Steven Bailey v Woondella Pty Ltd
[2012] VSC 396
•20 September 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. S CI 2009 of 10944
| STEVEN BAILEY | Plaintiff |
| v | |
| WOONDELLA PTY LTD ACN 004 681 387 | Defendant |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 – 5 September 2012 | |
DATE OF JUDGMENT: | 20 September 2012 | |
CASE MAY BE CITED AS: | Steven Bailey v Woondella Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 396 | |
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REAL PROPERTY – Mortgagor sold land to the plaintiff two days prior to mortgagee’s auction – Mortgagee unwilling to withdraw property from sale unless mortgage paid out in advance – Plaintiff attended mortgagee’s auction and was unsuccessful bidder – Property sold at auction and title eventually transferred to third party – Plaintiff sued under contract with mortgagor.
CONTRACT – Implied term – Performance conditional upon mortgagee withdrawing property from sale and co-operating in settlement of mortgagor’s contract with plaintiff.
CONTRACT – Mutual discharge and abandonment – Conduct of parties after failure of commercial purpose of contract – Neither party regarded contract as on foot
CONTRACT – Frustration – Failure of a commercial purpose of the contract – Contract became incapable of performance.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W. F. Rimmer of counsel | Ponte Earl |
| For the Defendant | Mr R. E. Cook of counsel | Fong & Co |
HIS HONOUR:
Introduction
The defendant, Woondella Pty Ltd, was the registered proprietor of Woondella Park at 1460 Sale-Maffra Road, Sale, Victoria. The land was a little over 19 hectares with a proposed plan of subdivision that, if approved, would yield 169 housing lots in addition to the retention of an old homestead on approximately .9 hectares. Woondella had owned the property since 1967.
The land was described in two certificates of title, Volume 10867 Folio 113 and 114. The directors of Woondella are Geoffrey Millar and Mary Gaywin Irvine. While not a director, John Robert Benjamin was an authorised representative of Woondella.
In around 2008, Woondella was pursuing redevelopment of the land. That would involve the preparation and registration of a Plan of Subdivision. I was told that Woondella had incurred substantial costs with the development proposal and had borrowed heavily from the mortgagee of the land, South Eastern Secured Investments Ltd, to meet those costs. The mortgage was registered on 31 January 2008.
By November 2009, Woondella was indebted to the mortgagee for more than $3 million. Woondella and the mortgagee were in dispute. There was a proceeding brought by the mortgagee against Woondella to recover the loans, and a proceeding brought by Longreach Family Living (Vic) Pty Ltd, an entity associated with Woondella, alleging a failure by the mortgagee to make further advances. The relationship was further complicated by the fact that receivers and managers had been appointed to the business of the mortgagee. The firm, Sullivan Braham Pty Ltd, Barristers & Solicitors of Sale, acted on behalf of the mortgagee.
In the months leading up to November 2009, Mr Benjamin, on behalf of Woondella, had been negotiating with various parties, including the plaintiff, Steven Bailey and his brother, to sell the land or otherwise reach some arrangement that would facilitate the development proposal and pay out the mortgagee. In any event, until 25 November 2009, no agreement had been reached. On that day contracts were executed and exchanged between the plaintiff and Woondella for the sale of the land.
The contracts were not confined to a sale of the land to the plaintiff. One priority of Woondella in its negotiations was to retain ownership of the homestead site. At that time, the land remained in two titles. It was only after a Plan of Subdivision had been approved, and new titles issued, that the homestead site could be separated from the other land.
The contracts executed on 25 November 2009 included a principal contract under which Woondella agreed to sell and the plaintiff purchase the whole of the land at a price of $4 million. A deposit of $400,000 was paid that day. Settlement was to take place on 29 December 2009. The contract contained the standard form General Conditions prescribed by the Estate Agents (Contracts) Regulations 2008, including an obligation on the vendor at settlement to do all things necessary to enable the purchaser to become the registered proprietor of the land. Simultaneously with execution of the principal contract, the parties executed an option agreement, prepared by the plaintiff’s solicitors, under which the plaintiff granted to Woondella an option to purchase the homestead for $10 on the terms set out in an attached contract of sale. An option fee of $1 was paid. It was common ground that the option had been exercised with the execution of the attached contract of sale. As might be expected, the price of the land sold under the principal contract had been adjusted to accommodate the option and sale back contract. At trial, the value of the homestead had been assessed differently by the parties. Woondella valued the homestead at $775,000. The plaintiff valued it at an amount substantially less. It was also important that the proceeds from the sale under the principal contract would be sufficient to discharge the mortgage.
The homestead was described in the option agreement and contract by reference to a ‘proposed Plan of Subdivision’. The homestead contract included Special Conditions, including an obligation on the plaintiff to cause a Plan of Subdivision to be prepared in final form for approval. The cost of subdivision was to be ultimately borne by Woondella. The homestead contract was made subject to and conditional upon registration of the Plan of Subdivision. If the plan was not registered within 24 months of 25 November 2009, Woondella could at its option terminate the contract.
At the time the contracts were executed, Woondella had exhausted its funds and was desperate to salvage what it could from a sale of the land after discharging its indebtedness to the mortgagee, and to retain the homestead. It was common ground that the contracts were executed in rushed circumstances and at a time when Woondella was under commercial stress. A mortgagee’s auction of the property was scheduled to take place at 1pm two days later, on Friday 27 November 2009. These were facts well known to all parties.
Notwithstanding the strained relationship between the mortgagee and Woondella, the parties assumed that they would be able to persuade the mortgagee to withdraw the land from auction by presenting it with the contracts of sale which, upon settlement of the principal contract, would yield sufficient funds to discharge the mortgage. The settlement date under the principal contract (29 December 2009) was obviously intended to provide the mortgagee with repayment of Woondella’s outstanding debt within the time anticipated for settlement of a sale at auction, although the evidence did not indicate what time that was.
The attempts by Woondella to enlist the cooperation of the mortgagee to withdraw the land from sale, and await settlement of the contracts with the plaintiff, failed. Having been informed of the contract, Mr Sullivan wrote to Woondella’s solicitors, Fong & Co, on 26 November 2009 outlining the basis upon which the mortgagee was prepared to settle all matters between the parties. The solicitor handling the matter at Fong & Co was James Stavris.
In his letter, Mr Sullivan proposed terms of settlement under which the outstanding amount due to the mortgagee, in the sum of $3,725,000, was to be paid by 12 noon on 27 November 2009 (the day of the auction) and for the discontinuance of the two legal proceedings, including mutual releases.
Mr Stavris gave evidence that he was surprised by the mortgagee’s response. That may be so, but with existing litigation on foot between the parties it is not surprising that the mortgagee required terms of settlement and an expedited payment in order to obtain its cooperation.
Mr Stavris responded to the letter from Mr Sullivan, dated 26 November 2009 on the same day. After confirming earlier discussions, and the particulars of the sale to Mr Bailey, he went on,
Our conversations, with the purchaser’s solicitor indicate that the purchaser will seek to enforce his contract of sale and we are informed that a caveat has been lodged over the security by the purchaser this day.
In the circumstances, our instructions are that if you do not accept the contract of sale as executed and allow this sale to proceed, we put you on notice that our client will enforce its rights as mortgagor and hold your client responsible for any loss it suffers, including but not limited to any action brought about by Mr Bailey and/or his nominee. Needless to say our client’s counterclaim will also be vigorously pursued.
While Mr Stavris may have been surprised by the response of Mr Sullivan on 26 November 2009, he ought to have realised that there was a very real risk that the mortgagee would respond just as it did. Nevertheless, I accept that the parties hoped that their contracts would have the desired effect, and were disappointed and even surprised when they did not. The plaintiff’s solicitor, Christopher Mayne Young, was somewhat more realistic. He understood the risk that the plan to persuade the mortgagee to withdraw the property may fail. He mentioned a ‘back up plan’ that would involve his client attending and bidding at the auction in the event the mortgagee would not cooperate with the auction.
In an attempt to impose pressure on the mortgagee, Mr Stavris went on to inform the mortgagee’s solicitors that an application for an urgent injunction was being prepared. When it became apparent that the mortgagee may not cooperate as anticipated, the parties set out to find ways to either encourage or even force its cooperation.
Mr Young conceded that at some point prior to the auction he told Mr Stavris that if the auction was not cancelled the plaintiff would have to bid at the auction. It was put to Mr Young that the conversation occurred on 25 November 2009, which was the day on which the contracts were executed. He agreed that could have been the case. He elaborated on the ‘back up plan’. Mr Young said that the plaintiff did not want the mortgagee selling to someone else, thereby losing the opportunity to acquire and develop the land.
Mr Young recognised that if his client became the successful bidder, the terms of the option and homestead contract may need renegotiation. During discussions with Mr Stavris on the morning of the auction, Mr Young informed Mr Stavris that if the plaintiff attended and bid at the auction (and presumably was successful) the option agreement would need to be renegotiated if the plaintiff had to pay a higher price for the property than $4 million.
On the morning of Friday 27 November 2009, counsel for Woondella attended at the Practice Court in the Supreme Court at Melbourne, to make application for an injunction to stop the auction scheduled to take place at 1pm that afternoon. Counsel for the mortgagee was also in attendance. There were discussions but no application was actually made to the court, and no agreement was reached prior to 1 pm.
During Friday morning the plaintiff was in Sale attempting to reach agreement with the mortgagee to stay the auction. There was an attempt to have Sullivan Braham accept a letter from the plaintiff’s bank indicating his ability to pay an amount sufficient to discharge the mortgage. There was even a suggestion that the plaintiff might purchase directly from the mortgagee. Mr Young, was involved in those negotiations. It seems that at one point, Mr Sullivan proposed that the plaintiff pay the purchase price of $4 million into his firm’s trust account, but the plaintiff was unwilling to do so without production of an unencumbered title.
Shortly before 1pm on Friday there was a heated telephone exchange between Mr Stavris and Mr Sullivan in which Mr Stavris was informed that the auction would go ahead. Mr Stavris then spoke with Mr Young who informed him that the plaintiff would attend and bid at the auction. Mr Stavris said that Mr Young told him that ‘he’s going to have to go to the auction and all bets are off’. Mr Young did not recall using the words ‘all bets are off’, and relied on subsequent correspondence in an attempt to demonstrate a different state of mind and that the parties continued to consider the contract as binding. In any event, the plaintiff attended the auction, made bids, but was the under bidder. The Sale Land Company Pty Ltd purchased the property for $4.9 million. The plaintiff’s highest bid was $4.8 million.
Following the auction, there were continuing discussions and written communications between Mr Stavris and Mr Young. Mr Young sought to insist upon performance of the contract, notwithstanding the sale by the mortgagee to an arms length third party. There were even discussions concerning the commencement of a proceeding by Woondella, to set aside the sale, on the basis that the mortgagee had acted unreasonably.
Mr Stavris held a deposit of $400,000 which was eventually returned. This proceeding was commenced on 24 December 2009, initially seeking specific performance, but eventually limited to a claim for damages.
The issues
The plaintiff approached the case as a straightforward claim for damages consequent upon Woondella’s repudiation which the plaintiff ultimately accepted. His claim for loss and damage was made in the alternative. The primary claim was for the sum of $5,104,194 as damages for lost profits. In the alternative, the plaintiff claimed the difference between the value of the land as at the date of the defendant’s alleged repudiation, and the amount for which the plaintiff had contracted to acquire the land. The amount of that claim was $900,000, by reference to the sale price at auction on 27 November 2009 less the amount for which the plaintiff could have acquired the land under the principal contract.
By its amended defence and counterclaim, Woondella alleged an implied contingent condition to the effect that the contract would only be enforceable in the event the mortgagee could be persuaded to withdraw the land from sale. The precise formulation of the proposed term, as pleaded by Woondella, was ‘that the mortgagee’s sale that had been foreshadowed by the mortgagee and fixed for 27 November 2009 would not proceed and that the mortgagee would be paid out by the plaintiff before the mortgagee’s sale’. The particulars in support of the implication were sparse, and did not include a range of matters later relied upon by Woondella, although without objection. Those matters included the commonly understood facts and circumstances that informed the commercial purpose of the contracts made on 25 November 2009 and, perhaps more importantly, how the contracts were to be employed to prevent the auction.
Woondella contended that the condition failed when the mortgagee refused to withdraw the land from auction, and proceeded to sell the land to a third party on Friday afternoon, 27 November 2009.
Woondella also contended, in the alternative, that the contract had been frustrated by the mortgagee’s sale. Alternatively, it contended that the contract had been terminated by consent of the parties. Woondella relied upon the conduct of the plaintiff on 27 November 2009, after it became apparent that the mortgagee would not withdraw the property from sale. That conduct included the statement by Mr Young that ‘all bets are off’, coupled with the plaintiff’s attendance and bidding at the auction. During the course of the trial, this part of the defendant’s case was reformulated as a mutual abandonment of the contracts by the parties. Woondella also counterclaimed under the homestead contract, attributing a value to that land of $775,000.
Accordingly, the following questions arose for determination by the court.
1.Was performance by the parties of their respective obligations under the contracts executed on 25 November 2009 conditional on the mortgagee withdrawing the land from auction and permitting the parties to settle their contract and discharge the mortgage by that means?
2.Did the parties discharge one another from performance under the contracts on 27 November 2007 or by their conduct abandon the contracts, thereby mutually discharging each other from further performance?
3.Was the contract on which the plaintiff sued frustrated by the mortgagees sale on 27 November 2009?
There were additional questions concerning the damages to which the plaintiff might be entitled if he established his case on liability.
Implied condition
The plaintiff submitted that there was no room for the implied contingent condition because it was inconsistent with the express obligation in cl 10 of the General Conditions of Sale, that required the vendor to do all things necessary to enable the purchaser to become the registered proprietor of the land. Thus, according to the plaintiff, the implication of the condition sought by Woondella failed to meet the requirements in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.[1] The plaintiff did, however, contend that the suite of agreements made on 25 November 2009 should be read and construed together, and that performance of the homestead contract was conditional on completion of the sale of the land to him. Thus, upon the failure of Woondella to complete the sale to the plaintiff, he was discharged from any obligation to complete the homestead contract.
[1](1977) 180 CLR 266; Codelfa Constructions Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337, 347.
While not pleaded, there is much to be said for the contention that the nature and purpose of the transaction supports the implication of the condition contended for by the plaintiff, just as it supports the contingent condition sought to be implied by Woondella. In the absence of a conveyance of the land to him, the plaintiff would be deprived of any opportunity to prepare and submit the Plan of Subdivision for approval, and registration, and would not be in a position to complete the homestead contract. Had the plaintiff successfully purchased the land at auction and settled that contract, he would acquire title and thus the ability to prepare and register the Plan of Subdivision. But would he be obliged under the homestead contract to transfer the homestead to Woondella for $10? The failure of the first part of the transaction deprived the second part of any opportunity for completion. While that analysis is fatal to Woondella’s counterclaim, it is by no means the end of the matter. The interdependency of the contracts, including the shaping of price, made the performance of the homestead contract dependent on a transfer of the land to the plaintiff at the price and on the terms and conditions negotiated with Woondella, not at a market price determined at public auction.
The circumstances in which the parties negotiated and made the contracts was most unusual. In addition to the strained relationship between Woondella and the mortgagee, including the litigation, Woondella had no capacity to meet its obligation to the mortgagee, without a sale of the property. In its negotiations with the plaintiff, it was paramount to Woondella that it retain the homestead site as part of the transaction. To facilitate such an arrangement, an adjustment was made to the purchase price under the principal contract to reflect the value of the homestead, the grant of an option by the plaintiff to Woondella, and the terms of the contract of sale under which the plaintiff was to transfer the homestead site to Woondella once a separate title had been issued.
Importantly, the plaintiff and his solicitor knew that there was no prospect of Woondella being able to procure a discharge of the mortgage and that it had no capacity to complete a conveyance to him unless the mortgagee cooperated and withdrew the land from sale and facilitated a settlement of the principal contract. The circumstances in which the contracts were made, their terms and their intended use in an attempt to induce the cooperation of the mortgagee, compel that conclusion.
When asked whether the contracts and option were unusual, Mr Young said,
As far as I was concerned, we were negotiating a clean contract to buy a parcel of land for a price that we were told was more than sufficient to cover the amount owing to the mortgagee, and on that basis the mortgagee should have accepted the contract.
That was a gross oversimplification, but revealed an acknowledgement by Mr Young that the contracts were designed and structured as an inducement to the mortgagee to cooperate. It was imperative that the principal contract settle to provide sufficient funds to discharge the mortgage, facilitate the removal of caveats, and justify the transfer of the homestead for $10 under the homestead contract.
At the time the parties entered into the contracts, they must have known that there was no guarantee that the mortgagee would cooperate by withdrawing the land from auction two days later. They were at least hopeful that it would do so, expressing varying degrees of optimism. But the parties made no express agreement about what would happen if the mortgagee did not cooperate as they hoped or anticipated, although the plaintiff and his solicitor had a ‘back up plan’.
It was plain that the parties intended to design and then to use the contracts as a tool to persuade the mortgagee to withdraw the property from sale and to permit them to complete the contracts they had made. That was a commercial purpose of the parties when executing the contracts on 25 November 2009. It was only if that objective was wholly achieved that the contracts could be performed according to their terms and intended outcome. The parties well understood that the contracts were not capable of performance unless the initial or threshold purpose had been achieved.
There is no novelty in the law for a stipulation of the kind sought to be implied by Woondella. A stipulation that renders performance conditional on the occurrence or non-occurrence of some event, qualifies as a contingent condition of performance, and may be implied.[2] But whether such a term will be implied requires compliance with the ordinary conditions necessary to ground the implication. These were set out in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council:[3]
Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[2]NC Seddon and MP Ellinghaus Cheshire & Fifoot’s Law of Contract 9th Australian Edition, Butterworth 2008, para 20.1.
[3](1977) 180 CLR 266, 282-3.
In my opinion a term of the kind advanced by Woondella ought to be implied into the principal contract if the commercial purpose of the parties was to be given effect. This is not a case, as the plaintiff would have it, where the vendor’s obligation of delivering title should be viewed in isolation from the commonly understood background facts and circumstances, the interrelated obligations and the use to be made of the contracts as a tool to induce the cooperation of the mortgagee. It was a paramount purpose of the parties to avoid the auction.
Had the parties turned their mind to the question – what provision should be made if the mortgagee is not persuaded to withdraw the property from sale? – they would have recorded an agreement which had the effect, that, as Mr Young said, ‘all bets are off’. If the strategy of presenting the mortgagee with the contracts did not persuade it to withdraw the property from sale, they knew that it would be necessary to walk away from the transaction as it was then structured. That might mean, as the plaintiff proposed in his ‘back up plan’, going to the auction and bidding for the land and, if successful, renegotiating the arrangement under which Woondella might acquire the homestead.
The term to be implied need extend no further in expression than that performance by the parties of their mutual obligations under the first contract was conditional upon the mortgagee withdrawing the land from sale and cooperating in settlement of the principal contract. Had the parties turned their mind to the question of performance of the first contract in the event the mortgagee refused to cooperate, I have no doubt they would have concluded that such an implied term was so obvious that it went without saying. I am satisfied that a term to the effect just mentioned meets each of the conditions required for an implied term in this case.
The plaintiff through his counsel and his witness, Mr Young, made much of the correspondence following the auction, contending that it revealed a common intention that the contracts remained on foot notwithstanding the auction; and therefore, was conduct inconsistent with the implied contingent condition, as well as the alternative defence of mutual discharge. In my opinion the correspondence, and the subsequent conduct of the parties should not be viewed, as Mr Young argued in his evidence, or as was submitted by the plaintiff, as inconsistent with the implied contingent condition.
The correspondence from Mr Young was unusual and, quite frankly, contrived to evidence an expectation of performance when Mr Young well knew that there was never any prospect that Woondella could have discharged the mortgage prior to auction, or settle the principal contract, without the mortgagee’s cooperation in withdrawing the property from sale and facilitating settlement of the principal contract.
There was some discussion between Mr Young and Mr Stavris about the commencement of a proceeding to have the sale to the new purchaser set aside. Mr Stavris said that the plaintiff had agreed to fund a proceeding. No such proceeding was commenced, and no basis was advanced by either solicitor for such proceeding apart from the mention of ‘Nolan’s case’ from time to time.
While the parties hoped that they could find a way to revive their transaction, involving the two contracts, I do not accept that the solicitors, with sober reflection, could have seriously considered that such a proceeding would ever enable Woondella to complete the sale under the principal contract.
The first of the letters on which the plaintiff relied, to support his contention that the parties recognised continuing obligations after the auction, was written by Mr Young to Mr Stavris on 7 December 2009. Mr Young referred to a telephone conversation with Mr Stavris on 3 December 2009 and continued,
Our client is becoming increasingly concerned that your client does not intend to settle its contract with our client and has instead elected to allow its mortgagee to enter into a subsequent Contract of Sale in relation to the same property.
We had previously understood that your client was disputing the amount claimed by its mortgagee and the terms it was insisting be inserted into a proposed contract with our clients. One of our client’s representatives was present in Court during the hearing of your client’s applications last Friday and was informed that a deal had been reached between your client and its mortgagee.
Notwithstanding this deal, it appears that the mortgagee proceeded to auction the property about half an hour later on Friday afternoon and has purported to enter into a new Contract of Sale.
Kindly confirm whether or not your client intends to take all necessary steps to defeat the mortgagee’s contract and to complete the original Contract of Sale with our client by return at your earliest convenience.
Take notice that in the event that we do not receive a positive response to this letter by close of business on Monday December 7, 2009, we have instructions to immediately commence a proceeding in the Supreme Court’s Commercial Court seeking urgent orders for the specific performance of the Contract of Sale and, alternatively, damages for breach of contract. In the unfortunate event that such a proceeding becomes necessary, a copy of this letter will be produced to the Court of the question of our client’s indemnity costs.
Mr Young sought to explain the letter as a genuine attempt on his client’s behalf to assert his rights under the contract. I reject his explanation. The letter is little more than a contrivance, designed to engineer a basis to claim damages. That contrivance by Mr Young continued when he caused Mr Stavris to write a letter on 23 December 2009 to set up the legal basis to commence this proceeding on the following day.
On 23 December 2009, Mr Stavris wrote to Mr Young ostensibly in connection with the deposit. Mr Stavris said that the letter had been written at the request of Mr Young to facilitate the return of the deposit. Mr Stavris stated in his letter,
As you are aware, the property known as Woondella Park was sold at auction on 27 November 2009 by the mortgagee in possession at public auction for $4,900,000.00.
The matter of whether the mortgagee has acted in a bona fide manner is questionable and certainly our respective client’s interests have been ignored.
In the circumstances, for matters beyond the control of our client, our client will not be able to complete the contract of sale by the due date or at all. We are advised that our client will not require your client to tender the balance of the purchase price on the scheduled completion day.
Our client is currently in the United States of America seeking treatment for advanced cancer; however, we have still been actively seeking counsel’s opinion in relation to a counterclaim to our existing amended defence against the mortgagee. Counsel has advised that written advices will be prepared shortly and we are happy to provide them once we have those instructions.
Given the festive season and the limits on issuing proceedings during this time, our respective client’s positions are neither strengthened nor weakened by issuing proceedings very early in the New Year. In any event, both our client’s have caveats on title and any completion will require their removal. Any attempt to remove the caveats will give both our clients the vehicle to address their claims if this attempt is brought before our clients issue proceedings.
We look forward to a successful resolution to this matter in the New Year and wish you all the very best for the festive season.
Having received the letter from Mr Stavris, prepared in response to his request, Mr Young’s reply was immediate,
We refer to your facsimile of December 22 (sic) 2009, the contents thereof constituting a repudiation of the contract of sale by your client.
Our client does not accept your client’s repudiation.
Kindly advise in writing if you have instructions to accept service of any proceedings in this matter.
Having heard Mr Stavris give his account of the events I am persuaded that he was quite out of his depth with these transactions. He did not grasp the reality of the situation when the contracts were made, or when the mortgagee refused to withdraw the property from sale. I accept his explanation for the letter of 23 November 2009. He said that after many conversations with Mr Young it was agreed that he should write the letter and return the deposit. He said that Mr Young told him ‘I need to have a letter from you saying that you’re not going to be able to complete the contract’. I accept that the letter was written by Mr Stavris at Mr Young’s request, but do not accept that the letter is evidence that the contract was still on foot. It was a part of Mr Young’s plan to create a basis to commence a proceeding.
Mr Stavris may have genuinely believed that the mortgagee would cooperate, but the background to the relationship between Woondella and the mortgagee must have indicated to a reasonable solicitor that it may not. Mr Stavris might have believed that an injunction could be obtained on the morning of 27 November 2009 to stop the auction, but the prospect of such an order being made, at such short notice and in the absence of a payment of the outstanding debt, should have been understood by him as remote. In any event, no application was made to the court.
Mr Stavris might have thought that he could commence a proceeding after the sale at auction to force the mortgagee to somehow facilitate settlement of the contracts made on 25 November 2009, but no rational basis for such a proceeding was ever explained. The convergence of the unrealistic and naïve assumptions or expectations of Mr Stavris and the opportunistic attempts by Mr Young to engineer a claim for damages, do not have the consequence contended for by the plaintiff. The correspondence and discussions after the auction between the two men did not revive contractual obligations that did not survive the auction.
Mr Young tried valiantly in his evidence to give the impression of a firm belief that the first contract remained on foot notwithstanding the auction and the eventual sale to a third party. He claimed that the plaintiff’s purpose in attending the auction was to mitigate his loss. I reject that explanation. It was an ex post facto attempt to explain away the plaintiff’s conduct that, when viewed objectively, was entirely consistent with his ‘back up plan’ and the operation of the implied contingent condition. I note that the plaintiff did not give evidence, but relied only upon evidence from Mr Young. When questioned about the prospect of his client acquiring the property at auction, and the consequence of his entering into a second contract for the purchase of the land, Mr Young suggested that his client could choose between the contracts, opting for the most beneficial, and that it may be necessary to renegotiate the option for the homestead site if the plaintiff had to pay more than $4 million.
It is true that there were steps taken, or at least considered, with a view to reviving the contracts. But the correspondence passing between Mr Young and Mr Stavris was, in my view, a contrivance by the plaintiff and Mr Young to seek to obtain an opportunistic benefit through the enforcement of contracts they never expected would be performed, unless the property was withdrawn from auction.
Mutual discharge or abandonment
As an alternative defence, Woondella relied upon the conduct of the plaintiff, Mr Young, on 27 November 2009 once they had realised that the mortgagee would not withdraw the property from sale. I accept the evidence of Mr Stavris that Mr Young said that ‘all bets are off’ when informing him that Mr Bailey would be attending the auction to be conducted shortly thereafter in Sale. While this part of Woondella’s case is framed as an alternative defence, the events of the preceding days cannot be ignored. Even if, for some reason, the contingent condition should not be implied, the fact remained that the parties had prepared and presented the contracts to the mortgagee in the hope and expectation that it would respond by withdrawing the property from sale. It refused to do so. The parties knew that Woondella was unable to obtain a discharge of the mortgage and complete the sale to the plaintiff without the mortgagee withdrawing the property from sale and facilitating settlement. Once they realised, shortly before 1pm on the Friday, that there was nothing that could be done to prevent the auction going ahead, Mr Young told Mr Stavris that his client would attend the auction and that ‘all bets are off’.
Mr Young said that he spoke of a need to renegotiate the option, or more correctly, the contract for the sale of the homestead site. On the Friday morning, Mr Bailey had attempted to dissuade the mortgagee from proceeding with the auction, and perhaps even went so far as to try and negotiate a pre‑auction purchase of the property directly from the mortgagee. When time ran out he implemented his ‘back up plan’.
The plaintiff submitted that even if Mr Young had said that ‘all bets are off’, those words were of uncertain meaning. They were not. The words meant, and in context would have been understood to mean, that the plaintiff would no longer be bound by the contracts made on 25 November 2009. Insofar as the contracts remained on foot, the plaintiff, by his conduct, repudiated any continuing obligation. But in my view it is unhelpful to analyse the legal consequences in terms of repudiation. After all, the plaintiff knew on entering the transaction that Woondella was incapable of performing its obligations without the cooperation of the mortgagee in calling off the auction and facilitating settlement of the principal contract.
The better, and more practical approach, is to examine the whole of the conduct of the parties, including the circumstances in which the contracts were made, to ascertain objectively their intention once it became apparent to them that the mortgagee would not cooperate. In my opinion, their conduct and the background circumstances converge to provide an ample and compelling basis to infer that they treated the contracts as at an end, whether characterised as mutual discharge or abandonment.
In CGM Investments Pty Ltd & ors v Chelliah & ors,[4] Finkelstein J reviewed relevant authorities and expressed the principles as follows:
[17]Whenever parties make a contract it is possible that they have conducted themselves in such a way that it can be said by implication that they have agreed to rescind their bargain: Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93, 114; Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520, 534. This was dealt with by Isaacs J in Summers v Commonwealth (1918) 25 CLR 144. In that case the parties had entered into a contract for the supply of a specified number of blocks of marble each of a certain dimension. For some time neither party took any step to perform the contract. It was held that the parties had abandoned or abrogated the contract. Isaacs J said (at 151-152):
"Whatever the terms of contract may be, it is possible for the parties so to conduct themselves as mutually to abandon or abrogate it. A position not too altogether dissimilar arose in the case of De Soysa v De Pless Pol [1912] AC 194. There, neither party had repudiated or refused to perform the contract, nothing in the nature of recision had occurred, but, said Lord Atkinson for the Privy Council: - 'One party to a contract is not bound to give the other unlimited time after a day named to do that which the other has contracted to do. There must be some point of time at which delay or neglect amounts to refusal ... In truth, the project seems to have been, to a great extent, if not altogether, abandoned by all the parties concerned.' In my opinion, that is the legal position here. Informally, but effectively, the parties have so acted in relation to each other as to abandon or abrogate the contract."
Summers v Commonwealth has been applied by the High Court in D T R Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423. This case concerned a contract for the sale of land. The purchaser purported to rescind the contract on the basis that the vendor had repudiated the contract by not complying with a condition. The vendor asserted that the purchaser's rescission constituted a wrongful repudiation and that the contract was thereby at an end. Stephen, Mason and Jacobs JJ (with whom Aickin J concurred) said (at 434):
"[T]here can be no doubt that ... when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as still being on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract."
[18]In my view, the authorities to which I have referred establish not only that an agreement can be abandoned by conduct, but also that the question whether an agreement has been abandoned does not require one to examine whether the parties actually had the intention of abandoning the agreement; only whether their conduct, when objectively viewed, manifests that intention. This conclusion accords with the objectivist theory of contract which is now irrevocably entrenched in our law: Taylor v Johnson (1983) 151 CLR 422. See also Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, where McHugh JA (as his Honour then was) said (at 336) that "[t]he weight of authority in favour of the objective theory is too great".
[4][2003] FCA 79; 196 ALR 548 at [17-18]. See also NC Seddon and MP Ellinghaus Cheshire & Fifoot’s Law of Contract 9th Australian Edition at para 22.9; Summers v The Commonwealth (1919) 26 CLR 180; Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288; Morris v Barren & Co [1918] AC 1; Fitzgerald v Masters (1956) 95 CLR 420; Marminta Pty Ltd v French [2003] QCA 541.
Notwithstanding the correspondence passing between the solicitors in the weeks after the auction and prior to the commencement of this proceeding, the words of Stephen, Mason and Jacobs JJ in DTR Nominees are apt to describe the circumstances of this case – ‘when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as still being on foot.’ It was all over once the mortgagee refused to withdraw the land from sale. In a context where the contracts had been prepared with the express purpose of inducing the mortgagee to withdraw the land from sale; when the parties well knew that Woondella did not have the funds to obtain a discharge of mortgage; and after the mortgagee had indicated its unwillingness to cooperate, the conduct of the plaintiff in attending and bidding at the auction was no more than the implementation of his ‘back up plan’ and recognition on his part that the commercial purpose of the transaction with Woondella had failed. The commercial purpose had also failed for Woondella.
Frustration
As a further alternative defence, Woondella contended that performance under the first contract had been frustrated and was thereby terminated because the land had been sold at auction to a third party. The plaintiff submitted that the auction was not a frustrating event upon which Woondella could rely, because Woondella had failed in its obligation to have the property withdrawn from sale and place itself in a position where it could give title to the plaintiff.
The plaintiff submitted that the frustrating event was one which Woondella was bound under the contract to avoid. He submitted that the risk of that event occurring was contemplated by the parties at the time the contracts were entered into and that the mortgagee sale did not alter the vendor’s obligation to make good title. Thus, the plaintiff would have the court examine the transaction through the clinical lens of the rights and obligations under the contract on which he sued, without regard to the circumstances in which both contracts were made, and the commercial purpose of the contracts, including the use to be made of them to persuade the mortgagee to withdraw the land from sale.
In Codelfa Construction Pty Ltd v State Rail Authority of NSW[5] the majority in the High Court held that contracts for the excavation of tunnels were frustrated as a consequence of injunctions granted to prevent noisy work being carried out at night and on weekends. In his judgment, Mason J said,[6]
The critical issue then is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances.
[5](1982) 149 CLR 337.
[6]At page 360.
In his judgment Aikin J made reference to the seminal authority, Davis Contractors Ltd v Fareham Urban District Council[7] in which Lord Radcliffe made what was later described as the ‘classic statement of the doctrine’ in the following terms,[8]
So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without the fault of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.
…
There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.
[7][1956] AC 696.
[8][1956] AC 696, 728-729.
The learned authors of Cheshire & Fifoot’s Law of Contract stated a theoretical basis for doctrine thus:[9]
The doctrine of frustration has been rationalised on a number of grounds. A multiplicity of theoretical strands can be teased out, but they are essentially tied to the question whether frustration rests on implied agreement or on the determination by the law of what is just and reasonable in light of the course of events. Although implication has had its adherents on the High Court, the modern trend is away from it. This is no doubt so because a doctrine that by hypothesis addresses the impact of post-contractual events not provided for by the contract itself cannot convincingly rest entirely on inference or implication. In at least some situations the court must, if it is to avoid artificiality, grasp the nettle and decide the matter from the point of view of what is just, or even in the public interest. It may in any case be doubted whether differences at a theoretical level, which can often seem elusive, translate well into the practicalities of application. It is more likely that a theoretical stance will be adopted to justify a decision arrived at on other grounds.
[9]Paragraph 19.13, case citations omitted.
The contracts were entered into at a time when the mortgagee’s auction was imminent and the parties knew that if it proceeded, their contracts could not be performed. They also knew that Woondella was in no position to discharge the mortgage. Those were more than mere risks assumed by Woondella, as the plaintiff would have it. They were certainties known to the parties. When the intended inducement failed, so did a commercial purpose of the contracts. The decision of the mortgagee to proceed with the auction was fundamentally inconsistent with a threshold purpose of the parties in making the contracts. Insofar as it is necessary to rely upon frustration, in my opinion the unusual facts of this case satisfy the requirements.
Counterclaim
Having regard to the foregoing conclusions, Woondella’s counterclaim falls away. There is no continuing obligation. But if I am wrong, and the plaintiff were to succeed in his contention that Woondella repudiated the first contract when conceding its inability to perform on 23 December 2009, the counterclaim would fail in any event. The obligation that arose under the homestead contract was entirely dependent upon performance by Woondella under the principle contract, giving the plaintiff an opportunity to prepare and lodge the Plan of Subdivision for registration, procure the issue of the homestead title and thus enable his performance under the homestead contract.
Quantification of loss and damage
In view of the foregoing, the need to quantify of loss and damage does not arise. But if the plaintiff were to succeed on its claim for breach, consequent upon Woondella’s inability to complete the principal contract, an assessment of damages would become necessary.
The plaintiff’s primary claim for loss and damage was for his lost opportunity to profit from the proposed development. Its alternative claim was for the difference between the contract price and the market value determined by the price at which the land was sold at auction on 27 November 2009.
The plaintiff contended that upon establishing liability he was entitled to an agreed sum of $2,690,000. The agreement was said to arise out of a letter dated 29 May 2012 from the plaintiff’s solicitors to Woondella’s solicitors and the reply. The plaintiff contended that Woondella had abandoned any opportunity to argue that damages should be calculated in a lesser amount, or on some other basis.
Woondella contended that the correspondence passing between the solicitors should be construed as no more than an agreement that, in the event damages were payable under the plaintiff’s primary claim for loss of profits, the amount would be $2,690,000. Woondella also contended that even such an agreement, confined to the ‘loss of profit’ head of damage, could be withdrawn just as an admission might be withdrawn at trial with the leave of the court.
Having regard to the background to the correspondence, including the alternate claims for loss and damage, and the directions for expert evidence, I accept the construction contended for by Woondella, namely, that the intention of the parties, objectively determined, was to avoid the need to file an additional joint expert statement and to call expert evidence of loss of profits.
The agreement that was reached should not be taken to prevent Woondella from contending that damages ought to be calculated, if payable, limited by the rule in Bain v Fothergill, or for loss of a bargain calculated by reference to the contract price and the value attributed to the land by the auction, less the present value of the homestead site and any adjustment necessary to reflect the cost to which Woondella would become liable under the homestead contract.
Woondella contended that the proper basis for the calculation of any claim was governed by the rule in Bain v Fothergill.[10] The rule is stated thus in The Sale of Land:[11]
… if a vendor, without any fraud involved, finds that he or she is incapable of making a good title, the purchaser is not entitled to recover damages for the loss of the bargain, but merely the deposit (with interest) together with the expenses of investigating the title. A vendor’s inability to compel a mortgagee to discharge a mortgage on the land or to consent to the sale was not a defect in title within the rule in Bain v Fothergill (1874) LR 7 HL 158. The rule in Bain laid down by the House of Lords over 125 years ago has stood the test of time but in Government Employees Superannuation Board v Martin (1997) 19 WAR 224 Ipp J held that this rule should not be followed in Western Australia. The rule applies to a defect which the vendor is unable to remove for reasons other than mere pecuniary inability.
A vendor is guilty of fraud within the meaning of this exception if he or she enters into a contract of sale knowing that he or she has no title nor the means of acquiring one, and in these circumstances the purchaser is entitled, in an action of deceit, to recover substantial damages. Further, this exception does not operate where a vendor, although not guilty of fraud in entering into a contract, wilfully puts it out of her or his power to carry it out or refuses to carry it out, or where he or she will not do what he or she can and ought to do in order to obtain a title; nor where the vendor has entered into the contract recklessly regardless of whether he or she will be able to make title or not.
The purchaser is entitled to damages for the loss of the bargain where the sale goes off by reason of a difficulty in conveyancing only, brought about by the pecuniary inability of the vendor to pay off a charge which he or she is legally entitled to pay. In such cases proof of wilful default or bad faith on the part of the vendor is unnecessary.
[10](1874) LR 7 HL 158.
[11]Lawbook Co, Voumard The Sale of Land, vol 1 (at update 42) [12.190] (citations omitted).
The application of this rule was considered by Needham J in Holmark Construction Co Pty Ltd v Tsoukaris & Anor.[12] In that case the plaintiff had contracted to purchase land from the defendant for $130,000. The plaintiff proposed to develop the land for profit. The land was subject to a mortgage under which the defendant owed $380,000. The mortgagee refused to discharge the mortgage or permit the sale. The defendant rescinded and sued for damages. The property was subsequently sold at auction to a third party for $280,000. The plaintiff’s claim for damages was for loss of bargain and loss of profit for breach of contract.
[12](1986) 4 BPR 97246; Supreme Court of New South Wales – Equity Division, 13 June 1986.
Needham J held that the vendor’s inability to compel the mortgagee to discharge the mortgage or to consent to the sale was not a defect in title within the meaning of the rule in Bain v Fothergill. The defendant’s inability to complete the transaction was due to its inability to obtain a discharge of the mortgage. That being so, Needham J assessed damages unrestricted by the rule in Bain v Fothergill.
The Court of Appeal,[13] disagreed with the calculation of damages made by Needham J at first instance in which he had allowed a claim for loss of profit damages. Priestly JA, with whom McHugh and Clarke JJA agreed, held that the correct calculation of the purchaser’s loss was the difference between the value of the land established by the price at which it was sold and the contract price. His Honour held that once the mortgagee sale had taken place, the plaintiff was in a position to transfer resources to another project.
[13]Priestly, McHugh and Clarke JJA, 6 May 1988; BC8801975.
Upon the plaintiff establishing liability for breach by Woondella’s failure to complete, he would, in my view, have been entitled to claim damages for loss of the bargain. The right of the plaintiff to damages for loss of profits under the second rule in Hadley v Baxendale[14] is less clear. The plaintiff did not give evidence. As in Holmark, once the property had been sold, the plaintiff might have turned his profit-making capabilities elsewhere.
[14](1854) 9 Ex 341..
Conclusion
The implied contingent condition, having failed, the parties were discharged from performance on 27 November 2009. The plaintiff’s claim is dismissed.
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