Ellison v Lutre Pty Ltd

Federal Court of Australia|1999-04-13|Before: O'Loughlin J, Goldberg JJ

1 This is an appeal from a decision of O'Loughlin J given on 19 December 1997. 2 The point at issue at the trial was whether, in the circumstances, the appellant Barry Ellison ("Mr Ellison") had validly rescinded a certain contract under s 1073(2) of the Corporations Law ("the Law") as in force until 1 July 1998. After that time, the Managed Investments Act 1998 substituted different provisions in the Law concerning managed investments, and Item 143 of Sch 2 repealed Divisions 5 and 5A of Pt 7.12 (ss 1063 - 1076ZC) of the Law. 3 There was no dispute at the trial that, up to a certain point in time, the right to rescind had existed by reason of s 1073(2). The learned trial judge held that Mr Ellison had lost that right by having elected to affirm the contract. 4 The contract was for the sale by Lutre Pty Ltd ("Lutre") to Mr Ellison and the purchase by Mr Ellison of certain units numbered 36 and 44 ("the units") in Stage II of a block of apartments situated at 259 Gouger Street Adelaide ("the contract").

5 The units are part of a development known as "the Directors Apartments", built in two stages. Stage II comprises thirty-six residential units numbered one to thirty-six and eighteen car parking units numbered thirty-seven to fifty-four, plus common areas, including an office and reception centre and storerooms. The Stage I units were completed and sold by the original developer and purchased by their respective owners prior to any involvement in the development by either Lutre or Directors Management Pty Ltd ("Management") the managers of the units. Lutre is a wholly owned subsidiary of Co-op Financial Services Pty Ltd ("CFS"), which is in turn a wholly owned subsidiary of Adelaide Bank Limited ("the Bank"). During the development period, and up to the time of the contract, the Bank was known as Co-operative Building Society of South Australia Limited. 6 Lutre, as the owner of the units in Stage II, entered in to management and letting agreements with Management commencing on 1 October 1991, initially for a period of ten years, but with rights of renewal. When Lutre sold a unit in Stage II, its rights and obligations under each of the agreements with Management were assigned to the purchaser of that unit. 7 The purchaser of a unit was to receive revenue for the investment from two sources. First, all revenue received by Management in respect of the letting of the apartments was pooled, and after payment of expenses and outgoings, the net profit was distributed quarterly to each owner in proportion to the capital value that owner's unit bore to the total capital value of the apartments. Secondly, Lutre agreed upon sale of the unit to procure the Bank to guarantee a minimum net annual income for a period of three years after the purchase, which income would represent a return on the purchase price of 7 per cent, 8 per cent and 9 per cent per annum successively in each of those three years. To the extent to which an owner's net profit share distributed by Management in the first three years after purchase did not reach the guaranteed minimum return, the Bank would make up the difference. 8 Mr Ellison purchased the units from Lutre under contract on 8 January 1992. It was settled on 7 February 1992. Lutre procured the guarantee from the Bank in respect of the net minimum annual income in the appropriate terms. That guarantee expired on 7 February 1995. 9 In the period to 30 June 1997, Mr Ellison had received $30,010.70 by way of distribution of net profits from Management, including significant payments on and after 20 September 1993, and on and after 15 February 1996. Those latter two dates are mentioned because, as appears below, they were the particular payment dates after settlement on 7 February 1992 which the learned trial judge regarded as significant. Mr Ellison also received a total of $15,551.97 by way of guarantee or "make up" payments from the Bank under the guarantee, including significant payments quarterly on and from 30 September 1993. The last guarantee payment was made on 31 March 1995. 10 Section 1073(2) of the Law provided: "(2) Where (a) an offer of a prescribed interest for subscription has been made; or (b) an invitation to subscribe for a prescribed interest has been issued; in contravention of a provision of this Law, a contract entered into by any person (other than the management company) to subscribe for the prescribed interest as a result of the acceptance by the person of the offer, or the acceptance of an offer made by the person pursuant to the invitation, is voidable at the option of that person by notice in writing given to the management company." 11 Mr Ellison alleged that the contract involved the sale by Lutre of a "prescribed interest" within the meaning of the Law, and that the sale had occurred in contravention of a provision of the Law, so as to activate the right of Mr Ellison to avoid that contract at his option by notice in writing given to Management. 12 The expression "prescribed interest" is defined in s 9 of the Law to include a participation interest, and "participation interest" is defined to include any right to participate in any profits of any financial or business undertaking or scheme. The contract in the circumstances did constitute the sale of a prescribed interest. At the relevant time, only a public corporation could offer a prescribed interest for subscription or purchase: s 1064. It was not lawful to offer or invite subscription for any prescribed interest without there being in force, in relation to the interest, an approved deed: s 1065. The nature of an approved deed was specified in s 1066. It required that there be a trustee appointed, independent of the management company, charged with responsibility of caring for the holders of the prescribed interest. There was no approved deed in existence in relation to the units, or the Directors Apartments generally. In addition, s 1018 of the Law prohibited the offer for subscription, or the invitation to subscribe, for securities of a corporation unless a prospectus in relation to the securities had been lodged which complied with the requirements of the Law. The word "securities" includes prescribed interests: ss 9 and 92. No prospectus was lodged with respect to the Directors Apartments. 13 Lutre and Management accept (for the purposes of the action) that the contract involved the sale of a prescribed interest, and that there should have been an approved deed and a prospectus for the sale of prescribed interests in the Directors Apartments project, including to Mr Ellison of the units. Under s 1073(2) therefore, Mr Ellison did have the right at his option to avoid the contract, upon notice being given to the Management. 14 On 7 January 1997, notice was given by solicitors on behalf of Mr Ellison to Management in the following terms: "Our client is now aware that the transaction constituted the "issue" of a "prescribed interest" within the Division 5 of Part 7.12 of the Corporations Law. In issuing that prescribed interest to our client, the provisions of the Corporations Law were contravened. Pursuant to section 1073(2) of the Corporations Law, our client is entitled to void (sic) the contract. Our client hereby gives notice in writing (as required by that section) of his exercise of the option to void (sic) the contract." The issue at trial 15 The issue at trial ultimately was whether Mr Ellison was deprived of that right to avoid the contract in the particular circumstances. Lutre and Management contended that, by his conduct, he had elected to affirm the contract. It is clear that, in the period up to 7 January 1997, he had received the benefit of distributions of net income from Management and for an initial period of three years he also received the benefit of the guarantee from the Bank. 16 The consideration of whether he had affirmed involved the learned trial judge drawing conclusions as to: (1) whether the right to elect to avoid the contract provided for by s 1073(2) could ever be lost by conduct of the purchaser of a prescribed interest; and (2) whether, if the right of avoidance could be lost by conduct, in the particular circumstances the conduct of Mr Ellison had resulted in his loss of that right, in effect by electing to affirm the contract. Included in this issue was whether it was necessary for Mr Ellison to have knowledge of the legal right to avoid the contract before that right could be lost, or whether knowledge of the facts giving rise to that right of avoidance could be sufficient for an election to be made.

17 The learned trial judge found that the common law doctrine of election applied in respect of the right of avoidance given by s 1073(2) of the Law. His Honour concluded that that was partly because of the consequence of the alternative position, namely that the right of election could be exercised many years after the contract even when the person entitled to that right had chosen to receive the benefits of the contract knowing of the right to rescind. His Honour considered that the expression "voidable at the option of that person" conveyed that a person in Mr Ellison's position would have the freedom to choose to exercise or not to exercise that option, but if the decision was taken not to avoid the contract there could be an affirmation of the contract. 18 His Honour then addressed the question whether conduct in the light of knowledge of the facts that gave rise to the right to avoid the contract, rather than knowledge of the legal right to avoid the contract, could be sufficient to constitute affirmation of the contract. He concluded that the time for election arose a reasonable period of time after Mr Ellison acquired knowledge of the facts that gave rise to the right to avoid the contract. His Honour found that it was not necessary for Mr Ellison to know of the legal right to avoid the contract. His Honour then addressed the facts in some detail. He was satisfied that Mr Ellison had the requisite knowledge of the facts by September 1993, and that progressively by his conduct after that he elected to affirm the contract so that by 7 January 1997 it was no longer open to him to rescind. 19 As noted above, and as the matter was argued on appeal, there were two critical points of time arising in the course of the communications between the Bank and Mr Ellison. 20 The first was a letter from Lutre to Mr Ellison of 20 September 1993. It provided: "Under the Corporations Law there are certain obligations imposed on persons, such as the Co-op and the Manager, in dealing with particular types of investments. In particular, obligations are imposed on persons who make available or sell investments known as "prescribed interests". Following discussions with the Australian Securities Commission ("the ASC") in relation to another apartments development using essentially the same investment structure as in the case of the Directors Apartments, the Co-op applied to the Federal Court seeking an indication from the Court as to whether the sale of units in that other development amounted to dealings in prescribed interests. The ASC was also a party to those proceedings. Ultimately, the Federal Court made a finding that the sale of those apartments involved dealings in prescribed interests. This means that when your apartment was sold to you certain provisions of the Corporations Law may not have been complied with. This may be something on which you may wish to obtain your own advice. In addition, some aspects of the Corporations Law will apply to dealings in the Directors Apartments, including subsequent sales by you of your apartment. Once that finding was made by the Federal Court the Co-op proceeded with the making of arrangements so that the provisions of the Corporations Law are fully satisfied with as little inconvenience to you and the other investors. The provisions of the Corporations Law in question effectively provide that:- 1. There must be in place a Trust Deed unless the ASC has provided an exception to this requirement; 2. Interests can only be made available for sale and offered for sale if there is in place a current prospectus for the units; and Pertaining to each of those matters: 1. The Co-op has indicated to the ASC that it will be seeking an exemption from the ASC in relation to the need to have a Trust Deed. 2. The ASC has agreed that rather than individual unit owners having to prepare a Prospectus in relation to any dealing they may wish to entertain with their unit, the Co-op and the Manager can have in place a prospectus which may then be used by any unit holder. The Co-op is currently preparing a prospectus which may be used by you for this purpose. It is not proposed to levy a charge to recoup the expense of initial preparation and lodgement of that prospectus. However, the prospectus is required to be regularly updated and renewed. It is proposed that an annual charge will be levied on all Owners as an additional Operating Expense to recoup the costs of updating the prospectus. Whilst this fee has not been finally calculated, and may vary from year to year, we anticipate the fee payable in the 1993-1994 financial year will be approximately $50.00. It is very important for you to note that you may only offer for sale your interest in your apartment pursuant to a prospectus. Should you wish to discuss any aspect of this matter further, may we suggest that you contact the writer on 216-9774 or Mr Greg Martin on 213-1231. Alternatively, you may wish to obtain your own advice as to the contents of this letter." 21 As his Honour then found, that letter was premised upon the absence of an approved deed and of a prospectus. It conveyed that there could not be a sale of the units by Mr Ellison. In fact, from 4 September 1994 when s 1043B of the Law became effective, a secondary sale did become possible, subject to only minor conditions. 22 It was from 20 September 1993 that the learned trial judge found that Mr Ellison was aware of facts which were sufficient to give rise to the right to avoid the contract. Specifically, his Honour found: "… that Mr Ellison knew, as from the time of his receipt of the bank's letter dated 20 September 1993 that some (to him) unspecified and unarticulated legal problem had arisen with respect to his ownership of his units and his right to sell them." 23 Mr Ellison was then content to rely upon the applicants and the Bank to resolve those problems. He did not take any action to avoid the contract. 24 The letter of 20 September 1993 led to ongoing communications between Mr Ellison or persons on his behalf and the Bank and its solicitors. Mr Ellison also attended meetings convened by Lutre of the strata corporation in March 1994, May 1995 and May 1996. The matters canvassed from time to time included the ongoing course of the Bank's application for an exemption under s 1084. By August 1995, Mr Ellison had engaged solicitors to act on his behalf, but those solicitors did not bring to his attention s 1073(2) or his rights thereunder. In February 1996, he changed solicitors. It is accepted, as the learned trial judge found, that he then became aware of his rights under s 1073(2). 25 That gave rise to the second critical date identified by the learned trial judge. On 15 February 1996 those solicitors wrote to solicitors for the Bank in the following terms: "It appears to us that Lutre Pty Ltd in selling units to our clients and assigning to our client its interest in respect to those units under the Management and Letting Agreement has issued to our client a "prescribed interest" without complying with Division 5 of part 7.12 of the Corporations Law. As such our client is considering his options under Section 1073(2) of the Corporations [Law]. Our client is considering serving a notice as contemplated by that subsection. As we assume that you act for Lutre Pty Ltd as well as the Bank, we enquire whether either you or your client wish to make any submission or proposal to our client before he makes a final decision regarding service of such notice." 26 The exemption application had not then finally been determined. The decision on that application was made on 18 September 1996 and notified to Mr Ellison and his solicitors on 25 September 1996. 27 The exemption relevantly provided exemption to Mr Ellison and those presently owning units in the Directors Apartments in respect of compliance with the provisions of Div 5 of Pt 7.12 of the Law and upon certain conditions. Within Div 5 was s 1065 which prohibited the issue of invitations to subscribe to or the selling of a prescribed interest without there being in force an approved deed. The exemption granted to Lutre by the ASC, did not relate to the obligation to have a prospectus available if a prescribed interest is to be sold: s 1018.

28 Mr Ellison first argued that s 1073(2) creates a statutory right of avoidance of the contract, which cannot be lost by any conduct which would otherwise constitute affirmation of the contract at common law. It was put that the doctrine of election does not apply in relation to that statutory right of avoidance, and that the only circumstances in which the right of avoidance might be lost would be if innocent third party rights were somehow created which could not be meaningfully reversed. 29 Secondly it was argued that the knowledge required before the right to avoid the contract can be lost by election is knowledge of the right to avoid the contract, and that it was not sufficient to know of the facts which in law may give rise to that right to avoid. 30 Thirdly it was argued that, on the facts, the learned trial judge erred in finding that Mr Ellison had elected to affirm the contract by his conduct and in the light of his knowledge from time to time between 20 September 1993 and the date of his letter of 7 January 1997, or alternatively between 15 February 1996 and 7 January 1997.

31 Under the provisions of the Uniform Companies Act 1961, the issue of a prescribed interest without an approved deed contrary to s 83 of the Code had been held to render the contract for the purchase of the prescribed interest void: Hurst v Vestcorp Ltd (1988) 12 NSWLR 394. It was clearly to avoid that inevitable consequence that s 1073(2) was introduced into the Law. 32 By the Corporations Legislation Amendment Act (No. 2) 1991, which was in force at times material to this application, further relevant amendments were introduced by s 1073A. It provided: "1073A(1) Within 21 days after a person gives a notice under subsection 1073(2), the management company may apply to the Court for an order declaring the notice to have had no effect. 1073A(2) The Court may extend the period within which the management company may apply under subsection (1), even if the notice under subsection 1073(2) has taken effect. 1073A(3) If, on an application under subsection (1), the Court is satisfied that: (a) the offer or invitation that led to the contract being entered into contravened section 1018, but only because of a contravention of Division 2 of Part 7.12 (or of regulations in force for the purposes of a provision of that Division) that: (i) was minor or insubstantial; and (ii) has not materially prejudiced, and is not reasonably likely to prejudice materially, the interests of the person who gave the notice under subsection 1073(2); and (b) in all the circumstances, it is just and equitable to declare the notice to have had no effect; the Court may by order so declare. 1073A(4) On an application under subsection (1), the onus of proving the matter referred to in subparagraph (3)(a)(ii) is on the management company." 33 At the same time subss (3) and (4) were added to s 1073 to provide for the suspension of the obligations of the parties to a contract during the twenty-one day period after a notice is given under s 1073(2) or, in the event of an application under s 1073A, until the final determination of that application. The notice takes effect at the end of the twenty-one day period, or in the event of such an application, when it has been finally determined. 34 Lutre's initial application, at least in part, was expressed to be brought under s 1073A of the Law. Ultimately it did not press its claim to relief under that section. It accepted that that section may be utilised only with respect to contraventions of a minor or insubstantial nature, and that its contraventions did not fall within that description. Section 1073A appears to have been intended to provide a means of ameliorating the consequence that the right to avoid a contract may be disproportionate to the nature of the contravention, as it provided the contravening party the opportunity, in the limited circumstances encompassed within s 1073A(3), to obtain a Court order affirming a voidable contract notwithstanding the contravention. In part, it is by reason of those confined circumstances being so identified that Mr Ellison contends that s 1073(2) does not permit of the common law doctrine of election being available to cause him to lose the option to avoid the contract. 35 Section 1073A(3)(a) was expressly confined to contraventions of Div 2 of Pt 7.12, which relevantly included only s 1018 concerning prospectuses. That submission was sought to be reinforced by reference to the requirements for an approved deed under s 1069: it must contain a buy-back covenant on the part of the offeror and a covenant relating to buy-back arrangements. Section 1073A does not provide any power to avoid the consequences of the absence of such covenants. So, it was argued, there was a legislative intent that those consequences ought not otherwise be avoidable. 36 In our judgment, the provisions of ss 1073 and 1073A do not lead to the conclusion that the Law excluded the common law doctrine of election from being available to apply, in appropriate circumstances, in relation to the statutory option created by s 1073(2). 37 In the first place, the use of the word "option" in s 1073(2) contemplates that the offeree or invitee should have a choice as to whether to avoid the contract in question. It is entirely consistent with that expression that the choice might be exercised to maintain the contract rather than to avoid it. The circumstances in which the option may be exercised are at large. That is by way of contrast with s 1073A, which is intended to provide relief to an offeror or invitor from avoidance of a contract but only if the contravention by that invitor or offeror is minor or insubstantial and if it has not or will not cause material prejudice to the offeree or invitee. There is no apparent reason why the provisions of s 1073A should be construed so as to enhance the apparent scope of s 1073(2) in the sense that the option provided for in s 1073(2) can never be lost by election. The doctrine of election is longstanding in the law, including in relation to the law of contract: eg Sargent v A.S.L. Developments Ltd (1974) 131 CLR 634. The loss of the right to rescind a contract by expressly declaring an intention to affirm it with knowledge of the circumstances giving rise to the right to rescind or by conduct inconsistent with the exercise of that right in the light of such knowledge has long been recognised: Ormes v Beadel (1860) 2 De G F & J 333; 45 ER 649; Sharpley v London & East Coast Railway Company [1876] 2 Ch D 663. If the legislature had intended that it should not apply to the statutory option prescribed by s 1073(2), it would have been easy to have so provided. There are no words in s 1073 which tend to suggest such an intention. 38 In addition, as the learned trial judge pointed out, there would be no limitation upon the time at which the option to avoid the contract might be exercised. It may be that the offeror or invitee is expressly told of the circumstances constituting the contravention, and of the option to avoid the contract, but (if the argument be correct) is nevertheless entitled to continue to act as if the contract is on foot for many years thereafter until exercising the option to avoid. In that period of years, the offeree or invitee may have continued to receive and enjoy the benefit of distributions from the management company, to attend and vote at meetings, and perhaps have participated in other ways in relation to the units. There is no reason apparent to me why the legislature, having introduced s 1073(2) in lieu of the absolute invalidity which the Code previously provided, would intend that consequence. 39 Molotu Pty Ltd v Solar Power Ltd (1989) 6 BPR 13,460 involved, inter alia, the question whether the right to rescind a contract for the purchase and sale of land, which was available to the purchaser under clause 7(2) of the Conveyancing (Vendor Disclosure & Warranty) Regulation 1986 (NSW), could be affirmed by election. Young J (obiter) followed his earlier decision in Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87 to the effect that an act of affirmation by a purchaser after due knowledge will waive the right to rescind. His Honour referred to a number of cases concerning statutory rights to rescind contracts where the court has recognised that the right to rescind may be waived. Mason CJ in Commonwealth v Verwayen (1990) 170 CLR 394 at 406 pointed out that the expression "waiver" is "… an imprecise term capable of describing different legal concepts, notably election and estoppel" but otherwise also indicated that, where the purpose of a statute is to confer a benefit upon persons as individuals, it is possible to "contract out" of the statutory provisions. The terms of s 1073(2), as well as the differences from its legislative ancestor, indicate that its purpose was to confer a benefit upon an offeree or invitee in the circumstances prescribed, rather than to impose a blanket consequence of contravention. 40 Accordingly, in our view, the conclusion of the learned trial judge on this question is correct. Has there been an election? 41 As noted above, the learned trial judge determined this issue by concluding that: (a) by 20 September 1993, or progressively thereafter, Mr Ellison was aware of facts which gave rise to the option to avoid the contract (b) by his conduct from 20 September 1993, he elected not to exercise that option and so was not entitled to do so at 7 January 1997

and additionally, and alternatively, by concluding that

(c) by 15 February 1996 Mr Ellison was aware of the provisions of s 1073(2) that expressly, in the circumstances, gave him the option to avoid the contract (d) by his conduct from 15 February 1996, he elected not to exercise that option and so was not entitled to do so at 7 January 1997. 42 Mr Ellison urged that the learned trial judge fell into error in his conclusions in each of (a), (b) and (d) above. It is not contended that his Honour erred in concluding that by 15 February 1996 Mr Ellison was explicitly aware of his legal right to opt to avoid the contract (if it had not by then already been lost). Indeed, the letter of that date from his solicitors acknowledges that he had that knowledge and was considering his position. 43 It is convenient to address first the conclusion that Mr Ellison lost his right to avoid the contract in the period of time between 15 February 1996 and 7 January 1997. 44 In the letter of 15 February 1996, Mr Ellison's solicitors invited Lutre and the Bank to make any submission or proposal to Mr Ellison before he "makes a final decision" regarding service of a notice under s 1073(2). On 4 March 1996, the solicitors for the Bank spoke to Mr Ellison's solicitors generally informing them that the Australian Securities Commission was in the process of addressing a proposal to grant exemptions from certain provisions of the Law upon certain conditions, with a view to enabling owners of units in the Directors Apartments to sell their units at their discretion. That position was confirmed by letter from the Bank's solicitors of 12 March 1996. The proposal, if implemented, was to obviate the need for the appointment of a trustee and the preparation of a trust deed, and owners of units would be free to sell their units. The evidence indicates that Mr Ellison then was of the view that the sale value of the units was significantly less than the amount which he had paid for them. 45 The position had not apparently progressed when a report on dealings with the Australian Securities Commission was given to the Annual General Meeting of the strata corporation on 6 May 1996. Mr Ellison attended that meeting. On 10 May 1996, his solicitors inquired of the Bank's solicitors as to progress in their dealing with the Australian Securities Commission, and they were informed by letter of 14 May 1996 that matters were progressing. 46 On 18 September 1996, the Australian Securities Commission granted a series of exemptions pursuant to s 1084(2) of the Law from compliance with the provisions of Div 2 and Div 5 of Pt 7.12 of the Law in relation to the scheme promoting investment in the Directors Apartments upon certain conditions. Mr Ellison was notified by letter of that decision, and on 24 October 1996 the Bank also informed him of the practical consequences of that decision. 47 The next step in the process was Mr Ellison's letter of 7 January 1997 purporting to exercise his option to avoid the contract. 48 In the period between 15 February 1996 and 7 January 1997 he received $6,721.81 from management by way of distribution of net profits. 49 Mr Ellison contends that the learned trial judge erred in concluding, in the circumstances, that Mr Ellison affirmed the contract in that period. His Honour said:

"… at the least, Mr Ellison must have lost his right to avoid within one or two months of consulting Mr King. At that stage he knew not only the facts that entitled him to avoid, but he also knew of his right at law to avoid. But still he did nothing for eleven months. That delay cannot be excused."

50 It is contended that delay itself cannot give rise to any election, and that Mr Ellison firstly did nothing in the relevant period which amounted to clear and unequivocal conduct affirming the contract and secondly was acting reasonably in awaiting the outcome of the exemption application to the Australian Securities Commission to know whether he could sell the units if he affirmed the contract. As the practical effect of the exemptions was that he could sell the units, that does not really provide an explanation for why he waited so long. 51 In Elder's Trustee and Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603, the Court (Rich ACJ, Dixon and McTiernan JJ) drew a distinction between cases where there is an unequivocal election to affirm a contract, and cases where there is conduct which is "merely some evidence" of an election to affirm. The plaintiff was, at the time of the allotments of shares in the respondent, entitled to disaffirm the contract of membership in the defendant and to treat the allotment as non binding. In respect of one allotment, he was aware of facts which might have conferred the right of decision upon him but not of the statutory provision by reason of which that right of recision in fact existed. The distinction noted by the Court was really only a practical or evidentiary one. Their Honours said (at 618):

"But in the present case the plaintiff did not exercise any rights adversely to the company. He did nothing inconsistent with renunciation or disaffirmance. He merely acted as if he were a shareholder and failed to disclaim that character. He so conducted himself that it might be considered a natural inference, if he knew that he had a right of election, that he had resolved to affirm. Further, it is possible that his conduct, if he had had that knowledge, might be regarded as raising an equity against allowing him to rescind at so late a stage. But in the absence of knowledge of his rights we do not think that in the actual circumstances any equity arose from his conduct, and clearly it could not be inferred that he made an actual election."

52 In Sargent, Stephen J (at 644, with whom McTiernan ACJ agreed) observed:

"Only where the conduct is not so unequivocal, amounting to no more than some evidence of election to affirm, will knowledge of the right of election be relevant and then only because, viewed in its light, his conduct may, as a matter of "natural inference", be regarded as constituting an affirmation of the contract."

53 Later in his reasons, in describing what sort of conduct may be sufficient to constitute an election, Stephen J remarked (at 646):

"… less unequivocal conduct, only providing some evidence of election, may suffice if coupled with actual knowledge of the right of election."

54 In the present circumstances, it is clear that Mr Ellison was aware of the facts which gave rise to the option resting in him under s 1073(2) of the Act to avoid the contract, and of the legal right to do so, by 15 February 1996. In the period of time until 7 January 1997 he continued to receive his distribution of net profit from management, he communicated with solicitors for the Bank regarding the exemption application to the Australian Securities Commission, and on 6 May 1996 he attended the annual general meeting of the strata corporation and requested that the strata corporation express its concern at the delay in the exemption application being dealt with. 55 The learned trial judge adverted to those facts in some detail. He found that Mr Ellison was not entitled to "sit back" indefinitely once the awareness of the facts giving rise to the legal right to avoid the contract, and of the existence of the legal right to avoid the contract, existed. He concluded that, in the circumstances, Mr Ellison's conduct in the period from 15 February 1996 did constitute an election to accept and exercise his rights under the statute. In our judgment, that was a conclusion of fact which was open to the learned trial judge. His observation that Mr Ellison "still did nothing" in that period, in the light of his Honour's careful analysis of the facts, must be taken to mean that Mr Ellison did nothing to exercise the right to avoid the contract in that period. The additional comment concerning delay, to which counsel for Mr Ellison also drew the Court's attention, does not indicate error on the part of the learned trial judge. He had earlier in his reasons correctly identified the question as to whether Mr Ellison by his conduct had affirmed the contract, and had recognised that mere delay cannot itself constitute conduct sufficient to amount to affirmation. His Honour specifically referred to Elders at 618 and Sargent at 656 in that regard. 56 Accordingly, in our judgment, the conclusion of the learned trial judge that Mr Ellison by his conduct from 15 February 1996 elected not to exercise the option to avoid the contract has not been shown to have been erroneous. We would dismiss the appeal on that basis. 57 In those circumstances, it is not necessary to deal with the first basis upon which the learned trial judge found that Mr Ellison had affirmed the contract, namely that there had been an election by him to do so by his conduct progressively after 20 September 1993 in circumstances where he was aware of facts which gave rise to the option provided for under s 1073(2) of the Law and notwithstanding that he did not until about February 1996 know of the legal right which those facts generated. However, it is appropriate that we should make some observations on that matter, as it was argued at length on the appeal. 58 In our judgment, the option to avoid the contract which rested with Mr Ellison could be lost by him affirming the contract after he became aware of facts which gave rise to that option to avoid the contract. We do not think it is necessary that he should know of the legal right itself which s 1073(2) creates before he might elect by conduct to affirm the contract. 59 Sargent (above) concerned the choice of rights between recision of the subject contract under its own terms, or its affirmation. In such circumstances, the contracting party must be taken to have knowledge of the rights which the contract provides, and knowledge of facts which activate or give rise to the relevant clause of the contract will suffice for the choice between alternative rights to arise: per Stephen J at 645, and per Mason J at 658. Stephen J did not expressly decide the nature of the knowledge necessary before a person is fairly confronted with a choice between the exercise of alternate and inconsistent rights, where one of those rights derives from statute as distinct from deriving from the terms of the contract itself. However, at 657 Mason J expressed a preference for the views of Jordan CJ in O'Connor v S. P. Bray Ltd (1936) 36 SR (NSW) 248 at 262-263 that:

"it is the general rule that a person may be held to have elected with knowledge of the facts giving rise to the existence of the alternative right, though unaware of the existence of that right".

"The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected."

61 Pincus J in Re Hoffman; Ex parte Worrell v Schilling (1989) 85 ALR 145 at 151 adopted that view, notwithstanding the contrary view of the English Court of Appeal in Peyman v Lanjani [1985] Ch 457, as did Young J in Molotu (above, at 11). 62 As the learned trial judge observed, under the particular provisions of legislation such as s 63 of the Workers' Compensation Act 1926 (NSW), an election to pursue a claim for compensation instead of a claim for common law damages arising out of a work-related injury does require knowledge of the legal right to select between those (then) mutually exclusive alternatives: Latter v The Council of the Shire of Muswellbrook (1936) 56 CLR 422. 63 There are, on the other hand, many illustrations where a right to avoid a contract given by statute has been held to be capable of being lost by election where the person in whom that right vests has knowledge of the facts upon which the right arises but not of the right itself. Counsel for Lutre and Management referred the Court to cases concerning s 39 of the Business Agents Act 1938 (SA) or similar legislation: Szep v Blanken [1969] SASR 65; Official Receiver v Feldman (1972) 4 SASR 246; to cases concerning regulations under the Conveyancing Act 1919 (NSW); Zucker (above), Molutu (above); and to cases under s 226 of the Companies Act 1892 (SA); Commonwealth Homes & Investment Company Ltd v Smith (1937) 59 CLR 443; Elders (above). 64 In our judgment, it is appropriate in the light of those authorities to approach the question by reference to the particular terms of s 1073(2) of the Law and its context. It is a matter of construction of a particular provision to determine whether the option to avoid the contract may be lost by the exercise of a choice to accept the benefits of the contract knowing of facts which give rise to the option to avoid the contract, or whether that choice may only be exercised when the legal right itself is known. Each statutory provision will need to be addressed in its own terms and content. There are particular reasons why provisions such as s 63 of the Workers' Compensation Act 1926 (NSW) dictate the conclusion in Latter (above). Once it is accepted that the option, if available under s 1073(2), may be lost by election, it is our view that the "general rule" to which Mason J adverted in Sargent applies. That is because there will have been knowledge of facts alerting the affirming party to the possibility of the right to avoid the contract. With knowledge of those facts, the affirming party may choose to act in a way which is consistent only with treating the contract as ongoing, and which obliges the other party to continue to perform it. Section 1073(2) identifies the circumstances in which the option to avoid the contract can arise. If a contracting party in whom that option vests becomes aware of those circumstances, but nevertheless acts in such a way as clearly to treat the contract as ongoing, there is in our view nothing which indicates that that conduct should not be treated as affirming the contract in the face of the knowledge of those circumstances. There will be cases where the affirmation is explicit. Most commonly, the affirmation will be inferred from conduct. As discussed in Elders (above), the inference that there has been an election to affirm the contract may be more readily drawn from conduct after the affirming party has knowledge of the legal right itself. 65 One case upon which counsel for Mr Ellison placed reliance was Coastal Estates Pty Ltd v Melevende [1965] VR 433. That case held that, in the case of fraudulent misrepresentations procuring a contract, the right to rescind could not be lost by an election not to rescind when the innocent contracting party did not know of the right to rescind: see especially per Herring CJ at 435. Cases of rescission for fraud, by their very nature, are different: per Stephen J and in Sargent at 645. The decision of the Full Court of this Court in Tiplady v Gold Coast Carlton Pty Ltd (1984) 8 FCR 438 shows that in cases not involving fraud, the general principle to which we have referred is applicable. 66 The learned trial judge carefully rehearsed the course of events between the Bank's letter of 20 September 1993 and 7 January 1997. By way of summary, his Honour concluded:

"In my opinion, the letter from the Bank dated 20 September 1993 should have been sufficient to alert Mr Ellison to "the possibility of the existence of his alternative right". Later events, as earlier disclosed in these reasons, actually point to Mr Ellison having some such awareness. It should not be expected of him that he would act immediately when he first became aware that there were difficulties concerning the Directors Apartments and the ASC. He was entitled to reflect, to consider his position and to take advice. There is no need, in my opinion, to convert that proposition into a period of time; each case must be considered individually so that the conduct of the electing party may be assessed against the background of all relevant facts. It is sufficient, having regard to the facts of this case, to point out that Mr Ellison did not seek to avoid his contract until January 1997 - a period of three years and three months after his receipt of the letter from the Adelaide Bank. In the intervening period of time he had enjoyed the benefits of ownership of the units, his share of the pooled rent and, until February 1995, the benefits of the guaranteed returns. Mr Ellison's conduct is better categorised as that of a unit owner pursuing his rights to hold and enjoy his units without restriction. It was not the conduct of a party seeking to avoid a contract and obtain a restoration of the status quo. In the words of Mason J he had "induced the other party to believe that performance of the contract (was) insisted upon.""

67 In our view, that fairly represents the evidence before the learned trial judge. From 30 September 1993, there were a series of occasions and correspondence indicating that Mr Ellison was aware that he was unable to sell the units, because of the absence of an approved deed and of a prospectus, that he was made aware of the enactment of s 1043B which from 4 September 1994 permitted a secondary sale in certain circumstances without a prospectus, and that he was aware of the general nature and course of the application for exemption from the Australian Securities Commission. In that period, he continued to receive the distribution of net profits from Management, and until March 1995, the guarantee payments from the Bank. He continued to communicate with the Bank encouraging it to expedite the exemption application. He wanted the Bank to overcome the difficulty he had in on-selling the units. He was throughout conducting himself in a way which obliged, and continued to oblige, Lutre and Management and the Bank to continue to perform their respective obligations. In our judgment, therefore, the findings of fact of the learned trial judge on this question are not shown to have been in error. It is consistent with those findings that Mr Ellison, as his Honour found, gave the notice of avoidance on 7 January 1997 because he had come to the view that the value of the units had dropped quite significantly by that time. Conclusion 68 In our judgment Mr Ellison has failed to demonstrate error on the part of the learned trial judge. We would dismiss the appeal. The appellant should pay to the respondent the costs of the appeal to be taxed. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Associate: Dated: 13 April 1999 Counsel for the Applicant: Mr A J Besanko QC with him Mr S Milazzo

Counsel for the Respondent: Mr R J Whitington QC with him Mr G Davis

Workers' Compensation Act 1926(NSW)s 63

Business Agents Act 1938(SA)s 39

Companies Act 1892(SA)s 226

Conveyancing (Vendor Disclosure & Warranty) Regulation 1986(NSW)cl 7(2)

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