Meehan v Jones

149 CLR 571
42 ALR 463

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(Decision by: GIBBS CJ)

Between: MEEHAN
And: JONES

Court:

Judges:
Gibbs C.J.Mason J.
Murphy J.
Wilson J.

Subject References:
Vendor and Purchaser

Hearing date: Brisbane, 24 June 1981, 25 June 1981
Judgment date: 17 September 1982

Canberra

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Decision by:
GIBBS CJ

The most important question on this appeal, and that on which the learned judges of the Full Court of the Supreme Court of Queensland were in disagreement, is whether a contract of sale of land was binding when it included a term which made the contract subject to certain conditions - particularly a condition making it subject to the purchaser or his nominee receiving approval for finance on satisfactory terms and conditions.

The facts of the case are more fully stated in the judgment of my brother Mason, which I have had the advantage of reading, and I need set out only enough to provide a basis for my own observations.

By a contract in writing, dated 14 March 1979, the first respondents ("the vendors") agreed to sell, and the appellant ("the purchaser") agreed to buy, certain land at Roma in Queensland, on which an oil refinery had been built, for $800,000. The contract recited (untruly) that the vendors had received the sum of $80,000 by way of deposit and in part payment of the purchase money and continued as follows:

"... provided that if the deposit is paid by cheque which is not duly honoured on presentation, the vendor may at his option cancel this Contract. The said deposit shall be retained in the Trust Account of the Solicitors for the vendor until the date of completion when it shall be accounted for to the vendor but if this sale shall not be completed for any reason other than the default of the purchaser the said deposit shall be refunded to the purchaser." The printed clauses which dealt with payment of the balance of the purchase price had been deleted, but the contract provided for completion on "such date as may be agreed upon between the parties or failing agreement on the Thirty-first day of August, 1979". Time was stated to be of the essence of the contract. Special condition 1 of the contract was in the following terms:

'This contract is executed by the parties subject to the following: -

(a)

The Purchaser or his nominee entering into a satisfactory Agreement or arrangement with Ampol Petroleum Limited for the supply of a satisfactory quantity of crude oil until such time as the Purchaser or his nominee has received the approval of the Federal Govt or the appropriate empowered authority for a crude oil allocation of 500 barrels per day or better;

(b)

The Purchaser or his nominee receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase here under;

and should either of the above conditions not be satisfied on or before the Thirty-first day of July, 1979 (or such extended time as the parties may agree upon) then this Contract (other than for the provisions of this Clause) shall be null and void and at an end and all monies paid hereunder by the Purchaser shall be refunded in full.'"

On 30 July 1979 the solicitors for the purchaser and for International Oil Pty. Ltd. who was stated by the purchaser to be his nominee, sent a telex to the vendors giving them notice that:

"1.

The Nominee of the Purchaser (International Oil Proprietary) has entered into a satisfactory agreement with Ampol Petroleum Limited for the supply of a satisfactory quantity of crude oil to the refinery until such time as International Oil Proprietary has received the approval of the Federal Government to a crude oil allocation of 500 barrels per day to International Oil Proprietary.

2.

International Oil Proprietary has arranged finance on satisfactory terms and conditions to enable them to complete the purchase."

There was evidence that the facts asserted in the notice were true. The question that therefore arises is whether, assuming that the condition was satisfied within the time stipulated, a binding contract resulted.

The submission advanced on behalf of the vendors and the second respondent was that the inclusion of special condition 1 had the result that no binding contract was made between the parties. The submission rested on a number of alternative propositions which may be summarized as follows. First, the word "satisfactory" in both pars. (a) and (b) refers to the satisfaction of the vendors as well as to that of the purchaser and the nominee, so that the clause leaves vital matters to be agreed between the parties; accordingly, there is no more than an agreement to agree. Secondly, the language of the clause is so imprecise and indefinite that it is not possible for the court to say what events would satisfy the conditions which are described. Thirdly, the clause leaves it to the discretion of the purchaser whether he will perform the obligations which the contract purports to describe, so that what appears to be a contract is really illusory. It was further said that there was no concluded bargain because the contract left a vital matter to the determination of one of the parties, but in the circumstances of this case that was only another way of saying that the contract was illusory.

The first of these submissions may be dealt with quite shortly. It was submitted that the vendors, as well as the purchaser, were interested in the nature of the agreement or arrangement to be made with Ampol Petroleum Ltd. ("Ampol") for the supply of crude oil, and in the terms and conditions on which finance was to be supplied. The vendors' interest in the proposed supply arrangement was said to result from the fact that they were indebted in the sum of $200,000 to Ampol, and were bound by a processing agreement which they had made with Ampol. It is unnecessary to discuss the evidence with regard to those matters, because it is clear that the agreement or arrangement mentioned in special condition 1 (a) has nothing whatever to do with the vendors' indebtedness or with their liability under the processing agreement. Special condition 1 (a) was plainly inserted in the interest of the purchaser or his nominee, in an endeavour to ensure that if the contract was completed, and the purchaser or his nominee became the owner of the refinery, a sufficient supply of crude oil would be available to enable the refinery to be continued in operation. The vendors' interest in the terms and conditions on which finance was to be supplied was said to be due to the fact that it had been contemplated in discussions between the parties that the vendors might make $250,000 available on second mortgage to enable the purchase to be completed, and was therefore interested in the terms on which any finance might be obtained on first mortgage. Again, the basis in fact of that submission need not be discussed, because the contract makes no reference to any loan being made by the vendors, or to the possible position of the vendors as holders of a second mortgage, and special condition 1 (b) is clearly directed to the question whether the terms and conditions of finance supplied are satisfactory from the point of view of the purchaser. This first submission fails; special condition 1, on its proper construction, affords it no support.

The second submission raises a question that has given rise to considerable differences of opinion in the cases in which the courts have been called upon to give effect to contracts which are made conditional upon the obtaining of finance or suitable or satisfactory finance. Of course it is obvious enough that every such case must depend on the particular words of the contract in question, and that it is not profitable to compare with each other cases decided on different contractual provisions. However, it may be possible to state principles which will provide some guidance through the thicket of decisions.

When the words of a condition state that a contract is subject to finance, or to suitable finance, or to satisfactory finance, the question immediately arises whether the test which is required to be applied is a subjective or an objective one. On the one hand, the contract may be conditional upon the purchaser obtaining finance which he finds sufficient or satisfactory - such finance as he honestly thinks he needs to complete the purchase. On the other hand, the condition may be fulfilled if finance is available which the purchaser ought to find sufficient, or which ought reasonably to satisfy him, even though he honestly, but unreasonably, regards it as insufficient or unsatisfactory. The fact that opinions may differ as to which of these two meanings is given to the words of the clause does not mean that the clause is uncertain. If the Court, in construing the contract, can decide which of the two possible meanings is that which the parties intended, there will be no uncertainty. As Barwick C.J. said in Upper Hunter County District Council v. Australian Chilling and Freezing Co. Ltd. (1968) 118 CLR 429 , at p 436:

"But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction...."

It is only if the court is unable to put any definite meaning on the contract that it can be said to be uncertain.

If the words of the condition are understood to import a subjective test - if the condition is fulfilled if the purchaser honestly thinks that the finance is satisfactory - it is impossible in my opinion to regard the condition as uncertain. The question whether the purchaser does think the finance satisfactory is a simple question of fact. In most cases it will be a question easily answered; if the purchaser thinks the finance satisfactory, he will normally seek to complete the contract, whereas if he does not think it satisfactory, usually he will not attempt to complete. In any case, whether the purchaser is satisfied is simply a question of fact, because, to use the well known words of Bowen L.J., "the state of a man's mind is as much a fact as the state of his digestion" (Edgington v. Fitzmaurice (1885) 29 ChD 459, at p 483 ). However if the test is purely subjective, the question will arise whether any binding agreement has been made at all. That is a question which I shall later discuss.

On the other hand, if the test is an objective one, and the question is whether the finance ought reasonably to be regarded as satisfactory, I should not have thought that the clause is too indefinite for the courts to be able to attribute any particular contractual intention to the parties. It is true that the condition may, as Holland J. said in Grime v. Bartholomew (1972) 2 NSWLR 827, at p 838, be "silent as to amount, term of the loan, rate of interest, conditions of repayment, class of lender, secured or unsecured or form of security". Nevertheless, a court which had evidence of the financial position of the purchaser, the amount required the complete the contract and the prevailing rates and conditions on which loans are made by various classes of lenders should not find it unduly difficult to decide what finance a reasonable man, in the position of the purchaser, would regard as satisfactory.

There are only four reported decisions of the English courts which have discussed this question. In In re Rich's Will Trusts (1962) 106 Sol Jo 75, Russell J. held that it was impossible to place any certain meaning on the expression "a suitable mortgage advance" and in Lee-Parker v. Izzet (No. 2) (1972) 1 WLR 775 ; (1972) 3 A11 ER 800, Goulding J. held that a condition making a sale "subject to the purchaser obtaining a satisfactory mortgage" was "too indefinite for the court to give it practical meaning". Both judges followed Scammell and Nephew Ltd. v. Ouston [1941] AC 251 , where the reference to "hire purchase terms " rendered the contract uncertain. On the other hand in Lee-Parker v. Izzet (1971) 3 A11 ER 1099, at p 1105, Goff J. held that the words "arranging... a satisfactory mortgage" meant a mortgage to the satisfaction of the purchaser acting reasonably, and that a clause containing those words was not uncertain. This case was followed in Janmohamed v. Hassam (1976) 126 NLJ 696, by Slade J., who held that in a contract containing such a clause a term should be imported that satisfaction should not be unreasonably withheld. In some cases in New Zealand also it has been held that satisfactory finance is "finance which a reasonable man acting fairly would consider to be satisfactory in the circumstances of the particular case", and that a condition that the purchaser obtain or arrange satisfactory finance is accordingly not uncertain: see Knotts v. Gray (1963) NZLR 398; Martin v. Macarthur (1963) NZLR 403. A similar view was taken by Matthews J. in Gagliardi v. Lamont (1976) Qd R 53. Other cases have left open the question whether a clause which makes a contract subject to finance imposes an objective standard, so that the test is whether the finance is available on terms that would suit or satisfy a reasonable man, or a subjective standard, so that it is left to the purchaser himself to decide whether the finance is sufficient or satisfactory, and, if that standard is subjective, whether the decision must be made in good faith: see Hines v. Good (1951) QWN 2; Zieme v. Gregory (1963) VR 214, at p 223. It is unnecessary to review all of the decisions, some of which were given in relation to clauses which specifically define the nature and amount of the finance required. However, in Australia and New Zealand the courts, except in New South Wales, have shown a disposition to hold that clauses which make a contract subject to finance are not void for uncertainty. In New South Wales the view has been taken that a subject to finance clause is void, whether it imports an objective or a subjective test: Moran v. Umback (1966) 1 NSWR 437.

It seems to me that unless a clause of this kind makes a clear indication to the contrary, its natural effect is to leave it to the purchaser to determine whether or not the available finance is suitable to his needs. A clause such as special condition 1 (b), which speaks of "satisfactory terms and conditions", in its natural meaning requires that the purchaser be satisfied. A cautious purchaser might be satisfied only with finance which was repayable over a long term and at comparatively low rates of interest, whereas a more adventurous purchaser might wish to proceed with the sale even though the term of the loan was short and the rate of interest high. It would be strange if an adventurous purchaser, having obtained finance on terms which were satisfactory to him, but at which a reasonable man might cavil, could be told by the vendor that the sale would not proceed, although the vendor was to be paid out in full and would have no interest in the purchaser's financial situation thereafter. Equally it would hardly seem likely that the parties would intend that a purchaser should be bound to complete if he honestly regarded the terms and conditions on which finance was available as unsatisfactory, notwithstanding that a court might take a different view. The intention of such a clause in my opinion is to leave it to the purchaser himself to decide whether the terms and conditions on which finance is available are satisfactory. The condition prevents a purchaser from being obliged to go through with a sale when he does not believe that he can raise the necessary funds. Such a condition is generally entirely for the protection of the purchaser, and it is the satisfaction of the purchaser, not that of some hypothetical reasonable man, that will satisfy the condition. No doubt it may be implied that the purchaser will act honestly in deciding whether or not he is satisfied. However, it does not seem to me necessary, in order to give business efficacy to a contract, that a condition should be implied that the purchaser will make reasonable efforts to obtain finance. The parties may expect that he will, but he does not contract to so do.

Although there is nothing uncertain about a clause which speaks of terms and conditions which satisfy the purchaser, the question nevertheless arises, when a contract is made conditional on such a clause, whether the contract is illusory. There is a well settled general principle which was expressed as follows by Kitto J. in Placer Development Ltd. v. The Commonwealth (1969) 121 CLR 353 , at p 356:

"... wherever words which by themselves constitute a promise are accompanied by words showing that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought at all."

His Honour went on to refer to the statement of principle in Leake on Contracts, 8th ed. (1931), p. 3:

"Promissory expressions reserving... an option as to the performance do not create a contract."

The submission on behalf of the respondents in the present case was that the condition left a discretion or option to the purchaser to decide whether he would carry out the contract and that the purported contract was therefore illusory. In my opinion that principle does not apply where the discretion or option of the contracting party relates, not to the performance of the contractual obligations themselves, but only to the fulfilment of a condition upon which the contract depends. That this is so is illustrated by the case of an option to purchase which is, in many cases at least, a contract to sell the land upon condition that the grantee gives the notice and does the other things stipulated in the option: see Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 CLR 57 , at p 75. Such an option gives the grantee a right, if he performs the stipulated conditions, to become the purchaser. However the fact that the grantee has a discretion as to whether or not he performs those conditions does not render the option illusory. The case of a conditional agreement is analogous. The fact that the condition is one whose performance lies wholly or partly within the power of one of the parties to the contract does not mean that there is no binding contract once the condition is fulfilled. There is a concluded agreement as to the terms of the contract which, if the condition is satisfied, leaves no discretion in either party as to whether he shall carry them out. Once the condition is fulfilled, within the time allowed by the contract for its fulfilment, the contract becomes completely binding.

It is clear that the condition in special condition 1 (b) is not a condition precedent to contract. Certain obligations under the contract attached immediately the contract was signed although the condition had not been fulfilled. For example, the provisions with regard to the deposit, and with regard to the giving and answering of requisitions on title, became immediately effective. Whether the contract is described as a condition precedent to completion, or as a condition subsequent, seems largely a matter of words. A similar question was discussed in Perri v. Coolangatta Investments Pty. Ltd. 149 CLR 537 .. The condition in that case made the sale subject to the purchasers completing a sale of their property. It was within the power of the purchasers to prevent the fulfilment of such a condition; in that respect they had a discretion as to whether they would completely perform the contract. Nevertheless, it was not doubted that a binding contract had been concluded.

For these reasons, special condition 1 (b) effectively and certainly described a condition on whose fulfilment the obligation to complete the contract depended. The possibility that the satisfaction might be that of the nominee did not introduce an element of uncertainty, for on no view was the satisfaction of the vendors necessary. Once approval was given by any lender for the making of a loan on terms and conditions regarded as satisfactory by the purchaser or his nominee the condition was fulfilled. Thereafter both the vendors and the purchaser were bound to complete.

What I have said in relation to special condition 1 (b) applies, in substance, to special condition 1 (a) also. Once the purchaser or his nominee had made with Ampol an agreement or arrangement which the purchaser or his nominee regarded as satisfactory the condition was satisfied and both parties were bound.

For these reasons I have concluded that the majority of the Full Court were in error in holding that special condition I was uncertain, or that it left it to the purchaser to decide whether he would proceed with the contract.

Certain other arguments were advanced on behalf of the respondents. These were not accepted in the Supreme Court, and they have been dealt with by my brother Mason in his judgment in this case. In relation to those aspects of the matter I agree with my brother's reasons and need add nothing to them. I may add that it was held in the Supreme Court that the vendors had waived their right to rescind the contract on the ground that the deposit was not paid as the contract required, and that this matter was not relied on by the vendors in argument before us.

I would allow the appeal.