Bahr v Nicolay

Bahr v Nicolay - [1988] HCA 16 - HCA 1987 case summary — Zoe

[32]

For our part we do not see the illustrations given and the statements made in the cases as amounting to definitive pronouncements that fraud is confined to fraud in the obtaining of a transfer or in securing registration. The statements, viewed in their context, merely express the reasons why particular circumstances fall within the statutory exception. Nor do we see anything in the language or the purpose of s. 68 which warrants such a restrictive interpretation. Indeed, we agree with Higgins J. in Stuart v Kingston [27] when his Honour said that there was much to be said for the view, expressed by Stawell C.J. on the equivalent Victorian provision, that the section should be "construed strictly" and the exception "liberally". The section restricts, in the interests of indefeasibility of title, rights which would exist otherwise at law or in equity. And granted that an exception is to be made for fraud why should the exception not embrace fraudulent conduct arising from the dishonest repudiation of a prior interest which the registered proprietor has acknowledged or has agreed to recognize as a basis for obtaining title, as well as fraudulent conduct which enables him to obtain title or registration? In the context of s. 68 there is no difference between the false undertaking which induced the execution of the transfer in Loke Yew and an undertaking honestly given which induces the execution of a transfer and is subsequently repudiated for the purpose of defeating the prior interest. The repudiation is fraudulent because it has as its object the destruction of the unregistered interest notwithstanding that the preservation of the unregistered interest was the foundation or assumption underlying the execution of the transfer. For the same reason the subsequent repudiation by a transferee of property of a limited beneficial interest in that property is fraudulent, when the transferee took the property on terms that the limited beneficial interest would be retained by the transferor. It is immaterial that the transferee "may have been innocent of any fraudulent intent in taking the conveyance in absolute form": Bannister v. Bannister [28] .

[177]

The Vendors hereby further agree that upon the expiration of the lease contained in clause 5 hereof they will enter into a contract with the Purchaser for the purchase by the Vendors of the land for a sum of forty five thousand dollars ($45,000) payable by way of ten (10%) per cent deposit with the balance of the purchase moneys to be paid at settlement. Settlement is to be effected thirty (30) days after the payment of the deposit. That clause is not a mere agreement to reach an agreement in the future; from its inception it has been "a contract binding the parties to join in bringing [a] formal contract into existence and then to carry it into execution": Masters v. Cameron [31] . Clause 6 is not itself a contract of sale of lot 340 from Nicolay to the Bahrs: it is a contract to bring a contract of sale into existence. Where a primary contract requires the parties to bring a formal contract of sale of land into existence, specific performance may be decreed - not a decree of specific performance of the formal contract of sale, but a single decree moulded to compel entry into the formal contract of sale and, subject to the party seeking the decree being ready, willing and able to perform that contract when it is brought into existence, to compel specific performance of it: Niesmann v. Collingridge [32] ; Godecke v. Kirwan [33] . As the prospective purchaser under such a contract is able to compel a transfer of the land to himself without further agreement on the part of the prospective vendor, the primary contract - like an option - confers on the prospective purchaser an equitable interest in the land: see London & South Western Railway Co. v. Gomm [34] ; Morland v. Hales and Somerville [35] ; Trustees Executors & Agency Co. Ltd. v. Federal Commissioner of Taxation [1] ; Sharp v. Union Trustee Co. of Australia Ltd. [2] . As the interest acquired under the primary contract is commensurate only with what a court of equity would decree, it is not accurate to describe a prospective purchaser as an equitable owner of the land before the formal contract of sale is made: Commissioner of Taxes (Q.) v. Camphin [3] and cf. Brown v. Heffer [4] . 1. (1954) 91 C.L.R. 353, at p. 360. 2. (1921) 29 C.L.R. 177. 3. (1973) 129 C.L.R. 629. 4. (1882) 20 Ch. D. 562, at p. 581. 5. (1910) 30 N.Z.L.R. 201. 6. (1944) 69 C.L.R. 270, at p. 285. 7. (1944) 69 C.L.R. 539, at p. 558. 8. (1937) 57 C.L.R. 127. 9. (1967) 116 C.L.R. 344, at p. 350.

[182]

That the Purchaser acknowledges that an agreement exists between Walter Bahr & Joanna Maria Bahr and Marcus Grenville Nicolay as stamped and signed on the 5th March 1980 [the Bahrs' contract]. As the Bahrs' contract conferred on the Bahrs an equitable interest in lot 340, not a mere contractual right, and as the Thompsons knew of that interest at all material times, the interest which the Thompsons acquired when they entered into their contract to buy lot 340 was subject to the interest of the Bahrs: see per Lord Upjohn in National Provincial Bank Ltd. v. Hastings Car Mart Ltd. [9] . The Thompsons could not have compelled Nicolay to complete the sale to them except on terms that the Bahrs' interest under cl. 6 should be protected, for completion of the sale without that protection would have involved a breach on the part of Nicolay of a prior contract affecting the land: Willmott v. Barber [10] ; Morland v. Hales and Somerville [11] . The consequence of inserting cl. 4 into the Thompsons' contract was that the Thompsons acknowledged not only the fact that the Bahrs' contract existed but also that the interest which they were purchasing was subject to the interest which the Bahrs had under cl. 6 of the Bahrs' contract. But cl. 4 is more than an acknowledgment of a fact; in its context it appears to be a contractual stipulation. It is one of a number of "Conditions" in the Thompsons' offer to purchase lot 340 which Nicolay, by his attorney Robertson, accepted, and the offer was expressed to be "subject to the Conditions". By reference to the Bahrs' contract (to which cl. 4 refers), it would have been apparent to the parties to the Thompsons' contract - or, more realistically, it ought to have been apparent to their legal advisers - that Nicolay would be in breach of cl. 6 of the Bahrs' contract unless cl. 4 of the Thompsons' contract is a contractual stipulation that the Thompsons' title on completion was to be subject to the Bahrs' interest. Having regard to the context in which cl. 4 is found in the Thompsons' contract and the relationship between the vendor Nicolay and the Bahrs which appears on the face of the Bahrs' contract, I construe cl. 4 not as a mere acknowledgment of a fact but as a term of the contract limiting the purchasers' interest by defining the interest to which the purchasers' title should be subject. 1. [1965] A.C. 1175, at pp. 1237-1238. 2. (1880) 15 Ch. D. 96, at p. 107. 3. (1910) 30 N.Z.L.R., at pp. 209-210.

[197]

It is clear that the parties to the Thompsons' contract intended that the title to lot 340 which the Thompsons acquired pursuant to their contract should be subject to the Bahrs' interest under cl. 6 of the Bahrs' contract. In other words, their intention was not only that the Thompsons should have notice of the Bahrs' interest, but that the Thompsons, upon acquiring lot 340, should be bound by cl. 6 of the Bahrs' contract. Robertson would not have signed the contract of sale on Nicolay's behalf if the Thompsons had not agreed to be so bound. In Munro v. Stuart [12] , a contract of sale contained a provision that the property was sold subject to existing tenancies or occupancies. Harvey J. [13] construed that provision simply as a condition "that the purchaser is to take the property over subject to any existing tenancies for what they may be worth and cannot repudiate the contract because of their existence". However, his Honour thought that such a provision might "have to be given a wider construction than this had there been during negotiations for the contract any agreement between the parties that the purchaser would recognize those leases, and that this clause had by mutual agreement been put into the contract for the purpose of giving effect to such an agreement". Though his Honour's tentative approach would lead to the conclusion that cl. 4 should be construed to accord with the parties' actual intention, that approach seems to me to involve an impermissible reference to evidence of intention as an aid to interpretation. Although it is permissible to refer to the factual matrix in which the parties were at the time of the contract in order to construe the terms of a contract (see Codelfa Construction Pty. Ltd. v. State Rail Authority of N.S.W. [14] ), it is not permissible to expand the meaning of the terms of the contract so construed so as to accord with the actual intention of the parties. I am unable therefore to embrace the tentative approach suggested by Harvey J. However, the extrinsic evidence is admissible to show that there is an independent and collateral unwritten contract which, together with the written contract, constitute the arrangements made by the parties: De Lassalle v. Guildford [15] , and see J. J. Savage & Sons Pty. Ltd. v. Blakney [16] . A collateral agreement that, in consideration of the vendor agreeing to sell, the purchaser will hold the land upon completion subject to the interest of a third party does not add to, vary or contradict the language of the contract of sale unless that contract contains a stipulation as to the terms on which the land should be held. As we shall see, such a collateral agreement though unwritten is effective to subject the title acquired by the purchaser on completion to the interest of the third party. It follows that I would hold the Thompsons to have given Nicolay an undertaking to hold their title subject to the Bahrs' interest. In my opinion such an undertaking is to be found in cl. 4 on its true construction but, if not in cl. 4, the undertaking was given by a collateral agreement.

[200]

As to the last paragraph of your letter, our clients have no intention of entering into a contract with your clients to sell the property for $45,000 and maintain that they are not bound by any terms of the agreement between your clients and Mr. Nicolay. We refer you to Section 68 of the Transfer of Land Act, 1893 as amended and the authorities on this subject. The attitude of each party has been persisted in since that time. The Thompsons take their stand on the provisions of ss. 68 and 134 of the Transfer of Land Act 1893 W.A. ("the Act"). Section 68 of the Act provides that, except in case of fraud, the registered proprietor of land holds the land subject only to such incumbrances as may be notified on the certificate of title save for certain exceptions, none of which is relevant here. Section 134 provides, inter alia, that, except in the case of fraud, no person taking a transfer of land: shall be affected by notice actual or constructive of any trust or unregistered interest any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud. These provisions are designed to achieve the main object of the Torrens system of registration of interests in land which the Privy Council in Gibbs v. Messer [17] , perceived to be: to save persons dealing with registered proprietors from the trouble and expense of going behind the register, in order to investigate the history of their author's title, and to satisfy themselves of its validity. That end is accomplished by providing that every one who purchases, in bona fide and for value, from a registered proprietor, and enters his deed of transfer or mortgage on the register, shall thereby acquire an indefeasible right, notwithstanding the infirmity of his author's title. The consequence is that, whereas equity would subject the interest of a purchaser of land to an antecedent unregistered interest of which the purchaser has notice, a purchaser who takes with notice of an antecedent interest but who becomes registered under the Act without fraud takes free of that interest: Oertel v. Hordern [18] ; Munro v. Stuart; Friedman v. Barrett; Ex parte Friedman [19] . Registration of the transfer is not fraudulent merely because the transferee knows that an antecedent interest of which he has notice will be defeated thereby. As Kitto J. said in Mills v. Stokman [20] : " merely to take a transfer with notice or even actual knowledge that its registration will defeat an existing unregistered interest is not fraud." 1. [1891] A.C. 248, at p. 254. 2. (1902) 2 S.R. (N.S.W.) (Eq.) 37. 3. [1962] Qd R. 498, at pp. 511-512. 4. (1967) 116 C.L.R. 61, at p. 78.

[204]

Proceedings may of course be brought against the registered proprietor by the persons and for the causes described in the quoted sections of the Act or by persons setting up matters depending upon the acts of the registered proprietor himself. These may have as their terminal point orders binding the registered proprietor to divest himself wholly or partly of the estate or interest vested in him by registration and endorsement of the certificate of title. Orders of that kind do not infringe the indefeasibility provisions of the Act. Those provisions are designed to protect a transferee from defects in the title of the transferor, not to free him from interests with which he has burdened his own title. In Loke Yew v. Port Swettenham Rubber Co. Ltd. [24] , Lord Moulton gave an example of a case where equity would enforce the terms on which a transfer was taken. He said: Take for example the simple case of an agent who has purchased land on behalf of his principal but has taken the conveyance in his own name, and in virtue thereof claims to be the owner of the land whereas in truth he is a bare trustee for his principal. The Court can order him to do his duty just as much in a country where registration is compulsory as in any other country, and if that duty includes fresh entries in the register or the correction of existing entries it can order the necessary acts to be done accordingly. By contrast, Waimiha Sawmilling Co. v. Waione Timber Co. [25] was a case where the purchaser had notice of a claim to an unregistered interest but had given no undertaking to be bound by it. That case illustrates the proposition that where a transferee has purchased with mere notice of an unregistered interest, registration of the transfer to him does defeat the unregistered interest, but Waimiha Sawmilling Co. v. Waione Timber Co. does not suggest that a registered proprietor who has purchased on terms that his title will be subject to an unregistered interest is able to defeat that interest upon the registration of his transfer. 1. (1971) 126 C.L.R. 376, at pp. 384-385. 2. [1913] A.C. 491, at pp. 504-505. 3. [1926] A.C. 101.

[206]

It is, we think, clearly a mistake to suppose that the equitable principle on which a constructive trust is raised against a person who insists on the absolute character of a conveyance to himself for the purpose of defeating a beneficial interest, which, according to the true bargain, was to belong to another, is confined to cases in which the conveyance itself was fraudulently obtained. The fraud which brings the principle into play arises as soon as the absolute character of the conveyance is set up for the purpose of defeating the beneficial interest, and that is the fraud to cover which the Statute of Frauds or the corresponding provisions of the Law of Property Act 1925, cannot be called in aid in cases in which no written evidence of the real bargain is available. Nor is it, in our opinion, necessary that the bargain on which the absolute conveyance is made should include any express stipulation that the grantee is in so many words to hold as trustee. It is enough that the bargain should have included a stipulation under which some sufficiently defined beneficial interest in the property was to be taken by another. In Lyus v. Prowsa Developments Ltd. land was sold by a bank, as mortgagee exercising a power of sale, subject to, but with the benefit of, a prior agreement to sell made between the mortgagor and the plaintiffs. The bank had consented to but was not bound by the plaintiffs' contract. The purchaser from the bank (and a sub-purchaser who was subject to the same obligation) was held to take its interest subject to a constructive trust for the plaintiffs. Though a statutory provision similar to s. 68 of the Act was relied on, Dillon J. found that although there is no fraud merely in relying on legal rights conferred by statute, there was fraud in a purchaser's "reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the [purchaser] acquired the land" [29] . 1. [1948] 2 All E.R. 133. 2. [1982] 1 W.L.R. 1044; [1982] 2 All E.R. 953. 3. [1948] 2 All E.R., at p. 136. 4. [1982] 1 W.L.R., at p. 1054; [1982] 2 All E.R., at p. 962.

[207]

Therefore, although a purchaser who secures registration of a transfer of the fee simple merely with notice of a third party's right to purchase acquires on registration of his transfer a title freed of any obligation to the third party which equity would otherwise impose, a purchaser who has undertaken - whether by contract or by collateral undertaking - to hold his title subject to a third party's right to purchase remains bound by his undertaking after registration of his transfer. If he should repudiate the third party's right to purchase, equity imposes a constructive trust so that the registered proprietor holds his title on trust for the third party to the extent of the third party's interest. It might be thought that, if the undertaking from which the constructive trust originates is found in an oral collateral agreement, s. 34 of the Property Law Act 1969 W.A. or the Statute of Frauds would preclude its enforcement. But an undertaking that a title to be acquired on registration of a transfer shall be held subject to the unregistered interest of a third party is not itself a disposition of the third party's interest; and s. 34 of the Property Law Act requires only an instrument disposing of an interest in land to be in writing: Adamson v. Hayes [30] . As to the Statute of Frauds, Scott L.J. held in Bannister v. Bannister that it presents no obstacle to the imposition of a constructive trust in cases where the constructive trust has its origin in an oral agreement. If a statute enacted to prevent fraud could be raised by a purchaser as a cloak for unconscionable conduct, the statute would be put to a purpose for which it was not intended: Rochefoucauld v. Boustead [31] ; Cadd v. Cadd [32] . Perhaps the theory which supports equity's willingness to modify the effect of the Statute of Frauds has not been convincingly expounded. Nevertheless it is a doctrine of long standing that the Statute does not preclude the imposition of a constructive trust when a transferee relies on the absolute character of the transfer to defeat a beneficial interest which, according to the true bargain between transferee and transferor, is to belong to another, and there is no reason why that doctrine should be doubted: Organ v. Sandwell [33] .

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