Worrell, I. v Schilling, G.R.

[1989] FCA 465

Re: IVOR WORRELL
And: GREGORY RUDOLF SCHILLING and HEATHER GRACE MAY HOFFMAN
No. G39 of 1989
FED No. 465
Contract

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Morling(1), Spender(1) and Lee(1) JJ.

CATCHWORDS

Contract - partnership - sale of interest in partnership - partner bankrupt at time of sale - trustee in bankruptcy - application to Court for directions - whether sale voidable - election to affirm sale - whether purchaser's conduct constituted election

Bankruptcy Act 1966 (Cth), s.134

HEARING

SYDNEY

#DATE 14:8:1989

Counsel for appellant: B.D. O'Donnell

instructed by: Purvis Duncan Walker Rhodes

Counsel for first respondent: G.H. Brandis

instructed by: Seymour Nulty

Second respondent: (Unrepresented)

ORDER

Appeal dismissed.

Appellant to pay first respondent's costs.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The appellant is the trustee of the bankrupt estate of Rodney Warren Hoffman, whose estate was sequestrated on 25 March 1985. During the course of his administration of the estate the trustee sought directions from the Court under s.134(4) of the Bankruptcy Act 1966 in respect of a matter arising in connection with the administration of the estate, namely whether a sum of $25,000 in his possession formed part of the property divisible among the creditors. The sum in question was paid by Mr Schilling, the first respondent, under a contract for sale of an interest in a business owned by Hoffman and his wife. Schilling claims to be entitled to his money back because at the time he entered into the contract Hoffman's estate had already been sequestrated.

1. It is not clear on the evidence precisely what happened to the $25,000 after it was paid by Schilling but when, as a result of a public examination in January 1986, it became apparent that the money was held in a trust account, it was paid to the trustee. The trustee's application to the Court was occasioned by his uncertainty as to how he should deal with the money. The learned trial judge (Pincus J.) ordered, in effect, that the money (less an allowance for certain payments made by the Hoffmans) should be repaid to Schilling.

2. The following account of the facts found by Pincus J. is taken from his Honour's judgment. In late April 1985 Schilling, who was then unemployed, was asked by Hoffman to work in a drilling business run by the latter. A few days later, Hoffman asked whether Schilling would be interested in buying a one-third interest in the business, telling Schilling that he (Hoffman) was in financial difficulties. This was indeed the fact, as Hoffman had been declared bankrupt on 25 March 1985.

3. Schilling approached a bank to borrow the money to buy the interest offered by Hoffman. The bank made the loan, requiring guarantors. Under an agreement made on 25 May 1985, Hoffman and his wife (who were the joint owners of the business) agreed to sell a one-third interest in it for $25,000. For this sum Schilling was to obtain an interest in certain equipment, which was under lease or hire purchase, and also in goodwill. The agreement provided, inter alia, that the vendors would remain in possession of the said business "jointly and as partner with the Purchaser" and would do everything necessary for "putting the Purchaser in full possession and enjoyment of his share of the said business and the premises and for otherwise performing this agreement".

4. After completion of the agreement and paying the $25,000, Schilling worked in the business under Hoffman's direction. He did not receive any distribution of profits. However, certain monthly sums which were due to Schilling's bank on the loan made to him were paid from a bank account operated by the Hoffmans or one of them. Schilling took no part in the management of the business and received nothing from it other than the benefit of the repayments to the bank. His living expenses also were paid by the Hoffmans. Repayments to the bank were made initially at the rate of $400 per month, and later at the rate of $430 per month. When the repayments ceased the amount owing to the bank was in the order of $20,000.

5. The evidence is not as clear as it might be as to the ownership of the bank account from which the abovementioned monthly payments of $400 and $430 were paid. It is plain from the evidence that Schilling did not collect any moneys or income on behalf of the partner ship. He said that he was aware that an account was operated at the Australia & New Zealand Bank at Mundubbera and that the monthly payments required to meet his loan repayments were paid from this account. At one place in his evidence he assented to a proposition put to him that this account was the account of the partnership, but we are far from persuaded that he knew enough of the partner ship affairs to be able to accurately identify the account. We are left with the firm impression from the evidence that Schilling was bereft of any business acumen or experience, that he had no idea of the business dealings of the partnership, and that he was in a position of almost total dependence upon the Hoffmans. For example, when he had the need to acquire necessities like clothing or shoes, he would go to Mrs Hoffman to obtain money for them.

6. After ascertaining the existence of the agreement of 1 May 1985 and taking legal advice the trustee instructed his solicitors to write to Mrs Hoffman about the transaction asking for her co-operation to achieve the result that "with further receipts of some $5,000-6,000, a dividend of 100 cents in the dollar might be paid in the Bankrupt's estate". In effect, Mrs Hoffman was asked to consent to the use of the $25,000 for the benefit of the creditors. On 28 July 1986 a letter was written to the trustee, signed by both Mrs Hoffman and Schilling, agreeing to "the trustee to use the $25,000 in the administration of the estate on Mr Hoffman's behalf ...".

7. There was a dispute at the trial as to the circumstances in which Schilling's signature to this letter was obtained. He said that one morning when he was about to leave for work, Mrs Hoffman told him to "sign this here so we can complete the Contract". Mrs Hoffman, who did not give oral evidence, swore an affidavit giving a quite different version. She claimed that she told Schilling the precise purpose of the letter and that he signed after that explanation and with due deliberation. Pincus J. did not find it necessary to determine precisely which version of the circumstances in which the letter was signed was correct. His Honour did not make any finding whether Schilling understood, at the time he signed the letter, that the $25,000 was to be expended in the course of administration of the bankrupt's estate. However, he found that Schilling understood that that was how the money was to be expended when he and the Hoffmans had an interview with the trustee on 30 July 1986. At that meeting the trustee asked Schilling whether or not he knew that Hoffman was a bankrupt and Schilling replied that he did. The trustee also asked Schilling whether he agreed to the use of the $25,000 in the administration of the bankrupt's estate, and Schilling said that he so agreed. The trustee said in evidence that he was satisfied that Schilling understood the nature of the transaction. The trustee instructed the solicitors to draw up a deed for signature by Mrs Hoffman and Schilling to give effect to what had been agreed at the meeting on 30 July.

8. At about this time Schilling had some communication from one of the guarantors which caused him to become concerned. He claimed that this contact with the guarantor was the first occasion on which he appreciated that Hoffman was bankrupt, but his Honour did not believe him on that matter. His Honour found that Schilling knew at an earlier time that Hoffman was bankrupt and that he (Schilling) took very little interest in what he regarded as the legalities of the matter until one of the guarantors induced in him some awareness of the implications of what had occurred.

9. On 11 September 1986 Schilling's solicitors wrote to the trustee alleging that the $25,000 had been paid by their client pursuant to misrepresentations made by the bankrupt. The letter did not purport to rescind the agreement for sale but merely asserted that the money was held on trust for Schilling and requested an undertaking not to dispose of it without giving notice of his intention to do so.

10. Some time after the writing of the letter of 11 September 1986 (the exact date is unclear) Schilling ceased to work in the partnership and took up other employment. When asked why he had done this he replied that it was because "I had already gone and seen my solicitor". When he was asked whether he just abandoned his share of the business at that time he answered: "Well, I do not know, really." He thought that the last monthly payment was made in November 1986 and he assented to the proposition that, at that time, he "just walked away from the business". away from the business". 12. It was common ground before the trial judge that the circumstances surrounding the execution of the agreement made it voidable at Schilling's option. The only substantial question which was agitated before the trial judge, and on appeal, was whether Schilling lost the right to rescind the agreement. At the trial, it was urged that Schilling's consent to the use of the $25,000 by the trustee of itself constituted an affirmation of the agreement. His Honour found that this was not so, and his finding on this issue was not challenged on appeal.

11. However, it was also submitted to his Honour that the acceptance by Schilling of free board and lodging provided by the Hoffmans until November 1986 and, more importantly, his acceptance of the monthly payments (probably two in number) after the writing of the letter of 11 September 1986 was unequivocal evidence that he affirmed the agreement with full knowledge of the facts which entitled him to rescind and of his right to rescind. This submission was also rejected by his Honour. His Honour found against the appellant on this argument and it was this finding which was the only matter argued on the hearing of the appeal.

12. The principles of law referable to the right to rescind an agreement of the kind entered into by Schilling and the Hoffmans are not in doubt. We need not restate them, since, as we have observed, it was common ground before Pincus J. that the fact that Hoffman was bankrupt when the agreement was made gave Schilling the right to rescind it. We therefore turn to consider whether Pincus J. was correct to find that Schilling's conduct did not deprive him of the right to rescind the agreement.

13. Irrespective of his intention, a party with the right to rescind an agreement will be treated as having elected to affirm it if he exercises rights under the agreement adversely to the other party or otherwise gains an advantage for himself under the agreement: Elder's Trustee & Executor Co Limited v Commonwealth Homes and Investment Co Limited (1942) 65 CLR 603 at p 618 and Sargent v ASL Developments Limited (1974) 131 CLR 634 at pp 646, 658. To establish election by a party his conduct must be unequivocal. In Tropical Traders Limited v Goonan (1964) 111 CLR 41 at p 55 Kitto J. (with whom Taylor and Menzies JJ. agreed) said that "Any act done ... consistent only with the continuance of the contract on foot the law would hold to constitute an election against rescinding ...": see also Haas Timber & Trading Co. Pty. Limited v Wade (1954) 94 CLR 593 at 602 and Sargent, supra, at p 646.

14. Counsel for the appellant argued that Schilling's conduct in accepting monthly payments and free board and lodging after the writing of the letter of 11 September 1986 necessarily implied the continuance of the agreement and therefore constituted an election not to rescind it. He relied particularly on Goonan (supra) at p 56. He also relied, by analogy, on the line of cases which establish that acceptance of payment of rent by a landlord, having the right to terminate or forfeit a lease, amounts to an affirmation of it: Matthews v Smallwood (1910) 1 Ch 777 at pp 786-7, O'Connor v S.P. Bray Limited (1936) 36 SR (N.S.W.) 248 at p 259, Fullers' Theatres Theatres Limited v Musgrove (1923) 31 CLR 524 at p 541, and Sargent (supra) at pp 656-7.

15. This argument is persuasive but, at the end of the day, we have reached the conclusion that it should not succeed. The significance of the acceptance of the monthly payments after 11 September must be considered in the context in which they were received. In the letter of 11 September, Schilling's solicitors made it clear not only that Schilling claimed to be entitled to the return of the $25,000 he had paid but also that he was still considering his position. Schilling was not bound to make an election as soon as he discovered the facts which entitled him to rescind. He was entitled to take time to consider whether or not he should rescind the agreement, provided he did not affirm it and provided the delay in making his decision did not cause prejudice to the trustee: Goonan (supra) p 55; Sargent (supra) at p 656 and Champtaloup v Thomas (1976) 2 NSWLR 264 at p 268. In the last mentioned case at p 269 Glass J.A. made the following observation with which we respectfully agree:
    

"It is always necessary to examine the conduct

relied upon as an affirmation in its particular

evidentiary setting. The question must then be

answered whether the party able to rescind has

communicated to the other party an unequivocal

election to affirm, i.e. to renounce its right

to rescind. The materials upon which the

decision is to be made will include any

reservations which have also been communicated.

The answer to be given is a decision of fact

based upon all the evidentiary data. There is

no overriding principle of law that an act done under the contract will always communicate the decision to affirm, regardless of the surrounding circumstances."

1. The evidence as to the circumstances in which the monthly payments were made after 11 September is sketchy. It is not certain how many payments were made but they were probably only two in number. There is no evidence that Schilling requested them to be made. He certainly appears to have accepted them without protest but, on the other hand, he had not withdrawn the assertion made in his solicitor's letter of 11 September that he was entitled to the return of the whole of the $25,000 he had paid to Hoffman. We are left with the firm impression from the whole of the evidence that so slight was Schilling's business acumen and so heavy was his dependence upon the Hoffmans that his conduct could not have been thought by the Hoffmans to be an affirmation of the contract.

2. To say that Schilling accepted the monthly payments after September 1986 is to put the matter rather too strongly against him. In truth, what happened was that he failed to stop the amounts being paid into his loan account at the bank. He himself received no payments at all, nor did he demand any. So far as the evidence shows, what happened was that the payments were made to the credit of his loan account without any prior reference to him.

3. The facts of the present case are far removed from cases in which a landlord, with a knowledge of facts giving him the right to rescind a lease, accepts rent from his tenant. In such cases, acceptance of rent by the landlord will ordinarily afford unequivocal evidence of his election to affirm the lease. We do not think that the evidence in the present case establishes unequivocal conduct on Schilling's part consistent only with the continuance of the agreement.

4. Nor do we think that this is a case in which, in the absence of unequivocal conduct constituting election, an inference should be drawn that Schilling elected to affirm the agreement. We accept that where a party faced with an election to rescind is aware not merely of the matters which give rise to the right of rescission but is also aware that he has that right, less than unequivocal conduct on his part may be sufficient to justify the inference that he has made an election: Elder's Trustee (supra) at p 618, Sargent (supra) at p 646. We think that by 11 September 1986 Schilling must be taken to have been aware of the facts which gave him the right to rescind the agreement and also that he had that right. But we do not think that his conduct after 11 September justifies the inference that he elected to affirm the agreement. It was submitted that since cl.19 of the agreement provided that he and the Hoffmans would work and operate the business as partners and since he continued to work in the firm and did not rescind the agreement or call for the return of his money, it should be inferred that he made an election to affirm the agreement. We do not accept this submission. There is only the sketchiest evidence as to what work Schilling did for the partnership during the period between 11 September and the time when he took up other employment. He was entitled to a reasonable time to make up his mind what he should do. In all the circumstances, the time he took to make up his mind was not unreasonable.

5. It was submitted on behalf of the appellant that no finding was made by the trial judge that Schilling ever rescinded the agreement. It is true that his Honour did not nominate in his reasons a particular time when rescission took place but his decision is consistent only with his having reached the conclusion that rescission did, in fact, take place. It is a reasonable inference from all the evidence that Schilling purported to rescind the agreement when he abandoned the business and took up alternative employment in November 1986. The letter of 11 September had informed the trustee that, in effect, Schilling was considering his position. What he did in November was, we think, a sufficiently clear indication of his decision to rescind the agreement and to be no longer bound by it.

6. It was further submitted that Schilling lost the right to rescind because of his delay in exercising the right. This submission cannot succeed. It was argued in support of this submission that the trustee was prejudiced in that he was delayed in disposing of the partnership business. There is nothing in the evidence to support this submission. There is no evidence that the business had any value. Indeed, the evidence tends to suggest the contrary. There is no evidence that any delay on Schilling's part caused any detriment to the trustee. It was submitted by counsel for the appellant that Schilling did not purport to rescind the agreement until a considerable time after November 1986. We do not think that submission is correct but, even if it were, there is nothing in the evidence to show that the trustee was thereby disadvantaged.

7. In the result, the appeal should be dismissed with costs.