Fair Trading Act 1987

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337

DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423

O'Brien v Smolonogov (1983) 53 ALR 107

Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR(NSW) 632

1 EATON DCJ: By a deed dated 27 July 2007 made between the plaintiffs and the defendants the plaintiffs granted to the defendants an option to purchase land being lot 1006 on deposited plan 202754 the whole of the land in certificate of title volume 2122 folio 32 ('the land') on the terms and conditions contained in that agreement.

2 The deed provided that in consideration of payment of a 'call option fee', an amount of $400,000, by the defendants to the plaintiffs the latter would grant to the defendants an option to purchase the land for $3.8 million on the terms and conditions contained in a contract of sale annexed to it. The call option fee was payable on 7 October 2007. The defendants were obliged to pay interest to the plaintiffs on the balance of the purchase price, less the call option fee, being an amount of $3.4 million at the rate of 8% per annum calculated from 7 October 2008 by calendar monthly instalments, the first being due and payable on 7 November 2008. The last monthly instalment was due and payable on 7 October 2009 being the date of termination of the call option period. Finally, the defendants were obliged to pay the plaintiffs $5,000 per calendar month commencing on 28 August 2007 and expiring on 7 October 2007 the first payment being payable, in advance, on the plaintiffs' execution of the deed.

3 The foregoing matters are not in issue as between the plaintiffs and the defendants.

4 In an action in this court the plaintiffs claim that in breach of the deed the defendants failed to pay the monthly instalments of $22,666.66 due and payable on 7 December 2008, 7 January 2009, 7 February 2009, 7 March 2009, 7 April 2009, 7 May 2009, 7 June 2009, 7 July 2009, 7 August 2009, 7 September 2009 and 7 October 2009. The plaintiffs claim, in addition, that the defendants failed to pay, in breach of the deed, the sum of $5,000 due and payable on 28 September 2007. They claim that the defendants are therefore liable to them in the sum of $254,333.26.

5 In addition to their monetary claim the plaintiffs seek, in the alternative, rectification of the deed. They say, in support of that claim, that the parties had a common intention, continuing up to the execution of the deed, but not included in it, that the plaintiffs would obtain a loan and create a mortgage over the land necessary to obtain a loan to pay $400,000 to a Mr and Mrs Kemp in order for Mr and Mrs Kemp to remove a caveat lodged by them over the land.

6 Having regard to the pleadings there is no issue as between the plaintiffs and the defendants with respect to the following matters:

(i) the option could be exercised by the defendants during the call option period;

(ii) the call option period was 24 months from the call option commencement date, 7 October 2007;

(iii) if the defendants failed to exercise the option, the call option fee would be forfeit to the plaintiffs; and

(iv) if the option was validly exercised the call option fee would be credited against the purchase price of the land.

7 The defendants plead that, in addition to the express terms of the deed, terms should be implied as follows:

1. the obligation to make monthly payments of interest pursuant to cl 2.1(c) would terminate upon the exercise of the option if prior to the expiry of the call option period; and
2. the defendants could at any time give notice to the plaintiffs that they did not wish to exercise the option, in which case the plaintiffs would retain the call option fee and the deed would terminate on the date of the notice.

The defendants assert that those terms are reasonable, equitable, necessary for the reasonable and effective operation of the contract, obvious, capable of clear expression and do not contradict any express term of the contract.

8 By the defence the defendants plead further that, on a proper construction of the deed, the call option period was created wholly or substantially for the benefit of the defendants having regard to the fact that the effect of the call option period was to define the period during which the option remained open for the defendants to exercise, that during that period the plaintiffs were unable to deal with the land except as provided in the deed and that on a proper construction of cl 2.1(c) the monthly instalments of $22,666.66 were not interest but rather were the consideration payable by the defendants per month for continuing the option period.

9 The defendants admit that they did not pay the plaintiffs the sum of $5,000 due and payable on 28 September 2007 but deny that they breached the deed as alleged.

10 The defendants plead further that the plaintiffs granted a mortgage over the land in favour of Perpetual Trustees of Victoria Ltd on 18 September 2007 in breach of cl 5.2 of the deed.

11 Finally the defendants plead that by their notice of 6 November 2008 to the plaintiffs they terminated the deed and that they were entitled to do so by reason of an implied term or, in the alternative, by reason of the plaintiffs' breach of cl 5.2. In the alternative the defendants plead that they were entitled to waive the balance of the call option period and terminate the deed by reason of the call option period being a condition wholly or substantially for the benefit of the defendants.

12 The defendants claim a set-off in damages and counterclaim on the basis that the deed was entered into between the plaintiffs in the course of trade and commerce and that the conduct of the plaintiffs said to be in breach of cl 5.2 of the deed was misleading and deceptive in breach of s 10 of the Fair Trading Act 1987. In consequence of that alleged breach the defendants claim an order pursuant to s 77 of that Act for rescission of the contract and refund of the money paid by them, namely the call option fee and the first monthly instalment paid.

13 By their amended reply and defence to counterclaim the plaintiffs join issue substantially with the defendants. They specifically deny that the term sought to be implied by the defendants should be implied. They plead that on 23 July 2007 the plaintiffs granted a mortgage over the land and did so with the consent, knowledge, acquiescence and encouragement of the defendants such that the plaintiffs were behaving under a fair assumption that they could take out a loan over the land and encumber it. They plead that it would be unjust if the defendants were to ignore the assumption and that it would be unconscionable conduct on the part of the defendants to do so. Such an outcome would, say the plaintiffs, deprive them of the benefits of the deed or of the substantial benefits of the deed.

14 In response to the claim under the Fair Trading Act the plaintiffs deny that the deed was entered into by the parties in trade and commerce.

15 The plaintiffs were at all material times the registered proprietors as joint tenants of the land. On 8 October 2003 they granted a mortgage over the land to Australia and New Zealand Banking Group Ltd which mortgage was registered on 23 October 2003 to secure an amount of $420,000. On 16 March 2004 the plaintiffs granted a further mortgage over the land to Australia and New Zealand Banking Group Ltd which mortgage was registered on 5 April 2004 and stamped to secure an amount of $240,000.

16 At all material times the defendants were the registered proprietors as joint tenants of lot 1007 on deposited plan 202754 the whole of the land comprised in certificate of title volume 1950 folio 287. By a contract dated 29 June 2006 the defendants agreed to sell lot 1007, known as 993 Baldivis Road, Baldivis, to Timefield Holdings Pty Ltd ('Timefield') for $4.5 million plus GST conditional upon the approval of the purchaser's plan of subdivision by the Western Australian Planning Commission and the terms and conditions of such approval being to the absolute satisfaction of the purchaser. On 22 December 2006 Timefield lodged a caveat over lot 1007 claiming an interest pursuant to that contract as purchaser.

17 Lots 1006 and 1007 Baldivis Road are neighbouring properties.

18 By letter of 19 December 2006 Timefield wrote to the plaintiffs expressing an interest in purchasing the land.

19 By letter of 20 December 2006 Timefield wrote to the defendants confirming the engagement of consultants to proceed with the preparation of an application to the Western Australian Planning Commission and to local government bodies for approvals.

20 On 9 January 2007, by facsimile transmission, Timefield suggested that it have an option to purchase the land for a purchase price of $4.5 million conditional on a successful application to the Western Australian Planning Commission for subdivisional and zoning approvals. By facsimile transmission of 15 January 2006 the plaintiffs informed Timefield that they would not accept its offer advising:

We have a litigation case to resolve and the outcome will determine whether we decide to sell or not.

21 The litigation referred to was an action in the Supreme Court of Western Australia (CIV 1004 of 2006) between the Shones and Stephen John and Roxanne Jillian Kemp who had sued the Shones over a contract dated 18 October 2004 for the sale by the Shones to the Kemps of lot 100 on deposited plan 42413, part of the land.

22 By a deed dated 13 July 2007 the Kemps and the Shones settled the action on the basis of a payment of $400,000 by the Shones to the Kemps. The contract for sale would be rescinded upon payment of that amount which would be received in full and final settlement of the Kemps' claims against the Shones arising out of that contract. The settlement sum was payable on 7 September 2007 or on such other date as the parties might subsequently agree.

23 The Kemps lodged a caveat dated 14 July 2005 over the land the subject of the sale. By the deed of settlement, upon payment of $400,000 they were obliged to provide the Shones with signed consent orders by which the action would be dismissed with an order that the Shones pay the taxed costs and a withdrawal of caveat.

24 In mid-2007 the Shones re-engaged with Mario Turco, acting on behalf of Timefield, suggesting the sale of the land with a deposit of $500,000 and settlement within 6 to 12 months. There were further discussions as to an option to purchase the land on 22 and 25 June 2007.

25 The defendants knew of Timefield's interest in purchasing the land and of the plaintiffs' problems with the Kemps. Denis Davies, on several occasions, expressed to the plaintiffs an interest in purchasing the land. In late June 2007 the plaintiffs and the defendants entered into negotiations with a view to an option to purchase the land. Those negotiations continued in early July 2007 as did negotiations between the plaintiffs and Timefield.

26 On about 11 July 2007 Jackson McDonald, solicitors acting on behalf of the defendants, prepared a draft deed as between the plaintiffs and the defendants. On 15 July 2007 the plaintiffs, by facsimile transmission to the defendants, requested certain amendments to the draft deed and said:

Please could you confirm how long it will be before we can execute this deed.

27 By facsimile transmission of 17 July 2007 the defendants advised the plaintiffs as follows:

My apologies for the inconveniences I have or may be causing you both, but we have hit a hurdle regarding financing the deposit of $400,000. After our finance broker assured us that he had three lenders prepared to finance us, when finalising the loan application all three have now reneged on the loan proposals.

My possible solution, regrettably to walk away and forget about the whole thing.

Your solution, progress as you were before, by putting loan in place. Then marketing your property with probably all potential buyers, because of the uncertainty of our properties potential, wanting 60 - 90 days due diligence and then perhaps still walking away.

Possible solution for us both

Readjust option to purchase, dates to coincide with the settlement of my families properties and then proceed with call option as per draft deed. You proceed with your loan to enable you to satisfy your neighbour.

We bear the costs of your loan up until our family property settles (up front on signing contract). If for some reason our family property does not settle, or when it does, your loan fees we have paid are yours to keep, over and above the purchase price. Basically we are paying for time.

Our thoughts on the family property settling are 98% as it has just been on sold and the put/call option has been called. The unconditional contract which forms part of the put/call option has been executed (signed) and settles 1.10.07. The new purchaser of our property has also taken over all the other options around the family property and they are also now in the unconditional stage with settlement brought forward 3 months.

Basic outcome of the above, same as before but one month later.

Give this matter your consideration, should you not be interested we fully understand and appreciate the opportunity you have given us to date.

28 The communication carried a post-script as follows:

If interested I expect we should be able to have contract modified and signed with cheque for loan next week.

29 By facsimile transmission of 18 July 2007 the plaintiffs advised the defendants as follows:

1. Interest on our loan payable in advance on signing deed. $5,000 commencing Aug to Oct and up until settlement of your families property;
2. Call option fee of $400,000 to be paid on settlement of families property Both to coincide at settlement;
3. Call option fee means commencing on (1 October 2007) on settlement of families property and ends 1 October 2009;
4. Purchase price $3.8 million as contract;
5. Grantee pay interest as contract.

Please amend ASAP. So this helps us with our loan application.

30 There were further drafts of the deed prepared by the defendants' solicitors and further discussions as to its content. Ultimately, the settled deed was executed by the parties on 27 July 2007. On that day the defendants paid to the plaintiff the sum of $5,000 pursuant to cl 2.1(d) of the deed.

31 On about 30 July 2007 Perpetual Trustees Victoria Ltd offered to loan the plaintiffs $784,909.39 to be secured by a mortgage over the land. On 2 August 2007 the plaintiffs advised Timefield that their negotiations were at an end. On 18 September 2007 a mortgage in favour of Perpetual Trustees of Victoria Ltd over the land was registered and on that day the plaintiffs indebtedness to Australia and New Zealand Banking Group Ltd in the sum of $364,366.38 was discharged and the Kemps were paid $400,000.

32 On 7 October 2007 the defendants paid to the plaintiffs the sum of $400,000 being the call option fee referred to in the deed of 27 July 2007. That amount was not paid in reduction of the debt due to Perpetual Trustees Victoria Ltd but was deposited, on 9 October 2007, to the plaintiffs' joint account with ANZ Bank.

33 In early 2008 Ron Farris Real Estate, acting on behalf of the defendants, erected a large 'for sale' sign relating to the land.

34 By letter of 6 November 2008 the defendants wrote to the plaintiffs advising:

This letter is to inform you that we do not intend to exercise the Call Option of which we entered into with you on 27 July 2007 and, therefore, release you and the land from any obligation arising from the Call Option.

Pursuant to cl 2.1(c) of the Call Option, please find enclosed interest payment to date being payment to you in full and final satisfaction of any claim you might have against us arising out of or in any way relating to the Call Option.

The amount of the payment which accompanied that letter was $22,667 for which the plaintiffs issued a receipt on 7 November 2008.

35 The plaintiffs claim that the defendants are in breach of the deed by failing to pay each of the monthly instalments of $22,666.66 payable from 7 December 2008 to 7 October 2009, inclusive, and by failing to pay the $5,000 payment due on 28 September 2007.

36 The defendants claim the plaintiffs are in breach of the deed by, contrary to cl 5.2, without notice to or written consent of the plaintiffs, granting a mortgage to Perpetual Trustees of Victoria Ltd.

37 The call option fee was paid by the defendants to the plaintiffs on 7 October 2007. Clause 2.1(c) obliged the defendants to pay interest to the plaintiffs on the balance of the purchase price, an amount of $3.4 million at the rate of 8% calculated from a date 12 months after the call option commencement date by calendar monthly instalments, the first of which would be due on a day 13 months after the call option commencement date. By cl 4.2, if the call option was not exercised the owner retained the call option fee and 'this deed terminates on the date being the last day of the call option period'.

38 The plaintiffs' claim is based upon the proposition that the deed obliged the defendants to pay calendar monthly instalments of interest on the seventh day of each month commencing in and including November 2008 with the final payment being due and payable on 7 October 2009 being the date of termination of the parties contractual obligations to each other. The defendants purported to terminate the deed by their notice of 6 November 2008 informing the plaintiffs that they did not intend to exercise the option and purporting to release the plaintiffs from any obligation arising from the deed, paying only the first of the monthly instalments of interest referred to. They say they were entitled to terminate the deed by reason of, firstly, an implied term to the effect that they could, at any time, give notice to the plaintiffs that they did not wish to exercise the option in which event the plaintiffs could retain the call option fee and the deed would terminate on the date of the notice and, secondly, by reason of the plaintiffs' alleged breach of cl 5.2.

This deed and the contract (if entered into) comprise the entire agreement between the parties in respect of their subject matter.

40 The deed provides that the option may be exercised at any time during the call option period, that period being defined as being a period of 2 years from 7 October 2007. There is no provision enabling the grantee to bring about an early termination. Not surprisingly the deed makes provision for the consequences of the exercise of the option and the failure to exercise the option providing, in somewhat superfluous fashion, that it terminates on the last day of the call option period.

Should the court imply the terms pleaded in par 3 of the Further Amended Defence?

41 The settled law is as stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 as follows:

For a term to be implied, the following conditions (which may overlap) must be satisfied:

(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.

42 In essence the contract between the parties is unusual. In consideration of the payment of the call option fee by the defendants to the plaintiffs the plaintiffs granted to the defendants an option to purchase the land for a particular price, the option to be exercised by the defendants at any time during a period of 2 years from the call option commencement date. There was mutual benefit in that the plaintiffs would receive the call option fee and the payments to be made pursuant to cl 2.1(c) and (d) and the defendants retained the opportunity to purchase the land for $3.8 million during the call option period to the exclusion of other interested parties.

43 By cl 2.1(c) the defendants were obliged to pay interest by monthly instalments on the balance of the purchase price for the remainder of the call option period. If, during that period, the defendants exercised the option the parties would then be, by the deed, bound by the terms of the contract for sale of land by offer and acceptance (Annexure B to the deed) which provides for the payment of the balance of the purchase price, an amount of $3.4 million within 28 days of the date of contract, in other words, within 28 days of the exercise of the option. It follows that, in the event of the exercise of the option the plaintiffs would be paid the purchase price, in full, at the expiry of 28 days. It seems reasonable, therefore, to imply a term to the effect that interest pursuant to cl 2.1(c) of the deed would cease to run on settlement or within 28 days of the exercise of the option. It would seem, however, given that there was no exercise of the option, pointless to imply such a term. The real issue between the parties is as to whether the court should imply a term to the effect that, during the call option period, the defendants could give notice to the plaintiffs of their intention not to exercise the option, in which circumstance the call option fee would be forfeit to the plaintiffs and the defendants' obligation to make payments of interest or otherwise would cease as at the date of the notice.

44 There can be no doubt as to the nature of the obligation cast by cl 2.1(c). It quite clearly refers to interest on the balance of the purchase price, specifying the rate and the dates for payment by instalments. The very nature of the deed is, however, that of an option granted to purchase the land for a particular purchase price and on the terms and conditions contained in a particular contract. An option to purchase imposes on the grantor an obligation to dispose of the subject property to the grantee on the occurrence of a specified event. The use of the term 'call option' in the deed is itself superfluous in that the deed provides that the grantee shall have the option to purchase the land. Clause 2.2 provides that the grantee may exercise that option during the option period by giving to the grantor a notice. The deed, however, imposes no duty on the grantee to exercise the option. It is only on the exercise of the option that the parties are obliged then to contract for the sale and purchase of the land in terms of the contract, being Annexure B to the deed.

45 Clause 4 deals with that circumstance providing that the call option fee shall be credited to the purchase price, that the parties are regarded as having entered into the contract as seller and buyer, respectively, that the date of the contract is the date of service of the notice exercising the option, that the grantee must deliver an executed copy of the contract with all necessary particulars to the grantor or their solicitors within three business days after the date of exercise and that the parties must exchange executed counterparts of the contract within seven days of that day.

46 It follows from the provisions of the deed that the defendants might have exercised the option at a date six months after the commencement of the call option period. In the event of doing so, by reason of cl 4.1(c), the balance of the purchase price would have been payable within 28 days. Assuming that settlement took place in accordance with the terms of the contract the purchase price, the sum of $3.8 million, would have been paid in full not later than 28 days from the date of the exercise of the option or about seven months from the date of the commencement of the call option period. There would be, in those circumstances, upon settlement no balance of purchase price unpaid. In such circumstances it would be inconceivable, in my view, that any payment to the plaintiffs pursuant to cl 2.1(c) of the deed would be required of the defendants.

47 The document dated 27 July 2007 describes itself as a deed. The creation of an option is governed by ordinary contractual principles. To be enforceable an option must be either granted by a deed or supported by consideration moving from the grantee to the grantor. In the deed the 'call option fee' is defined to mean $400,000 inclusive of GST. Clause 2.1(a) and (b) stipulate the consideration for the grant of the option as being the call option fee to be paid on the call option commencement date. Clause 2.1(c) refers to 'interest to the owner on the balance of the purchase price less the call option fee'. The provision for the payment of interest would be readily understandable if the agreement between the parties were a contract for the sale of the land on terms. In those circumstances, the defendants would be obliged by the contract to purchase the land for the price stipulated and on the terms agreed. Interest on the outstanding balance of the purchase price, in such circumstances, would be unexceptional.

48 The agreement reached between the parties was not a contract for the sale of the land but rather a contract conferring upon the defendants an option to purchase the land. Such a contract, as mentioned, cast no obligation upon the grantee to purchase. The call option fee, the sum of $400,000, is forfeit to the plaintiffs in the event of a failure to exercise the option. On the one hand it is tempting to characterise cl 2 of the deed as, in its totality, providing for the consideration flowing from the defendants to the plaintiffs for the grant of the option but the reference to interest 'on the balance of the purchase price' in that context makes no sense because the very essence of an option contemplates that there may be no sale. In the absence of the implied term sought by the defendants they would, on the plaintiffs' contention, be obliged, in the event of their failure to exercise the option, to pay not only the option fee of $400,000 but interest on the balance of a purchase price pursuant to a contract which never came into existence.

49 It may be the case that the defendants never contemplated that they would not exercise the option having regard to the circumstances of the real estate market in that particular area at the time when the deed was drawn. It is the case that it was prepared by their solicitors following negotiations between the parties. It is clear that, by the time the defendants wrote their letter of 6 November 2008, there had been a change in circumstances such that the defendants decided and, in effect, informed the plaintiffs that they would not either then or during the remainder of the term of the option, exercise it.

50 Consistent with the essence of an option to purchase granted for a particular term is the right granted to the option holder to call on the owner to transfer the land to him provided that the option holder complies with the option agreement. An option imposes on the grantor an obligation to dispose of the property to the grantee upon the exercise of the option. It follows, in the matter before me, that the defendants would have the right to exercise the option during the option period and that, during that period the plaintiffs were not at liberty to sell the land other than to the defendants. By cl 5.2 the plaintiffs were obliged not to, without the written consent of the defendants, sell or transfer the land or grant any other option inconsistent with the option granted to the defendants. If there were, in the deed, provision for earlier termination by the defendants by giving notice to the plaintiffs the plaintiffs would be able to, as of the date of that notice, retain the $400,000 paid by way of an option fee and deal with the land unfettered by the terms of the deed.

51 Clause 4.2 provides that if the call option is not exercised then the owner retains the call option fee and the deed terminates on the date being the last day of the call option period. Although that clause specifically provides for the retention of the call option fee in the event of there being no exercise of the option it is silent as to the payment of interest. The clause deals with a circumstance where no balance of purchase price would be payable. It follows that interest on the balance of the purchase price ought not to be payable in the event of earlier termination of the deed.

52 In Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 Mason J said at [5]:

The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties actual intention; the implication of a term is designed to give effect to the parties presumed intention.

53 The particular eventuality to which the parties appear to have failed to direct their minds is that in which the defendants, as grantees of the option, determine that in no circumstances will they exercise the option. Given the requirement for the payment of interest on the balance of the purchase price there would appear to be an assumption by the parties that the defendants would inevitably exercise the option. Having regard to the terms of the deed it does appear as though the parties failed to direct their minds to a circumstance in which the defendants would give notice of an intention not to do so thereby bringing the agreement to an end earlier than contemplated.

54 I conclude that I must imply such a term to facilitate earlier termination of the deed as pleaded by the defendants. I do so because, it does seem, in all the circumstances, to be both reasonable and equitable. Were there no requirement for the payment of interest the case for the implication of a term would be far less compelling. Given that provision, however, the implication of the term sought by the defendants is necessary, in my view, to give business efficacy to the contract. It would be, in my view, an absurdity to require the defendants to pay interest on the balance of a purchase price pursuant to a contract which never crystallised in circumstances where they determined that, under no circumstances, would they call upon the plaintiffs to convey the land to them. The implied term is capable of clear expression. Having regard to the terms of the deed it is, upon analysis, so obvious as to be necessary to make sense of the agreement reached between the parties. Finally, having regard to the terms of cl 4.2 of the deed the implied term does not, in my view, contradict that or any other express term of the contract.

55 I propose to imply a further clause in the following terms:

The grantee may, at any time, by written notice to the grantor terminate the deed and, in such event, the grantor retains:

(a) the call option fee; and

(b) all payments of interest pursuant to cl 2.1(c) and (d) of the deed

and the grantee is relieved of any further obligation to the grantor pursuant to cl 2.1(c) and (d) from the date of termination.

The plaintiffs' claim for $5,000 pursuant to cl 2.1(d)

56 As mentioned, by cl 2.1(d) the defendants were obliged to pay the plaintiffs $5,000 per calendar month commencing on 28 August 2007 and expiring on the call option commencement date, the first payment being payable in advance on the plaintiffs' execution of the deed. That amount was paid by the defendants to the plaintiffs on 27 July 2007. A receipt was issued. The call option commencement date was 7 October 2007. The obligation to pay $5,000 per calendar month expired on that day. It follows that the defendants were liable to pay the plaintiffs an amount of $5,000 on 28 September 2007. The plaintiffs seek to recover that amount. By their defence the defendants admit that they did not pay the sum of $5,000 but denied that they breached the deed in that regard pleading that, on a proper construction of cl 2.1(d) the first monthly payment was payable in advance upon execution of the deed but otherwise would not have been due until 28 September 2007 such that the second monthly payment was not due to be made until 28 October being the end of the second calendar month. In my view the clear agreement between the parties was to the effect that commencing on 28 August 2007 there would be an obligation to pay $5,000 calendar monthly expiring on the call option commencement date. The first of the those payments, in somewhat inelegant expression by the draftsman of the deed, is stipulated to be payable in advance on the plaintiffs' execution of the deed. It appears that it was. In my view, the second such payment was due on 28th of the following month, September 2007. It was not paid and should have been, subject, of course, to the resolution of the defendants other pleaded contentions.

57 The defendants plead not only that they were entitled to terminate the deed by reason of an implied term to that affect but in the alternative that they were entitled to terminate because of the plaintiffs' breach of cl 5.2 of the deed. They plead that prior to or on about 18 September 2007 the plaintiffs, without notice to or written consent of the defendants, granted a mortgage over the land and thereby breached an express term of the deed. The express term referred to is cl 5.2 which provides, inter alia, that the plaintiffs would not, until termination of the deed or exercise of the option, create any mortgage, charge or other encumbrance over the land or increase the then current liability under any existing mortgage, charge or other encumbrance over the land without the written consent of the defendants on such terms so as to preserve the defendants' priority under the deed as the defendants might reasonably require, such consent not to be unreasonably withheld.

58 That clause implies the presence of pre-existing encumbrances but the deed itself does not recite expressly what they were or the extent of them. As mentioned earlier, on 8 October 2003 the plaintiffs granted a mortgage over the land to Australia and New Zealand Banking Group Limited which was registered on 23 October 2003 to secure an amount of $420,000. On 16 March 2004 the plaintiffs granted a further mortgage over the land to Australia and New Zealand Banking Group Limited registered on 5 April 2004 and stamped secure an amount of $240,000. In evidence Denis Davies said that he was aware, at the time of execution of the deed that the plaintiffs had first and second mortgages with the ANZ Bank and an existing loan over the property.

59 The deed was executed by the parties on 27 July 2007. The plaintiffs were obliged to pay the Kemps an amount of $400,000 by 17 September 2009. The defendants were aware of that obligation. Denis Davies said, in evidence-in-chief:

My understanding was that if our contract with the Shones was put in place in time and we paid the $400,000 deposit the Shones would not need to raise a new loan, but would pay the deposit onto the Kemps. Similarly, I expected that if the Shones did take a new loan to pay out the Kemps, that the loan would be discharged when we paid our deposit.

60 According to Katherine Grace Shone, in her evidence-in-chief, on 27 June 2007 the plaintiffs made application through a mortgage broker to refinance the existing ANZ mortgages and to borrow $400,000 to pay out the Kemps. Refinancing, she said, was necessary because the ANZ Bank would not lend any further money due to the Kemps having lodged a caveat pursuant to the settlement reached with them. On 4 July 2007 the plaintiffs submitted a formal application for a loan.

61 Also on 4 July 2007 the defendants, in writing, advised the plaintiffs that they were having difficulties making their own arrangements and proposed an acquisition of the land by them for $3.8 million with a deposit of $400,000 payable within 60 days and the balance payable on or before 2 years from the date of payment of the deposit with interest from that date paid monthly at the rate of 8% until settlement. Under the heading 'Documentation' the defendants suggested 'put and call options to be prepared by the buyer's solicitor Mr G Boyle at Jackson McDonald, solicitors'. Indeed, on 11 July 2007 the defendants gave the plaintiffs the first draft of the document entitled 'Call Option Deed'. On 17 July 2007 the defendants wrote to the plaintiffs apologising for the inconvenience caused by reason of them having 'hit a hurdle regarding financing the deposit of $400,000'. A possible solution was suggested which involved proceeding with the call option proposal with amendment and the plaintiffs proceeding with 'your loan to enable you to satisfy your neighbour' on the basis that the defendants would bear the costs of the loan pending payment of the call option fee. That does suggest that the defendants contemplated that the plaintiffs might have to borrow by way of a bridging loan in order to pay out the Kemps pending the receipt of $400,000 being the option fee. That resulted in the stipulation by the plaintiffs on 18 July 2007 to the effect that there be 'interest on our loan payable in advance on signing deed. $5,000 commencing Aug to Oct and up until settlement of your families property.' That circumstance gave rise to the inclusion of cl 2.1(d) in the option deed.

62 On 20 July 2007 the plaintiffs were advised that their application to borrow $784,909.39 had been formally approved. The advice was through the medium of Wholesale Mortgage Funding Pty Ltd. The parties continued in negotiation with letters passing between them by facsimile transmission on 25 and 26 July 2007. On 30 July 2007 Perpetual Trustees Victoria Ltd made an offer to loan the Shones $784,909.39 on specified terms. That offer was accepted. On 10 September 2007 the Shones granted a mortgage to Perpetual Trustees Victoria Ltd registered on 18 September 2007. A loan disbursement schedule dated 12 September 2007 indicated the disbursement of the proceeds of the loan including an amount of $400,000 to the Kemps and $364,366.38 to the ANZ Bank.

63 In evidence-in-chief Katherine Grace Shone said that on 25 July 2007 their mortgage broker visited the Shones at home 'to get us to sign the loan offer and mortgage documents which we then returned to the new mortgagee'. The loan offer, as mentioned, is dated 30 July 2007 specifying the final repayment date as being 15 October 2036. In cross-examination both Robert Shone and Katherine Shone accepted that the defendants were not aware that the plaintiffs were endeavouring to borrow approximately $785,000 over a term of 30 years. Katherine Shone agreed that the effect of the re-mortgaging was to increase the amount for which the land was encumbered from about $364,000 to about $785,000 and that the arrangement negotiated by the Shones in that regard was not in the nature of either a short-term or bridging loan.

64 The plaintiffs submit that, while the mortgage to Perpetual Trustees Victoria Ltd was registered on 18 September 2007, the relevant document was executed by the plaintiffs on 25 July 2007, prior to the commencement of the deed and that, accordingly, there could be no breach of the deed by the granting of the mortgage. By cl 5.2 the Shones were obliged not to create any mortgage, charge or other encumbrance over the land or increase its current liability under any existing mortgage, charge or other encumbrance without the written consent of the Davies. I find that, subsequent to the execution of the deed, the Shones did create a mortgage over the land without the written consent of the Davies and that, in consequence, they were in breach of that term. I further find that the plaintiffs did not, as pleaded by them at par 6 of their amended reply and defence to counterclaim grant a mortgage over the land with the 'consent, knowledge, acquiescence and encouragement of the defendants'. In par 7 of that pleading there is an assertion that the defendants played a part in the adoption by the plaintiffs of an assumption that they could proceed with their arrangements for re-mortgaging without the need to inform the defendants. Paragraph 8 of the plaintiffs' amended reply and defence to counterclaim pleads that the defendants adopted that assumption and that the parties conclude their relationship on the basis of that mutual assumption. I find that there was no such assumption. The plaintiffs' claim for rectification must, in my view, fail.

65 The deed does not provide for termination for breach. The law does not confer a right to terminate for any breach. Such a right arises only if the breach constitutes repudiation, is a breach of an essential term, or causes substantial loss. Such a breach does not automatically terminate the contract but rather, confers an elective right of termination on the innocent party (see Cheshire & Fifoot's, Law of Contract (9th Australian ed) by Seddon and Ellinghaus, 21.8).

66 The deed does not stipulate that cl 5.2 is an essential term. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR(NSW) 632, 641 - 642 Jordan CJ 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.

67 That passage has been endorsed on more than one occasion by the High Court. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423, 431 Stephen, Mason and Jacobs JJ said:

... the quality of essentiality depends ... 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.

68 It is clear that the Davies knew that the Shones had to pay the Kemps $400,000. By the deed made with the Kemps dated 13 July 2007 they were obliged to pay that amount on 7 September 2007 or on such other date as the parties might agree. A couple of days later the Davies advised the Shones that they had 'hit a hurdle' regarding the provision of that amount of money and, by way of solution to the problem, suggested that they bear the 'costs of your loan up until our family property settles'. Katherine Shone's reply of the following day by facsimile transmission advises that the Davies should 'amend ASAP' as it would help the Shones with their loan application.

69 The Shones gave as their reason for not refinancing with the ANZ Bank that the ANZ Bank would not advance any further funds to them because of the presence of the Kemps' caveat. Of course, a refinancing in order to pay out the Kemps would involve, at settlement, withdrawal of their caveat. That is what happened when the mortgage to Perpetual Trustees Victoria Ltd was registered. I find that there was an initial anticipation by the Davies that the $400,000 call option fee to be provided by them would alleviate the Shones' problem of finding that amount in order to pay out the Kemps. The exchange of correspondence referred to above suggests that the Shones would, in light of the hurdle encountered by the Davies, have to make short-term or bridging arrangements to cover the delay in the availability of $400,000 from the Davies and to enable the Kemps to be paid out in accordance with the terms of the settlement with them. The Shones accepted in cross-examination that the Davies were unaware that, firstly, the Shones were negotiating a 30 year mortgage to secure some $785,000 and, secondly, that they were not proposing to use the call option fee, when paid, in reduction of that debt. Denis Davies, in cross-examination, said that he assumed that the Shones would resort to the ANZ Bank to refinance what he expected was a short-term or bridging loan.

70 On the evidence it is not clear precisely when the Davies became aware of the arrangements entered into by the Shones by way of re-mortgaging and of the extent of the borrowing. Certainly, their letter of termination of 6 November 2008 makes no reference to a breach of cl 5.2. That is, according to the law, not fatal to their claim of termination for breach. In Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359 Rich J said in somewhat terse fashion:

The suggestion faintly made that, because the defendant was unaware of the plaintiff's misdeeds in this matter until after the termination of the contractual relationship, they could not constitute a defence, is an ancient heresy to which I am surprised to find any surviving adherent.

71 In that case, on that point, Dixon J was more fulsome. He said:

But the rule is a general application in the discharge of contract by breach, and enables a party to any simple contract who fails or refuses further to observe its stipulations to rely upon a breach of conditions, committed before he so failed or so refused, by the opposite party to the contract as operating to absolve him from the contract as from the time of such breach of condition whether he was aware of it or not when he himself failed or refused to perform the stipulations of the contract.

'It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justication which in fact existed, whether he was aware of it or not.' (per Greer J, Taylor v Oakes Roncoroni & Co; see too, per Lord Sumner in British & Beningtons Ltd v North Western Cachar Tea Co. and per Starke J in Henry Dean & Sons (Sydney) Ltd v P. O'Day Pty Ltd).

72 It is clear that the Davies expected compliance with cl 5.2 notwithstanding that they were aware that the Shones, in the altered circumstances leading up to the execution of the deed on 27 July 2007, had a need to make some arrangements to meet their obligation to the Kemps. Denis Davies made it clear that he expected to be kept informed and expected compliance with cl 5.2. In cross-examination he said 'Well, they were raising the money. It was their position to liaise with me not the other way around'. Shortly after he said 'it's not my job to pursue them. I felt I was protected by clause 5.2 of the deed'.

73 That clause obliged the Shones to seek the Davies' consent before, in effect, changing the status quo so far as encumbrances over the land were concerned. It is true that the Davies anticipated the presence of short-term or bridging arrangements. It is equally true that the steps taken by the Shones contemporaneously with the execution of the deed and shortly thereafter were not within the contemplation of the Davies. That would have been known by the Shones. I accept that at the time of termination by the Davies the Shones were in breach of cl 5.2 and had been since the execution of the mortgage in favour of Perpetual Trustees Victoria Ltd. There can be no doubt that the Davies placed substantial importance on the protection afforded by that clause. It obliged the Shones, at the very least, to inform the Davies of the arrangements proposed by way of the registration of a new mortgage, its term and the principal sum secured and to seek their consent to those arrangements.

74 In my view, cl 5.2 was an essential term. The Shones were in breach. The breach was not necessarily known to the Davies when they terminated. Either way, in the light of the breach they were entitled to terminate when they did.

Fair Trading Act 1987

75 By par 15 of their further amended defence, set-off and counterclaim the defendants plead that the deed was entered into between the parties in the course of trade or commerce and that by reason of the terms of cl 5.2 the plaintiffs represented that they would not during the currency of the deed grant any new mortgage over the land or increase their liability under their existing mortgage without the consent of the defendants on certain terms. They plead further that the plaintiffs knew that the defendants believed that if the plaintiffs proposed to grant any new mortgage over the land or to increase their liability under an existing mortgage such proposal would be disclosed to the defendants. By failing to disclose the arrangements made by them leading to the mortgage with Perpetual Trustees Victoria Ltd the defendants plead that the conduct of the plaintiffs was misleading and deceptive and in breach of s 10 of the Fair Trading Act. They claim to have suffered loss and damage by reason of that breach. They seek, by way of relief, an order pursuant to s 77 of the Fair Trading Act for rescission of the contract and refund of the amounts paid by the defendants, namely the call option fee and the first monthly instalment of interest.

76 In response, the plaintiffs deny that the deed was entered into by the parties in trade or commerce and deny the conduct alleged against them and the relief sought in that regard.

77 Under the Act 'trade or commerce' includes any business or professional activity. The defendants submit that the fact that there was a residence on the land, a site comprising 8.4 ha, does not mean that the transaction represented by the deed was not in trade or commerce. The plaintiffs submit that the courts have interpreted the phrase 'in trade or commerce' as conduct having a trading or commercial character. The private sale of a house or a block of land has consistently been held to be a private transaction and not to fall within the concept of 'trade or commerce' in either s 10 of the Fair Trading Act or s 52 of the Trade Practices Act 1974.

78 Section 10 of the Fair Trading Act provides that a person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

79 The plaintiffs and the defendants were neighbours. The defendants had lived at their property, 993 Baldivis Road, Baldivis for approximately five to six years. Denis Davies had lived in the Baldivis area for 52 years. Both properties, it would appear, were in a rural setting. In his evidence-in-chief Denis Davies said that prior to the dispute giving rise to the litigation the relationship between the parties had been quite friendly. The plaintiffs allowed him to use parts of the land to graze cows, cut hay and store hay in their shed. He explained that, with the extension of the Kwinana Freeway south and the proposal for completion of the Perth to Bunbury freeway, there had been an expansion of residential subdivision between Perth and Mandurah which had led to an increased interest in subdivision of land in Baldivis. That much is clear from the evidence suggesting that property developers were taking an interest in land which, to that point, had best been described as 'rural residential'. In mid-2007 the plaintiffs contemplated selling the land to a property developer. In cross-examination Katherine Shone said that she and her husband had made application for subdivision in 2004. The plaintiffs engaged a surveyor to prepare a plan which would subdivide the land into three 7 acre lots. They proposed to sell one of those and keep the remaining two, one of which was their home. Katherine Shone agreed in evidence that for the purposes of the subdivision some roads were installed but said that, in general, the conditions of subdivision were not complied with.

80 There can be no doubt that the defendant's interest in the land was excited in part by a perceived substantial appreciation in the value of land in the area by reason of the factors referred to by Denis Davies.

81 The plaintiffs cite the decision of the Full Federal Court in O'Brien v Smolonogov (1983) 53 ALR 107. That case involved in alleged contravention of s 53A(1)(b) of the Trade Practices Act. The impugned conduct took place during telephone conversations that occurred as a result of a newspaper advertisement placed by the appellants wherein they solicited enquiries from potential purchasers of parcels of rural land owned by them. The Full Court said (113 - 114):

... it cannot be suggested that the lands acquired by the appellants became trading stock (see Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in Liq) (1978) 138 CLR 211). Nor is it a case where the taxpayer's activities amounted to more than the mere realisation of a capital asset and constituted the carrying on of land development (see Federal Commissioner of Taxation v Whitfords Beach Pty Ltd [1982] HCA 8; (1982) 39 ALR 521). The land was not used for any business activity: it was not used for farming or grazing.

It follows, in our opinion, that the only possible feature of the case which could conceivably be relied upon to suggest that the impugned conduct occurred in trade or commerce was the resort by the appellants to a newspaper as a medium of public advertisement of the land and the use made by the parties of the telephone for the purpose of conducting negotiations. It is true, as the learned judge observed, that the use of such facilities is common practice in the course of trade or commerce. ... But, in our view, the mere use, by a person not acting in the course of carrying out a business, of facilities commonly employed in commercial transactions, cannot transform a dealing which lacks any business character into something done in trade or commerce.

82 There is no evidence before me of any trade or commerce being conducted on the land. It is apparent that it, as mentioned, might be described as 'rural residential' and may have been employed, in part, for 'hobby farming'. My understanding of the evidence is that, principally, the land was the plaintiffs' place of residence. They entertained, firstly, its subdivision and, secondly, its sale to the defendants, ultimately culminating in the grant of an option to purchase. It may be that the land had residential subdivisional potential. There is a strong suggestion that the defendants wanted to acquire it for the purpose of on-sale in what appeared to them to be a rising market. Clearly, developers were taking an interest. In my view, however, on the authorities cited, the plaintiffs were not, as alleged by the defendants, engaging in conduct in the course of trade or commerce and the deed was not entered into between the parties in the course of trade and commerce, as alleged. The defendants' counterclaim must, therefore, fail.

83 There will be judgment for the plaintiffs in the sum of $5,000 with interest on that amount pursuant to s 32 of the Supreme Court Act 1935. The plaintiffs' claim of rectification is dismissed. The defendants' claim to a set-off insofar as it relates to the sum of $5,000 is dismissed, as is their counterclaim. I will hear counsel as to the precise form of final orders and as to costs.