Westland v Wallace & Anor - [2005] SADC 159

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
WESTLAND v WALLACE & ANOR
Judgment of His Honour Judge Lee
8 December 2005
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - IMPLIED TERMS
Defendants owners of freehold title of house property at West Lakes on trust for plaintiff – trust established by deed between parties in 1987 – plaintiff now seeks transfer of title to her – defendants resist order in those terms, and say by counterclaim they are entitled to declaration that they have exercised an option to purchase plaintiff’s beneficial interest in the property – outcome of dispute turns on construction of deed and events in August 2004 – held that option effectively exercised by defendants in August 2004 in terms of deed – claim dismissed and counterclaim allowed.
Land and Business (Sale and Conveyancing) Act s 5, referred to.
Dockside Holdings Pty Ltd v Rakio Pty Ltd (2001) 79 SASR 374; Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, applied.
Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) 59 SR (NSW) 122, distinguished.

WESTLAND v WALLACE & ANOR
[2005] SADC 159
Introduction

This is a dispute about a house property at 42 Martin Court, West Lakes.
For some years, the defendants, Mr and Mrs Wallace, have owned the freehold title of the property on trust for the plaintiff, Mrs Westland. Having moved to a residential care facility, Mrs Westland now seeks, through her son and attorney, Mr Morris, a transfer of the title to her. The Wallaces resist an order in those terms. They say by counterclaim they are entitled to a declaration that they have exercised an option to purchase the plaintiff’s beneficial interest in the property.
The outcome of the dispute turns on a deed which established the trust in 1987, and on events which occurred in August 2004.
The Wallaces are builders and developers. They purchased the land at Martin Court, when it was vacant, in about July 1987. They were on friendly terms with Mrs Westland at that time, having previously built a house for her at Antigua Grove, West Lakes. Mrs Westland’s husband died not long before April 1987. She told the Wallaces that she wanted to move to a smaller home. They took her to a number of sites. She liked their vacant block at Martin Court. Eventually she entered into an arrangement with them whereby they would build a house for her on the land to an agreed design, she would pay the cost of the land and the construction, they would hold the property for her on trust until she no longer wished to live there, she would have the right to require a transfer of the title to her, they would have the right to purchase her beneficial interest upon her departure or upon the occurrence of any one of a number of other events, and the price upon the exercise of the option would be arrived at according to a formula. The arrangement was set forth in a deed executed by the parties on 2 August 1987.
The formula for arriving at the purchase price was market value to be agreed or to be determined by an independent valuer less “the discount factor”. The expression “the discount factor” is defined in clause 17(b) of the deed to mean the costs of acquiring the land and constructing the house expressed as a percentage of market value. As appears from correspondence between the solicitors for the parties in 1989, the discount factor was agreed at that time at 22%. The correspondence comprised letters dated 23 June 1989 and 11 October 1989 from Mrs Westland’s solicitors and a letter dated 28 September 1989 from Mr Wallace’s solicitors.
The relevant clauses of the deed
At this point, I need to quote clauses 10, 11 and 12 of the deed in full:
10.   The Builders shall have the option to acquire the said land which may be exercised by them upon the happening of any of the following events:-
a)the death of the Client;
b)the Client permanently ceasing to reside in the said dwelling house;
c)the Client shall unreasonably or capriciously withhold approval for plans and specifications submitted to her as aforesaid;
d)the Client shall not approve plans and specifications submitted to her for such approval as aforesaid within three (3) months;
e)the Client failing to pay any amounts due to the Builders hereunder within twenty-eight (28) days of receiving a request so to do.
It is hereby acknowledged that the option referred to herein shall extend to the Builders in their personal capacity only and shall not extend to their heirs executors administrators and assigns.
11.a)    If the Builders desire to exercise such option the Builders shall upon the happening of any of the events referred to in the preceding clause or within fourteen (14) days thereafter tender to the Client a contract for the purchase by the Builders of the said land in the form of contract supplied by the Law Society of South Australia Inc. to its members;
b)the Client shall within thirty (30) days of receiving such contract:-
i)cause to be prepared and served on the Builders all such forms and notices as are required to be served by a vendor upon a purchaser pursuant to the Land Agents Brokers and Valuers Act 1973 as amended, and
ii)execute and return to the purchaser the said contract;
c)if on receipt of the said forms and notices the Builders desire to purchase the said land they shall execute the said contract;
d)settlement shall take place twenty-eight (28) days from the date on which the client returns the said contract to the Builders after having executed the same or such further or other date as the parties agree.
12.   The purchase price or sum payable by the Builders to the Client shall be the market value of the said land as at the date of the exercise of the aforesaid option less an amount equal to the discount factor of the aforesaid market value. For the purposes of this clause the market value as at the date of the exercise of the aforesaid option shall be mutually agreed between the parties hereto or failing such agreement to be determined by some competent and disinterested licensed valuer to be nominated by the President for the time being of the Real Estate Institute of South Australia Incorporated at the joint cost of the parties hereto.
The events in August 2004
The events in August 2004 can be summarised thus:
1.On 4 August 2004, Mr Morris telephoned Mr Wallace to advise that Mrs Westland had moved from the house and that Mr Wallace would need to make a decision about the option. There was discussion about the deed, but Mr Wallace did not have a copy at that stage. Mr Wallace said he would get back to Mr Morris within a couple of days.
2.On 9 August 2004, Mr Morris and Mr Wallace again spoke on the telephone. It is unclear who initiated the call. Mr Wallace had been unable to locate his copy of the deed. Mr Morris asked for and was given Mr Wallace’s fax number. Mr Morris then sent a fax to Mr Wallace in the following terms:
Dear Bill,
Just a short note to confirm our telephone conversation last Wednesday 4/8/04 and our telephone conversation to-day where I have let you know that mum is no longer living at 42 Martin Court West Lakes and is now living at “Oaklands Care Facility”. You and Bev. need to let mum know if you wish to take up your option to purchase as per the agreement made in 1987, and as you have asked to meet with me to discuss the agreement please contact me as soon as you can. I am available anytime this week.
I urgently await your call.
3.On 13 August 2004, Mr Wallace telephoned Mr Morris, and asked him to provide copies of the correspondence from the solicitors for the parties on the topic of the discount factor. By this time Mr Wallace was in possession of a copy of the deed. As already mentioned, the correspondence confirmed that the discount factor had been agreed at 22%.
4.On 18 August 2004 at about 3 or 3:15pm, Mr Wallace telephoned and then called upon Mr Morris at the latter’s house at Glengowrie. Mr Wallace handed to Mr Morris an envelope containing two copies of a form of contract headed “The Law Society of South Australia Contract for the Sale and Purchase of Land”. The envelope also contained a letter dated 17 August 2004 from the Wallaces’ solicitors to Mr Morris. Mr Morris did not read the documents at that time, but understood that Mr Wallace was wanting to exercise the option. There was discussion between them about price. Mr Wallace said he had heard from an agent, Denise Maxwell, about a recent sale of a courtyard house at West Lakes for nearly $600,000. Mr Morris said his mother thought that the house at Martin Court was worth a lot more. Mr Wallace proffered Denise Maxwell’s card, and suggested that Mr Morris talk to her. Mr Morris said he would be talking to a valuer rather than a real estate agent. After Mr Wallace left, Mr Morris looked at the contents of the envelope. The letter of 17 August 2004 was in these terms:
Dear Mr Morris
Your mother’s house property
We have been instructed by Bill and Bev Wallace who wish to exercise their option.
We understand that you are attending to your mother’s business.
Under the agreement made in 1987, to exercise the option, our clients have to send a contract in the Law Society’s form. Your mother is then to sign it and return it with all the forms and notices a vendor must give. Then our clients can sign.
We have prepared and enclose a contract in duplicate for your mother. Please note the following are yet to be inserted:
·        Price
This is to be 78% of market price to be fixed by agreement or failing that by independent valuation. Bill will call you to discuss this.
·        Settlement date
This is to be 28 days from when your mother returns the contract to us for our clients to sign.
Please contact us if you have any queries.
5.On 24 August 2004, the solicitors for Mrs Westland wrote to the solicitors for the Wallaces. Again it is necessary to quote the letter in full:
Dear Sir
re:        ELMA WESTLAND
We act for Mrs Elma Westland in this matter and have been handed your letter dated 17^th August, 2004 directed to Mr Steven Morris, our client’s Attorney.
As you are aware, for your clients to exercise the option pursuant to paragraph 11 of the subject deed your clients, within fourteen (14) days of a triggering event, have to tender to our client a contract. The document forwarded under cover of the abovementioned letter was not a contract as it does not declare a price and hence there is no consideration. As your clients have not complied with the terms of the deed, any option has lapsed.
We shall forward to you a transfer for execution by your clients in the near future.
Principal submissions of counsel
The principal submission for the plaintiff is that the contract that was tendered on 18 August 2004 was not a contract within the meaning of clause 11(a) of the deed. It should have contained a price, there was therefore no exercise of the option on that date, and the time for any exercise of the option thereafter has lapsed.
The principal submission for the defendants is that the exercise of the option was achieved on 18 August 2004 by the delivery of the form of contract and the solicitors’ letter of 17 August 2004. The solicitors’ letter effectively supplied the price left blank in the contract, namely “78% of market price to be fixed by agreement or failing that by independent valuation”.
The scheme in the deed for the exercise of the option
The scheme in clauses 10, 11 and 12 of the deed for the exercise of the option appears to contemplate the following steps:
1.Mrs Westland permanently ceasing to reside in the house or dying. I will call each a “triggering event”. For present purposes, the other triggering events can be ignored.
2.Within 14 days of a triggering event, a Law Society form of contract to be tendered by the Wallaces.
3.Within 30 days of the tender of the form of contract, Mrs Westland or her executor to serve the statutory forms upon the Wallaces.
4.Within the same period of 30 days, Mrs Westland or her executor to execute and return the contract.
5.If they desire to purchase Mrs Westland’s or her executor’s beneficial interest, the Wallaces to execute the contract.
6.In the event that the Wallaces choose not to exercise their cooling off rights pursuant to s 5 of the Land and Business (Sale and Conveyancing) Act, settlement to take place 28 days from the date of the return of the contract.
The scheme contains a number of errors and ambiguities.
Although the 14 day period is said to run from the occurrence of a triggering event, the parties have accepted that the period should run from 4 August 2004, which was the day that the Wallaces received notice of Mrs Westland’s departure from the house.
Although clause 11(a) requires the tender of “a contract for the purchase by the Builders of the said land”, the option is to purchase, not the land, but Mrs Westland’s beneficial interest in the land.
The deed does not say in express terms how many of the above steps are required for the exercise of the option. Is it merely the tender by the Wallaces of a form of contract within 14 days of a triggering event, as in steps 1 and 2 (in which event the option would be more accurately described as a right of first refusal)? Or is it the taking of all steps to and including the Wallaces’ execution of the contract, as in steps 1 to 5?
The deed does not say in express terms when the purchase price should be agreed by the parties or determined by an independent valuer. Nor does the deed say when the purchase price should be inserted in the form of contract. If it is suggested that the purchase price should be inserted in the form of contract at the time of its tender, that would allow the parties only 14 days from a triggering event to establish market value for the purposes of a calculation of the purchase price. It would be difficult to establish market value within 14 days if an independent valuation were to be required, and well nigh impossible if the triggering event happened to be Mrs Westland’s death.
The provision in clause 12 that market value be “at the date of the exercise of the aforesaid option” suggests that the option is exercised by the tender of a form of contract, and that, having established that date, market value should then be agreed or determined for the purpose of calculating the purchase price.
The letter of 24 August 2004 of Mrs Westland’s solicitors asserts that, to be effective, the contract needed to “declare a price”. Mr Morris said he expected when he opened the envelope that the contract would contain an offer. Yet, given that Mrs Westland or her executor is required to execute the contract after its tender, the parties could scarcely have intended that the Wallaces could merely declare a price or make an offer without negotiation or an independent valuation.
Conclusion
I have reached the conclusion that the option was effectively exercised by the Wallaces on 18 August 2004 in terms of the deed. I base that conclusion on one at least of the following grounds:
1.The word “Price” in the schedule to the contract referred to in clause 11(a) of the deed means “The market value agreed or determined by a valuer in accordance with clause 12 less the discount factor determined in accordance with clause 17(b)”. This ground arises from the application of modern principles of construction. The principles were discussed by Williams J, with whose reasons Olsson and Duggan JJ agreed, in Dockside Holdings Pty Ltd v Rakio Pty Ltd (2001) 79 SASR 374. His Honour was concerned with a dispute about a rent-fixing formula in a lease of shop premises, and found that the formula involved an obvious exercise in double counting. His Honour applied Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 and Investors Compensation Scheme v West Bromwich Building Society [1998] 1 All ER 98. The latter is a decision of the House of Lords. His Honour quoted the following passage from the leading opinion (at pages 114 to 115):
… I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989; [1976] 3 All ER 570, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarised as follows:
(1)Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2)The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3)The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4)The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd.
(5)The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201:
‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’
Williams J concluded that the lessee was entitled to relief. He said (at page 387):
In construing the document (without an order for rectification) “as if it said” something different, I am following the course adopted by the New South Wales Court of Appeal in Tanzone. The present case (like Tanzone) involves an extreme set of facts upon which it is evident that something must have gone wrong in the drafting (cf per Lord Hoffmann in ICS at 912). The literal approach for which the landlord contends produces a ridiculous commercial result based upon a review process which flouts common sense. The nature of the mistake and what was intended is sufficiently clear as to justify the Court in reading the document “as if” the appropriate language had been used to reflect the intentions of the parties.
So the law does not require judges to attribute to the parties an intention which they plainly could not have had. In the case of this deed, the parties could not have intended that negotiations and an independent valuation should all be conducted and obtained within 14 days of a triggering event.
It is true that, if the defendants made a bad bargain, that is their problem, and they are bound by the literal meaning of the words of the deed. But I consider that the deed goes further than merely creating a bad bargain. Something has gone wrong with the drafting in my view.
2.The word “Price” in the schedule to the contract means, given that the amount was left blank, “The market value agreed or determined by a valuer in accordance with clause 12 of the deed less the discount factor determined in accordance with clause 17(b) of the deed”. This ground arises from the application of the principle of an implied term to the deed. An implication of a term to the above effect is necessary to give business efficacy to the scheme of the deed. I rely upon the authority cited by counsel for the plaintiff, namely Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 346 to 347. The requirement that the implied term must be so obvious that “it goes without saying” is satisfied. Suppose that a bystander had said to the parties at the time of their execution of the deed: “What happens in the very likely event that the purchase price cannot be fixed and inserted within the 14 day period?” The ready and obvious answer would be: “The purchase price in the contract that is tendered is the market value agreed or determined in accordance with clause 12 less the discount factor determined in accordance with clause 17(b)”.
3.The tender of the form of contract and the solicitors’ letter of 17 August 2004 amounted in combination to an effective exercise of the option in terms of the deed. To put the point another way, the solicitors’ letter should be treated as having supplied the purchase price, or at least a formula for calculating the purchase price, for the purposes of the contract and the scheme of the deed.
Counsel for Mrs Westland cited Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) 59 SR (NSW) 122 in support of a submission that the option must be exercised strictly in accordance with the terms of the deed. Yet, on the day that the 14 day period is said to have expired, the Wallaces and their solicitors did all that they could have done in the circumstances to comply with the deed. The question for me is not whether there was strict compliance, but whether the obligation in the deed to tender a form of contract, with which the Wallaces had to comply, extended to an obligation to include in the form of contract at the time of its tender a dollar amount based upon a market value that had been agreed or determined by a valuer within 14 days of a triggering event.
4.The deed did not necessarily require the contract to contain a dollar amount for the price at the time of its tender. The dollar amount, following agreement or determination, could have been inserted at any time up to the execution of the contract by Mrs Westland. This process of agreement or determination and insertion of the resultant amount in the contract was interrupted and brought to an end prematurely by the assertion of Mrs Westland’s solicitors in their letter of 24 August 2004 that the option had lapsed.
Promissory estoppel

Before concluding, I should deal with the topic of promissory estoppel.
Counsel for the Wallaces submitted that, as the result of a representation by Mr Morris on 18 August 2004 that he would seek a valuation, Mr Wallace failed to take any further steps on that day to make good the exercise of his option, and thereby altered his position to his detriment.
There is a difference between Mr Morris and Mr Wallace about whether Mr Morris said he would speak to a valuer (Mr Wallace’s version), or whether he would speak to a valuer if he had to (Mr Morris’ version).
Mr Morris wrote in his diary:
3-15 (approx) – documents hand del. by Bill Wallace - $600,000 suggested as the top price paid for a courtyard home 3 weeks ago by Bernard Booth Co. – I said mum believes the place is worth much more than that - & I will be talking to a valuer not a real estate agent (who was bill’s friend) if I had to. It is not up to me to find out what the house is worth until you take up your option.
Mr Wallace wrote in his diary:
Dropped off contract with covering letter from Mike to Steve discussed the price as it was not included in the contract. As I had spoken with an agent previous I told Steve that 600,000 was close to what we believed to be a realistic value. He disagreed and suggested he would get a valuation. I then gave him the contact details of the agent I had spoken with.
My impression of Mr Morris and Mr Wallace is that each did his best to recall and accurately recount the conversation that took place between them on 18 August 2004. Indeed, they are largely in agreement about what was said on that day. As for the abovementioned difference, however, I would not be prepared to prefer Mr Wallace’s version to Mr Morris’ version.
But even on Mr Wallace’s version, I do not consider that estoppel applies. Although I am satisfied that, when Mr Wallace left Mr Morris on 18 August 2004, he expected that there would be further discussions about the price, I am not satisfied that that expectation and his failure to take any further steps on that day arose from reliance upon a representation of Mr Morris. I refer to the following passage of Mr Wallace’s evidence:
QAt the time of your conversation with Mr Morris on 18 August at his home, were you aware of the contents of the letter of Lindbloms on 17 August.
AYes.
QWere you aware that there was no price set out in the form of a contract.
AYes.
QAt that time you were prepared, in the event of agreement not being reached as to the value of the property, to apply the second part of clause 12 of the deed and have the value determined by an independent valuer nominated by the president of the Real Estate Institute.
AYes.
Regarding final orders
In the result, the claim fails and the counterclaim succeeds. I will hear the parties with respect to the orders which should now be made to give effect to these reasons.