Garratt v Ikeda
[2001] NZCA 316
•13 September 2001
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA44/01 |
| BETWEEN | CLIVE CHARLES GARRATT |
| Appellant |
| AND | KOZO IKEDA |
| Respondent |
| Hearing: | 29 August 2001 |
| Coram: | Blanchard J Tipping J McGrath J |
| Appearances: | N J Carter for Appellant A H Waalkens and C L Garvey for Respondent |
| Judgment: | 13 September 2001 |
| JUDGMENT OF THE COURT DELIVERED BY TIPPING J |
Introduction
The appellant (Mr Garratt) unconditionally agreed to buy a residential property in Auckland from the respondent (Mr Ikeda). The agreement was on the standard form approved by the Real Estate Institute of New Zealand and by the Auckland District Law Society (7th edition – July 1999). It was signed on 6 December 1999 and required Mr Garratt to pay a deposit of $180,000 in three instalments. $25,000 was to be paid on 31 December 1999; a further $25,000 on 10 January 2000, and the balance of $130,000 on 10 February 2000. The total deposit was just under 10% of the purchase price of $1,830,000. Mr Garratt paid the first two instalments but failed to pay the third. Mr Ikeda allowed him an extension of time for that payment but, when it had still not been made, he validly cancelled the contract on 20 March 2000, forfeiting the two payments totalling $50,000. In due course he brought summary judgment proceedings to recover the sum of $130,000. Master Gambrill entered judgment in Mr Ikeda’s favour for that sum with interest from 17 March 2000, being the date to which time had been extended. Mr Garratt appeals against that judgment, raising two main points.
The first concerns s8 and the second s9 of the Contractual Remedies Act 1979 (the Act). Mr Garratt’s primary contention is that his obligation to pay the balance of the deposit was extinguished by Mr Ikeda’s cancellation. That, he contends, is the effect of s8(3)(a) of the Act. In this respect we were invited to treat this Court’s judgment in Brown v Langwoods Photo Stores Ltd [1991] 1 NZLR 173, which the Master naturally followed, as wrongly decided. If his primary argument fails, Mr Garratt contends that he should have relief, either wholly or in part, from his obligation to pay the sum of $130,000 by appropriate order under s9 of the Act.
To consider that issue, if reached, it will be necessary to examine the circumstances of the case more fully. The first point requires no further elaboration of the facts. It turns on the correct construction of s8(3)(a) and, in particular, on whether that provision has the effect of discharging contractual obligations which have unconditionally fallen due prior to cancellation.
The Act generally
The Act is described in its long title as being designed to reform the law relating to remedies for misrepresentation and breach of contract. Section 5 says that if a contract expressly provides for a remedy or for any of the other matters dealt with in ss6 to 10, those sections shall have effect subject to that provision. In other words, a contractually agreed remedy covering circumstances which occur will predominate over any discretionary power the Court may have under s9. Section 7, which deals with cancellation of a contract, is described as replacing the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it or treat it as discharged for misrepresentation, repudiation or breach. Section 7 is obviously designed to be a self-contained code covering those matters. Section 8 sets out what its heading calls “rules applying to cancellation”. Unlike s7, it is not said to replace the earlier common law and equitable rules. That of course may be its effect but its principal purpose is to state rules in statutory form.
Our purpose in drawing attention to this contrast is to indicate that the provisions of s8 are not necessarily to be viewed as representing a departure from the earlier law. To the extent that any provision in s8 may be unclear or incomplete, it is permissible to inquire what the previous law was on the subject and whether the legislature has signalled an intention to make any significant change to it. Whereas s7 was obviously designed to introduce a new and self-contained regime, albeit having some basis in the previous law, s8 has a more declaratory connotation to it, although changes to the earlier law could well be involved in this section too.
Section 9 provides the Court with the power to adjust the position of the contracting parties after cancellation by various means, if it is just and practicable to do so. Its broad purpose is obviously to allow the Court to remedy any particular injustice which results from the operation of the ordinary rules pertaining to the effect of cancellation. There are of course constraints on what the Court can do under s9, both in terms of that section itself and also by dint of ss 5 and 10. But it is unnecessary at this stage to say more on that subject.
The law prior to the Act was that rescission of a contract operated only for the future. It did not destroy the contract from the beginning. That was the effect of the overwhelming preponderance of authority and was confirmed by the House of Lords in Johnson v Agnew [1980] AC 367 and Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827. The point for present purposes is that when a contract was rescinded or discharged for breach, rights which had previously accrued unconditionally under the contract were not divested: see also McDonald v Dennys Lascelles Ltd referred to in para [10] below. The concept of an unconditional accrual involved two requirements: (i) there must have been no impediment, by unfulfilled condition or otherwise, to the enforcement of the right at the point of rescission or discharge; and (ii) enforcement must not have been subject to any reciprocal obligation on the part of the enforcing party.
Section 8(3)(a)
Against this background Parliament provided in s8(3):
(3) Subject to this Act, when a contract is cancelled the following provisions shall apply:
(a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further:
(b) So far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.
Paragraph (a) involves two discrete but complementary ideas. The first is that of the contract “remaining” unperformed at the time of cancellation. The second is that of no party being obliged to perform the contract “further”. The word “remains”, in its context, could point to something which should have been performed earlier and is still not performed. That is a backward looking connotation as at the time of cancellation. Equally, however, the concept of a contract remaining unperformed could have a forward looking connotation. It could be directed at something which at the date of cancellation remains to be done, ie. is intended to be done in the future. The future connotation would be in harmony with the earlier law whereas a backward looking connection would not. The idea of no party being obliged to perform the contract further after cancellation must have a connotation which is essentially forward looking. It looks to further performance which naturally signifies what the contract requires to be done in the future. Such a reading is entirely consistent with the earlier law.
While it is possible to view the word “further” as involving something which should have been done before cancellation but in respect of which there has been a contractual default, that is not the way in which Dixon J used the word “further” in his classic statement in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457, 476 on which the framers of s8(3) undoubtedly relied:
When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach. (emphasis added)
This whole passage, which was essentially the blueprint for ss(3) and (4) of s8 was endorsed by Lord Wilberforce in Johnson v Agnew (supra) at 396. His Lordship described Dixon J’s formulation as more attractive and logical than others he had been discussing, and as setting out the principles with typical clarity. Coincidentally, this endorsement of what Lord Wilberforce described as a robuster attitude to the consequences of rescission, occurred less than six months before the Act came into force. All the other members of the House who sat (Lord Salmon, Lord Fraser, Lord Keith and Lord Scarman) expressly adopted Lord Wilberforce’s reasoning.
To the extent that the two aspects of paragraph (a), as drafted, may appear inconsistent, the dominant concept must be that of further performance in the sense of obligations falling due after the date of cancellation. The possible retrospective connotation of the word “remains” is not in its overall context strong. “Remains” is capable of having a prospective meaning and should be held to bear that meaning so that the paragraph as a whole looks harmoniously to future obligations. This reading is supported by the fact that nothing in the materials leading up to the passing of the Act suggests that s8(3)(a) was intended to change the existing law in a fundamental way. Indeed, in Brown v Langwoods Photo Stores Ltd this Court indicated that the intention of the Law Reform Committee, whose work led to the Act, was that rights accruing prior to cancellation should survive.
Furthermore it is of interest to note that in their book on the Act, published in 1981 before any case law had developed, Dawson and McLauchlan wrote at 134:
Under the Act, when a contract is cancelled for breach, wrongful repudiation or misrepresentation, it is not cancelled in the sense of never having existed. Both parties are discharged from further performance of their primary obligations but rights to money and to property which have been unconditionally acquired are not divested. Thus, if a purchaser fails to pay a deposit on the due date, the vendor does not lose his right to recover the deposit as a debt due by later cancelling the contract.
As we will later show, the fact that the obligation to pay the deposit is classed as a debt is not the crucial point; the point is that the vendor’s right to require payment of the deposit is a right that has been unconditionally acquired under the contract prior to cancellation.
It is appropriate to examine our forward looking interpretation of paragraph (a) of s8(3) against the terms of paragraph (b). The two are obviously meant to complement each other, albeit not necessarily to cover the whole ground. Reference to paragraph (b) may also help elucidate the overall legislative intent. Paragraph (b) is concerned with cases in which there has been some degree of performance prior to cancellation, whereas paragraph (a) is concerned with cases in which, at cancellation, performance of a contractual obligation is due in the future. Thus, between them, the two paragraphs do not deal with cases involving non-performance of a contractual obligation unconditionally due prior to cancellation. This consequence derives from two factors. The first is the forward looking nature of paragraph (a). The second is that paragraph (b)’s regime of non-divestment is limited to property transferred or money paid pursuant to the contract. It does not include contractual rights which have already accrued unconditionally.
We have considered whether the fact that the consequence of our interpretation of paragraph (a) is that paragraphs (a) and (b) together do not cover the whole ground, suggests that our interpretation is wrong and that paragraph (a) should be read as having a backward looking as well as a forward looking effect. But neither paragraph (a)’s dominant connotation, nor the existing common law rule, nor the expressed intention of the Law Reform Committee supports a backward looking interpretation, divesting unconditionally accrued rights, and thereby changing the common law in a major way. Indeed the reports of the Law Reform Committee which led to the passing of the Act demonstrate an intent to preserve the common law rule that rescission does not divest unconditionally accrued rights. If Parliament had intended to change the common law in this important respect, a clear statement to that effect could have been expected in the legislation. There is no such statement. As earlier noted, s8 can appropriately be regarded as stating specific rules in statutory form while leaving the existing common law rules to operate to the extent that the statutory rules do not cover any particular case. This is what has occurred in respect of rights unconditionally accrued at cancellation.
These reflections on the words of paragraphs (a) and (b) against the previous law must now be examined in the light of the case law and in particular the decision in Brown v Langwoods Photo Stores Ltd. The decision of Wylie J in Pendergrast v Chapman [1988] 2 NZLR 177 is the logical starting point. His judgment was endorsed by this Court in Brown v Langwoods Photo Stores Ltd with no disagreement as to its reasoning, but on the basis that the law should be stated more broadly. The essential facts of Pendergrast were the same as those in this case. A vendor sued a purchaser for the unpaid portion of the deposit after cancellation for its non payment. Wylie J held that as the unpaid deposit was a debt due from the purchaser to the vendor, which had unconditionally accrued due prior to cancellation, s8(3)(a) did not prevent its recovery because, as a debt, it stood outside the contract. Proceedings for its recovery were not therefore proceedings involving performance of the contract.
The essence of the Judge’s reasoning was that the debt had an existence independent of the contract. Thus the cause of action supporting it did not rely on the contract. That is why Wylie J held that the vendor could overcome what he considered would otherwise have been the obstacle of s8(3)(a). He said at 190:
In principle then I am satisfied that, statute apart, the plaintiffs are entitled to sue in debt as a cause of action distinct from an action to enforce the contract even though the debt arises out of the contract.
Brown vLangwoods Photo Stores Ltd did not involve a deposit but rather amounts which had fallen due under two franchise agreements before those agreements were cancelled. Section 8(3)(a) was in issue on that basis. Cooke P, delivering the judgment of the Court, whose other members were Casey and Williamson JJ, said at 175:
We have no doubt that the Master was right, and as to the interpretation of the Act we are in general agreement with the judgments of Wylie J [Pendergrast v Chapman] and Gallen J [Bussell v Morton Road Farming Corporation Ltd (1990) 1 NZ Conv C 190, 338] just cited …
On cancellation, the Act excludes any obligation or right to further performance of the contract. There is nothing, however, to suggest that it abrogates rights and liabilities accrued before cancellation. On the contrary, rights to damages for an antecedent breach are preserved by s 8(4); although, by virtue of s 10, any relief granted under s 9 - which confers a discretion on the Court to make orders for relief on cancellation - is to be taken into account on assessing damages or may give rise to a set-off. (emphasis added)
The Court then reaffirmed, by reference to the decision of the House of Lords in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29, that at common law termination of a contract for breach was not rescission ab initio and accrued contractual obligations remained enforceable. Their Honours referred to the 1967 and 1978 reports of the Contracts and Commercial Law Reform Committee which had led to the Act. They observed that the Committee’s intention, as apparent from the reports, was that whenever a contract was cancelled, “all rights based on prior breach or performance survive”. That statement may not have been intended to express the effect of s8(3)(a) because it puts the matter a little loosely. At 176 Cooke P continued:
In Pendergrast v Chapman, Wylie J held that s 8(3)(a) did not prevent enforcement of an accrued cause of action in debt. We agree, but would state the law more broadly. The provision does not abrogate any cause of action accrued unconditionally before cancellation, whether or not for debt. The present case is not concerned with any special point that may arise about deposits on the purchase of land; but we see no reason to doubt the decisions of Wylie J and Gallen J that such a deposit, if unconditionally due before cancellation but still unpaid, may be recovered by action after cancellation by the vendor based on default by the purchaser. That accords with the role of a deposit as an earnest that the purchaser will go ahead, and with the common law rule as now established by the weight of authority; see Damon Compania Naviera SA v Hapag-Lloyd International SA [1985] 1 All ER 475; Greig and Davis, The Law of Contract (1987) at pp 1277-1278. Decisions to the contrary such as Johnson v Jones [1972] NZLR 313 cannot now be regarded as correct.
We agree with the conclusion to which Wylie J came in Pendergrast v Chapman but not with his emphasis on the cause of action being for recovery of a debt. Let us assume for the moment that s8(3)(a) did have the effect of barring all claims for performance of a contract following cancellation, irrespective of whether the obligation sought to be enforced fell due before or after cancellation. On that hypothesis we do not consider that the non recoverability of an unpaid deposit could be avoided by classifying the obligation as a debt. To require payment of the unpaid deposit following cancellation is in substance to require performance of an obligation created by the contract. To take the view that as a debt the performance obligation should not be regarded as performance of the contract seems to us, with great respect, to be elevating form over substance. It would allow classification of the right of action to defeat what we are assuming for the moment to be the effect of the section. The better view is to say that s8(3)(a) does not have the effect of divesting unconditionally accrued rights. This statement of the law accords with the central thrust of Brown v Langwoods Photo Stores Ltd, albeit not with its endorsement of the reasoning in Pendergrast v Chapman. We do not consider that Brown’s case should be construed as stating any wider proposition than that just mentioned, namely that cancellation does not take away unconditionally accrued rights. We are here using the word “unconditionally” in the same sense as that referred to in paragraph [7] above; ie. (i) there must be no impediment, by unfulfilled condition or otherwise, to the enforcement of the right at the point of cancellation; and (ii) enforcement must not be subject to any reciprocal obligation on the part of the enforcing party.
In coming to this conclusion we have carefully considered Mr Carter’s argument that s8(3)(a) should be construed not as preserving but as destroying unconditionally accrued rights. Counsel based his argument on an article by Professor Brian Coote entitled “Debts unpaid at cancellation under the Contractual Remedies Act 1979” (1991) 14 NZULR 195. We have studied this article with the respect due to Professor Coote’s expertise in this field. We note, however, that the Professor says (at 199) that the Law Reform Committee (of which he was a member) had a preference for an approach to cancellation which did not divest any rights which had previously accrued. This is what he described as the Heyman v Darwins model: see [1942] AC 356. The Professor notes that the Committee’s preference in this respect was justified by the decisions of the House of Lords in Johnson v Agnew and Photo Production Ltd v Securicor Transport Ltd noted in para [7] above. He suggests that the Committee’s preference for a cancellation model which did not divest accrued rights explains, as he puts it, “why Section 8(3)(a) refers to release from the obligation further to perform the contract …”.
This explanation supports the construction which we would in any event put on s8(3)(a). It does not support Mr Carter’s argument, and indeed other aspects of the article, to the effect that cancellation does in terms of the Act divest accrued rights. In our view the words of s8(3)(a) are simply not strong enough to demonstrate a legislative intent to take away a right which already exists on an unconditional basis at the time of cancellation. On this aspect we agree with what Wylie J said in Pendergrast v Chapman at 191 that s8(3)(a) should not readily be construed in such a way as to take away rights which would have existed prior to its enactment.
We note that although Professor Coote argues, for reasons with which we respectfully disagree, that in Brown v Langwoods Photo Stores Ltd this Court was wrong in its construction of s8(3)(a), he does indicate at the beginning of his article that the result in that case was unlikely to cause much concern. Our disagreement with him relates only to the proper construction of the rather terse language in which s8(3) is expressed. Indeed, we agree with his criticism of the reasoning in Pendergrast v Chapman.
In this case Mr Garratt as purchaser owed Mr Ikeda $130,000 at the time the contract was cancelled. It is not, as earlier noted, the characterisation of Mr Ikeda’s right as one in debt which saves it from s8(3)(a). It is the broader point that, as a right already unconditionally existing, s8(3)(a) does not take it away. All other contractual rights and obligations are abrogated by s8(3)(a) as from the time of cancellation, subject of course to any order which may be appropriate under s9. We think it likely that this approach to cancellation commended itself to those responsible for preparing the Act because they thought it preferable to have unconditional rights and obligations preserved, albeit subject to possible adjustment under s9. The alternative of the cancelling party losing an unconditionally accrued right, and having to seek relief from the Court by way of upholding that right, was probably seen as an inappropriate inversion of prima facie entitlements and obligations.
For the reasons given we uphold Mr Waalkens’ submission that s8(3)(a) does not have the effect contended for by Mr Carter. Section 8(3)(a) did not prevent Mr Ikeda from obtaining summary judgment against Mr Garratt for the unpaid amount of the deposit. Mr Garratt’s first ground of appeal therefore fails.
Background in more detail
It is necessary to set out the background in greater detail in order to explain the arguments presented for and against Mr Garratt’s claim to be relieved pursuant to s9 from paying the balance of the deposit. It will be recalled that it was due on 10 February 2000 but was not paid by that date. On 21 February 2000 Mr Garratt wrote to Mr Fisher, who was acting for Mr Ikeda, explaining why he had not been able to make the third payment on time. He said he expected to be able to pay on 17 March 2000. Settlement date was 31 March 2000. On 23 February 2000 Mr Fisher replied to Mr Garratt acknowledging his letter and saying:
I have been instructed by Mr Ikeda to give you notice pursuant to clause 2.2 of the contract that the vendor requires you to pay the deposit within three working days of the receipt of this letter. Pursuant to clause 1.2 of the contract, this letter is deemed to be received by you in the ordinary course of the post. I calculate therefore that the three working days will expire at 5 pm on Tuesday the 29th of February 2000.
If the deposit is not paid within those three working days then my client has the right to cancel the contract. I have been instructed by Mr Ikeda that he does not intend to cancel the contract at that time, but preserves his right to cancel at any time without notice. He has indicated to me that provided payment of the deposit is made on the 17th of March as you have intimated in your letter no action will be taken pursuant to this notice.
If payment is not made on the 17th of March 2000, then my client reserves his rights pursuant to the agreement.
Mr Carter argued that this was not a sufficient notice in terms of clause 2.2 and that the later cancellation was invalid because a second notice was required and had not been given. This argument was not pressed and understandably so. The contract expressly made time of the essence of all three instalment dates. The only pre-condition of cancellation for non payment of the deposit was the giving of a three working day notice of intention to cancel. The letter of 23 February 2000 was such a notice. The fact that Mr Ikeda indicated he did not intend to cancel immediately on the expiry of the three days, does not mean that he had to give another three days notice. Mr Ikeda effectively allowed a period of more than three working days for compliance by Mr Garrett and instead of requiring payment immediately on the expiry of the three days, he extended time to 17 March 2000. His solicitor’s letter indicated that non payment by then might lead to cancellation and this is indeed what happened. The idea that by giving more than three days Mr Ikeda obliged himself to give a further three day notice after the expiry of the extended date is highly unpersuasive. Indeed Mr Fisher’s letter of 9 March 2000 about to be mentioned, had the effect of another 3 day notice. This ground of appeal must fail.
On 9 March 2000 Mr Fisher wrote to Mr Garratt who had not yet instructed any solicitor himself, saying:
Would you please let me have a transfer and notice of sale for execution in anticipation of settlement.
Mr Ikeda is to travel to New Zealand on the 20th of March and if the matter is to proceed on the 31st of March, then the transfer can be executed then. However, if you intend to settle early, as you have indicated you might wish to do, I would need to get a transfer up to Japan and signed by him and returned in time for an earlier settlement date.
Would you please treat this matter as urgent.
I would also be pleased to hear from you with regard to the further deposit, which is due on the 17th of March as per our previous arrangement. Please note that I do not think a further extension will be available to you and my client has signalled his intention to cancel the contract in the event of non payment on that date.
Mr Garratt replied on 13 March 2000 in these terms:
Thank you for your letter received 13th March 2000.
Payment of the 3rd part of the deposit, $130,000, will be deposited to your Solicitors Trust Account on Friday 17th March 2000.
…
I leave for London in 6 days time in order to further the settlement process.
We will not now settle before the 31st March.
Other matters covered in your letter are in hand.
Mr Garratt wrote a further letter to Mr Fisher on 17 March 2000, being the date on which he was supposed to pay the sum of $130,000. His letter said:
Further to my letter of 13th March 2000 in which I advised that I had made arrangements for the third part of the deposit of $130,000.00 to be deposited into your trust account by Friday 17th March:-
I have just been advised that the expected funds have not arrived in time to clear the banking system and be lodged in your account in time.
Both parties have assured me that they will clear this coming week.
The first amount of $50,000.00 will arrive and be available by Wednesday 22nd March and the balance of $80,000.00 will arrive and be available by Friday 24th March 2000.
In light of the above information please find enclosed two postdated cheques:
1 for $50,000.00 dated Wednesday 22nd March
1 for $80,000.00 dated Friday 24th March
I would be grateful if you do not lodge the cheques until I confirm to you by fax that the amounts have arrived in the Voyager Trust account.
I also advised in my letter of 13th March that I would be leaving for London in six days time. Mr Guerin and I have delayed that departure until the funds have been cleared and lodged into your account.
I am most regretful and apologise to Mr Ikeda for the delays we have experienced, thus causing him a further delay.
Our intention is to complete this total transaction as quickly as possible so the property can be transferred.
I will communicate with you against during Wednesday 22nd March.
Thank you for your assistance in this matter.
On 20 March 2000 Mr Fisher wrote to Mr Garratt cancelling the contract in these terms:
I note that the further deposit of $130,000 due on the 10th of February 2000 has not been paid by the 17th of March 2000 as indicated by you in your letter of the 21st of February 2000.
By letter to you of the 23rd of February 2000, I gave you notice pursuant to clause 1.2 of the contract that unless payment was made within three working days of the contract my client reserved the right to cancel the contract. In my letter of the 23rd of February 2000, I indicated to you that my client would allow you until the 17th of March 2000, but reserved his rights.
As a result of your non-payment my client hereby cancels the contract pursuant to clause 2 of the contract. The deposit of $50,000, which has been paid is hereby forfeited.
It is not necessary to describe what happened after cancellation in similar detail. Mr Ikeda was able to re-sell the property for more than the amount payable by Mr Garratt. Because of the nature of the re-sale transaction which involved in part an exchange of properties, it is not possible to say exactly how much more Mr Ikeda received from the second purchaser. Precision in this respect is not, however, important. After allowing for expenses of re-sale and costs, the excess over the first sale price is in the vicinity of $400,000. Mr Garratt contends that it is unfair for him to have to pay Mr Ikeda another $130,000 when he has already forfeited $50,000 and Mr Ikeda has profited by the cancellation to the extent indicated. The question is first whether Mr Garratt can bring a claim for relief under s9 of the Act and, if he can, whether his claim is sufficiently arguable to enable him to resist summary judgment for the sum of $130,000. The Master did not directly address the first point and implicitly found that Mr Garratt’s claim for relief was not such as to enable him to resist summary judgment.
Nature of a deposit
Mr Ikeda’s first response to Mr Garratt’s argument based on s9 was to invoke s5. Mr Waalkens on his behalf contended that because it was of the essence of a deposit that it was liable to forfeiture on default by the purchaser, the parties had thereby expressly provided for the remedy of forfeiture or, here, the ability of Mr Ikeda to claim the balance of the deposit on Mr Garratt’s default. Accordingly Mr Garratt’s ability to seek relief under s9 was, so Mr Waalkens submitted, taken away by an express provision of the contract permitting forfeiture.
In the present context the word deposit has a well settled meaning. The Oxford English Dictionary (2nd edition, 1989) defines a deposit as “something, usually a sum of money, committed to another person’s charge as a pledge for the performance of some contract, in part payment of a thing, purchase, etc.” The definition of a pledge is “anything handed over to or put in the possession of another, as security for the performance of a contract, or the payment of a debt, or as a guarantee of good faith, etc., and liable to forfeiture in case of failure.” Moving from general usage to legal usage, Black’s Law Dictionary (6th edition, 1990) describes a deposit as “money placed with a person as an earnest or security for the performance of some contract, to be forfeited if the depositor fails in his undertaking.”
The case law is to the same effect. In Soper v Arnold (1889) 14 App Cas 429, 435 Lord Macnaghten described a deposit in this way:
Everybody knows what a deposit is. The purchaser did not want legal advice to tell him that. The deposit serves two purposes – if the purchase is carried out it goes against the purchase-money – but its primary purpose is this, it is a guarantee that the purchaser means business; and if there is a case in which a deposit is rightly and properly forfeited it is, I think, when a man enters into a contract to buy real property without taking the trouble to consider whether he can pay for it or not.
Similar observations had been made by Cotton LJ in Howe v Smith (1884) 27 Ch D 89, 95:
What is the deposit? The deposit, as I understand it, and using the words of Lord Justice James, is a guarantee that the contract shall be performed. If the sale goes on, of course, not only in accordance with the words of the contract, but in accordance with the intention of the parties in making the contract, it goes in part payment of the purchase-money for which it is deposited; but if on the default of the purchaser the contract goes off, that is to say, if he repudiates the contract, then, according to Lord Justice James, he can have no right to recover the deposit.
Denning LJ also gave a similar description in Stockloser v Johnson [1954] 1 QB 476, 490 (CA).
These authorities were referred to by Davison CJ in Worsdale v Polglase [1981] 1 NZLR 722, 725. However, in that case the Chief Justice held that an express forfeiture clause was required before the remedy of forfeiture could be held to prevail over s9. Mr Waalkens argued that this approach was wrong because an express forfeiture clause would be redundant. It would amount to saying the same thing twice, because the right to forfeiture was inherent in the very nature of a deposit. Counsel argued it was sufficient for s5 purposes that the parties had described the sum of $180,000 as a deposit. Section 9 was ousted because the contract thereby provided its own remedy. Mr Carter argued that this proposition was inconsistent with the fact that s5 required express provision to be made for the remedy before it prevailed over the Court’s s9 jurisdiction. We note, as did Davison CJ (at 726), that in Stockloser v Johnson (at 490) Denning LJ equated a payment characterised as a deposit with a forfeiture clause:
But when there is a forfeiture clause or the money is expressly paid as a deposit (which is equivalent to a forfeiture clause), then the buyer who is in default cannot recover the money at law at all.
For present purposes the difference between recovery at law and recovery in equity is of no moment.
In Worsdale v Polglase at 728, after referring to this aspect of Stockloser v Johnson, Davison CJ continued:
Professor Burrows in a paper in the Canterbury Law Review, 1980 vol 1 at p 82, has discussed s 9 of the Act, and he said this:
"This discretionary power to order the payment of money opens some interesting possibilities in respect of deposits. It may well be that a court could now order the repayment of a deposit in a deserving case, although before so doing it would have to have regard to the terms of the contract [s 9(4) (a)]. (Could it be that the very use of the word 'deposit' necessarily involves that the parties intend forfeiture on breach by the payer? If so, section 5 may entail that that intention will prevail)".
In endeavouring to answer that question of Professor Burrows, I think if one interprets the words of s 5 "expressly provides" in their ordinary meaning of "plainly or clearly providing" as opposed to "providing by implication" then it must be said that the words of the contract referring only to the payment of a deposit, do not expressly provide for forfeiture of that deposit on default. Such forfeiture must be implied from the very nature of the deposit, but it is not expressly stated in the words of s 5 of the Act.
The fact that the parties choose to call a payment under a contract a deposit, irrespective of the amount involved or its true nature, does not mean that the use of the word “deposit” automatically ousts the remedial provisions of s9. Reference can be made to a passage to this effect in the judgment of Denning LJ in Stockloser v Johnson at 491, cited by Wild CJ in Codot Developments Ltd v Potter [1981] 1 NZLR 729, 733:
Again, suppose that a vendor of property, in lieu of the usual 10 per cent deposit, stipulates for an initial payment of 50 per cent of the price as a deposit and a part payment; and later, when the purchaser fails to complete, the vendor resells the property at a profit and in addition claims to forfeit the 50 per cent deposit. Surely the court will relieve against the forfeiture. The vendor cannot forestall this equity by describing an extravagant sum as a deposit, any more than he can recover a penalty by calling it liquidated damages.
More recently Henry J took the same view in Simanke v Liu (1994) 2 NZ Conv C 191, 888. But if the amount described as a deposit is no more than 10% of the contract price and otherwise serves the conventional purpose of a deposit, the parties have contracted on the basis that it is inherent in the nature of the payment that it will be liable to forfeiture or recovery on the purchaser’s default.
In delivering the judgment of the Privy Council in Linggi Plantations Ltd vJagatheesan [1972] 1 MLJ 89, Lord Hailsham LC held that what was described as a normal 10% deposit was subject to forfeiture on the purchaser’s default, even though the vendor suffered no loss. He added at 94:
It is also no doubt possible that in a particular contract the parties may use language normally appropriate to deposits properly so called and even to forfeiture which turn out on investigation to be purely colourable and that in such a case the real nature of the transaction might turn out to be the imposition of a penalty, by purporting to render forfeit something which is in truth part payment. This no doubt explains why in some cases the irrecoverable nature of a deposit is qualified by the insertion of the adjective “reasonable” before the noun. But the truth is that a reasonable deposit has always been regarded as a guarantee of performance as well as a payment on account, and its forfeiture has never been regarded as a penalty in English law or common English usage.
In the later Privy Council case of Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] 2 All ER 370, Lord Browne-Wilkinson at 373-374 undertook a most instructive discussion of the nature and historical antecedents of a deposit. His Lordship said:
In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. One exception to this general rule is the provision for the payment of a deposit by the purchaser on a contract for the sale of land. Ancient law has established that the forfeiture of such a deposit (customarily 10% of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract.
This exception is anomalous and at least one textbook writer has been surprised that the courts of equity ever countenanced it: see Farrand Contract and Conveyancing (4th edn, 1983) p 204. The special treatment afforded to such a deposit derives from the ancient custom of providing an earnest for the performance of a contract in the form of giving either some physical token of earnest (such as a ring) or earnest money. The history of the law of deposits can be traced to the Roman law of arra, and possibly further back still: see Howe v Smith (1884) 27 Ch D 89 at 101–102, [1881–5] All ER Rep 201 at 208–09 per Fry LJ. Ever since the decision in Howe v Smith the nature of such a deposit has been settled in English law. Even in the absence of express contractual provision, it is an earnest for the performance of the contract: in the event of completion of the contract the deposit is applicable towards payment of the purchase price; in the event of the purchaser’s failure to complete in accordance with the terms of the contract, the deposit is forfeit, equity having no power to relieve against such forfeiture.
It is against this background that the present issue falls for decision.
Discussion: deposits: section 5
This is an aspect of the law where it is of the highest importance to have as much certainty as possible. The primary nature of a deposit as expressed in the authorities cited, and both the popular and legal usage of the word, support the view that when the parties describe as a deposit a sum not exceeding 10%, paid or payable to seal the bargain, they must be taken as knowing and intending that if the purchaser defaults the deposit will be liable to forfeiture or recovery by the vendor. There can be few, if any, purchasers in New Zealand who do not understand and accept that a 10% deposit is not refundable if they default. The general point is underlined in the present case by clause 9.4 of the contract which is directed to the purchaser’s failure to comply with a settlement notice. The vendor is thereby given the right to cancel and “forfeit … the deposit paid by the purchaser but not exceeding in all 10% of the purchase price.” Mr Waalkens appropriately did not rely on clause 9.4 as part of his s5 argument because the clause is directed to a different contractual default. We refer to the clause simply as confirmation of the general proposition that a deposit not exceeding 10% of the purchase price is understood to be liable to forfeiture on the purchaser’s default.
We note the reservation expressed in Dawson and McLauchlan’s article entitled “Recovery of deposits by defaulting purchasers under the Contractual Remedies Act 1979” in 1981 NZLJ 486, 489. The authors suggest that 10% may be too high a percentage at which to allow forfeiture without the purchaser having any right to claim redress under s9. But a purchaser unwilling to risk that consequence can of course endeavour to negotiate a lesser percentage. The market, which has consistently adhered to a 10% figure, will dictate whether any change in practice should occur. We note also the authors’ suggestion, contrary to the view expressed by Davison CJ in Worsdale v Polglase (supra), that it should not matter for s5 purposes whether there exists an express forfeiture clause. They proffer the view, with which we agree, that the ability to forfeit or recover is already contained in the term deposit.
McMorland: Sale of Land (2nd edition, 2000) at 12.59 et seq. expresses the view that liability to forfeiture is “inherent” in the nature of a deposit, and it is irrelevant that the 10% sum liable to forfeiture is large in absolute terms. Lexane Pty Ltd v Highfern Pty Ltd [1985] 1 Qd R 446 is cited as such a case..
Davison CJ considered that the nature and connotation of a deposit did not amount to express provision in terms of s5. That view, as suggested by McMorland (op, cit.) at 12.61, places an inappropriately restricted meaning on s5. It fails to recognise, as the authorities cited demonstrate, that appropriate use of the word “deposit” does constitute express recognition by both parties, by dint of the meaning of the word “deposit” that, on default by the purchaser, the vendor has the remedy of forfeiture or recovery. The legal meaning of the word “deposit” is a sum of money paid to seal the bargain and liable to forfeiture on default by the purchaser. But, as noted in paragraph [38] above, the use by the parties of the word “deposit” does not of itself automatically mean that a payment is to be treated in law as a deposit for s5 purposes, irrespective of the amount involved or its true nature.
Although the deposit is part of the purchase price its primary function is as an earnest. It is when the purchaser is in default and the vendor cancels and there is no purchase price payable any more, that the question of forfeiture or recovery of the deposit arises. This is why the primary function of a deposit is to seal the bargain. In a sense it is the price paid by the purchaser for the vendor’s willingness to commit to a sale. If the sale goes off through the purchaser’s default, it has been axiomatic since Roman times that the vendor may keep or recover the price of such commitment.
We note that Wylie J viewed the matter in much the same way in Pendergrast v Chapman at 189 when he drew attention to the fact that two of the cases which he had discussed, Farrant v Leburn [1979] WAR 179, and Bot v Ristevski [1981] VR 120, had focused on a deposit as being not simply part of the consideration for the ultimate conveyance but as, in his words, the price for the vendor’s promise to sell.
For these reasons we respectfully disagree with Davison CJ’s approach to s5 and regard Worsdale v Polglase as having been wrongly decided on this point. We hold that in this case s5 prevents Mr Garratt from invoking s9. The deposit, being a conventional sum comprising no more than 10% of the purchase price, carried within it the express agreement of the parties that on default it was liable to forfeiture by Mr Ikeda. We do not consider it makes any difference that it is not a matter of Mr Ikeda retaining the sum in issue. Here he is suing for it. To take the view that this alters the position under s5 would be to allow Mr Garratt to take advantage of his own default. We also recognise that it is the non-payment of the very sum which is now subject to a forfeiture claim that led to the cancellation, but again we do not see this as logically making any difference to the s5 position.
Section 9 claim
For completeness we will discuss Mr Garratt’s claim for relief under s9 as if it were not precluded by s5. The key question is whether it is just in terms of s9(1) to give Mr Garratt relief, in whole or in part, from his liability to pay Mr Ikeda $130,000. If Mr Garratt has an arguable case for relief it should go to trial and summary judgment for Mr Ikeda would not be appropriate. Even if s5 did not apply, the fact would remain that a deposit has the legal connotation already discussed. In the ordinary course of things a conventional deposit, not exceeding 10%, is liable to forfeiture on the purchaser’s default. What is just in terms of s9 must be viewed against that clear and well understood background, amounting at least to an implied term for the purposes of s9(4)(a).
We said earlier that the broad purpose of s9 is to relieve against any particular injustice or hardship caused by the operation of the rules applying to cancellation as set out in s8. Whether relief is appropriate should be looked at not only from the point of view of the party in default but also from the point of view of the innocent party. In that respect we do not consider s9 gives any general or untrammelled power to depart from the ordinary operation of the cancellation rules. The party seeking relief under s9 must be able to show that the operation of those rules is unjust because of some special feature of the particular case. As regards forfeiture of deposits, it is not enough for a defaulting purchaser to say that the ordinary rule is unjust. The purchaser must be able to say “I know deposits are ordinarily forfeited in these circumstances but, because of this particular feature of my case or combination of features, it is just, weighing up the interests of both sides, to make an exception for me”.
Mr Garratt’s primary point is that Mr Ikeda made a substantial profit out of the re-sale. But in that respect Mr Ikeda was not without risk in the meantime and no doubt had to expend time and energy on achieving the second deal. In any event it is inherent in cancellation following a purchaser’s default, that the vendor may achieve more for the property on a re-sale. The market may be a rising one or the vendor may simply be fortunate, or indeed may have sold at too low a price the first time round. Furthermore the present re-sale was not just a cash transaction. We would not have regarded the so-called profit made by Mr Ikeda on the re-sale as justifying any relief against the forfeiture of Mr Garratt’s deposit or, more precisely here, relief against Mr Ikeda’s ability to recover the balance outstanding.
Mr Carter advanced as a further ground for relief the fact that Mr Garratt’s breach was not a deliberate one. He had apparently been let down by a friend. He was not an opportunist, as Mr Carter put it. All that may be so but the simple fact is that he signed an unconditional contract without having the money even to pay the deposit. He bought Mr Ikeda’s commitment to sell by means of a deposit he was unable to pay. He thereby took a risk which did not pay off. He made express promises to pay the balance of the deposit during his correspondence with Mr Fisher. He obviously had no assurance of being able to perform those promises. He was given the indulgence of an extension of time based on his assurances and even then he could not perform.
In our view Mr Ikeda, through Mr Fisher, treated Mr Garratt very fairly in that he did not cancel as soon as he was entitled to do so. He gave Mr Garratt more than the required three days notice and he made his intentions crystal clear and adhered to them. As already noted, justice in terms of s9 must involve justice to both sides. Mr Ikeda was willing to sell to Mr Garratt for what, on Mr Garratt’s own case was, for him, an advantageous price. He was given every opportunity to pay the balance of the deposit and, in our view, the case falls well short of being one in which, were it possible, it would be just to give Mr Garratt any relief from a consequence inherent in the agreement he signed, and the risk he thereby took. Mr Garratt cannot even claim to be unversed in financial matters; although even if he had been, that may well have made no difference. He is described in the papers as a financier, and from the evidence it is apparent he has experience in the financial world, both locally and internationally. His claim to relief under s9, had s5 not been an impediment, would not have been sufficiently arguable to justify a trial with the consequent withholding of the summary judgment to which Mr Ikeda was, prima facie, entitled. The second ground of appeal based on s9 must also fail.
Conclusion/formal orders
For the reasons given the appeal is dismissed. Mr Garratt is ordered to pay Mr Ikeda costs on the appeal in the sum of $5000 plus disbursements including the reasonable travel and accommodation expenses of one counsel to be fixed if necessary by the Registrar.
Solicitors
Carter & Partners, Auckland, for Appellant
N Fisher, Auckland, for Respondent
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