Bantick v Boss Properties Pty Ltd [2000] VSC 121

Supreme Court of Victoria|2000-04-07|Before: Gillard J

CONTRACT - Sale of Land - Breach of term - Condition or warranty - Right to rescind - Recover deposit - Breach of s.52 of Trade Practices Act 1974 - Whether misrepresentation caused loss - Remedy of rescission - Relief from forfeiture of

deposit - Section 49(2) Property Law Act - No exceptional circumstances.

In this proceeding commenced by writ, the plaintiff claims the return of a deposit paid pursuant to a contract for the sale of land and damages.

The plaintiff, Brady Roy Bantick, who is presently aged 26 years is employed as an executive in a pharmaceutical company. After leaving school he completed a Bachelor of Science degree at the Australian National University. Whilst pursuing his course he and his mother purchased a property in Canberra. He had no other experience prior to October 1997 in the acquisition of real estate, even though he and his brother, Mike Bantick, had attended auctions of properties prior to that date.

The defendant, Boss Properties Pty Ltd, is a developer building company. Prior to 25 October 1997 ("the contract date") it had been involved in some 40 property developments. It was at all material times controlled by its Director, Mr Jonathon Healey.

Prior to the contract date the defendant had developed the property which runs between Ormond Road and Glenhuntly Road, Elwood, slightly east of the intersection of the two roads. Prior to the development the property comprised a number of residential flats and four shops. The shops were in Ormond Road. As a result of the development the property comprised three downstairs flats and three upstairs flats and four shops.

The basic facts which led to the dispute and the present proceeding can be briefly summarised.

The plaintiff attended the auction of Lot No. 3, 42 Glenhuntly Road, Elwood on the contract date. Lot 3 is an upstairs unit fronting on to Glenhuntly Road.

Attached to this judgment and marked "A" is a portion of the plan of subdivision showing the development.

At the auction the property was passed in. Discussions took place between the plaintiff and a Mr Ferguson Chisholm who was employed by the real estate agent handling the sale and as a result a contract of sale was executed by the plaintiff. Subsequently that day the defendant executed the agreement through Mr Healey.

As at the contract date the whole area of the total development from Glenhuntly Road through to Ormond Road was the land described in Certificate of Title Volume 7429 Folio 771. As at that date a plan of subdivision numbered PS413207A had been approved by the council of the City of Port Phillip. The next step was registration by the Registrar of Titles pursuant to the Subdivisions Act 1988.

In the course of discussions had on the contract date, the plaintiff raised with Mr Chisholm the question of two bodies corporate being established for the development, one to cover the residential part of the development and one to cover the shops.

The contract of sale executed by the parties provided, inter alia -

"10. Body Corporate 10.1 The purchaser acknowledges that two bodies corporate will be established upon registration of the plan of subdivision, one for the residential component and the other for the commercial shops in Ormond Road."

The plan of subdivision at that time had not been lodged for registration.

The contract provided for settlement as being "the date 14 days after the Registrar of Titles registers the plan of subdivision from which the land forms part when the purchaser shall be entitled to possession of the property" or the 23rd December 1997 whichever is the later.

The plan of subdivision was registered by the Registrar of Titles on 19 November 1997. Accordingly settlement was to be on 23 December 1997.

An issue arose between the two parties as to whether or not the development would have two bodies corporate. The plan of subdivision which was registered provided for one body corporate only.

The plaintiff as purchaser demanded that the defendant as vendor comply with the express term of the contract before he would settle.

The defendant was not prepared to comply with the contract prior to settlement and accordingly the plaintiff refused to pay the balance on 23 December 1997. The defendant's solicitors then delivered a notice of default to the plaintiff's solicitors requiring payment with 14 days of service. The plaintiff refused to pay the balance.

On 6 January 1998 the defendant's solicitors purported to accept the plaintiff's repudiation of the agreement and rescinded it.

The defendant forfeited the amount of the deposit which was $23,700. A demand was made by the plaintiff's solicitors to repay the deposit and this was refused.

On 12 February 1998 the plaintiff issued a writ seeking a variety of relief.

On 5 August 1998 the plaintiff delivered an amended statement of claim.

The simple set of facts has spawned some seven causes of action.

In my opinion the real issue before the court is, which party was entitled to rescind the contract?

This issue is to be resolved by the court considering and determining whether the admitted breach of clause 10.1 concerning two bodies corporate was a condition of the contract or a mere warranty. In modern parlance was the term an essential term or was it a non-essential or subsidiary term? If the former the plaintiff was entitled to rescind the agreement.

Mr Colbran QC, counsel for the plaintiff, after some gentle encouragement from the Bench, ultimately relied upon three claims for relief and abandoned the rest. The first two were causes of action, one at common law, the other statutory and the third claim for relief was a claim based upon s.49(2) of the Property Law Act 1958 for an order for repayment of the deposit. The latter claim for relief was in the alternative to the other two claims.

(i) A claim for return of deposit with consequential relief on a cause of action, that the defendant breached a condition of the contract which entitled the plaintiff to refuse to honour the contract and bring it to an end;

(ii) A claim based upon s.52 of the Trade Practices Act 1974 that the defendant was guilty of a false representation which induced the plaintiff to enter into the contract and as a result the plaintiff suffered damage; and he sought rescission and return of the deposit and damages;

(iii) In the alternative a claim for relief under s.49(2) of the Property Law Act 1958 that the defendant refund the deposit which it had forfeited.

In an nutshell, what the plaintiff seeks is the return of the deposit paid of $23,700, together with a sum of $1,303.32 for legal costs thrown away by the termination of the contract of sale. He claims interest.

There is no real dispute in respect of the facts.

The plaintiff gave evidence, as did his brother Mike Edward Bantick and the plaintiff's solicitor Phillip John Tiernan. The plaintiff tendered a number of documents.

The defendant called Mr Jonathon Healey; Mark Edward Tappin, a licensed estate agent; Alan Geoffrey Hollibone, a director of a strata title body corporate management company; Randel Brett Gamon, a licensed estate agent; and Fergus James Chisholm, an agent's representative employed in real estate.

I am satisfied that each witness save Mr Healey were doing their best to honestly recall the events of 1997 and early 1998.

Mr Healey was prone to guess and was shown on occasions to be wrong and was unreliable. It will be necessary to scrutinise his evidence with care.

Mr Colbran QC submitted that the court was entitled to draw inferences by the failure to call the defendant's solicitor Mr Ian Beattie who handled the conveyancing matters on behalf of the defendant.

The court is entitled to more readily draw inferences which are open to it by the failure to call a witness who could have given evidence in respect to the matter and further the court can draw the inference that Mr Beattie's evidence would not have assisted the defendant. I refer to Jones v Dunkell [1959] HCA 8; (1959) 101 CLR 298, O'Donnell v Reichard [1975] VicRp 89; (1975) VR 916 and Earle v Castlemaine District Community Hospital [1974] VicRp 86; (1974) VR 722.

Prior to the contract date the defendant retained the firm of Messrs Deacons Graham and James to act as its solicitors in respect to the development at 42 Glenhuntly Road, Elwood and 15-21 Ormond Road, Elwood. The solicitor handling the matter was Mr Ian Beattie.

The defendant sub-divided the property into nine lots and prepared a plan of sub-division number PS413207A through a firm of Messrs Barge and Miller Surveys.

In order that the plan of sub-division be effective and in accordance with the law it was necessary for the local municipality, the City of Port Phillip, to approve it and it be registered pursuant to the Sub-Division Act 1988 by the Registrar of Titles.

The evidence reveals that the plan of sub-division was approved by the City of Port Phillip on 6 October 1997.

The plan of sub-division which was given the number PS413207A provided for one only body corporate for the total development being Lots 1 to 9 and the common property. The plan provided for the lot entitlement and liability of each lot and the five residential lots had an entitlement of Click here for Picture and a lot liability of Click here for Picture .

"Lot entitlement" is defined by the Act and expresses the extent of the lot owner's interest in the body corporate - see s.3. The same section defines "lot liability" and means "the lot liability for that lot, expressing the proportion of the administrative and general expenses of the body corporate which the lot owner is obliged to pay."

Mr Beattie prepared a contract of sale of Lot 3, 42 Glenhuntly Road, Elwood on the instructions of the defendant. It contained an express special condition 10.1 in these terms -

"10. Body Corporate 10.1 The purchaser acknowledges that two bodies corporate will be established upon registration of the plan of sub-division, one for the residential component and the other for the commercial shops in Ormond Road. 10.2 Levees imposed pursuant to Regulation 401(b) of the Regulations to the Act (defined as the Sub-Division Act) for recovery of general administration maintenance, insurance, rates and taxes and other recurrent obligations of the respective bodies corporate based on lot liability shall be adjusted between the vendor and the purchaser in accordance with condition 9 of Table A." (emphasis added)

General condition 9 prescribed that the general conditions of Table A of the Transfer of Land Act 1958 were to apply to the contract with an amendment to general condition 9 in Table A.

The general conditions of the contract provided -

"Conflict between conditions. 10. In case of a conflict between the conditions the order of priority is - (a) any special conditions in this contract (b) general conditions in this contract (c) general conditions in legislation."

On 25 October 1997, Lot 3, 42 Glenhuntly Road, Elwood was auctioned. It is an upstairs flat.

The plaintiff knew about the auction and was interested in purchasing the property. He had attended auctions of other properties prior to this one. He attended the auction. Prior to the auction he had a conversation with an agent's representative, Mr Fergus Chisholm, who was there assisting his father who was the auctioneer and one presumes a licensed real estate agent.

The development comprised five residential lots and four shops which fronted 15-21 Ormond Road. The plaintiff was concerned about his potential liability in relation to body corporate expenses and in particular concerned that the expenses may be greater in respect to the shops for which he as a residential lot owner may be liable to contribute to. Accordingly he raised the question with Mr Chisholm as to the number of bodies corporate.

I accept the version given by the plaintiff of his conversations with Mr Chisholm one of which occurred prior to the auction and one which occurred thereafter. Mr Chisholm was called as a witness by the defendant but was unable to recall any conversation with the plaintiff.

The first conversation which took place prior to the auction occurred in the hallway of the house where a copy of the contract was located. As he perused a copy of the contract he had a conversation with Mr Chisholm. The plaintiff asked what costs were involved in the upkeep and Mr Chisholm informed him of an approximate figure which Mr Bantick was unable to remember but was happy with the answer as it appeared to be a reasonable sum. He then asked how the body corporate was structured. He asked would the residential flats be separated from the shops downstairs with respect to expenses and body corporates? Mr Chisholm said that there would be two bodies corporate. He did not point out the clause in the contract but said, "It's in the contract". The plaintiff stated he was satisfied with this statement and he decided to proceed with the purchase.

The auction took place and according to the plaintiff abruptly finished when it was passed in at $225,000. The plaintiff did not make a bid. Later, after some discussion between the highest bidder and the selling agents the plaintiff had a further conversation with Mr Chisholm. They discussed price and it was then agreed between them that $237,000 was the appropriate sum and that at that price the plaintiff was prepared to purchase. They then proceeded upstairs during which time telephone calls were made. The plaintiff then again asked the question about the body corporate and Mr Chisholm referred him to the term in the contract. The plaintiff stated that he was satisfied that his concerns would be met and he paid the deposit and signed the appropriate documents. He paid $23,7000.

Mr Chisholm took the contract to Mr Healey of the defendant and it appears that Mr Chisholm asked him specifically at the time he signed the contract whether there would be two bodies corporate established for the property. Mr Healey gave evidence - "I said there would be two bodies corporate established for the property from the point of view of separate insurance for the retail component and separate insurance for the residential component." Mr Healey signed the contract.

The plan of sub-division was lodged with the Registrar of Titles on 7 November 1997.

According to the Sub-Division Act 1988, the registration of the plan of sub-division has the effect of incorporating the body corporate - see ss.24 and 28.

The evidence showed that the plan was registered on 19 November 1997 at 1.45 p.m. The registration only created one body corporate which covered Lots 1 - 9 and common property.

The copy of the plan of sub-division which was incorporated into the contract of sale in fact only referred to one body corporate but clause 10.1 of the special conditions made it clear that there were to be two bodies corporate upon registration of the plan by the Registrar of Titles.

The plaintiff gave evidence as to why it was a matter of concern to him that there be two bodies corporate. He said -

"It's about bottom line in the operation of a property, if the costs were going to be exorbitant for the maintenance of the property, then that would obviously have some implications to return of investment and also down the track in terms of someone purchasing a property, if it was obviously an important issue to me, it may be an important issue to someone else. There are some other terms there including my concern of being linked to the third party aspect of the shops downstairs so that if someone tripped over in the shops downstairs, was I indeed liable for that event occurring."

He was then asked the following series of questions and gave the following answers -

If you had not been told that there were to be two bodies corporate would you have acted differently?---Yes, I would.

Explain that to us, please?---I wouldn't have purchased the property and I wouldn't have made - I would have chosen a different property."

As I have said, subsequently to the execution of the agreement and payment of the deposit, the plan of sub-division was registered with only one body corporate.

I accept the plaintiff's evidence that he was induced by the representation that there would be two bodies corporate to enter into the contract and would not have done so if the development was to have one body corporate.

What happened thereafter can be traced through the correspondence which passed between the parties' solicitors and also the body corporate manager.

I should interpolate here to note that prior to the registration of the plan of sub-division which meant prior to the incorporation of the body corporate, Mr Healey on behalf of the defendant and Mr Alan Hollibone of Strata Title Flat Management Company purported to hold a meeting of the members of the body corporate on 30 September 1997 at which Mr. Healey represented all the lots on behalf of the defendant as owner of all the lots. At that meeting it was resolved that Strata Title Flat Management Company be appointed as body corporate managers. The minutes of the purported meeting were included in the contract of sale.

At another purported meeting of the members of the body corporate on 19 November 1997, Mr Healey as chairman of the meeting signed minutes which purported to state the unanimous resolution of the body corporate PS413207A in the following terms -

"At a meeting of the members of the body corporate of PS413207A held at 19A Ormond Road Elwood on 19 November 1997 the body corporate unanimously resolved to amend the plan of sub-division to include by way of an amendment an additional body corporate which solely had control of the retail shops at 15, 17, 19A and 21 Ormond Road."

Mr Healey in evidence stated that he signed that resolution on the morning of 19 November 1997 which was prior to the registration of the plan and hence prior to the incorporation of the body corporate. Again Mr. Healey represented the defendant as owner of all the lots.

The Sub-Division Act requires a meeting of the members of the body Corporate after its incorporation.

The plaintiff retained T.G. Mulvany & Co as his solicitors in respect to the purchase.

By letter dated 11 November 1997 the defendant's solicitors wrote to the plaintiff's solicitors informing the latter that the plan had been lodged for registration at the Land Titles Office and that on Friday 17 November 1997 it was expected it would be registered. The solicitors proposed to defer requisitions on title until the plan had been registered.

On 20 November 1997 the plaintiff's solicitors forwarded requisitions on title which were responded to by letter from the defendant's solicitors dated 3 December 1997.

These answers to requisitions alerted the plaintiff's solicitors to the fact that there was only one body corporate established and the matter was raised between the solicitors. Discussions took place.

On 10 December 1997 the plaintiff's solicitors wrote a letter to the defendant's solicitors in which it was noted that only one body corporate had been established "and that there is no present intention on the vendor's part to establish separate body corporates for the residential component and for the commercial shops.

Apart from the provisions of special condition 10 of the contract of sale, our client advises that he was assured by the vendor's agent that there would be two bodies corporate and that he, as the owner of a residential unit, would not be required to meet additional expenses associated with the commercial properties.

We note your advice to the effect that the body corporate manager proposes to obtain separate insurances for the four shops and the five residential apartments. We have advised our client that this proposal will not overcome the problem.

We should be pleased to receive your client's response to these matters."

On 11 December 1997 the defendant's solicitors responded and wrote -

"1. Body Corporate We confirm that it was originally proposed to have two separate bodies corporate, one to administer the five apartments and the other to administer the three shops. We are instructed it was subsequently decided, after speaking with the body corporate manager, that it would be a duplication of management expenses and it would be much simpler to raise separate levees in respect of the apartments and for the shops. We confirm that this has been done in relation to the insurance premium. Further, it is intended that when the first meeting of the members of the body corporate is held, separate levees will be raised in respect of other functions to be performed by the body corporate. The overall intention is to minimise duplication of management expenses."

Mr Healey stated he gave instructions in relation to the second sentence of that part of the letter but disagrees that he gave instructions with respect to the first paragraph. Bearing in mind the vagueness and inconsistencies in the evidence of Mr Healey and the fact that Mr Beattie was not called as a witness I am satisfied that what the solicitors wrote was in accordance with the instructions of the defendant.

On 10 December 1997 the plaintiff's solicitors wrote to Mr Hollibone raising the concern about only one body corporate. On the following day Mr Hollibone responded as follows -

"Whilst only one body corporate exists, we will dissect revenue and expenditure between the commercial and residential properties. Funds will be kept separately and this matter will be ratified at a forthcoming body corporate meeting."

The optimism displayed by Mr Hollibone depended of course upon at least 50% of the lot owners agreeing to that proposal - see Subdivision (Body Corporate) Regulations 1989.

On 15 December the plaintiff's solicitors wrote to the defendant's solicitors and stated, inter alia -

"It is now confirmed that the vendor will not oversee the establishment of the two bodies corporate and that it is proposed to overcome the disadvantage that would otherwise be suffered by the owners of residential properties by obtaining two separate insurance covers. It appears to be agreed that this proposal relies on the continuing good will of the owners of the commercial properties rather than any legally enforceable arrangement. We advise that these proposals are unacceptable to our client. As things stand, the vendor cannot perform its obligations under the contract and/or has induced our client to purchase the property on the basis of misrepresentation. Our client will not settle on the basis of current proposals."

It was then proposed by the plaintiff's solicitors that the problem could be overcome by the establishment of two bodies corporate as agreed or a formal agreement between the body corporate and the various proprietors of the commercial properties whereby the owners agreed to insure separately and to meet those expenses or additional expenses incurred by the body corporate as a result of the commercial nature of the properties owned by them.

In the meantime the plaintiff was applying for finance from a bank which was granted.

On 16 December 1997 the defendant's solicitors wrote to the plaintiff's solicitors and said, inter alia -

"We are instructed by our client that it will proceed to make application to amend the plan of sub-division to create a second body corporate in respect of the commercial shops. As indicated to you, the amendment under s.32 of the Sub-Divisons Act has to be certified by council and each member of the body corporate and the mortgagee is required to endorse its consent. Therefore whilst the amendment is only simple it may take some time to put into effect. We are instructed by our client that it will exercise due diligence in effecting the amendments sought. Please confirm you are in a position to effect settlement on Monday 22nd December 1997." Under the terms of the contract of sale and the events which occurred settlement was due on 23rd December 1997.

On 17 December 1997 the plaintiff's solicitors wrote to the defendant's solicitors stating that the plaintiff was not prepared to settle on the basis of the defendant's agreement to establish the two bodies corporate and that advice was being sought as to the plaintiff's rights under the contract.

Mr Bantick took advice from his solicitor and counsel was also retained to give advice. He was advised that there was a question as to whether the term concerning the two bodies corporate was an essential condition and that there was a risk if he failed to settle on the due date he would be liable. The plaintiff despite the advice took the view that he was not obliged to settle until the contract was complied with. I reject the suggestion that he was trying to get out of the contract. I do not accept the evidence of Mr Gamon to that effect. The evidence of Mr Gamon is inconsistent with the attitude throughout of the plaintiff. Further I accept the plaintiff's evidence that he did not tell Mr Gamon that he wished to get out of the contract. This evidence is corroborated by the evidence of the plaintiff's solicitor, Mr. Tiernan

On 18 December 1997 the defendant's solicitors wrote to the plaintiff's solicitors confirming that the defendant instructed that settlement was to occur "on 23 December 1997 in accordance with the terms of the contract.

Our client maintains there is an enforceable contract of sale and if settlement does not occur a rescission notice will issue accordingly."

On 23 December 1997 the defendant's solicitors wrote to the plaintiff's solicitors requiring settlement at 3.00 p.m. that day and warning -

"In the event that settlement does not proceed, we have instructions to issue a rescission notice making time of the essence of the contract and imposing penalty interest on late completion."

The plaintiff did not settle on that day and on the same day the defendant's solicitors served a notice of default upon the plaintiff's solicitors requiring the purchaser to remedy the failure to pay the balance of the purchase price within 14 days of service.

By letter dated 24 December 1997 the plaintiff's solicitors wrote to the defendant's solicitors and stated, inter alia, that the defendant had repudiated the contract by not complying with the undertaking concerning two body corporates and indicating that the plaintiff was able to complete the contract "provided that your client strictly adheres to the terms thereof."

Notice was given to the defendant's solicitors that unless the defendant ensured the establishment of two bodies corporate by 11 January 1988 then the plaintiff would accept that the defendant had repudiated the contract and would rescind the contract with effect from 11 January 1998.

In a letter dated 31 December 1999 the defendant asserted through its solicitors that any remedy the plaintiff had was not a right of rescission but damages.

On 5 January 1998 the plaintiff's solicitors asserted that the plaintiff was ready willing and able to pay the balance of the purchase price within 14 days after the Registrar of Titles registered the plan of sub-division which provided for separate bodies corporate. It was asserted that the plaintiff had not breached the contract and went on to state that if the defendant failed to agree in writing that it would not purport to rescind the contract of sale as threatened by it in the notice of default, that the plaintiff would treat the defendant's notice of default as repudiation and would thereby rescind the contract.

On 6 January 1998 the plaintiff's solicitors wrote to the defendant's solicitors again repeating that their client was not in breach but going on to provide that in an effort to resolve the dispute the plaintiff was prepared to "extend the period for the registration of the plan of sub-division providing for the establishment of two bodies corporate until 31st January 1998. If your client considers that period to be inadequate you are hereby invited to advise us of your client's views to what it considers to be a reasonable period. However we refer you to special condition 9.1 which provides that the vendor shall have the plan of sub-division registered 'without delay'. We further notify you that our client will not rescind the contract of sale for reason of the failure of your client to register the plan of sub-division before 31 January 1998 or such other date as the parties may in writing agree."

The attitude of the plaintiff apparent from the correspondence and the fact that he obtained finance for the purchase are contrary to the suggestion he was seeking to get out of the contract.

On 6 January 1998 the defendant's solicitors purported to rescind the contract of sale and forfeited the deposit.

In fact the amendment to the plan of sub-division was not registered until 20 August 1998 which supports the view expressed in December 1997 that the proposed amendment would take a period of time.

The plaintiff's solicitors somewhat late in the piece rendered an account on 2 March 2000 in the sum of $1,303.32 for the solicitor's services and payments made in respect to the aborted purchase of Lot 3, 42 Glenhuntly Road, Elwood.

Each party maintains that it was entitled to take the stand which it did. The plaintiff for his part asserts that the defendant was obliged to strictly comply with the terms of the contract. By its failure to provide for two bodies corporate it blatantly and wilfully breached an express term of the contract which relieved the plaintiff of the obligation to complete the contract. In other words the breach was a breach of a condition or essential term which discharged the plaintiff's obligation to complete the contract and entitled him to a refund of the deposit. The defendant for its part asserts that the breach of the term was a breach of a warranty or a non-essential term which gave the plaintiff a right to damages but not a right to bring the contract to an end.

In a nutshell, the question is, which party was entitled to do what it did as a matter of law?

The parties entered into a bi-lateral contract, comprising a promise by the defendant vendor to sell a unit with certain rights over common property and the granting of a licence in respect to a car park and a promise by the plaintiff as purchaser to pay the balance of the purchase price of $237,000.

The law required both parties to fully perform their respective obligations. Subject to any term of the contract, the law does not recognise substantial performance of a contract - strict performance of the contractual promises is required. The discharge of the obligations of the parties to the contract is not effected except by strict compliance with its terms.

In the present dispute the parties entered into a detailed written contract which contained, inter alia, what were described as general conditions and special conditions. In addition, the general conditions in Table A of the seventh schedule of the Transfer of Land Act 1958 applied.

The general conditions contained a term as to priority in the case of conflict with the special conditions taking priority over the general conditions.

Condition 5 of Table A made time of the essence of the contract. But in the event of default the innocent party was not entitled to exercise his rights until he served a default notice on the other party.

In the events which occurred the parties were bound to perform the contract on 23 December 1997.

As at that date the vendor defendant was bound to transfer the unit to the plaintiff with a body corporate in respect to the common parts applying to the residential units only. This the defendant vendor was unable to do at that date.

The plaintiff for its part was obliged to pay the balance of the purchase price adjusted for the usual outgoings.

It is clear that the defendant was in breach of the contract and was unable to transfer the unit with a body corporate dealing with the residential units only.

The express 10.1 term must be construed in context and the objectively known facts surrounding the transaction.

Under the Sub-Division Act 1988, the registration of the sub-division plan effects the incorporation of "each body corporate for which the plan provides" - see s.28.

The opening words of the section make it clear that there can be more than one body corporate as did the evidence of what the parties objectively knew at the date of the contract.

In my opinion the special condition 10 obliged the defendant vendor to provide for two bodies corporate, one dealing with the residential units and the other dealing with the commercial shops.

The defendant did not so provide at 23 December 1997 and was in breach of its contractual obligations.

Mr I. Jones of counsel who appeared for the defendant did not contend otherwise.

Despite this breach the defendant demanded of the plaintiff that he comply with his contract obligations to pay the balance of the purchase price on 23 December 1997, and when he failed to do so, delivered a notice of default. Upon its expiration without compliance, on 6 January 1998 it purported to rescind the contract.

The plaintiff refused to complete until the defendant complied fully with its obligations to provide two bodies corporate.

The underlying philosophy which runs through our law of contract is that the expectations of honest men must be protected.

In First Energy (UK) Ltd v Hungarian International Bank Ltd (1993) 2 LL.L.Rep. 194 at 196 Steyn LJ summarised this underlying philosophy when he said -

"A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or principle of law. It is the objective which has been and still is the principal moulding force of our law of contract. It affords no licence to a judge to depart from binding precedent. On the other hand, if the prima facie solution to a problem runs counter to the reasonable expectations of honest men, this criterion sometimes requires a rigorous re-examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness."

The expectation of the parties to the present contract required each to fulfil his and its obligations.

The arrogant demand made by the defendant that the plaintiff must fulfil his obligations to the letter despite the former being in breach of a term which on the undisputed evidence was of some importance to the purchaser was inimical to what was fair, equal and just in the circumstances.

But the law recognises that there are other issues to address when parties fail to perform a contract strictly in accordance with its terms. The books are full of cases in which a party has substantially performed his obligation under the contract but then defaults. If this discharged the other parties' obligation to pay for the performance it could in certain circumstances result in a travesty of justice. An example, commonly experienced in the field of building law, is the builder who substantially performs his contract to be met with a refusal to pay anything by the proprietor because of an alleged breach. See, for example, H. Dakin & Co Ltd v Lee (1916) 1 KB 566 at 579-80.

Another example is the party who seeks to get out of a contract because of some trivial breach.

The law faced with these conflicting demands for justice decreed that not every breach by a contracting party would discharge the other party from his obligation to perform the contract.

A breach which is serious confers a right to bring the contract to an end. It has the effect of giving a right to the innocent party to rescind the contract. He does not have to do so. It is a matter for his election. He may instead of bringing the contract to an end, continue with it and sue for any damage caused by the breach.

The difficulty is where to draw the line between requiring compliance and discharge.

In the present matter the plaintiff contends that he was not obliged to perform his side of the bargain until the defendant complied with special condition 10.1 which it could not do so at the date of completion, namely, 23 December 1997 and accordingly he was discharged from compliance with the contract.

Once the innocent party elects to terminate the contract, assuming he has the right, the obligations of both parties in futuro are discharged, and neither has any obligation to further perform the contract.

The answer to this question depends on whether special condition 10.1 is an essential term or as it was formerly put, a condition rather than a warranty?

What is an essential term? In the absence of an express term in the contract which answers that question the court must give the answer.

The test to determine the question was authoritatively laid down in the joint judgment of Dixon, Williams, Webb, Fullagar and Kitto JJ in Associated Newspapers Ltd v Banks [1951] HCA 24; (1951) 83 CLR 322.

In that case the plaintiff an artist, by contract agreed for a long period of time at a substantial weekly salary to devote all his time and attention to the affairs and business of the defendant newspaper and agreed to provide a cartoon each week and the newspaper agreed that it should be presented on the front page of the comic section.

For a period of approximately two years the newspaper company complied with its undertaking but in February 1951 on three occasions the cartoon was printed inside the paper and not on the front page of the comic.

The artist gave notice that he was no longer bound by the contract.

The High Court stated the issue as follows at p.336 -

"The first question is whether the company's undertaking to present the defendant's drawings on the front page of the comic is a condition or essential term of the contract going to its very root, the breach of which would immediately entitle the defendant at his option to rescind the contract and sue for damages for the loss of the contract, or a mere warranty or non-essential and subsidiary term the breach of which would entitle the defendant to damages."

The court went on to consider the various tests which have been advanced by the courts to determine what is a condition. The Court after referring to a number of cases and a text book and concluded that the test was that stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd. His Honour said -

"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: (certain authorities were referred to). If the innocent part would not have entered the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight."

This test adopted by the High Court has been consistently applied ever since by the court. See by way of example, D.T.R. Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 430-31, and Shevill v The Builders Licensing Board [1982] HCA 47; (1981) 149 CLR 620 at 627 and 636.

The consideration and determination of whether a term is an essential term or not, is one of construction. In the D.T.R. Nominees Pty Ltd case, supra, Stephen, Mason, and Jacobs JJ said at p.430 -

"Whether a term of a contract is essential or not is a question of construction which is to be answered with due regard to the general nature of the contract considered as a whole and to its particular terms."

In a leading English authority Bowen LJ said in Bentsen v Taylor Sons & Co (1893) 2 QB 274 at 281 -

"There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one's mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability."

In construing a contract the court is entitled to consider the setting and the surrounding circumstances objectively known to the parties.

See Prenn v Simmonds (1971) 1 WLR 1381 at 1383-4, Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at pp.347 et seq and in particular p.352.

More recently Lord Hoffmann in the House of Lords in the case of I.C.S. Ltd v West Bromwich B.S. [1997] UKHL 28; (1998) 1 WLR 896considered the authorities and in relation to the background facts stated at p.912 -

"(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact' but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent."

Lords Hope and Clyde agreed with Lord Hoffmann.

The focus according to the test laid down by the High Court is on the nature of the contract and the substantial importance of the term to the promisee so that he would not have entered into the contract unless he had been assured of its performance and this ought to have been apparent to the promisor.

In the D.T.R. case, supra at p.431 Stephen, Mason and Jacobs JJ amplified on the relevant matters when they stated -

"(The test) emphasises that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances." (Emphasis added.)

It is noted that the court placed emphasis on the importance the parties have attached to the provision. And in considering that question it was appropriate to consider the contract as applied to the surrounding circumstances.

The surrounding circumstances would include a statement made by one of the parties in negotiation which established the importance of the subject matter and which was not rejected by the other party.

In Bannerman v White [1861] EngR 713; (1861) 10 C.B.N.S. 844: 142 E.R. 685 the court was concerned with the sale of a crop of hops by the grower to hop merchants. It was well-known that brewers would not buy hops that had been treated with sulphur. When samples were produced the purchaser's representative asked if any sulphur had been used that year to which he received a negative answer. Further, he stated that if sulphur had been used then he would not purchase. The price being agreed the seller gave an express guarantee "against any loss ... through the mode of treatment on the poles or curing".

It is noted that this was an undertaking to pay damages if sulphur had been used.

It turned out that sulphur had been applied to a small part of the crop some five acres out of 300 and the seller had honestly forgotten this. Accordingly there was no was question of fraud. The buyers received the hops but discovering that some part was contaminated with sulphur and that the whole was mixed together refused to accept the hops.

The case was heard by a particularly strong court presided over by Erle CJ and the court held that the discussion held in the course of the preliminary negotiations established a term of the agreement which entitled the purchasers to reject the goods and rescind the contract.

"Thus the question was - 'was the affirmation that no sulphur had been used intended between the parties to be part of the contract of sale, and a warranty by the plaintiff?' As to this, it was contended on one side that the conversation relating to the sulphur was preliminary to entering on the contract, and no part thereof, both from the form of expression and also from the written guarantee which was shown to have been given. On the other side it was contended that the whole interview was one transaction, that the intentions of the parties alone are to be regarded, that the defendants had declared the importance they attached to the enquiry, and that the plaintiff must have known it. And the jury answered this question in the affirmative. The effect of this finding of the jury, taken with the evidence, is now to be considered. We avoid the term 'warranty' because it is used in two senses, and the term 'condition' because the question is whether that term is applicable. Then the effect is that the defendants required, and the plaintiff gave his undertaking, that no sulphur had been used. This undertaking was a preliminary stipulation; and if it had not been given, the defendants would not have gone on with the treaty which resulted in the sale. In this sense it was the condition upon which the defendants contracted; and it would be contrary to the intention expressed by this stipulation that the contract should remain valid if sulphur had been used. The intention of the parties governs in the making and in the construction of all contracts. If the parties so intend, the sale may be absolute, with a warranty superadded; or the sale may be conditional, to be null if the warranty is broken. And, upon this statement of facts, we think that the intention appears that the contract should be null if sulphur had been used; and upon this ground we agree that the rule should be discharged."

In my opinion it is open to the plaintiff to prove that the discussions objectively showed the importance of the term in the bargain to the parties.

The question is, was special condition 10.1 an essential term the breach of which entitled the plaintiff to terminate the agreement thereby discharging his obligation to complete? In my opinion it was. In reaching that conclusion I have relied upon the following matters.

(i) That prior to placing the residential unit on the market, the vendor decided to provide for two bodies corporate, in respect of the common property, one to look after the interests of the residential unit holders and the other to look after the interests of the shop keepers.

In considering the significance of this decision by the vendor and the proffering of the unit for sale on this basis it is instructive to consider the use of two bodies corporate in a development. The Strata Titles Act 1967 introduced the concept of a body corporate to deal with common property in strata sub-divisions. I interpolate to note that this Act was repealed by the Sub-Division Act 1988 - see s.44(1).

This Act provided for the registration of a plan of strata sub-division with the Registrar of Titles (see s.9) and provided for common property (s.12) and the right of the registered proprietors of the units to the common property (s.13).

Section 14 provided that the registered proprietors for the time being of the units on the registered plan shall be a body corporate under the name "Body Corporate - Strata Plan No. ".

It is noted that each registered plan could only have one body corporate.

Under s.27(1) of the Sub-Division Act 1988 a plan may provide for the creation of one or more bodies corporate. This also covered common property. See s.28(2).

The bodies corporate were incorporated by the registration of the plan with the Registrar of Titles. See s.28.

The common property vested in the owners of the units as tenants in common.

There is a limitation on dealing with the common property - see s.28A.

The reason why the plan may provide for two bodies corporate is because the interests of groups of unit holders may be different, for example, where there are residential and commercial interests. There are many building in Victoria in which there is a mix of unit holders. For example, there are residential holders, office holders, factory holders and shops' holders.

The expenses relative to the common property relating to these particular groups may vary. Often disputes arise between unit holders because one unit holder may take more care and maintain a common area better than another unit holder. Yet the cost of repairs and maintenance may fall upon all unit holders.

The norm in the past has been for one body corporate but it is now recognised that in certain circumstances it is appropriate to have a body corporate representing the interests of one group of unit holders and another body corporate looking after the interests of another. A matter of concern is the cost of insurance especially where restaurants are concerned. The ever present risk of fire in a restaurant usually means a higher insurance premium. Fortunately in most bodies corporate the unit holders can agree on division of expense in a way which is fair but this would depend upon the good will of the unit holders.

The vendor decided that it would have two bodies corporate to represent the different interests of the five residential unit holders and the four shop unit holders and included this arrangement in the contract. It obviously thought it was appropriate and necessary for the development comprising a mix of residential and commercial lots. It recognised the significance and importance of the arrangement by including it in the contract. Mr. Healey by the contract date had been involved in 40 developments, was familiar and conversant with bodies corporate and recognised that it was advantageous to lot owners to have more than one body corporate to represent separate interests especially where a lot may be occupied by and used as a restaurant business. The risk of fire is ever present.

(ii) The plaintiff raised the question prior to the auction and was assured that there would be two bodies corporate and that it was included in the contract. This was confirmed prior to him signing the contract and the evidence of the vendor's director Mr Healey is that he confirmed that fact to the agent prior to him executing the contract on behalf of the defendant.

In my opinion the parties have objectively attached importance to two bodies corporate in the development.

(iii) The evidence establishes and I accept that the plaintiff would not have entered into this contract if he had been told there was only one body corporate. He made it quite clear in evidence that he had an appreciation of the importance of having two bodies corporate and the risk that was always there that if there was one body corporate representing the different interests of two groups of unit holders that there was the possibility that he would be up for an expense associated with the conduct of the commercial businesses.

He made his wishes known to the defendants' agent and his concerns were objectively known to the parties at the time of contracting.

(iv) The importance of having two bodies corporate is borne out by the way a body corporate operates.

The plan of sub-division did specify the lot liability of each of the nine lots. Lot 3 carried a 20/200 liability.

"Lot liability" is defined by s.3 of the Act and it means the liability for that lot, "expressing the proportion of the administrative and general expenses of the body corporate which the lot owner is obliged to pay."

That means that the owner of Unit 3 was liable to one-tenth of the administrative and general expenses of the body corporate. This would include the expenses of insurance as under the Sub-Division (Body Corporate) Regulations 1989 there was an obligation to ensure all lots in the common property. See regulations 701 and 702.

Most decisions made by the lot holders are by majority but some important financial decisions are by special resolution which means "at least 75% of the votes for the total number of lots affected by the body corporate".

The evidence was that in many cases unit holders co-operate but there is always the risk that a dispute could arise and 75% of the members could resolve to prejudice the interests of 25%.

It is not difficult to imagine a circumstance where the four shop owners ultimately occupy four out of the five units as their residence with the result that the fifth unit holder would be left at the mercy of the other unit holders.

The evidence showed that the budget for expenses was somewhere in the vicinity of $5,000 so that unit holder No. 3 was liable at the date of settlement for about $500.

Although good will is important the fact is that there was always the potential for one unit holder to be prejudiced and in my opinion the fact that the parties both agreed to two bodies corporate shows the importance of a particular body corporate looking after the interests of a particular group of unit holders. This is especially so with a mix of residential and commercial interests.

It makes obvious common sense that any step that can be put in place to avoid potential conflict between unit holders should be arranged and two bodies corporate would be a step in the right direction. It has that significance and is an important arrangement.

(v) Another factor of some importance is to consider what the plaintiff was purchasing. He was purchasing a unit which was the subject of a title to land, and in addition he was acquiring an interest in the common property. That interest is defined by s.28(d) of the Sub-Division Act in these terms -

"Any common property vests in those owners as tenants in common in shares proportional to their lot entitlement".

At a glance

Court

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Judgment (281 paragraphs)

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Legislation Cited (4)

Cases Cited (9)