Redoute Securities Ltd v Thomson HC Auckland CIV 2007 425 000281

[2007] NZHC 1960

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

CIV 2007 425 000281

IN THE MATTER OF     Section 145 of the Land Transfer Act 1952

AND IN THE MATTER OF  Caveat No. 7369476.1 Otago Land

Registration District

BETWEEN  REDOUTE SECURITIES LIMITED Applicant

ANDRETA THOMSON Respondent

Hearing:         27 July 2007

Appearances: D Wood for Applicant

J St John for Respondent

Judgment:      1 August 2007

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

Issue

[1]      Whether an obligation to pay a deposit by way of cleared funds is satisfied by payment of funds by electronic transfer.

Background

[2]      On 12 April 2007 Ms Thomson signed an agreement to sell her Glenorchy property to Mr G Robertson, or his nominee, for $1,300,000.00.   The agreement required a deposit of $100,000.00 to be paid to Locations Realty trust account upon

the agreement becoming unconditional.

REDOUTE SECURITIES LIMITED V RETA THOMSON HC INV CIV 2007 425 000281  1 August 2007

[3]      On  4  May  2007  the  agreement  was  made  unconditional.    By  Deed  of Nomination Redoute Securities was nominated as purchaser.   On 8 May 2007 Mr Thomson’s  solicitors  advised  the  agreement  for  sale  and  purchase  would  be cancelled if “the deposit was not paid within three working days”.  That same day Locations Realty faxed details of their trust account for payment purposes.

[4]      A  “batch  summary”  report  shows  that  at  2.38pm  on  11  May  Redoute

Securities’ solicitors paid from its Bank of New Zealand trust account the sum of

$100,000.00 by way of electronic funds transfer to the Bank of New Zealand trust account of Locations Reality.

[5]      Following that transfer, Mr Grant of Redoute Securities’ solicitors sent a facsimile at 3.31pm to Locations Realty and to Ms Thomson’s solicitors.

[6]      There is a dispute about whether Locations Realty had knowledge of receipt of the transfer of those funds to its trust account prior to 5pm that day.  Mr Guthrie a sales person employed by Locations Realty deposed Locations Realty had received a facsimile  from  Mr  Grant  recording  payment  of  the  deposit  by  electronic  bank transfer.  He said Locations Realty trust account was checked about 4.30pm by Ms McGregor, an administrator when the deposit into the trust account was sighted.  He said he was informed of the sighting and refers to the fact that a receipt dated 11

May was then written.

[7]      Ms McGregor, also of Locations Realty, disputes this account.   She said Locations Realty had received a facsimile from Mr Grant saying the deposit funds had been electronically transferred into its trust account.  She said:

I did check the Locations Realty trust account a couple of times on Friday 11

May (the last occasion being 14.17 hours) but no deposit funds were visible on that day.

One could infer from this account that Ms McGregor made her inquiries in response to having received Mr Grant’s facsimiled advice.   However, Mr Grant’s facsimile was not sent until 3.31pm.   On her own account Ms McGregor did not make any check after 2.17pm.  It was on Saturday, the following day, that she wrote the receipt

and noted the date of 11 May “because that was the date that the deposit funds were lodged in the Locations Realty trust account”.

[8]      At 4.55pm Ms Thomson’s solicitors faxed Mr Grant advising:

The electronic method of payment does not provide cleared funds, and is not an acceptable method of payment of the deposit.

Please provide us with notification of cleared funds payment to Locations or notice of cancellation may be forthcoming.

[9]      Mr Grant says he received this facsimile at approximately 5pm.  After trying to contact Ms O’Donnell, solicitor for Ms Thomson, he contacted her at 5.11pm regarding their facsimile.   He said he advised her that he would undertake that Redoute Securities’ solicitors “would not stop, reverse or cancel the electronic transfer made and would confirm that in writing”.   Ms O’Donnell’s response was that Ms Thomson’s solicitors took the view that the payment made did not constitute cleared funds and they had instructions to cancel the contract.

[10]     At 5.21pm Mr Grant sent an email containing the undertaking he said would be provided.  It appeared this email crossed with a facsimile containing a notice of cancellation of the contract.

[11]     On Monday 14 May 2007 Redoute Securities lodged a caveat against Ms Thomson’s title.   Late, at 4.36pm on 14 May, Ms Thomson’s solicitors sent a facsimile referring to the sum of $100,000.00 having arrived as cleared funds in Locations Realty trust account, and as the contract was cancelled on 11 May they wished  to  return  the  deposit.    They  requested  Redoute  Securities’  solicitors  to provide written authority for release of the funds.   Redoute Securities’ solicitors response was no authority would be given for return of the deposit because in their view there was no right of cancellation.

The contract

[12]     It was in the REI– ADLS (7th ed (3)) July 1999 form.

[13]     Clause 2.2.provided:

The vendor shall not be entitled to cancel this agreement for non-payment of the deposit unless the vendor has first given to the purchaser three working days notice of intention to cancel and the purchaser has failed within that time to remedy the default.  No notice of cancellation shall be effective if the deposit has been paid before the notice of cancellation is served.

[14]     By clause 1.1 of the contract a “working day” is deemed to commence at

9.00am and to terminate at 5.00pm.

Payment of the deposit – Should payment by electronic transfer be treated as cleared funds?

[15]     The facts are not in dispute in any material sense.

[16]     The  contract  did  not  require  payment  of  the  deposit  by  cleared  funds, although in current property transactions such an obligation may be implied. Certainly, the opposing parties have addressed evidence and argument about whether upon payment of the purchaser’s deposit it was then immediately available to the vendor.   Considerations of commercial exigency dictate immediate access to paid funds.  Rules have evolved and practises prescribed as a consequence.  Mr Jones of Auckland, solicitor, is a person who has experience of electronic funds transfer protocols and procedures.   He has 32 years experience as a legal practitioner, has been a member of the Auckland District Law Society’s Property and Business Law Committee, is a member of that society’s Forms Committee, and a convenor of the New Zealand Law Society’s working party on the automation of the land registry system.    He  was  responsible  for  drafting ASB  Bank’s  electronic  funds  transfer settlement protocols, and is familiar with the electronic funds transfer protocols and procedures for banks other than the ASB Bank, including BNZ.  He has provided an affidavit on behalf of Redoute Securities.

[17]     In Mr Jones’ opinion the electronic funds transfer in this case should have been treated as cleared funds within the time required for payment, and an acceptable manner of payment of the deposit.  He explains:

(a) The electronic funds transfer meant that the funds went directly from one BNZ trust account to another BNZ trust account.

(b) There are protocols in the banking industry to ensure that funds paid by electronic funds transfer are cleared funds before they are paid out because of the need for the bank to match those funds against cleared funds from their client payer.

(c) By remitting the funds electronically from their BNZ account to the  recipient’s  BNZ  account  they  are  deemed  to  have  been received immediately in real time.

(d) The batch  summary –  direct  credit  report  issued  by the  BNZ confirms that the funds had been despatched to the real estate agent’s trust account from the trust account of the purchaser’s solicitors.  The report confirms that the status of the payment was “sent”.

(e) The real estate agent on behalf of the vendor confirms that they were able to check the BNZ desk top banking facilities and view the deposit of the sum of $100,000 into their trust account. (Although a dispute remains about whether it did at that time view receipt of the deposit).   This, Mr Jones says, is a feature of electronic funds desk top banking in the BNZ system and with other banks using similar technology.

(f) Any person dealing with or being informed of the BNZ electronic funds transfer should have been aware that the funds are cleared funds at the moment of deposit and may be relied upon.

(g) The letter from the real estate agency requiring payment to their trust account did not stipulate any particular form of payment.

(h) The letter  from  (the  vendor’s  solicitors)  notifying  intention  to cancel if payment of the deposit was not made within three working days did not stipulate any particular form of payment.

(i)  The contract does not stipulate any particular form of payment for payment of the deposit.

(j)  The vendor through the real estate agency and her solicitors, had been informed about 3.30pm on 11 May 2007 that there had been the electronic transfer of funds.

(k) That there was not an undertaking until after 5pm on 11 May that the payment would not be stopped reversed or cancelled does not mean that the payment of the deposit had not been made prior to

5pm.

(l)  In the electronic banking system between the same banks (i.e.

BNZ to BNZ) there is no need for a letter of confirmation that the funds have been transferred as cleared funds and are irreversible. However, there is a practise to confirm the transfer of funds by letter which only confirms what in fact has happened in the banking system.

[18]     Mr Jones concludes by stating that:

If a solicitor was concerned to have confirmation that an electronic funds transfer would not be stopped reversed or cancelled there would have been such  a  request  prior  to  any  cancellation  of  the  contract.    Also…  the electronic funds transferred to the real estate agency was on a basis that meant that the receipt of the funds on behalf of the vendor was secure regardless of any undertaking being given.

[19]     Ms Thomson’s solicitor, Ms O’Donnell deposes to events on 11 May 2007 following receipt of advice of the electronic transfer.   She discussed the situation with the partners of her firm.  Their understanding was the payment would need to be made by way of cash, bank cheque or other cleared funds.  She faxed Mr Grant at

4.55pm with that advice.   She is aware Mr Grant tried to contact her before they

spoke  at  5.11pm.    She  said  she  confirmed  her  instructions  were  to  cancel  the contract.  She confirmed that advice by facsimile at 5.21pm.  She says the email Mr Grant says he sent at 5.21pm was not received until 5.27pm.   She acknowledges receiving a facsimile verifying the emailed undertaking.   She says a notice of cancellation was sent before the undertaking was received.  Regardless, her view is notwithstanding the undertaking no irrevocable payment of cleared funds had been received to prove cleared funds had been deposited with Locations Realty.

[20]     As at 11 May Ms O’Donnell said she had no knowledge or evidence of the status of the electronic funds transfer or the banking system used by Mr Grant’s firm, or whether BNZ’s protocols surrounding electronic transfers made from one account holder to another would provide cleared funds.  She states:

Had the funds transfer of the deposit been made by way of a same day cleared payment (SCP) or had we been given evidence of electronic payment made by a service that immediately provided clear funds, then we would have accepted the deposit as payment of cleared funds.

[21]     Ms O’Donnell attached an example of an SCP payment confirmation advice from BNZ which notes that payment is cleared funds and will not be reversed.  She said her firm’s expectation was, and remains, that the payee should receive confirmation of the mode and status of any electronic payment.  She claims “this is a matter of common practice”.

[22]     Ms O’Donnell refers to her firm’s inquiries of BNZ to answer the question regarding the status of electronic funds transferred in this particular instance.  She considers the response equivocal.  Her firm still does not know what type of account Redoute Securities’ solicitors operated, or whether electronic payments are immediately available as cleared funds.   Her experience is that not all payments made by way of electronic funds transfer from one account to another account of the same bank is the equivalent of payment by bank cheque.

[23]     Referring to the New Zealand District Law Society’s published guidelines for practitioners on electronic banking for settlement payments she notes the committee summarised BNZ’s electronic banking settlement payment methods, and stated that, in its view, a BNZ SCP is the preferable mode of payment.  Ms O’Donnell expects

that view would apply equally to deposits as to settlement payments.  In her view, the law requires payments to be made by way of irrevocable cleared funds, but neither her firm nor the Locations Realty were told what BNZ banking protocol applied to the electronic transfer, or that there was an irrevocable cleared payment.

[24]     Ms O’Donnell challenges Mr Jones’ opinion that in this case the electronic funds transfer “should have been treated as cleared funds within the time required for payment and an acceptable manner of payment of a deposit”.  In her view, it assumes that her firm knew, or should be deemed to have known, the type of BNZ banking system that was being operated by Mr Grant’s firm to transfer funds electronically, and the BNZ banking protocols that applied to the funds electronically transferred in this instance.  In fact, she says that on 11 May, her firm had no direct knowledge of the BNZ banking system that was operated by the purchaser’s solicitors  or  the banking protocols which applied to the payment.

Legal principles

[25]     The applicant has the onus to justify the continued existence of its caveat.  It must show it has a reasonably arguable case for the interest claimed in the property. Although an arguable case may be made out the Court may, in its discretion, and on the balance of probabilities, direct the caveat be removed.

Relevant law

[26]     The present case is not dissimilar to that dealt with by the Supreme Court in Otago Station Estates Ltd v Parker [2005] 2 NZLR 734. Concerning clause 2.2 the Court held at [31] the clause required cash, or its equivalent of immediate payment. Adopting an observation from Somers J in Henderson v Ross [1981] 1 NZLR 417 at

433 the Supreme Court noted that a person entitled to payment of the deposit is entitled to certainty of receipt.

[27]     At [27] the Court held:

The law relating to the mode of payment of deposits is well understood and workable in practice…that a contractual requirement for the making of a payment must, as a matter of law, be performed by means of legal tender, bank cheque or other cleared funds…

[28]     In a series of cases involving the same parties in Rick Dees Limited v Larson [2005] 3 NZLR 538 (HC), Rick Dees Limited v Larson [2006] 2 NZLR 765 (CA), and in the Supreme Court decision in Larson v Rick Dees Limited [2007] NZSC 39, the various Courts dealt with the phrase “other cleared funds”.

[29]     The various Courts noted the prevalence of a practice for parties to settle by using electronic banking methods rather than bank cheques.   Each level of Court held that electronic funds payment is legal tender, and is the commercial equivalent of cash and/or a bank cheque to meet its contractual obligation and “certainty of receipt”.

[30]     A point of difference between the Court of Appeal and the Supreme Court concerned whether or not notification of the payment was required to be given and when.   Reversing the Court of Appeal, the Supreme Court noted that informing a vendor  that  funds  were  available  was  an  essential  feature  of  settlement  when contracts were silent about mode of settlement.   A purchaser paying by remote settlement must allow sufficient time to inform the vendor of payment, and he/she must do so in the time required for payment.

[31]     The factors of significance affecting our present case include:

(a) It concerns the payment of a deposit, and not settlement of the transaction, as in Rick Dees.

(b) The contract did not prescribe the method of payment, nor was there any separate agreement about the method of payment.

[32]     The issue is whether in the manner payment was made by electronic transfer Redoute Securities provided “certainty of receipt” and thereby met its contractual obligations.

Considerations

[33]     Ms St John for Ms Thomson submits in the present case there is no evidence that the electronic transfer was irrevocable and funds could immediately have been drawn upon.  She submits no evidence was proffered by Redoute as to the type of banking system operated their solicitors.   If the banking system used guaranteed cleared funds one would expect evidence of that to be available, but there is none.

[34]     Ms O’Donnell deposes to trying to ascertain which BNZ banking system was used  on  this  occasion.    She  asserts  not all  payments  made  by electronic  funds transfer from BNZ to BNZ accounts would be the equivalent of a bank cheque.  In some instances she claims funds are able to be reversed.   She said the “cleared funds” protocol still does not apply to payments by BNZ’s personal computer business banking (PCBB) system.   Her knowledge is not qualified by reference to her experience or expertise.

[35]     Ms  St  John  relies  upon  NZLS  guidelines  for  practitioners  on  electronic banking for settlement payments that state a BNZ SCP is the preferable mode of payments.   An SCP is a same day cleared payment.  The problem, she said, is that Ms O’Donnell had no knowledge of the process by which the electronic funds were transferred and, therefore, was not in a position to know whether electronic funds were “cleared funds”.  Ms St John submits Mr Jones’ opinion that the funds should have been treated as cleared funds rests upon the assumption that Ms O’Donnell knew, or should be deemed to have known:

(a) The type of BNZ banking system that was being operated by

Redoute’s solicitors to transfer funds electronically; and

(b) The BNZ banking protocols that applied to the funds that were electronically transferred.

[36]     In   my  judgment   Redoute   Securities,   through   Mr   Grant,   fulfilled   its contractual obligation to pay the deposit by cleared funds by 5pm 11 May 2007.

Further that notification of that payment likewise was provided before 5pm 11 May

2007.

[37]     In discussion with Ms St John I asked her whether it was likely that the deposit payment had been made by cleared funds.  She responded “probably so”.  I gathered she was not prepared to acknowledge more than a “probability”.   In my view, the contractual obligation was performed because the method of payment was not prescribed nor, in anticipation, were protocols defined.

[38]     Ms O’Donnell sent a facsimile at 4.55pm stating the electronic method of payment was not “acceptable”.  She requested provision of “notification of cleared funds of payment to Locations…”.  Later at 5.21pm she purported to issue a notice of cancellation “on the basis that the deposit has not been made by way of cleared funds…”.

[39]     Yet, she had evidence of Mr Grant’s payment from about 4pm, by her own acknowledgement.   She would, or should have been, aware that the transfer went directly from one BNZ trust account to another.  She had an understanding of the existence of protocols in the banking industry to ensure that funds paid by electronic funds transfer are cleared funds.  I assume, for it is not clear to me otherwise from her affidavit, that she was not then aware of those protocols.   Further, the batch summary – direct credit report confirmed the status of the payment as having been “sent”.

[40]     There is sufficient evidence of receipt of payment by Locations Realty before

5pm 11 May,  even  though  Ms  McGregor  did  not  check  Locations  Realty trust account record after 2.14pm that day.   The fact is the following day she wrote a receipt and noted the date of payment as 11 May “because that was the date the funds were lodged in Location Realty’s trust account”.

[41]     Neither by the contract, nor in communications prior to payment being made was any stipulation provided for the particular form of that payment.

[42]     The fact that after 5pm Mr Grant provided an undertaking that the payment would not be stopped, reversed or cancelled, does not mean that the payment of the deposit had not been made prior to 5pm.   Mr Grant deposes he provided this undertaking out of an abundance of caution, and not because he acknowledged any defect in his actions before then.

[43]     Criticism can also be levelled at the purported basis of cancellation, i.e., lack of “any evidence” that the payment was made by way of cleared funds, because, that claim fails to acknowledge:

(a) The payment was made to the agent direct.

(b) There was evidence the agent had received the payment.

(c) There  was  evidence  Ms  O’Donnell’s  law  firm  was  aware  the agent had received the payment.

(d) The “mode and status” of the electronic payment was self evident from the information provided and confirmed by telephone advice to Ms O’Donnell’s office.

[44]     Ms O’Donnell made certain assumptions based on her “personal experience” of banking transactions.   The evidence of Mr Jones, proffered as evidence of an expert, is to be preferred.   Although Ms O’Donnell now purports to justify the cancellation due to the lack of evidence of proof of cleared funds, it does not appear to me that particular bank protocols were effective in the cancellation.  Nor on the facts of this case was there any obligation upon Mr Grant to identify the form of electronic payment being made.

[45]     Ms O’Donnell may presume now to explain her understanding of banking protocols as a result of inquiries she has made after the events.  She cannot presume there was any understanding of those on 11 May 2007 when she claimed a lack of evidence of payment of “cleared funds”.

[46]     To  answer  the  issue  posed  at  the  beginning  of  this  judgment  –  yes  an obligation to pay a deposit can  be  satisfied  by payment  of  funds  by electronic transfer.  Where in the normal course of business such payments may be treated as cleared funds the payer is entitled to rely upon such until the payee identifies a sufficient basis for further information to be provided by the payer.  Of course, any uncertainty concerning this process would be avoided by contractual terms setting out a protocol for electronic transfer payments.

Judgment

[47]     There is clear evidence to support the view that Redoute Securities has an arguable case.  There is no basis for the Court to exercise its discretion to order that the caveat should none the less lapse.  In the course of her submissions to me Ms St John mentioned the existence of a back up purchase contract.   Apparently Ms Thomson is at risk by that contract which purportedly was brought into existence due to the cancellation of Redoute Securities contract.

[48]     I do not doubt what Ms St John says, but have no evidence of the particulars of the back up contract at all.   If nothing more it was just one of the risks Ms Thomson and her solicitors brought into calculation in deciding to cancel Redoute Securities contract.  Of itself it is insufficient reason to order the caveat to lapse.

[49]     Redoute Securities is entitled to costs on a Category 2B basis, together with disbursements as fixed by the Registrar.

Solicitors

Gallaway Cook Allan, Dunedin for Plaintiff
Anderson Lloyd, Dunedin for Defendant