Stern v. McArthur

165 CLR 489
81 ALR 463

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(Judgment by: Deane J, Dawson J)

Between: Stern
And: McArthur

Court:

Judges: Mason CJ
Brennan J

Deane J
Dawson JGaudron J

Subject References:
Purchaser

Hearing date: 3 December 1987
Judgment date: 11 October 1988

Canberra

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Judgment by:
Deane J
Dawson J

It has been said in a variety of ways that a vendor under a valid contract for the sale of land holds the land as trustee for the purchaser.  He is, however, a trustee only in a qualified sense and the qualifications are such as to rob the proposition of much of its significance or, for some purposes, its validity.  The vendor must make title before there can be any alteration in the equitable ownership of the land, although the alteration may then relate back to the date of the contract.  Even so the vendor retains a substantial interest in the property until the whole of the purchase money is paid.  He is entitled, subject to the contract, to possession and to the rents and profits in addition to a lien on the land as security for any amount outstanding.  Any right to equitable ownership on the part of the purchaser is contingent only, being subject to the payment of the purchase money and being said to exist only so long as the contract remains specifically enforceable at his suit.  In Rayner v. Preston (1881) 18 ChD 1 , at p 11, considerations such as these led Brett L.J. to remark: 

"Therefore, I venture to say that I doubt whether it is a true description of the relation between the parties to say that from the time of the making of the contract, or at any time, one is ever trustee for the other.  They are only parties to a contract of sale and purchase of which a Court of Equity will under certain circumstances decree a specific performance."

 

As Deane J. pointed out in Kern Corporation Ltd. v. Walter Reid Trading Pty. Ltd (1987) 163 CLR 164 , at p 191, it is not really possible with accuracy to go further than to say that the purchaser acquires an equitable interest in the land sold and to that extent the beneficial interest of the vendor in the land is diminished.  The extent of the purchaser's interest is to be measured by the protection which equity will afford to the purchaser.  That is really what is meant when it is said that the purchaser's interest exists only so long as the contract is specifically enforceable by him.  Specific performance in this context does not mean specific performance in the strict or technical sense of requiring the contract to be performed in accordance with its terms. Rather it encompasses all of those remedies available to the purchaser in equity to protect the interest which he has acquired under the contract.  In appropriate cases it will include other remedies, such as relief by way of injunction, as well as specific performance in the strict sense.  As Sir Frederick Jordan put it:   

"Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties": Jordan, "Chapters on Equity in New South Wales", Select Legal Papers, 6th ed. (1947), p 52, n.(e).  See also Legione v. Hateley (1983) 152 CLR 406 , per Mason and Deane JJ. at p 446; Tailby v. Official Receiver (1888) 13 AC 523 per Lord Macnaghten at pp 547-549; Redman v. Permanent Trustee Co. of New South Wales Ltd. (1916) 22 CLR 84 , per Isaac J. at p 96; Hoysted v. Federal Commissioner of Taxation (1920) 27 CLR 400 , per Isaac J. at p 423; Pakenham Upper Fruit Co. Ltd. v. Crosby (1924) 35 CLR 386 , per Isaacs and Rich JJ. at pp 398-399.

 

To put the matter in this way is to say little more than that the equitable interest of a purchaser under a contract for the sale of land is that which equity recognizes and protects.  See Hewett v. Court (1983) 149 CLR 639 , per Deane J. at pp 665-666.  The relationship of trustee and beneficial owner will certainly be in existence when the purchase money specified in the contract has been paid, title has been made or accepted and the purchaser is entitled to a conveyance or transfer.  At that point the purchaser is entitled in equity to the land and the vendor is a bare trustee:  see McWilliam v. McWilliams Wines Pty. Ltd (1964) 114 CLR 656 , per McTiernan and Taylor JJ. at p 660.  Otherwise there is no unanimity upon when the relationship of trustee and beneficial owner arises:  see Chang v. Registrar of Titles (1976) 137 CLR 177 , per Mason J. at p 184.  But that does not mean that before that time has arrived the purchaser may not be entitled to a lesser equitable interest than ownership.  

It seems that when the purchaser under a contract for the sale of land which is executory on both sides is described as the equitable owner of the land, that expression is used with somewhat less precision than in other contexts.  For example, in Brown v. Heffer (1967) 116 CLR 344 , it was said that the purchaser under two contracts for the sale of land was not the equitable owner because he was unable to obtain specific performance of the contract.  In that case the Court was required to determine whether a specific devise of land was adeemed by the contracts which were entered into by the testator with respect to the land after the date of the will.  The transfer of the land in each case was dependent upon the consent of the Minister being obtained.  At the time of the death of the testator no consent had been obtained.  For ademption to have occurred it was necessary that the land should in the eyes of equity have been converted at the time of death into other property.  It was held (at pp 349-350) that there was no notional conversion of the land into money because immediately before the testator's death, a court of equity would not, by reason of the lack of the Minister's consent, have ordered specific performance by him of his obligation under the contracts to transfer the land. Entitlement to specific performance in the strict sense was necessary before the purchaser could be regarded as the owner in equity for the purpose of ademption.  But that did not mean that, even if that remedy was unavailable, the purchaser could not have an interest under either contract which equity would protect regardless of whether he could, in a manner of speaking, be called the equitable owner.  In appropriate circumstances equity would have directed that proper steps be taken to obtain the Minister's consent and, consent having been obtained, that the land be transferred to the purchaser.  If in those or comparable circumstances there are those who would describe the relationship between the vendor and purchaser as that of trustee and beneficial owner in some qualified sense, it does not alter the substance of the matter.  

Legione v. Hateley identified two kinds of equitable relief against the consequences of the termination of a contract for the sale of land.  The first is relief against the retention by the vendor of both the land and any instalments of purchase price (other than a genuine deposit), irrespective of any damage suffered by him.  The second is relief against the loss of the purchaser's equitable interest in the land.  Relief of this kind is a necessary step to enable an order for specific performance of the contract to be made. These two categories of relief had not in the past always been kept distinct, both being spoken of as relief against a penalty or a provision in the nature of a penalty.  The first - relief against the vendor's retention of the instalments of purchase money - is in the nature of relief against a penalty because it relieves the purchaser against losing both the land and the payments he has made.  Such a consequence could only be by way of punishment upon default.  The second - relief against forfeiture of the purchaser's equitable interest - is not relief against a penalty but is relief against forfeiture of an interest in the land.  Whether a court is relieving against penalty or forfeiture may be seen from what it actually does.  

In Kilmer v. British Columbia Orchard Lands Ltd [1913] AC 319 , the Privy Council, following In re Dagenham (Thames) Dock Co., Ex parte Hulse (1873) LR 8 Ch App 1022, spoke in terms of relief against penalty saying at p 325 that "... the penalty, if enforced according to the letter of the agreement, becomes more and more severe as the agreement approaches completion, and the money liable to confiscation becomes larger."  But the relief granted was against the forfeiture of the purchaser's interest under the contract. Specific performance was ordered, not the return of any part of the purchase moneys already paid by the purchaser.  Thus it was that in McDonald v. Dennys Lascelles Ltd (1933) 48 CLR 457 , at p 478, Dixon J. suggested that the ground upon which Kilmer v. British Columbia Orchard Lands Ltd may have been decided was "that relief should be granted, not against the forfeiture of the instalments, but against the forfeiture of the estate under a contract which involved the retention of the purchase money."  That is the explanation of the nature of the relief given in Kilmer v. British Columbia Orchard Lands Ltd. which was adopted in Legione v. Hateley (per Gibbs C.J. and Murphy J. at p 426; per Mason and Deane JJ. at p 442).  

The other point of note in Kilmer v. British Columbia Orchard Lands Ltd. is that the order for specific performance by the vendor was made notwithstanding that the time for payment was of the essence of the contract and the purchaser was in default in making payment.  At all events, that is the view of that case which was adopted by a majority of this Court in Legione v. Hateley where, following Kilmer v. British Columbia Orchard Lands Ltd., it was held that even where time is of the essence and the purchaser fails to make due payment, it does not preclude an order for specific performance being made against the vendor in an appropriate case.  

In two decisions of the Privy Council subsequent to Kilmer v. British Columbia Orchard Lands Ltd. (Steedman v. Drinkle [1916] 1 AC 275 ; Brickles v. Snell [1916] 2 AC 599 ), the view was adopted that courts of equity never exercise jurisdiction to grant specific performance where it is provided time is of the essence and the party seeking relief is in breach of such a provision. Kilmer v. British Columbia Orchard Lands Ltd was in those cases distinguished upon the ground that the stipulation as to time in that case had been waived. But, as we have said, both the categorical principle laid down in the two later Privy Council decisions and the explanation there given of Kilmer v. British Columbia Orchard Lands Ltd were rejected in Legione v. Hateley.  Subsequent decisions in England may indicate that the law in that country and the law in Australia is developing along divergent lines.  See Scandinavian Trading Tanker Co. A.B. v. Flota Petrolera Ecuatoriana [1983] 2 AC 694 and Sport International Bussum B.V. v. Inter-Footwear Ltd. [1984] 1 WLR 776 .  If that be so, it is nevertheless the view expressed by the majority in Legione v. Hateley which prevails here and must govern the decision in this case.  

That means that the first task is to identify those considerations which are relevant to the grant or refusal of relief against forfeiture as a preliminary to an order for specific performance in a case, such as the present one, where the purchaser is in breach of an essential stipulation as to time.  The second is to determine whether, in the light of those considerations, relief should be granted in this case.  

In Legione v. Hateley it was said that it is only in exceptional circumstances that orders for relief against forfeiture and specific performance will be made at the instance of a purchaser who is in breach of an essential term:  per Gibbs C.J. and Murphy J. at p 429; per Mason and Deane JJ. at p 449. Gibbs C.J. and Murphy J. expressed the view that it was nevertheless open to a court to grant relief to prevent injustice.  Mason and Deane JJ. said that whether exceptional circumstances exist to justify granting relief will hinge upon the existence of unconscionable conduct.  We do not understand there to be any significant difference between these two approaches.  Moreover, in referring to unconscionable conduct, Mason and Deane JJ. were not saying that there must be unconscionable conduct of an exceptional kind before a case for relief can be made out.  Rather, what was being said was that a court will be reluctant to interfere with the contractual rights of parties who have chosen to make time of the essence of the contract.  The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable - or, more accurately, unconscientious - conduct.  

In considering whether such intervention is justified, great weight will be given to the bargain which the parties have made for themselves. "Generally speaking equity expects men to carry out their bargains and 'will not let them buy their way out by uncovenanted payment' (Shiloh Spinners v. Harding [1973] AC 691 , per Lord Wilberforce at p 723).  Nor will it remake the parties' contract simply because it transpires that as things have happened one party has made a bad bargain." Legione v. Hateley, per Mason and Deane JJ. at p 447) It is in that sense that it is said that the circumstances must be exceptional to warrant relief in favour of a purchaser who is in breach of an essential term and that there must ordinarily be something such as fraud, mistake, accident or surprise before relief will be granted.  These elements do not, however, exhaust the scope of unconscionable or unconscientious behaviour; they are referred to in this context to emphasize that a strong case must be made out to warrant departure from the general approach, which is to hold the parties to their bargain. The general underlying notion is that which has long been identified as underlying much of equity's traditional jurisdiction to grant relief against unconscientious conduct, namely, that a person should not be permitted to use or insist upon his legal rights to take advantage of another's special vulnerability or misadventure for the unjust enrichment of himself (cf., e.g., Holdsworth, A History of English Law 3rd ed. (1945), vol V, pp 293-332; Yale, Lord Nottingham's Chancery Case, vol II, (1961) 79 Selden Society, at pp 8-9; Turner, The Equity of Redemption, (1931), at pp 22-23;  Corbin, "The Right of a Defaulting Vendee to the Restitution of Instalments Paid", (1931) 40 Yale Law Journal 1013, at p 1023).  

One situation in which equity has traditionally granted relief is where provision for forfeiture has been made to secure the payment of money and the party in default seeks relief upon the basis of payment of the amount owing together with the appropriate compensation.  In that situation the object of the provision is achieved and it would be unconscientious for the other party to seek to take advantage of the forfeiture.  An obvious application of this principle (although it may have emerged separately) is the equity of redemption in the case of a mortgage.  There, no proof of fraud, mistake, accident or surprise is required to establish the equity because the very nature of the transaction is such that the court, acting upon conscience, will grant relief. See Turner, The Equity of Redemption, (1931), Ch II.  This distinction was adverted to by Lord Wilberforce in Shiloh Spinners v. Harding, at p 722, when he identified two heads of jurisdiction to grant relief:   

"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....  

Secondly, there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, the inclusion of which entailed the exclusion of mere inadvertence and a fortiori of wilful defaults."

In the case of transactions falling under the first head relief may be granted because conscience requires that there should be no forfeiture.  No doubt where the question is, not whether the jurisdiction exists, but whether it should be exercised, having regard to the breach of an essential stipulation with respect to time by the party seeking relief, exceptional circumstances in the form of fraud, accident, mistake or surprise may suffice to justify intervention.  But those elements are not the basis of the jurisdiction and the circumstances which will suffice to support its exercise despite the breach of an essential term are not confined.  In particular, it is not necessary, in our view, for the party claiming relief to show unconscionable or unconscientious behaviour of an exceptional kind.  

The circumstance in the present case which warrants relief being granted is not only that the forfeiture provision was by way of security for the payment of the purchase moneys, but also that the contract as it was carried into effect was essentially an arrangement whereby the appellants undertook to finance the respondents' purchase upon the security of the land.  In other words, there was a close and obvious parallel between it and a purchase with the aid of a mortgage (cf. Harpum, "Relief against Forfeiture and the Purchaser of Land", (1984) 43 Cambridge Law Journal 134, at pp 145-146) and the parties acted upon that basis.  The respondents were required to pay a commercial rate of interest on the balance of purchase money from time to time outstanding in much the same way as would have been the case if the outstanding purchase price had been advanced to them by the vendors by way of interest-bearing loan.  The contract was not "an ordinary commercial contract unconnected with interests in land" (cf. Sport International Bussum B.V. v. Inter-Footwear Ltd., at p 788).  It was a contract by an ordinary couple for the purchase of land in a subdivision upon which they proposed to build their home.  In that regard, it is relevant to note that, in this country, the instalment contract for the purchase of land has long been one of the types of contracts used by subdividers for selling lower-priced blocks of land (cf., as to the apparently different position in England where instalment contracts have been used as a device to avoid the Rent Acts, Hoggett, "Houses on the Never-Never: Some Legal Aspects of Rental Purchase", (1972) 36 The Conveyancer and Property Lawyer 325).  The respondents, with the consent of the appellants entered into possession of the land, erected a house on it and occupied the house as their home.  The second respondent has continued to occupy the house as her home.  The respondents commenced to pay rates on the land. Whether or not their entry into possession effected a variation of the contract by conduct matters little.  The importance of the parties' conduct is that it demonstrates how they themselves regarded the transaction, and that is of relevance where matters of conscience are to be considered.  It is at least of passing interest to observe that, although it is not established by the evidence, the contract may well have been an instalment contract within the meaning of Pt III of the Land Sales Act 1964 (NSW) and, if so, the point would have been reached where the respondents were entitled under s 13 of the Act to call for a transfer of the land upon executing a mortgage back to the appellants.  

The deposit paid by the respondents was small and the instalments of purchase moneys extended over a considerable period of time.  As has been said, interest was payable at a substantial rate upon the balance of purchase moneys outstanding from time to time.  The appellants retained the legal estate as security for the payment of the instalments and the provision for forfeiture was by way of further assurance.  Had there been a mortgage, equity would have regarded the respondents as entitled to their equity of redemption without regard to any stipulation as to time. The maxim pacta sunt servanda would not have prevailed. That being so, there seems to us to be no good reason why equity should not extend a similar remedy in a transaction of such a similar character or why that similarity should not provide the justification for refusing to hold the respondents strictly to their bargain. Such is the approach which has been adopted in other jurisdictions and it is now, in the light of Legione v. Hateley, appropriate to adopt it here.  See, e.g. Jenkins v. Wise (1978) 574 P 2 d 1337, especially the cases cited at p 1341; Nelson and Whitman, Real Estate Finance Law, 2nd ed.  (1985), paras 3.26-3.27; Fleming v. Watts (1944) 4 DLR 353 .  

If, however, further justification is required for the exercise of the jurisdiction to grant relief, it is to our minds provided by the circumstance that it is the respondents who had a reasonable expectation of benefiting from any increase in the value of the land with the passage of time.  Under the contract the appellants could, in the absence of default, look for no more than the purchase price together with the interest provided.  The land has in fact increased considerably in value so that it forms much more than adequate security for the balance of the purchase moneys owing.  The forfeiture of the respondents' interest in the land would truly result in a windfall to the appellants whereas relief against forfeiture would not result in a gain to the respondents properly describable as a windfall.  The offer made by the appellants to allow the respondents the value of the improvements is but an attempt -  and clearly an inadequate attempt - to make allowance for the unexpected advantage which would be enjoyed by them upon forfeiture.  

In our view the Court of Appeal was correct in concluding that this was an appropriate case for the exercise of the jurisdiction to relieve against forfeiture and to grant specific performance upon terms.  We would dismiss the appeal.