Stern v. McArthur
165 CLR 48981 ALR 463
(Judgment by: Brennan J)
Between: Stern
And: McArthur
Judges:
Mason CJ
Brennan JDeane J
Dawson J
Gaudron J
Subject References:
Purchaser
Judgment date: 11 October 1988
Canberra
Judgment by:
Brennan J
The appellants as vendors and the respondents as purchasers entered into a contract for the sale of a parcel of land on 3 November 1969. The contract provided for the payment of $250 deposit upon the signing of the contract and for the payment of the balance of the purchase price, namely $5000, together with interest at 8.5 per centum per annum by monthly instalments of not less than $50. There was no occasion to specify a date for completion. The purchasers undertook to tender an appropriate assurance for execution by the vendor within 14 days after payment of the final instalment: cl.18(b). Payment of the price was therefore to be made before completion. Although the vendors were not obliged to give the purchasers possession before completion (cl.12) and were entitled in the meantime to the rents and profits (cl.9), the contract made provision for the eventuality that the purchasers might be let into possession before completion. Clause 17 provided (inter alia) - If, before transfer of title, the Purchaser is given the benefit of possession of the property then, until transfer of title
- "(i)
- he shall not let or part with possession of the property or make any structural alteration or addition to the same
- (ii)
- he shall
- (a)
- ...
- (b)
- ...
- (c)
- punctually pay all rates and taxes on the property ...
- (d)
- ..."
In fact the respondent purchasers, Mr and Mrs McArthur, were let into possession in 1972. They cleared the land, put up some fencing and erected a dwelling. In January 1973 they went to live together in that dwelling. In January 1975 they separated. Mrs McArthur (now Mrs Bates) stayed on and Mr McArthur continued to pay the instalments and rates. These outgoings were paid until March 1977 when default was first made in the payment of instalments. Mr McArthur did not then know of the default. The default brought cl.18(a) into operation:
"Where the balance of the purchase price is payable by instalments before transfer of title
- (a)
- default by the Purchaser in payment of any instalment of the purchase price or interest hereunder shall continue for four weeks the balance of the purchase price then owing with accrued interest shall immediately without notice to the Purchaser become due and payable."
Although the primary rule is that the purchase price is not payable by the purchasers until completion (McDonald v. Denny Lascelles Ltd. (1933) 48 CLR 457 , at pp 475-476), cl.18(a) makes a different provision. Clause 18 differs from the clause considered in Ciavarella v. Balmer (1983) 153 CLR 438 , at pp 442-443, but it has the same effect. The balance of the purchase price became due and payable four weeks after the default in payment of an instalment in March 1977.
Clause 15 conferred on the vendors a right to terminate the contract upon the occurrence of any breach of contract by the purchasers. It provided:
"If the Purchaser defaults in the observance or performance of any obligation imposed on him under or by virtue of this Agreement, the deposit paid by him hereunder, except so much of it as exceeds 10% of the purchase price, shall be forfeited to the Vendor, who shall be entitled to terminate this Agreement and thereafter either to sue the Purchaser for breach of contract or to resell the property as owner and the deficiency (if any) arising on such resale and all expenses of and incidental to such resale or attempted resale and the Purchaser's default shall be recoverable by the vendor from the purchaser as liquidated damages provided that proceedings for the recovery thereof be commenced within 12 months of the termination of this Agreement. The vendor may retain any money paid by the purchaser on account of the purchase other than the deposit money forfeited under this clause as security for any deficiency arising on a resale or for any damages or compensation (including any allowance by way of occupation fee or for rents or profits from a purchaser who has been in possession of the property or in receipt of the rents or profits thereof) awarded to him for the purchaser's default provided that proceedings for the recovery of such damages or compensation be commenced within 12 months of the termination of this Agreement."
The vendors did not terminate the contract either for default in the payment of an instalment in March 1977 or for default in the payment of the balance of the purchase price when it became due four weeks later, though a year passed before any further payment was made. When Mr McArthur discovered that a default had occurred, she paid $150 in April 1978 and asked the vendors' solicitor, Mr McQueeney, to advise whether there were other arrears then owing and what was the amount then required to pay the whole of the purchase price. Her queries went unanswered for a time. She paid a further instalment at the beginning of May 1978 by depositing $50 to the credit of the vendors' account with their bank. Later in that month, she received a letter of demand requiring immediate payment of "the full amount due and owing". An offer by Mrs McArthur to pay the total arrears of monthly instalments was rejected. The vendors wanted payment of the whole of the balance purchase price. After some further correspondence of no present moment, 78 had been calculated at $3940.17 against which any payments made after 30 June 1978 would be credited. Mrs McArthur had continued to pay the monthly instalments of $50 as they fell due. Indeed, she continued to deposit sums to the credit of the vendors' account until June 1981. When Mrs McArthur was told the amount required to complete the purchase, she took some ineffectual steps towards completion. She arranged to borrow funds to complete the purchase but the arrangement was abandoned because of some difficulty between herself and Mr McArthur. She attempted to resell the property but no resale was effected.
On or shortly after 17 January 1979, Mr McQueeney on behalf of the vendors served a notice to complete the contract within 21 days. It was not completed. On 26 February 1979, he served a notice of termination of the contract, by which the purchasers were notified that they would
"forfeit the deposit to the Vendors who will proceed to re-sell the subject lands and ... will hold you responsible and liable for any deficiency in price as well as for all costs, charges and expenses occasioned by such re-sale."
Mrs McArthur's solicitor immediately wrote to Mr McQueeney asserting that a resale by Mrs McArthur was imminent and that Mrs McArthur would obtain a personal loan, if necessary, to pay out the amount due to the vendors. It seems that the solicitors for the respective parties must have had some further conversations on the matter, but Mr McQueeney wrote on 28 March 1979:
The situation is still as contained in my last letter, that is, if your clients are prepared to introduce my clients to their Purchasers, my clients are prepared to allow your clients to receive the benefit of any improvements that they may have erected upon the property. However, all other increases in the value of the land and otherwise are to the benefit of my clients. It is noted that no further correspondence will be entered into in this matter. Unless I receive your confirmation within 48 hours hereof, my clients will proceed to the sale of the property to another purchaser."
In May 1979 Mr McArthur deposited $2500 to the credit of the vendors' account with their bank. Mr Stern did not notice this deposit for some time probably due to an illness which befell him. On 13 May 1981 he drew a cheque for $2500 in intended refund of the amount deposited in May 1979, and handed it to his solicitor. His solicitor failed to send it on. After March 1979, other refund cheques were sent on but they were not presented by the purchasers' solicitor.
In September 1979 the vendors commenced an action in the Supreme Court of New South Wales. By their amended statement of claim they sought, inter alia, a declaration that they had validly terminated the contract and an order for possession of the land. By an amended defence and cross claim the defendants sought, inter alia, a declaration that the vendors' notice of termination was ineffectual either to determine the contract or "to forfeit the equitable interest of the (purchasers) in the said land" and a decree of specific performance. Waddell J. found that "the contract was effectively terminated on or shortly after 26 February 1979". He held that the vendors' conduct had not contributed to the purchasers' breach, that the breach involved a failure to pay instalments for one year, that the breach was not slight nor was it inadvertent so far as Mr McArthur was concerned. He found that the vendors had not suffered a large loss by the breach but they would gain the considerable increase in land value if the purchasers lost their interest in the land; conversely, the purchasers would lose the increase in land value if they were denied relief. The purchasers were willing to submit to payment of compensation for their breach as a condition of a decree of specific performance. His Honour gave judgment for the vendors. On appeal, the Court of Appeal set aside the substantive orders of Waddell J., declared that the purchasers should be relieved against the forfeiture of their estate and interest in the land and decreed that the contract for sale be specifically performed and put into execution. Before Waddell J. the vendors accepted that, if successful, they were bound to allow the purchasers the value of the improvements they had made and they accept that, if successful in this Court, the up-to-date value of those improvements must be allowed. The vendors' acceptance of that obligation reflects a purchaser's entitlement in equity to compensation for the permanent improvements he has made with the vendor's consent while the purchaser was in possession if the vendor should rescind the contract of sale: see Lexane Pty. Ltd. v. Highfern Pty. Ltd. (1985) 1 QdR 446 , at p 455 and cases there cited. I respectfully agree with McPherson J. that the measure of that compensation is "the extent to which the value of that land has been enhanced".
In the courts below and in argument in this Court, the question whether the purchasers should be relieved from forfeiture of their interest in the land has been thought to turn on a true understanding of the principles canvassed in the two majority judgments in Legione v. Hateley (1983) 152 CLR 406 . By reference to what was said in that case, the purchasers sought to show that they were entitled to relief against forfeiture of their estate in the land; the vendors sought to show the contrary. The issue was seen to be whether the present case fell within an area which the judgment in Ciavarella v. Balmer, at p 454, described as an
"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."
As all the majority Justices in Legione joined in this conspectus of the decision, it can be accepted that the means by which equity protects a purchaser's estate in land in a Legione case and relieves against its forfeiture is by denying validity to the vendor's act of rescission. In principle, that must be so. Though the jurisdiction to relieve may be confined to cases where the party in breach had a proprietary interest which equity would enforce by a decree of, or in the nature of, specific performance, the proprietary interest ceases to exist once the contract is validly rescinded. Then, the sometime contract ceases to support the purchaser's equitable estate and there is no contract susceptible of specific enforcement. But if the validity of the act of rescission is denied in equity, the contract is kept on foot: it supports the purchaser's estate in the land and its specific performance can be decreed. A right to rescind arises when a purchaser repudiates the contract or otherwise commits a breach going to the root of the contract or does not observe an essential condition. Such a right to rescind in future arises under the general law: see McDonald v. Dennys Lascelles Ltd., at p 477. Another right to rescind may arise from a different source: it may be conferred by contract if the parties have stipulated for such a right on the occurrence of an event and the event occurs. In that case, the right to rescind arises by operation of the contract itself. Legione was a case in which the purchaser failed to observe a stipulation as to time which the parties had agreed to be an essential term of the contract. It was therefore a case where equity intervened in the exercise of a right arising under the general law, as Mason and Deane JJ. noted at pp 445-446.
Prior to the Judicature Act 1873 (Imp.) an innocent party's common law right to rescind by reason of the other party's failure to comply with a stipulation as to time would be accepted by equity in some circumstances but denied in others: see Louinder v. Leis (1982) 149 CLR 509 , at pp 524-525, 532; Holland v. Wiltshire (1954) 90 CLR 409 , at p 418. Then the rule of the common law as to time was statutorily brought into conformity with the rules of equity - in New South Wales, by Conveyancing Act 1919. The effect of the statutory assimilation was to restrict rescission for failure to observe a time stipulation to those cases where equity would regard time as being of the essence. The statute did not change the circumstances in which equity would leave the parties to their common law rights. As Kitto J. pointed out in Holland v. Wiltshire, at pp 418-419, a stipulation as to time which the common law would regard as being of the essence of the contract ceases to be of the essence-
"only in cases which are appropriate for the granting of equitable remedies by way of relief against the loss by a party of his contractual rights by reason of a failure on his part to perform the contract in precise accordance with its provisions as to time. This is so because only in such cases do the rules of equity treat as not of the essence of the contract time stipulations which are of the essence according to the traditional view of the common law: Stickney v. Keeble [1915] AC 386 ))."
Prior to Legione, a promisee would have been entitled to rescind a contract for a promisor's breach of a time stipulation if, but only if, equity would regard timely performance as essential. If time was of the essence, the promisee was entitled to rescind; if not, he was not entitled to rescind: see Carr v. J.A. Berriman Pty. Ltd. (1953) 89 CLR 327 , at pp 348-349.
The significance of Legione is that the parties' agreement that time should be of the essence no longer necessarily entitles a vendor to rescind for a purchaser's failure to observe the time stipulation. Equity's jurisdiction has been held to extend to the relief of a purchaser against forfeiture of his estate in land despite the vendor's purported rescission for breach of a time stipulation which the parties had agreed to be essential. My dissent in Legione testifies to my difficulties in accepting that proposition but I am bound by the majority view and I must seek to apply it.
Strictly speaking, Legione has no immediate application to the present case. In Legione the parties had agreed that time should be of the essence; here the contract expresses no date for completion. However, a notice to complete was served and the case has been conducted on the footing that time was thereby made of the essence so that the vendors became entitled to rescind the contract subject to the jurisdiction to relieve against forfeiture which Legione asserted. Therefore it is material to examine the grounds on which, in cases to which Legione directly applies, relief against forfeiture may be granted. In examining the grounds on which equity will grant relief, it is material to note that a purchaser under a contract of sale has an equitable estate in the land and that equity protects that estate in appropriate circumstances by relieving against the purchaser's loss of contractual rights. But that is merely to identify the steps by which a court of equity relieves a purchaser of loss of his estate; it is not to identify the circumstances which will move equity to take those steps. The equitable estate of the purchaser is commensurate with the relief which equity will grant to protect it, but it begs the question to assert that the estate may survive the purported rescission of the contract on which it depends. The question is: on what grounds will equity deny the validity of the rescission and thereby relieve against forfeiture of the purchaser's estate?
In Legione Gibbs C.J. and Murphy J. (at p 424) cited the speech of Lord Wilberforce in Shiloh Spinners Ltd. v. Harding [1973] AC 691 , at p 722, setting out two heads of the jurisdiction to relieve against forfeiture of property:
"'... First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs (Peachy v. Duke of Somerset ( (1721) 1 Stra 447 (93 ER 626)) and cases there cited).
... Secondly, there were the heads of fraud, entailed the exclusion of mere inadvertence and a fortiori of wilful defaults.'"
Their Honours said (at p 425) that "it is difficult to see any reason why the power of courts of equity to relieve against forfeiture should not be available in a case such as the present". To an objection that equity will not grant relief where the purchaser's interest is lost consequent on discharge of the contract, their Honours responded (at p 429):
"A court of equity will grant specific performance notwithstanding a failure to make a payment within the time specified by the contract if there is nothing to render such an order inequitable. 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. However, if it is just to relieve against the forfeiture which is incurred when the vendor retains payments already made under the contract, it is difficult to see why it should be unjust to relieve the purchaser against the forfeiture of the interest in the property that results in exactly the same circumstances. 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.
Nevertheless on principle we can see no reason why such an order should not be made if it will not cause injustice but will on the contrary prevent injustice. If relief against the forfeiture is granted, the objection to the grant of specific performance is removed."
Their Honours did not seek to define the concepts of justice of injustice which are central to this passage.
Mason and Deane JJ., though adopting "an expansive view of the equitable jurisdiction to relieve against forfeiture", found (at p 444) that view to be conformable
"to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct - see Story, Commentaries on Equity Jurisprudence, 12th ed (1877), vol 2, par 1316."
Acknowledging that it is ordinarily unjust to decree specific performance against an innocent party at the suit of a party who has breached an essential term of their contract, their Honours observed (at p 447) that-
"if there be fraud, mistake, accident, surprise or some other element which would make it unconscionable or inequitable to insist on forfeiture of the purchaser's interest under the contract because he has not performed in strict accordance with its terms there is no injustice to the innocent party in granting relief against forfeiture by means of specific performance with or without compensation."
Mason and Deane JJ. held that relief was available to protect a purchaser's estate of the vendor has been guilty of unconscionable conduct in rescinding the contract of sale, though they acknowledged that "(i)t is impossible to define or describe exclusively all the situations which may give rise to unconscionable conduct on the part of a vendor in rescinding a contract for sale" (at p 449). Once it is accepted that it may be unconscionable to rescind for breach of an essential term as to time, the essentiality of the term is merely a factor in evaluating the conduct of the vendor in seeking to rescind. Other factors must also be weighed. The "subsidiary questions" which Mason and Deane JJ. articulated (at p 449) to assist in the exercise of the jurisdiction reflect the heads of jurisdiction to which Lord Wilberforce referred in Shiloh Spinners.
The two judgments do not express the relevant principles in the same terms. The passage from the judgment of Gibbs C.J. and Murphy J. in Legione cited above may suggest that the jurisdiction to relieve against forfeiture of a purchaser's estate depends on broad notions of where justice lies between vendor and purchaser. But such an approach is not sufficiently specific to guide the court in answering the relevant question, namely, whether an act of rescission which the rules of law and equity alike would ordinarily regard as valid should be denied validity. The only warrant for equity's intervention to restrain the exercise of rights which equity and law recognize is that the exercise is unconscionable. That approach is not inconsistent with what Gibbs C.J. and Murphy J. said and it is explicit in the judgment of Mason and Deane JJ. It is, in my opinion, the only legitimate warrant for equity's intervention.
Although the categories of unconscionable conduct are not closed, the concept of unconscionability is not a charter for judicial reformation of contracts "for the Chancery mends no man's bargain": Maynard v. Moseley (1676) 3 Swans 651 , at p 655 (36 ER 1009, at p 1011). The courts have not sought a power to destroy the rights and obligations which the parties to a contract create. If unconscionability were regarded as synonymous with the judge's sense of what is fair between the parties, the beneficial administration of the broad principles of equity would degenerate into an idiosyncratic intervention in conveyancing transactions. It is worth recalling what Lord Radcliffe said in Campbell Discount Co. Ltd. v. Bridge [1962] AC 600 , at p 626:
"'Unconscionable' must not be taken to be a panacea for adjusting any contract between competent persons when it shows a rough edge to one side or the other, and equity lawyers are, I notice, sometimes both surprised and discomfited by the plenitude of jurisdiction, and the imprecision of rules that are attributed to 'equity' by their more enthusiastic colleagues.
Since the courts of equity never undertook to serve as a general adjuster of men's bargains, it was inevitable that they should in course of time evolve definite rules as to the circumstances in which, and the conditions under which, relief would be given, and I do not think that it would be at all an easy task, and I am not certain that it would be a desirable achievement to try to reconcile all the rules under some simple general formula. Even such masters of equity as Lord Eldon and Sir George Jessel, it must be remembered, were highly sceptical of the court's duty to apply the epithet 'unconscionable' or its consequences to contracts made between persons of full age in circumstances that did not fall within the familiar categories of fraud, surprise, accident, etc., even though such contracts involved the payment of a larger sum of money on breach of an obligation to pay a smaller sum."
And in Muschinski v. Dodds (1985) 160 CLR 583 , at p 616, Deane J. recalls that "undefined notions of 'justice' and what was 'fair' had given way in the law of equity to the rule of ordered principle which is of the essence of any coherent system of rational law".
There are some familiar categories of unconscionability referred to by Lord Wilberforce in Shiloh Spinners. The first, which he discussed at pp 722-723, relates to a stipulation providing for forfeiture which is inserted in the contract to secure the primary object of the contract: see cl.15 in the present case. The usual purpose of such a stipulation is to furnish the sanction of forfeiture for breaches of covenant even though the breaches be minor. If the purpose of such a stipulation in a contract of sale is to secure performance of the purchaser's covenants and if relief can be granted to the purchaser on terms which compensate the vendor for any loss he has sustained by reason of the breach which enlivened the vendor's right to rescind, a clause which authorizes the vendor to take back the beneficial ownership of the land may be seen as exacting a penalty against which equity will relieve in accordance with the principle stated by Lord Macclesfield in Peachy v. Duke of Somerset (1721) 1 Stra 447 , at p 453 (93 ER 626, at p 630):
"The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired."
This principle relates to the jurisdiction which is exercised when a vendor relies not on his general law right of rescission but on a contractual right. We need not be detained to consider the scope of that principle in this case. It was not suggested in Legione that a clause which makes time of the essence is a clause which is inserted as security for the performance of the purchaser's obligations and which may attract relief on the ground stated by Lord Macclesfield. No doubt cl.15 is such a stipulation and it is true that the notice of termination served on the purchasers echoed the terms of that clause. But the purchasers' breach, on which the vendors are constrained to rely, is not a mere late payment of an instalment or a late payment of the balance of the purchase price due under the contract. A late payment enlivens cl.15 but that is not the breach to which the vendors are restricted in supporting their rescission of the contract. The material breach consists in the failure of the purchasers to pay the balance of the purchase price at any time prior to the service of the notice of termination on 27 February 1979 although the balance had become due in or about April 1977 and had been demanded by the vendors in May 1978, and although a notice to complete had been served on or shortly after 17 January 1979 requiring completion within 21 days. The rescission on which the purchasers are entitled to take their stand is not a termination under a contractual stipulation but a rescission under the general law for such a delay in payment of the balance of the purchase price as amounted to repudiation of the contract. Priestley J.A. thought that the present case fell readily into the head of jurisdiction which arises from Peachy v. Duke of Somerset but I respectfully disagree. That head may have been invoked if the vendors had been constrained to rely on cl.15 but it has no application when the vendor exercises a general law right to rescind: it applies only to a contractual stipulation which is inserted in order to secure the payment of money. In a later passage in his judgment, his Honour treats a vendor's general law right to rescind as no more than a security for the payment of the purchase price, seemingly by analogy with a mortgagee's right to foreclose. Unless the analogy be valid - and, as will appear, it is not - it would be erroneous to treat a vendor's general law right to rescind as a mere security for the payment of the price: it is a right which arises by reason of the purchaser's repudiation of the contract under which the price is payable or his commission of a breach going to the root of the contract or his failure to observe an essential term. The purpose of the general law right to rescind is not to secure performance of a contract but to secure its termination.
Presently it will be necessary to consider whether it is right to regard the purchasers as having repudiated the contract but, for the moment, in order to examine further categories of unconscionability, let it be assumed that the purchasers did repudiate the contract - at least in the sense that their failure to complete within the time limited by the notice to complete prima facie entitled the vendors to rescind.
We come next to the traditional grounds of fraud, accident, mistake or surprise. In Ciavarella v. Balmer, one of the grounds on which the Court distinguished Legione appears to relate to this ground. Their Honours said (at p 453):
"Moreover, in Legione v. Hateley the material in evidence strongly indicated unconscionable conduct on the part of the vendor in seeking to insist on the rescission of the contract in circumstances where the statement of the vendor's solicitors had helped lull the purchaser into a belief that the vendor would accept completion provided it took place within a few days and where the consequence of rescission was that the vendor would reap the benefit of the very valuable improvements which the purchaser had effected to the property."
In the present case, it is conceded that the vendor's conduct contributed in no way to the failure of the purchasers to pay the balance of the purchase price within the time limited by the notice to complete. Further, that failure was not occasioned by accident, mistake or surprise. The failure to pay the balance of the purchase price was of long standing and had continued despite the vendors' continuing demands for payment of the balance since May 1978.
On the assumption that the purchasers repudiated the contract, the specific categories of relief to which Lord Wilberforce referred in Shiloh Spinners can be put aside and we come to a suggested category of unconscionability which appears (if I understand the argument correctly) when a vendor under an instalment contract, having let the purchaser into possession, rescinds for breach of the purchaser's obligation to pay the price and retakes the whole beneficial interest in the land he had agreed to sell, enjoying the windfall of any increase in its value. The true position of such a vendor, it is submitted, is analogous to the position of an unpaid mortgagee. It is said that equity, regarding the vendor's right to rescind as a mere security for the payment of the price, will grant relief against forfeiture on terms that the purchaser shall pay the price and compensate the vendor for any loss which late payment has occasioned. The argument depends on the proposition that such an unpaid vendor whose purchaser is in default is in practically the same position as an unpaid mortgagee whose mortgagor is in default.
The analogy between a contract of sale and a mortgage was mentioned by Kitto J. in Haque v. Haque (No 2) (1965) 114 CLR 98 , a case in which unpaid purchase price was classified as movable property for the purposes of the private international law of succession. His Honour said, at pp 124-125:
"(The vendor) was not a mere trustee for the purchaser, but his position was something between that of a mere trustee and a mortgagee. He could exercise for his own benefit such rights with regard to the land as were consistent with the contractual rights of the purchaser until payment of the purchase money in full, and until that event he had a lien or charge for the unpaid purchase money: see Lysaght v. Edwards ( (1876) 2 ChD 499 , at p 506). Sir George Jessel M.R. (ibid) would have described him as being in a position analogous to (though not identical with) that of a mortgagee, one point of similarity being that if the contract should be validly cancelled for nonpayment of the purchase money the land would become his absolute property."
And at p 129:
"The analogy of a contract of sale with a mortgage is not a complete analogy, but the points of similarity are the very points which are important for our present purpose. The problem, as in the case of a mortgage, is to decide whether the land or the debt should be considered the principal thing. It seems to me that a system of law which views the rights and interests of a vendor of land as they were viewed in Lysaght v. Edwards must, of logical necessity, accept the answer that the debt is the principal thing."
However, the analogy of a contract of sale with a mortgage is not complete and it is the distinction between them which is critical. The mortgagee must accept the mortgage debt at any time prior to foreclosure, or even later if the foreclosure is reopened, and he cannot acquire the beneficial estate of an owner unless an order for foreclosure is made: Campbell v. Holyland (1877) 7 ChD 166 . A mortgagee of old system land cannot foreclose the mortgagor's equity of redemption by his own act Re Farnol Eades Irvine & Co., Limited (1915) 1 Ch 22 , at p 24) and the procedure for foreclosure of a mortgage of land under the Real Property Act 1900 (NSW) also precludes the mortgagee from acquiring ownership of the land by his own act: see 62. By contrast, a vendor who has a general law right to rescind may, by his own act and without any order of the Court, take back the beneficial ownership of the property. It is the vendor's general law right to rescind which distinguishes his position from that of the mortgagee. Some may think it desirable to eliminate the distinction and to assimilate the position of an unpaid vendor to the position of an unpaid mortgagee. But that is not the present law, and the present law is what parties have relied on in entering into conveyancing transactions. If equity's enthusiasm for the protection of the defaulting purchaser were to eliminate the distinction between contracts of sale and mortgages, it would no longer be true to describe the circumstances in which relief might be given in accordance with; Legione as "exceptional": relief would be given as readily to a defaulting purchaser as to a defaulting mortgagee. If the distinction were eliminated, any attempt by a vendor to rescind for breach of a condition would be nugatory and specific performance would be decreed at the suit of a defaulting purchaser moulded to reflect its correspondence with a redemption action. It would be otiose to look for conduct which enlivened equity's jurisdiction to relieve in cases of fraud, mistake, surprise or accident: the threatened loss of the purchaser's estate would be sufficient to attract equity's protection. A new maxim of equity would be born: "once a purchaser, always a purchaser" and against that maxim no stipulation that time should be of the essence would prevail.
On the other hand, if the distinction between the general law right of a vendor to rescind and a mortgagee's right to foreclose on default is preserved, there is no material analogy between a contract of sale and a mortgage. The conduct of a vendor who has a right to rescind and thereby to retake the full beneficial ownership of land and who exercises that right cannot be judged as though he were a mortgagee who had no such right. Without more, an exercise of such a right is not unconscionable even though the consequence is the forfeiture of the purchaser's estate. When a vendor rescinds in exercise of his general law rights, it is not unconscionable for him to take the benefit of the forfeiture which is thereby effected: there is no penalty, for the vendor is bound to refund what the purchaser has paid (other than a genuine deposit) and he is obliged to compensate the purchaser for the permanent improvements made on the land with the vendor's consent to the extent that the value of the land is thereby enhanced. True it is that the vendor is entitled to recover his beneficial interest in the land and, if there be any natural increase in the value of the land, he takes the benefit of the increase. But that benefit goes with the land, whether the ownership of the land passes absolutely to the purchaser or reverts to the vendor. I respectfully agree with Mahoney J.A. who, in his dissenting judgment, said that there is
"no inequity in such an increase in the value of the land accruing to the vendor rather than to a defaulting purchaser. And this, I think, does not depend on whether the purchaser's right in land contracted to be purchased is measured by whether specific performance or some other form of relief be seen as appropriate or at what time it is so seen."
The purchasers submit that, even if there be a material difference between a mortgage and a contract of sale in the ordinary case, the facts of the present case show that there was a variation of the contract of sale - or at least conduct consistent with a variation of the contract of sale - whereby the parties virtually assumed the relationship of mortgagor and mortgagee. The purchasers were let into possession, they treated the land as their own by improving it and building a dwelling upon it with the vendors' consent and they (or one of them) remained on the land for six years before service of the notice of termination. These circumstances fall far short from showing that the parties were virtually in the relationship of mortgagor and mortgagee. The contract contemplated that the purchasers might be let into possession before completion (see cl.17) and the only part of that clause binding on the purchasers which was waived was the part prohibiting the making of structural alterations or additions. The vendors cannot be regarded as having bargained away their general law rights of rescission by waiving compliance with a clause which is for their benefit. If it were otherwise, no vendor could safely allow a purchaser any use of the land pending completion of an instalment contract.
In the present case, subject to a misgiving I shall mention, there is nothing in the vendors' conduct which equity would regard as unconscionable in their rescission of the contract for the purchasers' failure to pay the balance of the purchase price within the time limited by the notice to complete. The misgiving relates to the time which the vendors allowed the purchasers in their notice to complete. Prior to the service of the notice to complete, time was not of the essence of the contract. The purchasers were in breach of their obligation to pay the balance of the purchase price when it fell due but at law as well as in equity the failure to pay within a reasonable time was no more than a breach of an inessential term. In any event, the parties were proceeding on the clear understanding that the contract was still on foot. Mrs McArthur had been in possession for six years, she was paying instalments regularly and they were being accepted, the property had been improved greatly by the purchasers, a comparatively small amount of the current value of the property remained outstanding as purchase price and Mrs McArthur was willing to complete as soon as she could. I confess to some doubt whether, in all the circumstances, the time limited by the notice to complete was reasonable. If the time allowed for completion was unreasonable, there was no foundation for rescission and there was no forfeiture of the purchasers' estate. However, no objection to the shortness of the time allowed has been taken at any stage of the proceedings. The case has been conducted throughout on the footing that relief against forfeiture was needed to avoid the consequences of a valid rescission. The rescission based on failure to pay within the time limited by the notice to complete was valid because the notice to complete had the effect described in Ciavarella v. Balmer, at p 446:
"the effect of a valid notice to complete, once the purchaser fails to comply, is to establish the existence of an essential breach, the breach which preceded the giving of the notice being non-essential. The function of the notice is to fix a reasonable time for completion so that non-compliance with its requirements evidences a fundamental breach or renunciation (see; Louinder v. Leis (149 CLR, at pp 519-520,523-524, 532-537). The effect of the notice is not to convert a non-essential term into an essential term. In this respect what is important for present purposes is that the notice requires completion of the contract, notwithstanding that the object of the party issuing the notice is to place himself in a position in which he can terminate the contract in the event of non-compliance with the requirements of the notice, should he choose so to do."
And in Louinder v. Leis, Mason J. said (at p 526):
"Unreasonable delay in complying with the stipulation in substance amounting to a repudiation is essential to justify rescission. It is to this end that, following breach, the innocent party gives notice fixing a reasonable time for performance of the relevant contractual obligation. The result of non-compliance with the notice is that the party in default is guilty of unreasonable delay in complying with a non-essential time stipulation. The unreasonable delay amounts to a repudiation and this justifies rescission."
See also p 536 and Holland v. Wiltshire, at p 420. As the case was conducted on the footing that service of the notice of termination was effective to rescind the contract for breach of the purchasers' obligation to complete within the time limited by the notice to complete, the purchasers' claim for relief is without merit: ex hypothesi, they must have been guilty of unreasonable delay amounting to repudiation.
If the purchasers were guilty of unreasonable delay in the face of the vendors' demand for completion, it would be unjust to order specific performance against the vendors: cf. Holland v. Wiltshire, at p 419. The so-called "windfall" of the natural increment in land value properly belongs to the vendors though they are bound to compensate the purchasers for the value of the improvements they have made. It is not necessary now to consider the adjustments to be made in respect of an occupation rent and the payments of instalments: cf. Rawson v. Hobbs (1961) 107 CLR 466 , at pp 484-485.
I would allow the appeal, set aside the judgment of the Court of Appeal and remit the matter to the Supreme Court to make an order for possession in favour of the appellants on terms to be settled by the Supreme Court.