171 Godfrey Constructions Pty Ltd v Kanangra Park Pty Ltd (1972) 128 CLR 529 dealt with cl 14 of the then standard contract for the sale of land in New South Wales, which was in the following terms:
'14. If the Vendor shall be unable or unwilling to comply with or remove any objection or requisition which the Purchaser has made and shall not waive within fourteen days after the Vendor has given him notice of intention to rescind this Agreement, the Vendor, whether he has or has not attempted to remove or comply with such objection or requisition, and notwithstanding any negotiation or litigation in respect thereof, and whether the Purchaser has or has not taken possession shall be entitled by notice in writing to rescind this Agreement.'
Barwick CJ held that there had been no requisitions within the meaning of the clause but said (at 538):
'If the matter be approached, as in my opinion it should not, by assuming that what the appellant had said in his "requisitions" 2 and 33 were requisitions within the meaning of cl. 14 of the contract, it ought, in my opinion, to be held that it would be unconscionable for the respondent to have attempted to exercise his powers under cl. 14, in the circumstances. I would have thought clearly it was so, because what he would be doing would be to deny to the purchaser the performance of an essential obligation which he had undertaken when entering into the contract with knowledge of the existence of the caveat. In this connexion I find no need to refer to decisions on the use of this type of clause in connexion with land under common law title. The title to this land is under the Real Property Act. The caveat was lodged and presumably notified before the sale was made. To allow the vendor to rescind in the circumstances would be to afford him the right, in substance, to say that the sale was in reality no sale at all: only a transaction conditional on his own willingness to perform.'
McTiernan J agreed with the Chief Justice. Walsh J said (at 543):
'The principles by which limitations have been imposed upon the right of a vendor to exercise the power conferred by such a clause as cl. 14 are well known and they were of course recognized by the learned primary judge, who referred in his judgment to some of the authorities on this subject. But with due respect to his Honour I am of opinion that he did not give sufficient weight, in deciding whether the respondent did attempt to use the power arbitrarily or unreasonably, to some features of the case to which I shall now refer.'
His Honour dealt with matters particular to the case and then said (at 546):
'I am of opinion that what the respondent could not do, if acting reasonably, was to exercise the power under cl. 14 to get rid of its contract with the appellant whilst the litigation with Doris Parkinson was still pending. The respondent was not engaged in that litigation because it had made the contract with the appellant. The case is not one in which the existence of that contract involved, or might involve, the respondent in expensive litigation of which otherwise it would have been free and which it was reasonable for it to avoid by exercising its power of rescission.'
Gibbs J said (at 547):
'In my opinion, it was unreasonable for the respondent on 7th April 1971 to attempt to exercise the power of rescission given by cl. 14 of the contracts and the attempt was accordingly ineffectual. I concur with what my brother Walsh has said in his judgment in relation to this aspect of the case.'
Stephen J said (at 549):
'Courts have approached the task of confining the operation of such clauses within what are regarded as proper limits in one or other of two ways; the vendor has been denied the right to rescind either upon the basis that, as a matter of construction, the circumstances of the particular case do not fall squarely within the terms of the clause or else because, although, on its proper construction, the clause applied, nevertheless, the vendor having attempted to use the rights conferred upon him for an improper purpose, he could not be permitted to rely upon its terms. In Webster's Conditions of Sale, 3rd ed., p. 356, the learned author concludes that: "It is not really a question of construction - the court interferes with the contract to prevent a fraud being committed." It perhaps matters little which of these two approaches be preferred; there may, on analysis, be no very clear distinction between them. I do not propose in this judgment to adhere to any clear distinction between the two approaches.'
After reviewing the authorities, his Honour said (at 554-555):
'It cannot be, consistently with the authorities to which I have already referred, that a vendor may, in such circumstances, take advantage of what it believes to be only a passing cloud which the purchaser has pointed out must be, and which both parties believe will be, removed and, while proceeding in fact to have it removed, declare that it constitutes such an obstacle in fulfilling its contractual obligations as to entitle it to have recourse to cl. 14. To do so is to employ the clause for a purpose quite foreign to that which the courts have regarded as its true function.'
172 One of those authorities was Gardiner v Orchard (1910) 10 CLR 722, particularly the passage from Isaacs J, including the following, concerning a clause similar to cl 14 (at 739-740):
'In considering whether such a clause justifies a vendor in any given case in cancelling his contract, the Court must bear in mind three things: First, the purpose of every such condition, which is a matter of law, and is stated in the passage quoted from Greaves v. Wilson ((1858) 25 Beav. 290 [53 E.R. 647]); next, the necessity for bona fides on the part of the vendor in using his power for that purpose: see also Woolcott v. Peggie ((1889) 15 App. Cas. 42). This is a question of fact, and is admitted here. The third essential is that the cancellation must be reasonable. Reasonableness is a question of fact, dependent on the whole of the circumstances, though one of those circumstances consists always of the wording of the contract itself.'
The reference to Greaves v Wilson was explained by Stephen J as follows (at 552):
'His Honour's reference to Greaves v. Wilson ((1858) 25 Beav. 290 [53 E.R. 647] is to a passage in which Sir John Romilly M.R. said ((1858) 25 Beav., at p. 293 [53 E.R., at p.649]) that such conditions were introduced to meet the case where a vendor finds that he is to be put to: " ... so much expense and trouble as to make it unreasonable that he should be called upon to do it." The learned Master of the Rolls emphasized that it was always "a question of the reasonableness of the thing required". As early as 1841 Lord Langdale M.R. had used reasonableness as a test of the validity of the vendor's rescission in his judgment in Page v. Adam ((1841) 4 Beav. 269, at p. 285 [49 E.R., 342, at p. 348]).'
173 There was further discussion of cl 14 in Pierce Bell Sales Pty Ltd v Frazer (1973) 130 CLR 575. Barwick J, after referring to the decision in Godfrey Constructions, said (at 587):
'Broadly it may be said that the vendor will not be allowed to use his contractual right if it would be unconscionable in the circumstances to do so.'
Later he said (at 588):
'According to my view of the contract between the parties, the obligation to transfer to the appellant the fee simple in the land was central and fundamental to their bargain. It must be a relatively rare case, in my opinion, in which cl. 14 can conscionably be used to avoid performance of such an obligation.'
Gibbs J cited with approval the following passage from Viscount Radcliffe in Selkirk v Romar Investments Ltd ([1963] 1 WLR 1415 at 1422-1423) (at 590):
'Thus, it has been said that a vendor, in seeking to rescind, must not act arbitrarily, or capriciously, or unreasonably. Much less can he act in bad faith. He may not use the power of rescission to get out of a sale 'brevi manu', since by doing so he makes a nullity of the whole elaborate and protracted transaction. Above all, perhaps, he must not be guilty of 'recklessness' in entering into his contract, a term frequently resorted to in discussions of the legal principle and which their Lordships understand to connote an unacceptable indifference to the situation of a purchaser who is allowed to enter into a contract with the expectation of obtaining a title which the vendor has no reasonable anticipation of being able to deliver.'
174 Meehan v Jones (1982) 149 CLR 571 concerned a special condition in a contract for the sale of land on which an oil refinery had been built as follows:
'This contract is executed by the parties subject to the following:- (a) the purchaser or his nominee entering into a satisfactory agreement or arrangement with Ampol Petroleum Limited for the supply of a satisfactory quantity of crude oil … (b) the purchaser or his nominee receiving approval for finance on satisfactory terms and conditions in an amount sufficient to complete the purchase hereunder.'
Gibbs CJ said (at 580-581):
'The intention of such a clause in my opinion is to leave it to the purchaser himself to decide whether the terms and conditions on which finance is available are satisfactory. The condition prevents a purchaser from being obliged to go through with a sale when he does not believe that he can raise the necessary funds. Such a condition is generally entirely for the protection of the purchaser, and it is the satisfaction of the purchaser, not that of some hypothetical reasonable man, that will satisfy the condition. No doubt it may be implied that the purchaser will act honestly in deciding whether or not he is satisfied. However, it does not seem to me necessary, in order to give business efficacy to a contract, that a condition should be implied that the purchaser will make reasonable efforts to obtain finance. The parties may expect that he will, but he does not contract to so do.'
Mason J said (at 589):
'To say that a "subject to finance" or "subject to finance on satisfactory terms and conditions" clause denotes finance which is satisfactory to the purchaser is not to say that he has an absolute or unfettered right to decide what is satisfactory. To concede such a right would certainly serve the object of the clause in protecting him. But it would do so at the expense of the legitimate expectations of the vendor by enabling the purchaser to escape from the contract on a mere declaration that he could not obtain suitable finance. With some justification the vendor can claim that the agreement made by the parties is not an option but a binding contract which relieves the purchaser from performance only in the event that, acting honestly, or honestly and reasonably, he is unable to obtain suitable finance.'
After referring to authority, his Honour said (at 590-591):
'In this case it is not necessary to decide whether the purchaser, in deciding whether finance is on satisfactory terms, is bound to act honestly or whether he is also bound to act reasonably. The cases already mentioned appear to support the first rather than the second alternative. And there is some ground for thinking that the parties contemplated that the question was to be left to the honest judgment of the purchaser rather than to the judgment of a court as to whether the purchaser acted reasonably in the circumstances.