outgoings.  All the arrears will be waived and we will be able to continue negotiating terms for the purchase of the property.  But we cannot put these things into your notice of exercise of option as this will cause us legal problems.”

5. Mr Manoy next handed Mrs Blakeman the copy of the notes he had been writing.  According to Mrs Blakeman another document was prepared on the letterhead of Alphega Medical Practice, a company different from Alphega.  The contents of this document were as required by Mr Manoy.  It was addressed to Ruthol, dated 18 March 1997 and stated as follows:

   “Dear Sir

   Re:  Lease of 258 Condamine Street, Manly Vale

   We hereby confirm that we, by this letter, exercise the option to renew the lease of the above property in accordance with our discussions today and previously.  We hand this letter to Mr Manoy today.”

6. Mr Manoy asked Mrs Blakeman to sign this document.  According to Mrs Blakeman she said:  “I want to be clear on this.  I am signing this on the basis of our agreement that there will be no more automatic increases in rent.”  Mr Manoy responded: “That’s understood.”  Mrs Blakeman signed the notice exercising the option to renew the lease and the other document written out by Mr Manoy during the telephone conversation and recording the rent for the first year and the waiver of arrears of rent and outgoings.

7. Mrs Blakeman said that she signed the notice exercising the option on the understanding that there had been an agreement between Alphega and Ruthol which contained not only the terms in the document prepared by Mr Manoy at Mr Singer’s dictation, but also these terms:  first, the automatic 6 per cent annual rent increases provided by the original lease would not apply to the renewed lease;  secondly, the personal guarantees of Dr Harris and Mr Gracie would not be required;  and thirdly, rent would be paid fortnightly in advance rather than monthly in advance.

8. On the other hand, Mr Manoy said that he did not agree that there would be no 6 per cent annual rent increases during the term of the renewed lease.  He said that he agreed only that the rent for the first year of the new term would remain at the current rate, but thereafter the 6 per cent annual increases would apply.  He said that he did not agree to the proposition that Dr Harris and Mr Gracie would not be guarantors of the renewed lease.  He did agree, however, that Mrs Blakeman requested that the new lease provide that rent be paid fortnightly in advance rather than monthly in advance, and that he assented. 

9. Neither Mr Legg nor Mr Blakeman was called by Mr and Mrs Mills to give evidence.

10. On 21 March 1997 Mr Milch sent to Mr Manoy for approval a copy of the new lease to be entered into by Alphega.  The rent for the first year was $69,436.20 as stipulated in the document signed at 18 March meeting.  But the lease still contained provisions for the 6 per cent annual rent increases, personal guarantees to be given by Dr Harris and Mr Gracie (referred to as Dr Gracie), and for rent to be paid monthly in advance.  The covering letter noted Mr Manoy’s instructions to Mr Singer “to cancel the option with Mills notwithstanding that the lease has not been signed by the tenant”.

11. In the letter of 21 March 1997, which Ruthol’s solicitors sent to Mr and Mrs Mills’ solicitors, the solicitors wrote:

    “We have been informed by our client that the lessee of the above premises has exercised its right to renew under the lease.”

12. Mr Mills asked his solicitor to request proof that the option to renew the Alphega lease had been exercised.  That request was made.  On 17 April 1997, Mr Singer, by way of compliance, sent a copy of the handwritten document exercising the option to renew which had been signed by Mrs Blakeman at the meeting of 18 March.   Palmer J observed that Mr Singer did not send a copy of the other document which Mrs Blakeman and Mr Manoy had signed on that day nor did he give any information as to what the current position between Ruthol and Alphega was.  Upon receipt of the copy notice from Alphega apparently exercising unconditionally the option to renew the lease, Mr Mills concluded that there was nothing further he could do.  He allowed the period, during which the option to purchase could be exercised, to expire on 30 June 1997 without attempting to exercise it.  He said that had he not been told that Alphega had exercised its option to renew the lease he would definitely have exercised the option to purchase within the option period.  His evidence to that effect was not challenged and Palmer J accepted it without reservation.

13. On 8 May 1997, Alphega’s solicitors, by now Kaufmann Peters (KPL), wrote to DLS saying that it was not clear to them whether the option to renew Alphega’s lease had been properly exercised.  They said that the draft new lease Ruthol’s solicitors had prepared did not reflect the agreement between the parties reached at the 18 March meeting.  They wrote that their client was under the impression the rental sum of $69,436.20 was a gross figure inclusive of all outgoings.  “The draft lease presumes the abovementioned figure is net of outgoings.”  This would accord with Art 2 of the lease whereunder Alphega covenanted to pay the yearly rental “without any deduction whatsoever” and Art 4 which provided for the payment by Alphega of outgoings as defined therein.  The solicitors went on to say that guarantees had been included although Dr Harris and Mr Gracie were not prepared to guarantee any new lease and requested further discussion about the purchase of the property.

14. According to Palmer J, Mrs Blakeman said that she participated with Dr Harris in instructing KPL that the draft lease, which had been sent by Ruthol’s solicitors, did not conform to the terms which she said were agreed with Mr Manoy on 18 March.  Palmer J observed

    “that Alphega’s solicitors do not complain that the 6 per cent annual rent increases have not been deleted from the new draft lease and that payment of rent monthly in advance had not been altered to fortnightly in advance, although they do complain about the retention of Dr Harris and Mr Gracie as guarantors.  This is a circumstance which I must take into account in assessing whether Mrs Blakeman’s evidence of what was discussed and agreed at the 18 March meeting is accurate.”

15. On 28 July 1997 KPL telephoned Mr Singer noting that there had been no answer to their letter and requesting a meeting to discuss the issues.  No response from Ruthol was received.  Palmer J said that it was not until October 1997 that Mr Manoy gave his attention to the Alphega lease.  Alphega had remained in occupation after expiry of the term of the original lease on 30 June 1997, paying the rent fixed for the final year of the original lease.

16. On 3 October 1997 Mr Manoy sent a fax to Mr Singer advising that he had had a meeting that day with Dr Harris and Mr and Mrs Blakeman.  He said that the points that needed discussing were:  whether the rent for the first year of the new term was net of outgoings or gross, the possible sale of the property to Alphega and “option – same lease or new lease”. 

17. On 10 October 1997 Mr Singer discussed with Mr Manoy the possible purchase of the Manly Vale property by Alphega.  Mr Singer’s diary note contained the following:

    “DS (ie Mr Singer) to check whether we have to have a fresh lease executed because terms vary from old lease.  Rent is definitely fixed until December 98 so this is a reason that there should be a new lease.”

18. Palmer J said that the fixing of the rent until December 1998 was a reference to a discussion between Mr Manoy and Alphega earlier in October in which the suggestion was made, as a compromise, that there be no rent review at the end of the first year of the new lease, namely 30 June 1998, but that the rent for the first year remain fixed for another six months before the next review.  His Honour said that this term, if incorporated into the renewed lease, would “of course” have been a variation of the terms of the original lease.  Hence, Mr Singer’s comment “that there should be a new lease”. 

19. On 12 November 1997 Mr Manoy sent a fax to Alphega commenting in numbered paragraphs on various points for discussion and containing this paragraph:

    “2.$69,420 Net [ie the first year’s rent under the new lease] + Increases must go in the lease but you pay $69,420 N [ie net] to 31/12/98.  Bal. of all o/s amounts will be adjusted on settlement.”

20. Palmer J said:

    “42Mr Manoy was asked about this paragraph in cross examination:  T40.10-41.5.  His attempt to explain it as meaning that there was to be an express variation in the lease so that the first rent review would take place, not on 1 July 1998 but on 1 January 1999, is unconvincing and I do not accept it, for the following reasons.  First, his explanation is contrary to the natural meaning of the words which he used:   ‘Increases must go in the lease but [i.e. notwithstanding what is in the lease] you pay …’.  Second, his explanation flies in the face of the advice which Mr Singer had given him on 10 October that to vary the rent review provisions in the original lease would require a fresh lease, not a renewal – a situation which Mr Manoy was obviously anxious to avoid.  Third, it was clear from the way in which Mr Manoy gave this evidence that he found it very awkward to explain away what seemed clear from his facsimile.  At first, he sought to avoid answering the question ‘What did you mean by the expression ‘$69,420 net plus increases must go in the Lease’.  In the answers which followed, he appeared to me to prevaricate, saying at first that he knew what he meant but finally saying that he did not know what were the ‘outstanding amounts’ referred to at the end of the paragraph.

    43I regret to say that I have reached the conclusion that Mr Manoy was not telling the truth when he denied that his facsimile was intended to suggest that ‘the lease will say one thing but what will happen in reality will be something different’.  I conclude that what he was proposing to Alphega was that the new lease contain the same provisions for rent review as the original lease, but that there be a ‘side agreement’ varying the rent for the first half of the second year – a side agreement which would not be discoverable by anyone, such as Mr Mills, searching the new registered lease.”

21. These observations cannot be faulted and the conclusion reached was clearly one open to the trial judge.

22. On 13 November 1997 Mr Manoy had a conversation with Mr Milch of DLS, who had taken over the conduct of the matter from Mr Singer.  Mr Milch gave advice to Mr Manoy recorded in a diary note as follows:

    “Advised

    If previous grantee finds out that lease not pursuant to option or granted option to purchase – he would commence proceedings for breach of contract.  You rescinded on basis that tenant exercised option to lease.  He not worried, he’s a dead duck, do it all the time.”

23. Mr Manoy, when asked, said that he did not recall the conversation.  Mr Milch agreed that the concluding words of the diary note probably recorded a statement by Mr Manoy in response to Mr Milch’s advice to this effect:  “I’m not worried;  Mills is a dead duck;  I do it all the time.”  Palmer J ascribed that meaning to Mr Manoy’s words.  Again, such conclusion was open to the trial judge.  In his Honour’s opinion, one could legitimately draw the inference from these words, in the context in which they were said, that Mr Milch told Mr Manoy that what was being done between Ruthol and Alphega was not a renewal of the Alphega lease pursuant to the option to renew but was, rather, a fresh lease with different terms.  If Mr Mills found out what had happened he would commence proceedings for breach of the Millses’ option to purchase.  Palmer J inferred from Mr Manoy’s response, as recorded by Mr Milch, that Mr Manoy’s attitude to this advice was:  “I’m not worried about the possibility of being caught out by Mr Mills;  I’ve succeeded in manoeuvring him out of his option rights;  I do this sort of manoeuvre all the time”, this latter remark being a reference to his extensive experience in negotiating commercial leases in the course of conducting his business.  Palmer J said:

    “It may well be that Mr Manoy felt confident that he had little to fear from Mr Mills because he believed that the new lease would contain no variation of the annual rent increase provision as the proposed variation that there be no rent review until 1 January 1998 would be contained in an undisclosed ‘side agreement’ with Alphega.”

    This reasoning is logical.

24. On 17 November 1997 Mr Milch wrote to KPL advising, inter alia, that it was an essential term of the lease that the guarantors be Dr Harris and Mr and Mrs Blakeman.  On 11 February 1998 Alphega wrote to Ruthol complaining that

    “we are very disturbed with the way things have progressed over the term of the lease.  Also [this letter] is to confirm that Alphega Management is on a month to month lease and is  trying to obtain suitable alternative premises.”

25. On 18 February 1998, Mr Manoy replied to this letter disputing, amongst other things, that Alphega was in occupation pursuant to a monthly tenancy.  He asserted that the option to renew the lease had been exercised on 18 March 1997. 

26. On 14 May 1998 Ruthol served on Alphega a notice to quit which asserted that Alphega was “holding over on a month to month tenancy”.  As already mentioned, Mr Milch’s statutory declaration of 2 July 1998, which was attached to the Tricon lease, stated that Alphega was lessee of the property under lease number E542841 had not exercised the option of renewal and vacated the property on 30 June 1998.  In August 1998 Mr Mills happened to notice that the Manly Vale property had been vacated.  He rang Mr Manoy and asked what had happened with Alphega.  Mr Manoy replied:  “Alphega renewed their lease under the Option Agreement.  However, they then defaulted and we asked them to vacate.”  This evidence was not contradicted by Mr Manoy.  Palmer J said that this statement to Mr Mills was inconsistent with Ruthol’s notice to quit and with Mr Milch’s statutory declaration of 2 July 1998.

27. Mr Mills’ suspicions were aroused and he tried to contact Alphega to make further enquiries.  Finally he was able to speak to Mrs Blakeman on 29 January 1999.  His solicitor conducted a Land Titles Office search and discovered the Tricon lease and Mr Milch’s attached statutory declaration.  After that steps were taken to exercise the Mills’ option to purchase on 3 March 1999 and to lodge a caveat.

28. Tricon only became aware in July 1999 of the Mills’ claim to a prior equitable interest under their option to purchase and the contract for sale said to have come into existence as a result of the exercise of the option.  After that Tricon made its several attempts to exercise its option to purchase the Manly Vale property.

    Submissions at trial 

29. Mr and Mrs Mills alleged, amongst other things, that Ruthol deliberately misrepresented to them that the Alphega option had been exercised and that, in reliance upon that representation, they had refrained from exercising their option to purchase the Manly Vale property within the option period.  They alleged that their option to purchase created an equitable interest in the property and that the contract for sale which came into existence on 3 March 1999 by their exercise of that option itself created an equitable interest in the property derived from the equitable interest created by their option to purchase.  It was accepted that this equitable interest was subject to Tricon’s leasehold estate, derived from a lease registered on the title, being a subsequent legal estate, taken by Tricon for value and without notice of the Millses’ prior equitable interest in the property.  It was said that the Tricon option to purchase created an equitable interest in the Manly Vale property but subsequent in time to the Millses’ equitable interest.  Accordingly the Millses’ equitable interest took priority.

30. Ruthol contended that on 18 March 1997 Alphega agreed to take a renewed lease of the property on the same terms and conditions as those contained in the original lease, that Alphega’s option to renew was validly exercised in accordance with the terms of the lease and that the representation by Ruthol to the Millses was true.

31. Ruthol put other arguments, amongst them that the representation by Ruthol to Mr and Mrs Mills that Alphega “has exercised its right to renew under the lease” was a representation of law and should be taken as a statement of opinion and therefore not actionable either at law, in equity or under the Fair Trading Act 1987. Another was that the time for exercise of the Millses’ option to purchase had passed and the Court could not indirectly order relief against forfeiture of an expired option. The Court would not order specific performance of a contract for sale to Mr and Mrs Mills because the rights of Tricon had intervened.

32. Tricon contended that Ruthol’s submission should be accepted.  If there had been any wrongful conduct on the part of Ruthol in relation to the Millses’ option to purchase, Tricon took its equitable interest in the property, pursuant to the Tricon option, for value and without notice at a time when the Mills had no prior equitable interest in the property because their option had expired.   All that Mr and Mrs Mills had then and still had was a right in personam against Ruthol by way of an estoppel.  That right was a mere equity.  In a competition between a prior “mere equity” and a subsequent equitable interest in property taken for value and without notice of the prior “mere equity”, the subsequent equitable interest prevailed.  Accordingly, Mr and Mrs Mills must be left to their remedy in damages against Ruthol.

    Palmer J’s reasons for judgment

1. Palmer J addressed the question of what was said and done at the meeting between Mr Manoy and Alphega’s representatives on 18 March 1997.  His Honour said that at the outset he accepted the evidence of Mrs Blakeman in preference to that of Mr Manoy for reasons which he gave as follows:

   “83First, it is common ground that the rent under the Alphega lease was significantly above current market rent and that, for some time, Alphega had had difficulty in paying it.  As at 18 March 1997 arrears of rent were in the order of $30,000.  It is also common ground that at the meeting of 13 March Dr Harris expressed in the strongest terms his view that the rent was too high and that Alphega would not pay it.  Mr Manoy concedes that at the 18 March meeting Mrs Blakeman repeated that the rent was too high.

   84It is inherently improbable that at the 18 March meeting Mrs Blakeman would agree to enter into a new lease with the same annual rent increase provisions as in the original lease when Alphega was already in serious difficulty in meeting its existing rent commitments.  The conditional waiver of arrears of rent proffered by Mr Manoy if Alphega punctually paid the ever-increasing rent under the renewed lease would have been of little attraction to Alphega because its difficulty in paying the escalating rental under the renewed lease would probably generate a default, which would entitle Ruthol to claim the rent in arrears as well.

   85In my view, it is inherently improbable that Mrs Blakeman agreed at the 18 March meeting that the exercise of Alphega’s option to renew would commit it to annual rent increases in accordance with the terms of the original lease.  It is highly improbable that she would have done so without Dr Harris’ prior approval.  It is to be remembered that Dr Harris was not at the 18 March meeting.  There is no evidence that Mr Manoy’s proposal as to waiver of arrears of rent had been put to Alphega prior to 18 March.

   86Mrs Blakeman, though strongly challenged in cross examination, remained unshaken in her evidence that she signed the letter exercising the Alphega option to renew only upon the assurance of Mr Manoy that there would be no annual rent increase provisions in the renewed lease.  I bear in mind that the letter of 8 May 1997 written by Alphega’s solicitors to DLS made no express reference to this assurance:  ... I do not think that this omission outweighs the inherent probabilities to which I have referred:  the letter did protest that the draft lease was not in accordance with the agreement which had been reached between the parties and made it clear that further discussion was necessary.

   87Second, it is common ground that at the meeting of 13 March Dr Harris objected vehemently to giving a guarantee for the renewed lease and that Mr Manoy was told that Mr Gracie would not be giving a guarantee because he had nothing further to do with Alphega.  Mrs Blakeman says that she repeated this assertion at the 18 March meeting.  Mr Manoy agrees that nothing said by Mrs Blakeman at the 18 March meeting indicated that Dr Harris had changed his mind about giving a guarantee.  He admits that Mrs Blakeman said that Mr Gracie would not be a guarantor but he says that he did not agree.

   88Accordingly, as Mr Manoy’s own evidence stands, it is clear that at the 18 March meeting Mrs Blakeman continued to maintain the position that Dr Harris and Mr Gracie would not guarantee the renewed lease, Mr Manoy continued to maintain the position that they were required to give guarantees, and no resolution of the impasse was achieved.

   89Third, Mrs Blakeman says that when she told Mr Manoy that Dr Harris and Mr Gracie would not give guarantees he responded:  ‘It is very important for us that you sign a document which can be used as an option for renewal’.  She says that when Mr Manoy telephoned Mr Singer during the meeting, Mr Manoy said:  ‘What can I write and how can I write it?  How can I do this so that they are seen to be exercising an option that we can get them to sign?’  Further, she says that Mr Manoy made the statement which I have set out in paragraph 27. [para 22 of this judgment]

   90Mrs Blakeman’s evidence is strikingly probable in view of the advice which had been given to Mr Manoy by Mr Singer at the discussion with Mr Abbott earlier on 18 March.  It is strikingly in conformity with Mr Manoy’s objective in going to the 18 March meeting with Alphega, as discussed between himself, Mr Singer and Mr Abbott and revealed in Mr Singer’s diary note:  see paras 18-21 [referred to below in this judgment].  It is inconceivable that Mrs Blakeman could have manufactured this evidence when Mr Manoy’s purpose in going to the 18 March meeting was not disclosed.  I cannot accept Mr Manoy’s contradiction of this evidence.

   91Fourth, Mr Manoy concedes that at the 18 March meeting he agreed that the renewed lease would provide for rent to be paid fortnightly, rather than monthly, in advance:  T26.10-22 (20.03.02).  Yet the draft renewed lease sent by Mr Singer to Alphega on 8 May 1997 did not contain this variation although Mr Singer knew of it:  see paragraph 19.  I infer that it did not, because both Mr Manoy and Mr Singer knew that such a variation would show that there had not been an exercise of Alphega’s option to renew in accordance with the terms of the Alphega lease.  I infer that Mr Manoy was prepared to agree to a variation as to the time for rental payments in order to procure Alphega to sign the notice of exercise while intending not to carry out his agreement to incorporate the variation into the renewed lease.  This attitude of Mr Manoy strongly reflects on his credibility as to the other variations to the renewed lease to which Mrs Blakeman says he agreed.

   92Fifth, while the credit of Mrs Blakeman remained unshaken, I am of the view that Mr Manoy’s credit has been severely damaged, for the following reasons:

   -he attempted to suggest, falsely, that he was relatively indifferent to whether Ruthol would avoid the Mills’ Option:  …;

   -his proposal to Alphega in his facsimile of 12 November 1997 to the effect that the renewed lease would contain the same rent review provisions as the original lease, but that there would be a side agreement to the contrary, was, I have concluded, a deliberate attempt to conceal the truth from the Mills if they should search the registered renewed lease:  …;

   -he was not frank when questioned about the facsimile:  …;

   -in the face of advice from Mr Milch that Mr Mills would sue if he found out that the new Alphega lease was not granted pursuant to the option to renew in the Alphega lease, Mr Manoy displayed an almost contemptuous unconcern.  His attitude seemed to be that breach of legal obligations was of no great consequence;

   -he was prepared to assert to Alphega, when it suited him, that Alphega had exercised its option to renew and was bound to take the renewed lease and to assert, when it suited him, that Alphega was holding-over on a monthly tenancy:  …;

   -he told Mr Mills in August 1998 that Alphega had renewed its lease but had defaulted when he had, in May 1998, required Alphega to vacate under a monthly tenancy:  ...”

2. To understand the force of what Palmer J said in para 90 above it is helpful to go now to paras 18-21 of the trial judge’s reasons for judgment.  That part of the judgment is headed “Mr Manoy’s objective”.  Reference is made to a conference Mr Manoy had either at a meeting or by telephone linkup with Mr Singer and Mr Adrian Abbott, an accountant, shortly before going to the meeting of 18 March 1997.  Mr Singer made a diary note of the conference.  About this, his Honour said:

   “19The diary note records a discussion in which Mr Manoy expressed Ruthol’s desire to get out of the Mills’ Option because there was a possibility of selling the Property for a higher price.  The discussion recognised that the only way in which Ruthol could get out of the option was if Alphega exercised its option to renew on the same terms and conditions as in the original lease.  However, it was further recognised that Alphega did not want to do that.  Various solutions to the problem were canvassed but, in the end, it was agreed that Mr Manoy would try to get Alphega simply to exercise its option to renew, so that Ruthol could tell the Mills that their option had lapsed.  After that, Ruthol could continue to negotiate with Alphega.  Mr Manoy agreed that this was the content of the discussion recorded in the diary note:  T 18.55-19.55.

   20With the benefit of the advice which he had received from Mr Singer and Mr Abbott, Mr Manoy went to the 18 March meeting with Alphega’s representatives.  It is clear that he went with the objective of obtaining from Alphega a notice of exercise of the option so that he could use that notice to inform the Mills that their option was at an end:  the notice of exercise would not necessarily reflect the fact that both Alphega and Ruthol had agreed that the renewed lease would be on the same terms and conditions as the original lease – that was a matter which could be negotiated later.

   21Mr Manoy endeavoured to suggest that he was relatively indifferent as to whether or not he achieved that objective.  I do not accept that evidence.  Mr Singer’s diary note of the 18 March conference reveals that one-and-a-half hours of intense discussion were devoted to considering ways and means whereby Ruthol could get out of the Mills’ Option without exposing itself to litigation.  The reason for this manoeuvring is also revealed by the diary note:  ‘We want $610,000 in 18 months time’.”

3. The reference “$610,000” was a reference to the suggested offer by Alphega discussed at the earlier meeting.

4. For the reasons I have set out, Palmer J concluded that the evidence of Mrs Blakeman as to what transpired at the 18 March meeting should be preferred to the evidence of Mr Manoy.  In doing so, his Honour said that he kept in mind Mr Manoy’s evidence that he would not have agreed to remove the annual rent review provisions from the renewed lease because that would be highly uncommercial.  Palmer J said:  “I accept that such an agreement on Mr Manoy’s part would indeed have been uncommercial – if he had ever intended to honour it.”  Palmer J was satisfied that just as Mr Manoy agreed to a variation of the provisions as to time for the payment of rent without intending to incorporate that variation in the renewed lease, Mr Manoy agreed to vary the rent review provisions without intending to honour that agreement.

5. Palmer J found that at the 18 March meeting:

   “94         …..

   -Mrs Blakeman, on behalf of Alphega, signed a notice exercising the Alphega option to renew induced by an express agreement with Mr Manoy, on behalf of Ruthol, that the renewed lease would not contain the annual rent review provisions in the original lease, and would contain an amendment varying the time for payment of rent from monthly in advance to fortnightly in advance;

   -Mrs Blakeman maintained that Dr Harris and Mr Gracie would not guarantee the renewed lease, Mr Manoy would not agree and there was no resolution of this disagreement;

   -Mr Manoy induced Mrs Blakeman to sign the notice exercising the Alphega option to renew in unconditional terms by agreeing to amend the terms of the renewed lease as to annual rent reviews and as to time for payment of rent although he did not intend that Ruthol should honour that agreement.”

6. In the event, Palmer J found that as at 18 March 1997

• Alphega did not agree to take a renewed lease upon the same terms and conditions as in the original lease;

• Mr Manoy knew that fact and that the terms in the original lease as to annual rent reviews and as to time for payment of rent had been varied by agreement and that there had been no agreement at all as to whether the guarantors of the original lease would guarantee the renewed lease;

• Mr Manoy knew that the renewal option in the Alphega lease required that, if the option were to be validly exercised, Alphega would have to take the renewed lease upon the same terms and conditions as in the original lease;  and

• by reason of the advice he had received from Mr Singer, Mr Manoy knew that the notice of exercise signed by Mrs Blakeman and handed to him at the meeting of 18 March was not an exercise of the option to renew in accordance with the requirements of the Alphega lease.

  Appeal

1. Ruthol’s amended notice of appeal contained eleven grounds.  The appellant did not press, as discrete grounds of appeal, those set out in paras 7 and 8.

2. It is helpful immediately to refer to ground 5 that the trial Judge erred in not permitting the tender of the letter dated 1 April 1997 from Rodd A Peters of KPL to Mrs Blakeman.  That letter was tendered by counsel for Ruthol on the afternoon of the second day of the trial just after Mr Milch had given evidence for the defendant, Ruthol, and of course after Mr and Mrs Mills had closed their case.  Mrs Blakeman, who had given evidence for the plaintiffs, was not cross-examined about its contents.  Counsel for Mr and Mrs Mills objected to the tender and it was rejected.  No reasons appear in the transcript.  No evidence was put before the Court of Appeal about any interchanges or statements from the Bench to show why the tender was rejected. 

3. The writer of the letter begins by thanking the addressee, Mrs Blakeman, for her instructions to advise her in relation to “the renewal of your lease at 258 Condamine Street, Manly Vale”.  The writer refers to being provided with listed documents which include:

   “4.Handwritten letter of agreement between Nicole Blakeman and somebody (we assume) on behalf of the lessor dated 18 March 1997 stating to grant an option on certain terms and conditions.

   5.Letter dated 18 March 1997 on Alphega Medical Practice letterhead bearing ACN 060 527 442 purporting to exercise the option granted in the letter of agreement.

   6.Letter from David Lander, Stewart & Co Solicitors, to Alphega Management Services Pty Ltd dated 21 March 1997 enclosing an account and a draft lease in favour of Alphega Management Services Pty Ltd.”

4. There follows some outline of factual material including the following:

   “7.On 21 March 1997 a fresh lease was supplied by Ruthol Pty Limited’s lawyers, which is curious if there has in fact been a proper exercise of the lease (sc option).  Where an option is exercised it is usual for the option period of the lease to be governed by the lease, and no new lease is drawn.”

5. The writer goes on to comment upon what the addressee’s position would be if Ruthol could prove a proper exercise of the option.  It is said that the addressee had two options.  The first was to exercise in a valid way the option dated 18 March 1997.  The second was expressed as “Alphega Management Services Pty Ltd can indicate the option dated 18 March 1997 has not been and will not be exercised.  On this basis you can attempt to renegotiate a fresh lease agreement at market rates.”  The writer points to major impediments to negotiating an improved position.  These would include that “a concluded agreement was reached on 18 March 1997”. 

6. It could no doubt be suggested that whatever instructions were given to Mr Peters, who wrote the letter, they were not consistent with the account that Mrs Blakeman gave of the meetings she had had with Mr Manoy.  Mr Peters did not give evidence.  Mrs Blakeman was not cross-examined about the letter.  In my opinion, on the material before this Court, we could not be satisfied that the trial judge erred in rejecting the tender of the letter.  Ground 5 of the appeal fails.

7. Mr Walker SC appeared with Mr Lancaster for the appellant on the appeal.  Neither had appeared at the trial.  In his oral submissions, Mr Walker relied upon three points.  The first was a challenge to what were undoubtedly credibility-based findings of fact (grounds 1-3 and 6 of the amended notice of appeal).  Counsel accepted that if he did not succeed on that particular challenge he could not succeed on any other factual arguments.  He summarised it as the incapacity of the Judge’s reasons to explain in a manner satisfactory to this Court the discrepancy between the testimony he accepted from Mrs Blakeman on the one hand and what Mr Walker called contemporaneous documents that should have corroborated but in fact contradicted that testimony on the other hand.  Counsel accepted that if the appeal succeeded on this ground a new trial would be necessary.

8. The second point was that even if that argument failed, the documents in the case demonstrated that there was, within the meaning of Alphega’s option, an exercise of the option and therefore there was no misleading conduct.  Thirdly, as a fall-back argument, Mr Walker sought to re-order the priorities between Mr and Mrs Mills on the one hand and Tricon on the other and in that respect relied upon submissions put by Mr M W Young of counsel, who appeared on the appeal for Tricon.  Tricon had filed a notice of appearance but did not file any cross appeal or notice of contention.   

9. Except to the extent to which they are taken up by the submissions under the three points I have mentioned, grounds 9 – 11 of the amended notice of appeal were not pursued.

   The first point of appeal

10. Mr Walker’s argument was founded upon a combination of what he described as objective factual surrounding material, inherent commercial probabilities and the documentary evidence.  He reminded the Court that both parties’ witnesses were testifying about conversations, pivotal to Palmer J’s findings about Mr Manoy’s credit, which occurred about five years before the hearing.  Mr Walker accepted that in this appeal by way of re-hearing this Court’s powers were exercisable “only where the appellant can demonstrate that, having regard to all the evidence now before the appellate Court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error;  Allesch v Maunz (2000) 203 CLR 172 at 180.” The appellant’s argument was that clear inferences from undisputed testimony and incontrovertible documents contemporaneous with the dealings were wrongly not drawn by Palmer J.

11. Two useful observations by the Federal Court were cited in the written submissions.  In Cabal v United Mexican States (2001) 108 FCR 311 at 362 the Full Federal Court observed that in general on an appeal by way of re-hearing from a judge sitting without a jury an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge.

    “In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge.  However, once having reached its own conclusion it will not shrink from giving effect to it.”

    In Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) FCA 183 at para 24 Allsop J, with whom Drummond and Mansfield JJ agreed, said:

    “The demonstration of error may not be straightforward where findings or conclusions involve elements of fact, degree, opinion, or judgment or when the findings to conclusions in question can be seen as made with the advantage of hearing the evidence in its entirety, presented as it unfolded at the hearing and adjournments for reflection and mature contemporaneous consideration and assessment, in particular in a long and complex hearing ….”

12. Mr Walker directed his submission to the determination of what agreement, if any, had been reached at the meeting of 18 March 1997.  The point made on behalf of Ruthol was that if, as it contended, an agreement had been reached to take a new lease on the same terms as the old one there was nothing inaccurate in the information subsequently given to Mr and Mrs Mills.  It was only by demonstrating that some “side arrangement” had come into place between Mr Manoy and Mrs Blakeman that Mr and Mrs Mills could contend that Alphega’s right to renew the lease had not been properly exercised.  To support this claim some derogatory comments were made about Mrs Blakeman and Dr Harris to the effect that Mrs Blakeman was the cat’s paw of Dr Harris, appointed a director to fill the vacancy created by the latter’s disqualification.  It was said that Mr Manoy was an experienced businessman and that Palmer J’s findings depended upon a conclusion that on this occasion Mr Manoy decided to flout all the legal advice that he was given.  Reliance was put upon his evidence that it was a matter of indifference to him which particular party bought the property, though it should be observed immediately that the price suggested at the meeting in early March 1997 by Dr Harris and Mrs Blakeman was considerably higher than the $490,000 Mr and Mrs Mills had agreed to pay if they exercised their option.

1. Ruthol submitted Mr Manoy was aware from legal advice that he had received that the new lease had to be documented in the same way as the old lease for the right to renew to be properly exercised. 

2. In the course of his judgment, Palmer J pointed out that no explanation had been proffered as to why Mr Blakeman and Mr Legg had not been called by Mr and Mrs Mills but said that Ruthol and Tricon had made no Jones v Dunkel (1959) 101 CLR 298 submission as to their absence. On this basis his Honour seemed to put aside consideration of what was said in that case. We were referred to the transcript of the trial and with due respect it is not correct to say that counsel for Ruthol did not put to his Honour in oral submissions that Mr Legg should have been called. [Ground 4 of the amended notice of appeal].

3. Even if no such submission had been advanced, it seems to me that a trial judge required to make a choice between acceptance of the evidence led on behalf of one party and the evidence led on behalf of another as to the truth of a fact should pay regard to the form of jury direction approved in Jones v Dunkel. In the absence of any explanation for their absence, Palmer J should have weighed the evidence on the basis that if either Mr Blakeman or the solicitor Mr Legg had gone into the witness box, his evidence would not have assisted Mr and Mrs Mills by supporting Mrs Blakeman’s account or throwing doubt on Mr Manoy’s account of what occurred at the March meetings at which he was present; (101 CLR at 308). However, I do not think Palmer J’s failure, in weighing the evidence, to take into account the absence of these witnesses undermined the reasoning which led him to make the findings he did.

4. As Ruthol put it, the central fact was that a new lease was prepared and sent out by Ruthol’s solicitors to Alphega within three days of the meeting on 18 March 1997.  It was submitted that the sending of that document in that form was only consistent with instructions being given by Mr Manoy that Alphega had agreed to renew the lease on its existing terms.  That was what was stated in the letter prepared on 18 March 1997 as dictated by Mr Singer to Mr Manoy.  It was said that notwithstanding her testimony to the contrary Mrs Blakeman with her solicitor present signed a letter which acknowledged that “the rent for the first year is to be the same rent as is currently payable for current year of our lease and thereafter as provided in the lease”. 

5. It was submitted that the following occurred:

   “(a)On 18 March 1997 Mr Manoy faxes instructions to his solicitors to prepare the lease in accordance with the notice of exercise of option and letter signed by Ms Blakeman on 18 March 1997 [Blue 648];

   (b)Mr Singer’s Diary Note [Blue 646 and 647] clearly advised Mr Manoy that the new lease had to be documented in exactly the same form as the original lease and had to provide for rent increases after the first year.  Notwithstanding his Honour’s findings [Red 58J] and the cross-examination of Mr Manoy [Black 77L] Mr Manoy did not say that his Honour’s version of the Diary Note was correct.  Particularly his Honour’s question to Mr Manoy [Black 76T], where it is put to Mr Manoy that after the exercise of the option Ruthol could negotiate with the doctors about purchase or sale or anything else.  That is not the effect of the Diary Note.  On 21 March 1997 a lease is prepared for execution in exactly the form as one would expect if the exercise occurred [Blue 654];

   (c)No objection of any sort is then received from Alphega between 21 March 1997 and 8 May 1997.  (Furthermore, as discussed below, Ms Blakeman receives legal advice from her new solicitor that it appears that her legal position is ‘tenuous’ in resisting a claim for specific enforcement of the lease);

   (d)The letter of 8 May 1997 from her solicitors contradicts Ms Blakeman’s evidence as to the ‘agreement’ of 18 March 1997 [Blue 693];

   (e)No document exists at all which shows that Ms Blakeman ever again raised the ‘agreement’ of 18 March 1997;

   (f)Subsequently, after further negotiations, Ruthol’s solicitors confirmed on 17 November 1997 that the terms of the lease submitted on 21 March 1997 remained unchanged except for the guarantors [Blue 709];

   (g)On 18 February 1998 (at a time at which there was no threat of any litigation by the appellant and so no motive for Mr Manoy to be disingenuous) Mr Manoy writes a letter to Ms Blakeman to which a reply is never received which is entirely consistent with his  testimony at the hearing [Blue 720].”

6. Ruthol submitted that Mrs Blakeman did nothing, when she received a lease document shortly after 21 March 1997, which was in terms entirely contrary to her expressed understanding of the agreement she had reached.  She did not contact Mr Manoy immediately and she made no complaint.  On her evidence, her main complaint was with respect to the rent increases.  She went through the new lease document with Dr Harris and discussed her concerns with her solicitor Mr Peters.  She did not recall whether or not she had had any discussion with Mr Peters about those concerns and expressed no concern about the rent increase.

7. In summary, Ruthol put that the trial Judge’s conclusions were relevantly inconsistent with all the available contemporaneous material.  His reasoning involved a series of unlikely events:

   (a)an experienced businessman seeking detailed legal advice on a complicated legal issue involving two different documents giving rights to various parties;

   (b)categoric advice that unless he acted in a certain way he might expose himself to a suit for damages and the transaction would be ineffective;

   (c)apparently ignoring the advice and entering some undocumented side agreement with one party which, it was never suggested, must be concealed from everyone else;

   (d)a document immediately submitted which was not at all in accordance with the “side agreement”;  and

   (e)the other party making no complaint at all about the alleged deficiencies in the document.

8. Clearly Mr Manoy had been advised and was well aware that Mr and Mrs Mills’s option to purchase the Manly Vale property would become ineffective if Alphega exercised its option to renew the lease.  If it was his intention to deny Mr and Mrs Mills’s right to purchase it must have been clear to him that the documentation must show that Alphega had exercised the option to renew the lease on its existing terms.  One must accept, as counsel for Ruthol strenuously submitted, that it was not clear from time to time in what respects Mrs Blakeman and Dr Harris wished the lease of the future to be different from the existing lease.  Undoubtedly they were not happy with the terms of the existing lease in several respects and there were significant arrears in rent payments.  But if Alphega had, in the mind of Mr Manoy, exercised the option to renew, why would his solicitor, Mr Milch, on 13 November 1997 make a note of advice to him in terms

   “if previous grantee finds out that lease not pursuant to option or granted option to purchase – he would commence proceedings for breach of contract.  You rescinded on basis that tenant exercised option to lease.  He not worried, he’s a dead duck, do it all the time.”

9. Why would that same solicitor in May 1998 issue a notice to quit asserting that Alphega was “holding over on a month to month tenancy” and on 2 July 1998 make a statutory declaration that Alphega had not exercised the option of renewal?  To my mind, the integrity of these actions by a solicitor must be accepted.  Yet they are wholly inconsistent with his client’s case.

10. In short, I see nothing extraordinary in Mr Manoy ensuring that the documents were consistent with an exercise of the option to renew the lease but I consider that if the lease was indeed renewed by exercise of the option there could be no possible explanation for the solicitor’s making the diary note he did, drafting the notice to quit in the form he did and subscribing under the provisions of the Oaths Act 1900 the statutory declaration he did, short of incompetency or dishonesty, and for no purpose whatever. Neither Mr Milch’s affidavit nor his oral evidence provides any acceptable explanation or throws any light upon what he did. The suggestion in his affidavit of oversight is implausible.

11. In the result, I am not persuaded that the documentary evidence Mr Walker relies upon and the uncertainties of the attitude taken by Mrs Blakeman from time to time point to a conclusion contrary to the one that Palmer J came to that Alphega had not exercised its option to renew the lease.

    Second point of appeal

12. Mr Walker’s second point was this.  Clause 4.01 of the lease required no more than that Alphega give notice in writing within the stipulated period of its desire to take a renewed lease of the Manly Vale property.  As put to Palmer J, it was suggested that Alphega did not exercise the option and Ruthol was not obliged to grant a renewed lease on any particular terms.  However, the giving by Alphega of its “notice of desire” was an exercise “by the lessee under the lease of the right to renew contained in the lease” for the purpose of terminating the Millses’ option to purchase. 

13. In Palmer J’s opinion the true construction of cl 4.01 was that if the lessee gave the written “notice of desire” within the prescribed time and at the time of giving such notice it had not committed any breach of the lease which had not been waived by the lessor, the lessee thereupon became entitled to the grant of a further lease.  The lessee had validly exercised its option to renew.  However, that right of renewal was subject to defeasance if, between the date of exercise of its option and the expiration of the original term of the lease, the lessee committed a breach of the lease which the lessor did not waive.  Clause 11 of Mr and Mrs Mills’s option to purchase was for the protection of Ruthol.  Ruthol avoided becoming subject to two inconsistent obligations, the obligation to sell the Manly Vale property to Mr and Mrs Mills with vacant possession if Mr and Mrs Mills exercised their option and the obligation to grant a renewed lease to Alphega if it exercised its option under the lease.  If there was no obligation to grant a new lease to Alphega arising by virtue of something done by it before 7 April 1997, Mr and Mrs Mills’s option was to remain on foot.  Palmer J said:

    ”104This is evidence from the use of the words in Clause 11(a) ‘non-exercise of the right to renew’.  These words connote that by virtue of something done by the lessee, it will have a right to renew the lease which is enforceable against Ruthol.  If Alphega had, on 18 March 1997, given an unconditional notice to Ruthol that it desired to renew the lease upon the same terms and conditions as in the original lease, and if Ruthol had waived all of Alphega’s breaches of the lease then subsisting, there would have been an exercise by Alphega of its right to renew the lease within the meaning of Clause 11(a) of the Mills Option.  That is so because Alphega, at that point in time, would have had a contingent right to enforce the option against Ruthol.  Alphega’s right was contingent in that it could be lost if Alphega thereafter committed a breach of the lease which was not waived by Ruthol.  But if Alphega had a right to renew which was still subsisting by 7 April 1997, the Mills’ Option would be terminated pursuant to Clause 11(a) even though at some time after 7 April 1997 Alphega’s right to renew might be lost.

    105For the reasons I have given, Alphega did not give to Ruthol on 18 March, or at any time prior to 7 April 1997, notice of its desire to take a renewal of the lease upon the same terms and conditions as in the original lease.  Accordingly, the Mills’ Option was not terminated under Clause 11(a) either on 18 March 1997 or at any time prior to expiry of the Mills’ Option period, ie 30 June 1997.”

14. For the reasons given by Palmer J, which I respectfully adopt, this point of appeal fails.

    Third point of appeal

15. For his third point Mr Walker adopted on behalf of Ruthol the submission put by Tricon by Mr Young of counsel that Tricon as a purchaser for value without notice had a superior right to Mr and Mrs Mills and was entitled to specific performance against Ruthol and damages for delay, leaving Mr and Mrs Mills to their remedy in damages for breach of contract against Ruthol.

16. In his reasons for judgment, Palmer J carefully considered the competition between Mr and Mrs Mills and Tricon.  There was no dispute that the grant of the Millses’ option to purchase and the grant of the Tricon option to purchase the Manly Vale property gave each grantee an equitable interest in the property;  Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 at 75 per Gibbs J. Mr Young submitted that the equitable interest which Mr and Mrs Mills had so acquired came to an end on 30 June 1997 at the expiry of the option period without the option having been exercised. Thereafter on 6 May 1998 the Tricon option was granted when the Tricon lease was executed. Palmer J said that it followed, according to Mr Young, that at the time Tricon’s equitable interest in the property came into existence, Mr and Mrs Mills had no prior equitable interest. The exercise of the option on 3 March 1999 might be valid as against Ruthol but that was only because the court would decree that, as against Mr and Mrs Mills, Ruthol could not rely upon its own wrongdoing to deny valid exercise of the option. The right of Mr and Mrs Mills to have the exercise of their option validated against Ruthol by a judgment of the court was a “mere equity” which could not prevail against an equitable interest in the Manly Vale property which Tricon acquired for value without notice. Palmer J said that there was no doubt that as a general rule a “mere equity” did not enter into competition with an equitable interest in property which was taken for value and without notice, even if the equitable interest was acquired later in time.

17. Palmer J posed these questions: 

    “What is the right or interest of the Mills which is in competition with the equitable interest in the Property held by Tricon?  Is it a merely personal right against Ruthol which prevents Ruthol from denying that the Mills’ Option was exercised within time?  If so, is that right a common law right or an equitable right which could properly be called a ‘mere equity’?  If the right is a common law right, does the rule enunciated in Phillips v Phillips (1861) 4 De GF & J 208 at 218; 45 ER 1164 still apply?”

18. His Honour by reference to the cases and text books carefully explored what is meant by the contrast between “mere equity” and equitable interest.  He referred in passing to Kearney J’s remarks in Burns Philp Trustee Co Limited v Viney [1981] 2 NSWLR 216 at 223:

    “… there is some circuity involved in finding the starting point for the existence of … an equitable interest, the problem being to isolate as the initiating factor the proprietary interest or the right to enforce the interest …This problem is almost of jurisprudential mystery.”

19. In the decision of the High Court in Latec Investments Limited v Hotel Terrigal Pty Limited (In liquidation) (1965) 113 CLR 265 the opinions of Kitto J and Taylor J differed about whether a mortgagor whose land had been fraudulently sold and transferred by the mortgagee to the purchaser retained from the date of transfer an equitable interest in the mortgaged property, the view preferred by Taylor J at 284, or something less and distinguishable from an equitable estate because logically antecedent to it, the view preferred by Kitto J at 277-8. Menzies J, the third member of the Court, said this at 291:

    “There is no doubt that the two lines of authority are well established.  See, for instance, Halsbury’s Laws of England, 3rd ed., vol 14, pars. 1009 and 1030.  Furthermore, there is room for the application of each in appropriate circumstances.  Thus, if Terrigal were a person instead of a company and the question were whether, in the circumstances here, that person had a devisable interest in the hotel property by virtue of his equity to have the conveyance to Southern set aside, Stump v Gaby (1852) 2 DeGM & G 623; 42 ER 1015 would require an affirmative answer on the footing that, in the circumstances, Terrigal had an equitable interest in the hotel property. Where, however, the question arises in a contest between Terrigal and MLC Nominees, the holders of an equitable interest in the hotel property acquired without notice of Terrigal’s rights, the authority of Phillips v Phillips is (i) that the contest is between Terrigal’s equity to have the conveyance set aside and the equitable interest of MLC Nominees and (ii) that in that contest, Terrigal’s equity is not entitled to priority merely because it came into existence at an earlier time than the equitable interest of MLC Nominees.  In the circumstances here, therefore, the maxim ‘Qui prior est tempore potior est jure’ has no application.”

20. Palmer J said that Phillips v Phillips could be explained as a policy decision rather than a decision resting on distinctions in the qualities of various equitable rights.  The policy was that where the holder of a prior equitable interest needs the assistance of the equity court to perfect his or her title to it, that equitable interest will be defeated if, before the title is perfected, the third party takes an equitable interest for value without notice.  On this appeal it is unnecessary further to investigate this proposition which can be taken to be correct.

21. However, Palmer J concluded that Mr and Mrs Mills did not require the assistance of the equity court in order to exercise their option validly so that the competition between them and Tricon was not one between something less than an equitable interest, perhaps inappropriately described as a “mere equity” and an equitable interest.  His Honour said that Mr and Mrs Mills validly exercised their option, even though the option period had expired, because of the principle of the common law which deprives a wrongdoer of the advantage of his or her wrongdoing.  For this principle his Honour went back to Coke on Littleton 148b and Broom’s Legal Maxims, 10th ed (1939) at 191 and following.  Palmer J said:

    “136In the present case, if the Mills had not placed a caveat on the title to the Property and the Property had been transferred to Tricon, the Mills could have successfully claimed damages for breach of contract in a court of common law.  The court of common law, applying the maxim, would have held that the condition as to the time of exercise of the option had been ‘eliminated’, to use the words of Corbin (see para 114), that the option had been validly exercised so that a contract for sale had come into existence, that that contract had been breached by Ruthol, and that the Mills were entitled to damages.  If a court of common law would recognise that the contractual right to exercise the Mills’ Option continued to exist until 3 March 1999, so also would a court of equity.  The court of equity would, in addition, have recognised that because the contractual right to exercise the option continued to subsist until 3 March 1999 so also did the Mills’ equitable interest in the Property which had been conferred by the grant of the option.

    137From the time of grant of the Mills’ Option up to the date of judgment, the Mills have never required the assistance of equity to perfect their title to an equitable interest in the Property.  They have held their equitable interest without interruption from 25 February 1997.  For that reason, the competition between the Mills and Tricon is a competition between equitable interests so that, if the merits are equal, the interest which is prior in time will prevail.”

22. Proceeding from this premise, Palmer J said that whereas in this case both Mr and Mrs Mills and Tricon had an equitable interest in the Manly Vale property, Tricon had to demonstrate that Mr and Mrs Mills’s prior equitable interest should be postponed to its later equitable interest.  It bore the onus of proving an act or neglect of the prior owner which contributed in some way to the subsequent owner acquiring its interest without notice of the prior equitable interest;  Lapin v Abigail (1930) 44 CLR 166 at 204 per Dixon J and Butler v Fairclough (1917) 23 CLR 78. His Honour said:

    “139In the present case Tricon, quite properly, does not submit that any conduct on the part of the Mills contributed to the acquisition by it of its equitable interest in the Property without notice.  The Mills did not exercise their Option nor did they register a caveat before 3 March 1999 because they had been deceived by Ruthol into believing that the Option had been terminated on 18 March 1997.  Mr Mills discovered the deception by chance and thereafter acted to protect his rights with all appropriate expedition.

    140It follows that as between the Mills and Tricon the merits are equal.  Both have been deceived by Ruthol.  The result is that the prior equitable interest of the Mills prevails over the subsequent equitable interest of Tricon.”

1. Mr Young, on behalf of Tricon, submitted that Palmer J erred in concluding that Mr and Mrs Mills had never required the assistance of equity to perfect their title to an equitable interest in the property.  This suggested, so the argument ran, that the maxim “no man can take advantage of his own wrong” was a basis for relief in this case but not in Latec Investments where the maxim was not called in aid by the defrauded mortgagor to claim an equitable interest in priority to the trustee for debenture holders, the chargee over the land charged by the fraudulent purchaser.  Mr Young relied upon the reference in Broom at 200 to what was said in Hooper v Lane (1859) 6 HL Cas 443 at 461-2; 10 ER 1368 at 1376 by Bramwell B:

   “I think it [that is to say the maxim in question] is never applicable where the right of a third party is to be affected, as here, viz., the right of Lane; - I know of no case to that effect.  Can one man by his wrongful act to another deprive a third of his right against that other?”

2. Mr Young submitted that this is an exception to the maxim in cases where a third party acquires rights bona fide under a fraudulent transaction.  Thus the application of the maxim that “no man shall take advantage of his own wrong” is no valid means of avoiding the rights of third parties, as their rights are fully acknowledged in the application of the maxim.  The finding that Ruthol made a deliberate misrepresentation of fact is an equivalent of a finding of fraud against Ruthol.  Latec Investments was similarly a fraud case.  In both Latec Investments and the present case a person had an equitable interest in land;  a fraudulent transaction took place purporting to deprive that person of the equitable interest – in Latec Investments a fraudulent sale and in the present a fraudulent assertion of exercise of a prior option.  Thereafter a third party stepped in and acquired an equitable interest in reliance upon the validity of the fraudulent transaction.  A court of equity was approached to make orders allowing the person to realise the former equitable interest.  Mr Young submitted that there was no sound basis for distinguishing between the two cases.  Thus, whether Ruthol had committed a fraudulent act or not, Tricon as the purchaser for value without notice had a superior right to Mr and Mrs Mills and was entitled to specific performance against Ruthol and damages for delay.

3. Tricon did not appeal from Palmer J’s orders although it sought, in effect, to have some of the trial Judge’s orders set aside.  However, the point it relied on was embraced in Ruthol’s notice of appeal and the argument adopted on Ruthol’s behalf.  In my opinion, the argument should succeed.  While, as Palmer J said, Ruthol could not rely upon its deliberate misrepresentation to Mr and Mrs Mills about whether Alphega had exercised its option to renew the lease to defeat Mr and Mrs Mills’ claim to damages against it, the maxim “no man can take advantages of his own wrong” did not enable Mr and Mrs Mills to posit in reliance on that misrepresentation an equitable interest which would defeat Tricon’s equitable interest in the Manly Vale property. 

4. Assuming, as Palmer J does correctly, that Ruthol was estopped from denying that the Millses' option was properly exercised, what application could the maxim that no man may take advantage of his own wrong have to Tricon’s priority which could be reconciled with the decision of the High Court in Latec Investments?

1. The maxim (that no party may take advantage of its own wrong) is well established at common law.  It has its roots in the sixteenth century where it can be found in the writings of Sir Francis Bacon and Sir Edward Coke.  Its influence on the law of contracts has been discussed notably by Reading CJ in the English Court of Appeal in The New Zealand Shipping Company Limited v the Societe des Ateliers et Chantiers de France [1917] 2 KB 717 at 723-4 (see also [1919] AC 1), by the House of Lords in Alghussein Establishment v Eton College [1988] 1 WLR 587 and by this Court in TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 147 and Mitchell v Pattern Holdings Pty Ltd (2002) NSWCA 212 where many of the cases are cited and discussed by Powell JA at [55]. It was recognised in this State in Green v Woodroffe (1828) Dowling Select Cases Vol 1 per Forbes CJ, Stephen and Dowling JJ.  In Suttor v Gundowda Pty Limited (1950) 81 CLR 418 at 441 the High Court said that:

   "if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract." (my emphasis).

2. However, in Hooper v Lane at 461-2 and 1376, Bramwell B instanced limitations of the rule that "no man shall take advantage of his own wrong." See Broom at 200.

1. In the case of In re London Celluloid Company (1888) 39 Ch D 190 at 206, Bowen LJ described the observations of Bramwell B as being "very instructive" and said that the maxim meant “that a man cannot enforce against another a right arising from his own breach of contract or breach of duty”. The case concerned a claim by the liquidator of a company to enforce against directors the payment of calls on shares. At 207 Bowen LJ said:

   "Here there has been a breach of contract by the company but the right to enforce payment of calls does not arise from that breach.  Even if it did, I doubt whether the maxim would apply.  You cannot sue a person whom you have wronged, for a demand arising out of the wrong, but that rule does not apply in favour of transferees, unless they have by special agreement been clothed with all the rights and cross demands of the transferors.  Again, the maxim cannot be applied so as to defeat rights which have subsequently arisen…” (my emphasis.)

2. The principle of protecting the rights of third parties acquired bona fide under a fraudulent transaction is also exemplified in Broom at 200, by the case of a shareholder in a company who has been induced to take shares by the fraud of the company and who cannot avoid  the contract and have his name removed from the register after an order for the winding up of the company has been made, nor after a petition for winding-up has been presented on which an order is subsequently made; because of the intervening rights of the creditors accruing under that order: Oakes v Turquand & Anor (1867) LR 2 HL 325; Houldsworth v City of Glasgow Bank (1880) 5 AppCas 317.

1. In Broom at 200 reference was also made to sale of goods cases such as White v Garden (1851) 10 CB 919; 136 ER 364 where it was decided that a contract for the sale of goods, obtained by fraud on the part of the purchaser, is void only at the election of the vendor but it is too late to declare such election after the goods have passed into the hands of a bona fide purchaser. There is a faint echo of the situation in the present case in the observation of Cresswell J (at 926; 367) that:

   "One of two innocent parties must suffer: and surely it is more just that the burthen should fall on the defendants, who were guilty of negligence in parting with their goods upon the faith of a piece of paper which a little inquiry would have shewn to be worthless, rather than upon the plaintiff, who trusted to the possession of the goods themselves."

2. In S and Y Investments (No. 2) Pty Limited (InLiquidation) v Commercial Union Assurance Company of Australia Limited (1986) 44 NTR 14, Asche J, with whom Kearney J essentially agreed, referred to the case of In P Samuel & Co Ltd v Dumas [1924] AC 431, where the mortgagee of a ship claimed against the loss of the ship which was insured against "perils of the sea". Asche J's description of the case continued:

   "In fact the loss of the ship was caused by the owner of the ship scuttling her and the House of Lords held that because of this deliberate act the loss did not have the accidental element which was essential to constitute a peril of the sea.  But their Lordships held that otherwise the act of the shipowner would not have avoided the policy vis a vis the mortgagee who was not a party to the owner's fraud.  While the owner could not take advantage of his own wrong the mortgagee would only be excluded on this ground if, in the words of Viscount Finlay at page 457:

   ‘The mortgagee is to be considered as so identified with the owner whose wilful misconduct brought about the loss as to be incapable of taking advantage of it.’ “

3. The maxim that a party may not take advantage of its own wrong will not usually apply to affect the right of an innocent third party acquired from the wrongdoer.  Palmer J determined that Mr and Mrs Mills did not need the assistance of the equity court to perfect their equitable interest on the ground that they "validly exercised their option, even though the option period had expired, because of the principle of the common law which deprives a wrongdoer of the advantage of his or her wrongdoing."  With respect, the maxim did not enable Mr and Mrs Mills to defeat Tricon’s claim to priority.  Ruthol could not rely on its wrongdoing in misleading Mr and Mrs Mills to defeat their claim against it.  But Tricon was not guilty of any wrongdoing and the maxim did not prevent its asserting its priority over the interest claimed by Mr and Mrs Mills.

4. Accordingly, in my opinion, for the reasons given in Latec Investments, Tricon’s equitable interest as purchaser of the Manly Vale property took priority over Mr and Mrs Mills’ equity to proceed against Ruthol for breach of contract in reliance on their late exercise on 3 March 1999 of their option to purchase.

   Costs

5. Since preparing these reasons I have had the benefit of reading Cripps AJA’s judgment.  For the reasons his Honour has given I agree with the costs orders he proposes.

Orders

1.            Appeal allowed;

2.Judgments and orders of Palmer J of 19 April 2002 set aside except as to costs;

3.The appellant to pay the costs of first and second respondents of the appeal;

4.The second and third respondents to pay the third respondents’ costs of the appeal but to be indemnified in respect of the amount of those costs by the appellant;

5.In both matters No 2101/99 and No 4858/01, order that the parties bring in short minutes of order in accordance with these reasons for judgment.

1. CRIPPS AJA:  I agree that the appeal should be allowed for the reasons given by Sheller JA. 

2. I will set out the salient facts for my additional comments as to why the equitable interest of Tricon in the subject property prevails over the earlier equitable interest of the Mills and why Tricon is entitled to an order for costs. 

3. By deed dated 25 February 1997 Ruthol granted the Mills an option to purchase its land provided the option was exercised between 7 April 1997 and 30 June 1997.  The option entitlement was conditional on the non-exercise of the existing lessee, Alphega, of a right to renew its lease.  Before the time had expired for the Mills to exercise their option they were told by Ruthol (fraudulently as it turned out) that Alphega had exercised its option and for that reason the Mills did not attempt to exercise their option during the relevant period. In fact Alphega had not exercised its option but the Mills were not aware of Ruthol’s deceit.  When Mills became aware of the true state of affairs in early 1999 they purported to exercise the option and lodged a caveat on the title to protect their interest.  In March 1999 they commenced proceedings against Ruthol for specific performance and in the alternative for damages for breach of contract (2101 of 1999)

4. In the meantime Tricon on 6 May 1998 entered into a five year lease with Ruthol to commence upon Alphega vacating the subject premises in July of that year.  The instrument of lease contained an option to purchase within three years.  Tricon claims it exercised the option in May 1999.  Between late 1998 and early 1999 Tricon spent $250,000 renovating the premises.  At the time Tricon entered into the lease agreement containing the option to purchase it had no notice of any interest the Mills might have in the subject property.  Moreover it had no notice of the interest of the Mills during the period of renovation.  Later Tricon became aware of the caveat lodged by the Mills and it commenced proceedings against Ruthol and Mills (4858 of 2001) seeking an order for specific performance against Ruthol and an order against Mills that it remove the caveat.

5. Both suits came on for hearing before Palmer J.  His Honour held, inter alia, that the equitable entitlement of the Mills prevailed over the equitable interest of Tricon.  In his order his Honour left it to Mills to elect whether they wanted the contract specifically performed or whether they would accept, in lieu, an award of damages for breach of contract.  His Honour directed that if the Mills became the owners of the land they would take subject to Tricon’s legal interest.  His Honour also directed that in the event the Mills elected to claim damages for breach of contract Tricon was entitled to an order for specific performance.  The Mills elected to have the contract specifically performed.

6. Ruthol appealed and joined Tricon in its notice of appeal.  Tricon did not appeal.  Because both matters were heard together and because no objection was taken to Tricon’s submission in the appeal that it, and not the Mills, was entitled to specific performance I agree with Sheller JA that Tricon’s argument should be entertained.

7. Palmer J concluded that as between Ruthol and the Mills it was not open to Ruthol, by reason of its conduct, to assert that the option that it gave to the Mills could not be exercised in 1999.  His Honour concluded that the interest of the Mills was not a “mere equity” but an equitable interest in the property and because it was earlier in time it prevailed over the equitable interest of Tricon.  The equitable interest of the Mills was recognized because, as has been pointed out by Sheller JA, Ruthol was not permitted to take advantage of its own wrongdoing to maintain that the Mills had not exercised the option within time. 

8. Tricon had done no wrong to the Mills and the Mills did not contribute in any way to the position Tricon found itself in.  Both the Mills and Tricon were innocent of any wrongdoing and were both the victims of Ruthol’s deceit.

9. Before Palmer J submissions were directed to whether the interest of the Mills was relevantly a “mere equity” or whether it was an equitable interest in property.  His Honour found it was an equitable interest in property.

1. In my opinion the issue should be resolved in favour of Tricon by reason of the decision of the High Court in Latec Investments Limited v Hotel Terrigal Pty Limited(In liquidation) (1965) 113 CLR 265 without the need to categorize the interest of the Mills. Latec was concerned with competing equities over land on which was erected the Terrigal Hotel.  Terrigal was in arrears under its mortgage and Latec purported to exercise its powers of sale as mortgagee.  It sold the land to one of its wholly owned subsidiaries entitling Terrigal to set aside the sale by reason of Latec’s fraudulent conduct.  Later the subsidiary gave MLC Nominees Limited security by way of floating charge over its assets with the result that it became in equity the mortgagee of the land.  The issue for determination was whether Terrigal’s equitable entitlement being first in time prevailed over the equitable entitlement of MLC Nominees Limited.  Although proceeding by somewhat different routes (set out by Sheller JA) the three members of the High Court concluded that the equitable entitlement of Terrigal did not prevail over the equitable interest of MLC Nominees Limited.  Sheller JA has set out the conclusions of Menzies J in that case and I need not repeat them.

2. In my opinion the facts in the present case are relevantly the same as those in Latec.  In Latec the registered proprietor was deprived of its property by fraud.  In the present case the Mills were precluded from acquiring property by fraud.  In both cases the equitable interests arising subsequently were acquired without notice of the earlier interests.

3. In my opinion the authority of Latec concludes the matter in favour of Tricon’s equitable interest in the property prevailing over the equitable interest of the Mills.  Accordingly I agree with the orders of Sheller JA setting aside the decision of Palmer J.

4. I would propose that the appellant pay the costs of the Mills.  That is because as between Ruthol and the Mills the Mills would have been wholly successful had it not been for the recognition of Tricon’s equitable interest.  Ruthol may have preferred to sell the land to Tricon rather than to the Mills but in the light of its conduct I do not think its wishes should be recognized by the Court.  Tricon is entitled to an order for specific performance because its equity prevails over that of the Mills not because Ruthol wished it.

5. In my opinion Tricon is entitled to an order for costs against the Mills because it was successful in its claim.  However Ruthol should indemnify the Mills for the costs payable to Tricon.     

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LAST UPDATED:               26/03/2003