Stern v. McArthur
165 CLR 48981 ALR 463
(Decision by: Mason CJ)
Between: Stern
And: McArthur
Judges:
Mason CJBrennan J
Deane J
Dawson J
Gaudron J
Subject References:
Purchaser
Judgment date: 11 October 1988
Canberra
Decision by:
Mason CJ
This is an appeal from an order of the New South Wales Court of Appeal (Hope and Priestley JJ.A., with Mahoney J.A. dissenting) allowing an appeal from Waddell J. in the Supreme Court of New South Wales who had dismissed the respondents' action for relief against forfeiture and specific performance of a contract for the sale of land at Cranebrook under which the respondents, Mr McArthur and Mr Bates (formerly known as Mr McArthur), were purchasers. By the contract, which was dated 3 November 1969, the appellants, Mr and Mr Stern, agreed to sell and the respondents agreed to buy the land for the sum of $5,250. The contract provided for the payment of $250 as a deposit on the signing of the contract and for the payment of the balance of the purchase price, together with interest thereon at the rate of 8.5 per cent per annum calculated on annual rests, to be paid by regular monthly instalments of not less than $50 on the third day of each month. The respondents were entitled to pay the balance of the purchase price at any time before the due date for payment and they were entitled to pay additional instalments in any year. If the regular monthly payments had been paid without the making of any additional payments, the purchase price would have been paid in full sometime in 1983.
The contract was in the standard form approved by the Law Society of New South Wales and the Real Estate Institute of New South Wales. Clause 9 provided that the appellants should be entitled to the rents and profits and should pay all rates, taxes and outgoings up to and including the date of completion. By cl.12 the appellants agreed to give possession to the respondents on completion. Clause 15 provided that in the event of default by the respondents the deposit would be forfeited and that the appellants would be entitled to terminate the contract and to sue for breach of contract or to resell the property and to recover the deficiency (if any) arising on resale together with expenses as liquidated damages provided that the proceedings should be commenced within twelve months of termination of the contract. By cl.18(a) on default in payment of any instalment of the purchase price or interest for four weeks "the balance of the purchase price then owing with accrued interest shall immediately without notice to (the respondent) become due and payable".
Despite cl.9 the respondents entered into possession, to the knowledge of the appellants, and built a house on the land. The respondents began to live in the house in January 1973. Mr McArthur paid the rates until March 1977. In the beginning of 1975 the respondents separated and thereafter Mrs Bates lived in the house, Mr McArthur having departed to live elsewhere. He continued to pay the instalments regularly until March 1977 when he ceased to do so.
Mrs Bates was unaware that he had ceased to pay instalments. When she saw him in or about March 1978 he told her that he had missed a couple of payments. She then made a payment of $150 which she believed would bring the payment of instalments up to date. She requested Mr McQueeney, the appellants' solicitor, to ascertain and to communicate to her the payout figure and the amount of any arrears.
After making the next payment on 5 May 1978 Mrs Bates received a letter dated 11 May 1978 from Mr McQueeney stating that $200 only had been paid since November 1976 and demanding payment or arrangements for the payment of "the full amount" within seven days. In fact an amount in excess of $200 had been paid since November 1976. Whether the reference to "the full amount" related to the amount of the arrears or the remaining balance of the purchase price together with interest thereon was not made clear. Mrs Bates asked Mr McQueeney what the full amount was but he did not know. Thereafter she paid $50 per month into the appellants' bank account on or about the third day of each month up to and including June 1981.
Mrs Bates received another letter from Mr McQueeney dated 4 July 1978 stating that Mr Stern had instructed him to advise her that she had seven full days in which to arrange alternative finance and that otherwise he had no alternative but to take action for the recovery of the land and all moneys owing under the contract. At the suggestion of her solicitor, Mr Wilson, she went to see Mr Stern in August 1978 with a view to ascertaining the payout figure. He stated that the payout figure was $3,940.17 and that the last payment had been made on 30 June 1978. In a letter dated 29 August 1978 Mr McQueeney confirmed the correctness of this payout figure as the amount owing up to 1 November 1978. The letter stated that Mrs Bates would be credited with any payments made after 30 June 1978.
In her evidence Mrs Bates stated that she was aware at this time that she and Mr McArthur were in arrears, that the appellants were calling for the full amount owing under the contract and that she hoped to be able to arrange finance to pay the full amount owing within a couple of months. However, her attempts to find a lender and subsequently to find a buyer for the property were unsuccessful. So far as Mr McArthur is concerned, there is no direct evidence that he was told by anyone before his one and only meeting with Mr Stern sometime in 1979 that the appellants were relying on their rights under cl.18(a).
In January 1979 a notice to complete signed by Mr McQueeney was served on each of the respondents. The notice dated 17 January 1979 required the respondents to complete the purchase within twenty-one days of the date of the notice and made time the essence of the contract in all respects. Subsequently the appellants gave the respondents a notice of termination dated 26 February 1979. It recited the earlier notice and the failure of the respondents to comply with it. The notice of termination went on to state that the contract was at an end and that pursuant to cl.15 of the contract the deposit was forfeited and that the vendors would proceed to resell the land and hold the respondents responsible for any deficiency in price. In March 1979 the appellants' solicitors wrote to the respondents' solicitor stating that the appellants were prepared to allow the respondents to receive the benefit of any improvements they may have erected on the property and that all other increases in the value of the land and otherwise were to be for the benefit of the appellants. In May 1979 Mr McArthur deposited $2,500 in the vendors' bank account. According to Waddell J., this amount was enough to discharge whatever was then owing under the contract. At a later date Mr Stern sought to refund $600 to the respondents but his cheque for that amount was not banked by the respondents. Subsequently on 9 February 1981 the appellants' solicitors sent a cheque for $1,100 to the respondents' solicitor but the cheque was not banked. The same fate befell a cheque for $150 sent by the appellants' solicitors on 14 May 1981.
In September 1979 the appellants commenced an action against the respondents for an order for possession of the land. After a very long delay an amended statement of claim was filed on 17 July 1981. The delay may well have been caused by Mr Stern's illness. The amended statement of claim claimed, in addition to an order for possession, declarations that the contract had been validly terminated, that the deposit had been forfeited and orders requiring the respondents to withdraw the caveat that they had entered against the title to the land. The respondents defended the statement of claim. On 4 August 1981 a more comprehensive defence and a cross-claim were filed. By the cross-claim the respondents sought specific performance of the contract and, in the alternative, relief against forfeiture.
Some issues which arose for consideration before Waddell J. and the Court of Appeal are no longer relevant to the appeal as it was conducted in this Court. For present purposes it is sufficient to say that his Honour held that the respondents were not entitled to relief against forfeiture and to state his reasons for reaching this conclusion. His Honour noted that at the trial the appellants had again stated that they would allow the respondents the value added to the property by the improvements. He noted that the appellants did not seek to forfeit any moneys paid under the contract other than the deposit. He reviewed the evidence relating to the improvements. According to that evidence, materials for the building of the house cost about $6,000. The labour was supplied by Mr McArthur and friends in the building industry who assisted him in return for, or in anticipation of, assistance by him. The improved value of the property at 31 January 1979 was $34,000. At 26 September 1984 it was $89,000, the value of the land being said to be about $72,000 and the improvements $17,000. His Honour found that, when subdivided, the value of the land would be approximately $115,000-$120,000.
After discussing the judgments of this Court in Legione v. Hateley (1983) 152 CLR 406 , especially the questions identified by Mason and Deane JJ. at p 449, his Honour based his rejection of the case for relief against forfeiture on findings which may be shortly stated. The first finding was that the appellants did not contribute to the respondents' breach, except that Mr Stern was somewhat careless in keeping an eye on whether payments were being made and did not notice that they had fallen into arrear. Secondly, the respondents' breach was neither trivial nor slight because it involved a failure to pay instalments for one year. Although it was not wilful, it was not inadvertent so far as Mr McArthur was concerned. He failed to ensure that the payments were made and gave no proper explanation for this failure. Thirdly, the damage which the appellants suffered as a result of the breach was not considerable in that all the appellants lost was the use of the money outstanding which was not large. Fourthly, if the forfeiture were to stand the appellants would gain the increase in land value of the property which is something which the respondents would have gained had they complied with the contract. The respondents would lose that increase in value because of their failure to comply with the contract. Finally, his Honour adverted to the question whether specific performance with compensation would be an adequate safeguard for the appellants, but did not answer the question. Apart from making these findings his Honour went on to make the point that there was no unconscientious or unconscionable conduct on the part of the appellants in insisting that the termination of the contract should stand. Moreover, his Honour considered that if relief against forfeiture were to be granted in the instant case, it would constitute a first step in establishing a general rule that a vendor, who had acted reasonably and patiently and in all respects properly before giving a notice to complete and terminate the contract for a failure of the purchaser to comply with it, is liable to lose the benefit of having done so as a consequence of the purchaser obtaining relief against forfeiture on the footing that the land the subject of the sale has increased substantially in value.
Priestley J.A. (with whom Hope J.A. agreed), after referring to the judgment of Gibbs C.J. and Murphy J. in Legione, at pp 425-429, concluded that it was equitable to grant relief against forfeiture on the ground that:
"... in the events that occurred, after the de facto variation of the contract brought about by the McArthurs going into possession, building and paying rates, the object of the transaction from the point of view of Mr and Mr Stern seems to me to have become essentially to secure the payment of money."
His Honour continued:
"In substance it had become very similar to a transaction of mortgage; the McArthurs had at the least a contingent equitable estate in the land (see eg Raynor v. Preston 18 Ch D 1 and Chang v. Registrar of Title (1976) 137 CLR 177 at 184), they owed money under the contract and Mr and Mr Stern's legal rights under the contract and as registered proprietors of the land gave them security for payment of the unpaid balance of the purchase price."
His Honour was not saying that the contract was in substance one of mortgage from its inception but rather that it became so subsequently. His Honour noted that the contract was on foot until February 1979, that default had not been of concern to the appellants until sometime in 1978 and that the delay between that time and the giving of notice of termination was due to Mrs Bates unavailing attempt to borrow money to pay off the balance of the purchase price.
However, Priestley J.A. went on to hold that, even if it was necessary to find a basis in unconscionable conduct to support relief against forfeiture, "it would be unreasonable and unconscionable in the circumstances to permit (the appellant) to shut (the respondent) out from ownership of land ..." His Honour considered that, in the light of the history, the appellants conduct created, or contributed to, the impression that the respondents' breaches were not fundamental and that they sank to the level of comparatively minor breaches. His Honour thought that specific performance with compensation would adequately protect the appellants and concluded by saying that he did not think that the grant of relief would have the general consequence comprehended by Waddell J.
On the other hand, Mahoney J.A. was of the opinion that unconscionable conduct on the part of the appellants was not made out. He pointed out that the circumstances in which the respondents effected the improvements upon the land had not been "significantly investigated" and that the dispute did not concern the respondents' loss of the value of their improvements because the appellants had indicated their willingness to allow a sum to cover improvements. In his view there would be incongruity in a decision which, in order to protect the respondents from the loss of the net value of their improvements, conferred on them as defaulting purchasers the windfall rise in the value of the land.
In this Court the appellants' case is that relief against forfeiture will not be granted in the absence of unconscionable or unconscientious conduct on the part of the party against whom the relief is sought and that the evidence does not demonstrate any such conduct on the part of the appellants. The respondents contest each of these propositions. Indeed, they assert, relying on American authority, that an instalment contract for the sale of real estate is in essence a security for the payment of the money. And, in the alternative, they advance the less sweeping proposition accepted by Priestley J.A. in the Court of Appeal, namely that in the circumstances of this case, as a result of the conduct of the parties under the contract, it had become a security for the payment of money.
It is convenient to examine first the respondents' broad submission. It seems that in some, but certainly not all, jurisdictions in the United States the retention by the vendor of legal title under an instalment contract is regarded essentially as security for the payment by the purchaser of the purchase price, the provision for cancellation and forfeiture upon default by the purchaser in payment of the purchase price being a further assurance that the purchaser will perform his part of the bargain. This view proceeds on the footing that the real object sought to be attained by the vendor's retention of legal title and the inclusion of the forfeiture provisions is the performance by the purchaser of his promise to pay. Thus, the penalty of forfeiture is designed as a mere security and relief will be granted on the basis that the vendor will obtain the benefit of his bargain if he receives his money and damages: see, for example, the discussion in Jenkins v. Wise (1978) 574 P 2d 1337, at p 1341. There the court said that, absent gross negligence and bad faith on the part of the purchaser, relief will be granted and specific performance ordered when the vendor can be adequately compensated. At the same time the court asserted that "a key factor" in the court's determination is "whether forfeiture would be harsh and unreasonable under the circumstances": Jenkins v. Wise, at p 1341 (footnote omitted). A significant element underlying the approach adopted in such cases as Jenkins v. Wise was that the purchaser was entitled to possession and required to pay taxes and keep the property in repair under the contract. His position is therefore more readily equated to that of an owner and thus to a mortgagor. Indeed, the instalment contract is sometimes described as "a mortgage substitute": see Nelson and Whitman, Real Estate Finance Law, 2nd ed. (1985), paras 3.26-3.27. This description signifies that in some jurisdictions the instalment contract has been employed in order to avoid restraints on foreclosure by mortgagees. Under the standard form of contract in the present case the vendors were entitled to possession and rents and profits until completion but were liable for rates, taxes and outgoings.
There is nothing novel in the proposition that the jurisdiction to relieve against forfeiture of property extends to cases where the object of the transaction and the insertion of the right to forfeit is to secure the payment of money. In Shiloh Spinners v. Harding [1973] AC 691 Lord Wilberforce observed, at pp 723-724, that in appropriate and limited cases the court will relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained by the terms of a court order and where the forfeiture provision is added by way of security for the achievement of that result. The primary object of the transaction is the payment of money, the provision for forfeiture being additional security for the attainment of that object. Forfeiture pursuant to this provision is a preliminary condition of the exercise of the jurisdiction, just as a forfeiture in the nature of a penalty is such a condition. Once the existence of the preliminary condition is satisfied it is for the court to determine whether the circumstances of the case are appropriate for the grant of relief. The critical question then is: what standard does the court apply in deciding whether the circumstances are appropriate for the grant of relief?
Historically Australian courts, like their English counterparts, did not perceive an analogy between instalment contracts and mortgages. Indeed, until Legione broke the ice, our courts, following the decisions of the Privy Council in Steedman v. Drinkle [1916] 1 AC 275 and Brickles v. Snell [1916] 2 AC 599 , had refused to relieve against forfeiture of the purchaser's interest under a contract for the sale of real estate where the party against whom relief was sought had validly rescinded the contract: Real Estate Securities Ltd v. Kew Golf Links Estate Pty Ltd (1935) VLR 114, at p 119; but cf. McDonald v. Dennys Lascelles Ltd (1933) 48 CLR 457 , at p 478. The courts relieved against forfeiture under mortgages because borrowers entered into mortgages under the pressure of financial need and it was just and equitable to relieve them from strict compliance with their obligations if the object of the transaction, the repayment of the loan and interest, could be secured by other means. With other contracts it was different. Pacta sunt servanda. Equity would relieve against forfeiture of instalments, as distinct from the deposit (unless the deposit was excessive), but it would not relieve against forfeiture of the purchaser's interest under the contract. The Privy Council so held in Steedman and Brickles, despite earlier authority to the contrary: see In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) LR 8 Ch App 1022; Kilmer v. British Columbia Orchard Lands, Ltd [1913] AC 319 . Equity's refusal to grant such relief before Legione must be ascribed to the compelling force of pacta sunt servanda and to the perception that it would be unfair to deprive the vendor of the effect of rescission and consequential forfeiture of the purchaser's interest under the contract of sale when the parties had expressly stipulated for that result. Generally speaking, equity expects parties to carry out their bargains and "will not let them buy their way out by uncovenanted payment": Shiloh Spinners, at p 723.
But, as Legione was to demonstrate, equity will relieve against an unconscionable exercise of legal rights. If the vendor's insistence on rescission and forfeiture of the purchaser's interest under the contract is, in the circumstances of the case, unconscionable, there can be no unfairness in depriving the vendor of the benefit of rescission with the forfeiture of the purchaser's interest entailed by rescission. That was the message conveyed by Legione. It was a message which confirmed the long-standing principle that, granted the existence of the preliminary condition for the exercise of the jurisdiction to relieve against forfeiture, the actual exercise of the jurisdiction depends upon the existence of circumstances which make it unconscionable for the vendor to insist on rescission and forfeiture of the purchaser's interest: see the joint judgment of Mason and Deane JJ. in Legione, at pp 447-448. We stated (at p 449) that "it is only in exceptional circumstances that specific performance will be granted at the instance of a purchaser who is in breach of an essential condition". In this way we sought to balance the interest of the defendant in holding the plaintiff to the actual terms of a bargain freely made and the interest of the plaintiff in invoking an equitable jurisdiction to relieve against the consequences flowing from an over-rigorous insistence on the enforcement of the terms of the bargain.
Despite the suggestion to the contrary made in the judgment of Priestley J.A. in the Court of Appeal I do not read the joint judgment of Gibbs C.J. and Murphy J. in Legione as denying these propositions. Their Honours quoted the passage from the speech of Lord Wilberforce in Shiloh Spinners in which he spoke of the head of jurisdiction to relieve against a forfeiture where the right to forfeit is essentially to secure the payment of money, the payment of money being the object of the transaction. Having asserted that the preliminary condition to the existence of jurisdiction was satisfied, their Honours proceeded to consider whether the jurisdiction should be exercised in case of breach where time was of the essence of the contract. They observed (at p 429):
"The fact that time for the performance of the stipulated obligation is of the essence of the contract generally makes the grant of specific performance inequitable in such a case."
They went on to say (at p 429):
"No doubt where the parties have chosen to make time of the essence of the contract the grant of relief against forfeiture as a preliminary to an order for specific performance will be exceptional."
And later their Honours concluded (at p 429) that "(t)o enforce the legal rights of the vendors in these circumstances would be to exact a harsh and excessive penalty for a comparatively trivial breach."
Subsequently in Ciavarella v. Balmer (1983) 153 CLR 438 , which was mentioned by Waddell J. but not by the Court of Appeal, this Court (Gibbs C.J., Mason, Wilson, Deane and Dawson JJ.) unanimously accepted that the jurisdiction would be exercised in exceptional circumstances only. There the Court concluded (at p 454) that "the case stands outside the area of exceptional circumstances in which, in accordance with Legione v. Hateley, relief against forfeiture of the purchaser's estate will be granted after a rescission, which in all other respects is valid, of a contract for sale". Earlier the Court had pointed (at pp 453-454) to the absence of any evidence of unconscionable conduct on the part of the vendor and in this respect contrasted the case with Legione where there was such conduct on the part of the vendor.
Ciavarella, following hard on the heels of Legione, established (a) that only in exceptional circumstances will the court relieve against forfeiture of the purchaser's interest in land under a contract for sale which has been validly rescinded by the vendor for breach of a term which is an essential condition and (b) that in order to make out exceptional circumstances the purchaser must show conduct amounting to unconscionable conduct on the part of the vendor. This approach to the exercise of the jurisdiction is quite opposed to the notion that lies at the heart of the respondents' broad submission that, as the object of an instalment contract, in conjunction with a forfeiture provision, is to secure the payment of money, if specific performance with compensation will adequately protect the vendor then relief should be granted. If this were all that mattered, the Court in Legione and Ciavarella would not have asserted that relief would only be granted in exceptional circumstances. And it would have been unnecessary for the Court in Legione to have considered, as it did (at pp 429, 449), whether the breach was wilful and serious or trivial and inadvertent.
Furthermore, to accept the respondents' submission and extend relief against forfeiture to instances in which no exceptional circumstances are established would be to eviscerate unconscionability of its meaning. The doctrine is a limited one that operates only where the vendor has, by his conduct, caused or contributed to a situation in which it would be unconscionable on the vendor's part to insist on the forfeiture of the purchaser's interest. Priestley J.A. thought that "it would be unreasonable and unconscionable ...to permit (the vendors) to shut (the purchasers) out from ownership" (my emphasis), and consequently allowed relief against forfeiture. But, contrary to his Honour's view, the jurisdiction to grant relief against forfeiture does not authorize a court to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side's situation more favourable.
The respondents' second submission seizes on the fact that they entered into possession and built on the land with the acquiesence of the appellants and that the respondents thereafter paid the rates. They submit that there was a "de facto" variation of the contract in this respect, no doubt with a view to providing a firmer foundation for the proposition that from that time onwards the object of the transaction was merely to secure payment of the purchase price to the appellants. However, the evidence does not indicate that the contract, in particular cll.9 and 15, was varied in any material respect. The evidence indicates acquiesence by the appellants in entry into possession by the respondents and in the making by the respondents of improvements to the land, subject to their payment of the rates thereafter, but that is all. There is nothing to indicate that what occurred between the parties when the respondents entered into possession transformed or altered in any relevant way the respondents' equitable interest under the contract of sale. It remained exactly as it had been before without being transformed into a new or higher form of ownership.
In the ultimate analysis therefore the fate of the appeal turns on the question whether the appellants' insistence on maintaining their rescission and forfeiture of the respondents' interest in the land amounts, in the circumstances of the case, to unconscionable conduct. The relevant circumstances include the offer of the appellants to compensate the respondents for the value of the improvements which they effected to the land. The contest therefore concerns the question: who should have the benefit of the windfall increase in the value of the land?
This was not a case, like Legione, where the conduct of the vendors led to the breach of the contract by the purchasers. The appellants' conduct did not induce or contribute to the respondents' failure to pay the monthly instalment in April 1977. And the failure to pay instalments persisted for eleven months or thereabouts. However, the appellants' conduct appears to have contributed to the extent of the breach. In that time Mr Stern did not draw the attention of the respondents or either of them to the non-payment of instalments, Mrs Bates being unaware that Mr McArthur had ceased to make the payments.
It is a reasonable inference that Mrs Bates would have seen to the payment of instalments and arrears had she been informed of the position at an earlier time. In fact she took the initiative in alerting the appellants' solicitor to the situation when she did become aware of it and endeavoured to ascertain precisely what was the amount in arrears. She did not succeed in ascertaining this figure and ultimately she was confronted in August 1978 with a demand for the full amount owing under the contract. The point is that, although the respondents' breach of conduct was not trivial, it occurred in circumstances in which the appellants' lack of concern about non-payment of instalments played a part in what occurred. If the appellants had given notice of non-payment of the instalment falling due in April 1977, there is some basis for thinking that the default would have been speedily remedied and future payments made promptly.
However, the respondents' breach of contract brought into operation cl.18(a) with the result that the balance of the purchase price with accrued interest then became immediately due and owing. That was in April 1977. It was not until July 1978 that the appellants insisted on payment of the amount owing under cl.18(a). Thereafter a further period of six months ensued before the appellants caused a notice to complete to be served on the respondents, allowing twenty-one days for completion and making time of the essence. In that period Mrs Bates attempted unsuccessfully to find a lender and subsequently a buyer.
As the appellants have offered to give the respondents the benefit of the value of the improvements, I am unable to identify any aspect of the appellants' conduct which can accurately be described as unconscionable. They effectively allowed the respondents sufficient time within which to raise the amount needed to complete the purchase price so that there is nothing oppressive or harsh in their insistence on their legal rights in the circumstances of the case. By no stretch of the imagination can the circumstances be described as "exceptional". It is simply a case in which the vendors have exercised their legal rights under a contract for sale after giving the purchasers ample time within which to find the balance due and allowing the respondents the benefit of the value of their improvements. The situation in which the respondents are now placed is due to their own default. To grant relief against forfeiture on the basis of unconscionability on the appellants' part would be to drain unconscionability of any meaning. I therefore agree with Mahoney J.A. that the appeal to the Court of Appeal should have been dismissed.
I would allow the appeal to this Court and set aside the orders made by the Court of Appeal.