Kazacos v Shuangling International Development Pty Ltd

Supreme Court of NSW|2015-10-30|Before: White J

oran (1980) 42 FLR 236 Soper v Arnold (1889) 14 App Cas 429 Talley v Wolsey-Neech (1979) 38 P & CR 45 Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117 Tiplady v Gold Coast Carlton Pty Ltd (1984) ATPR 40-491 United Australia Ltd v Barclay's Bank Ltd [1941] AC 1 Wallace-Turner v Cole (1983) 46 P & CR 164 Ward v Ellerton (1927) VLR 264 Ward v Ellerton [1927] VLR 494 Category: Principal judgment Parties: Peter Kazacos (1st Plaintiff) Vicki Kazacos (2nd Plaintiff) Shuangling International Development Pty Ltd (1st Defendant) Xiuyan Guan (2nd Defendant) Representation: Counsel: D D Knoll (Plaintiffs) D H Mitchell with C E O'Neill (Defendants)

Solicitors: Law Corporation Pty Ltd (Plaintiffs) W & H Lawyers (Defendants) File Number(s): 2014/303297

Judgment

HIS HONOUR: This is a vendor and purchaser suit. On 14 March 2013 the plaintiffs (Peter and Vicki Kazacos) entered into a contract to sell a property at 311-317 Sussex Street, Sydney to the first defendant (Shuangling International Development Pty Ltd). The purchase price was $17 million. The Completion Date was 12 months after the date of the contract. The deposit was said to be $1,700,000 but special condition 52.1 provided that one half of the deposit, equal to five per cent of the price, was payable on the making of the contract. The other half, equal to a further five per cent of the price, was payable on the earlier of the Completion Date and the date on which the contract was actually completed. Only $850,000 was paid on exchange.
The second defendant, Ms Xiuyan Guan, guaranteed the due performance and observance by Shuangling International Development Pty Ltd of all of its obligations contained in or arising out of the contract.
The purchaser failed to complete the contract on 15 March 2014, although the vendors were ready and willing to complete. The vendors served a notice to complete requiring the purchaser to complete the contract on 4 April 2014 with time being of the essence. On 28 March 2014 the parties agreed to extend the time for completion. The vendors agreed to extend the completion date to 28 April 2014 with time being of the essence. The purchaser agreed that the five per cent deposit paid on exchange should be released to the vendors. It agreed to pay, and did pay, $100,000 to the vendors and agreed that the price payable under the contract should be increased to $17,250,000. The payment of $100,000 did not form part of the amended purchase price.
The purchaser failed to complete the contract on 28 April 2014. On 29 April 2014 the vendors agreed to extend the time for completion to 9 May 2014 with time being of the essence. On 8 May the time was further extended to 16 May 2014. The purchaser failed to complete on 16 May 2014. Instead, it proposed that the contract be rescinded and that a new contract be made with a proposed new purchaser. The vendors did not agree. On 22 May 2014 the vendors served a notice to complete requiring completion on or before 6 June 2014 with time being of the essence of the contract. The purchaser did not complete and on 10 June 2014 the vendors terminated the contract. They retained the deposit of $850,000.
On 11 August 2014 the vendors entered into a contract for resale of the property for $18 million. That contract was completed on 10 October 2014.
The vendors made a profit from the purchaser's default. Had the purchaser completed the purchase on 14 March 2014 the vendors would have received $16,150,000 subject to usual adjustments. They would also have been entitled to payment of the deposit of $850,000 less agent's commission of $561,000 (3.3 per cent of $17 million); a net amount of $289,000. In total the vendors would have received $16,439,000, subject to usual adjustments.
As a result of the purchaser's default the vendors retained the five per cent deposit of $850,000. They received an additional $100,000 as consideration for their agreement to extend the completion date. They received $18 million on the resale but paid agent's commission of $792,000. In round terms they received $18,158,000, whereas if the purchaser had not defaulted they would have received, in round terms, $16,439,000, a difference of $1,719,000 (or $1,619,000 if the $100,000 consideration paid for their agreement to extend the completion date is left out of account). These figures are subject to legal costs, holding costs, rent and contributions to outgoings received from tenants until completion of the second contract, but those adjustments do not change the substance of the vendors' position.
In these proceedings the vendors sue the purchaser and the second defendant as guarantor to recover: the balance of the ten per cent deposit, being $850,000; a sum in the nature of liquidated damages said to be payable under clause 9.3.1 of the contract of sale in the amount of $874,846.94; and interest.
The moneys claimed pursuant to clause 9.3.1 of the contract are holding costs and expenses in respect of the property from 6 June 2014 until 10 October 2014, being council rates, water rates, trade waste charges and land tax totalling $42,259.09; legal fees in connection with the purchaser's default and termination of the contract and incurred in connection with the second sale totalling $14,050; real estate advertising costs for the resale totalling $26,537.85; and real estate agent's commission on the resale totalling $792,000.
The defendants challenge the reasonableness of the real estate agent's commission that was charged at a rate of 4.4 per cent. The real estate agent was Real Property Corporation Pty Ltd that trades as KAZ Property. Its website stated that "KAZ Property is a member of the KAZ Family of Companies" and that "KAZ is the hallmark of the Kazacos family". The plaintiffs are members of the Kazacos family referred to. Peter Kazacos, the first plaintiff, was a director and chairman of Real Property Corporation Pty Ltd.
The contract of sale was subject to existing tenancies. The plaintiffs claim under clause 9.3.1 for reasonable costs and expenses arising out of the purchaser's non-compliance with the contract, or out of the notice of termination and of resale, makes no allowance for rent received between the purchaser's default or the service of the notice of termination and the completion of the resale, nor in respect of the tenants' contributions to outgoings.
Clause 9 of the contract provides: "9 Purchaser's default If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can - 9.1 keep or recover the deposit (to a maximum of 10% of the price); 9.2 [deleted] 9.3 sue the purchaser either - 9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover - the deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and the reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale; or 9.3.2 to recover damages for breach of contract."

Issues

The plaintiffs' first claim is for payment of the second half of what was called the deposit. The defendants contend that the term of the contract requiring payment of the second half of the deposit on the Completion Date, or on the actual completion of the sale, whichever was the earlier, is void as a penalty.
The plaintiffs' second claim is for a sum alleged to be payable under clause 9.3.1 that is in the nature of a claim for liquidated damages. As to this claim the defendants submit that: clause 9.3 requires the purchaser to elect between inconsistent rights either to claim a sum in the nature of liquidated damages under clause 9.3.1 or to recover damages for breach of contract under clause 9.3.2. The defendants contend that by their statement of claim (prior to its amendment) the vendors elected to pursue their claim for damages for breach of contract under clause 9.3.2. They submit that the vendors are bound by their election; no moneys are payable under clause 9.3.1 unless there is a deficiency on resale. In this case there was not. They submit that the vendors are not entitled simply to recover what are alleged to be reasonable costs and expenses under the second dot point of clause 9.3.1 if there is no deficiency on resale; the vendors are required to give credit for the deposit of $850,000 retained by the vendors against reasonable costs and expenses claimed under the second limb of clause 9.3.1; the vendors are required to give credit for the surplus on resale and for the rents received from tenants and the tenants' contribution to outgoings as a credit against reasonable costs and expenses claimed under the second limb of clause 9.3.1; if on the proper construction of clause 9.3.1 the vendors are not required to give credit for the deposit, or for the surplus on resale, or for the rents and the tenants' contributions to outgoings received by the vendors between the notice of termination and the completion of the resale, clause 9.3.1 is void as a penalty; and the vendors have not shown (the onus being on them to do so) that the expenses claimed are reasonable, in particular, that the 4.4 per cent real estate agent's commission paid to a related party was reasonable.
For the reasons which follow I have concluded that the purchaser's obligation to pay what was described as the balance of the deposit was void as a penalty and that credit was to be given for the deposit forfeited to the vendors and the surplus on resale against the claim for costs and expenses under the second limb of clause 9.3.1. It follows that the vendors' claim should be dismissed.
I will deal first with the plaintiffs' claim for recovery of a further five per cent of the purchase price as the balance of the deposit.

Claim to Remaining Half of "Deposit"

The contract stated that the deposit was $1,700,000, being 10 per cent of the price.
Clause 2.1 provided that: "2.1 The purchaser must pay the deposit to the depositholder as stakeholder."
Clauses 2.2 and 2.3 provided: "2.2 Normally, the purchaser must pay the deposit on the making of this contract, and this time is essential. 2.3 If this contract requires the purchaser to pay any of the deposit by a later time, that time is also essential."
"Normally" was defined to mean "subject to any other provision of this contract" (clause 1).
Special condition 52 provided: "52. Deposit by Instalments 52.1 The Vendor agrees that the purchaser is permitted to pay the deposit by instalments and not in accordance with the provisions of clause 2.2. The purchaser agrees that it must pay the deposit as follows:- (a) one half of the deposit, equal to 5% of the price on the making of this contract; and (b) the other half of the deposit, equal to a further 5% of the price, ('Deposit Balance') on the earlier of:- (i) The Completion Date; and (ii) The date on which this Contract is actually completed. (c) The times for making the payments of deposit set out to in clause 52 are essential. (d) The vendor may recover the Deposit Balance as a liquidated debt in any court of competent jurisdiction together with:- (i) the vendor's legal costs and expenses on a full indemnity basis; and (ii) interest on the deposit balance at the rate set out in clause 44.1. 52.2 The provisions of this clause 52 (where appropriate) do not merge on completion."
The "Completion date" was defined as "Twelve (12) months after the date of this contract".
The purchaser was in default in completing on the Completion date. On 14 March 2014 Mr Abrahamian of Lawcorporation, the solicitor for the vendors, wrote to the purchaser's solicitor noting that completion of the contract was due on that day, that they had not received a signed transfer executed by the purchaser, nor had they been contacted to make arrangements to effect settlement. Mr Abrahamian stated that the vendors were ready, willing and able to complete the contract in accordance with its terms on the Completion date. He stated that as the purchaser was in breach of clause 15 of the contract, he anticipated receiving instructions to issue a notice to complete.
As noted above, on 28 March 2014 the parties entered into an agreement which varied the terms of the contract. The deed made on 28 March 2014 recited that the Purchaser had failed to complete the contract on the Completion Date. The deed of 28 March 2014 relevantly provided: "2. CONDITION PRECEDENT (a) The Purchaser's satisfaction of its obligations under Clause 4 of this Deed is a condition precedent to the operation of Clause 3 of this Deed, and for the avoidance of doubt Clause 3 of this Deed shall have no operation or effect where the Purchaser fails to satisfy its obligations under Clause 4 of this Deed. 3. COMPLETION (a) Subject to the provisions of Clause 2, the Vendor agrees to: (i) extend the Completion Date to 28 April 2014, which time shall be of the essence ('The Extended Completion Date'); (ii) Withdraw the Notice to Complete; and (iii) Subject to Clause 3(b), waive the interest payable by the Purchaser pursuant to Clause 44 of the Contract for the period from the Completion Date to the Extended Completion Date. … 4. RELEASE OF DEPOSIT, PAYMENT AND INCREASE IN PURCHASE PRICE In consideration of the indulgences granted by the Vendor referred to in Clause 3 above, the Purchaser: (a) Shall at the date of this Deed release the 5% deposit paid on exchange of the Contract ('the Deposit') and provide to the Vendor a letter to Real Property Corporation Pty Ltd, the Vendor's Agent (being the deposit holder under the Contract) authorising them to unconditionally release the Deposit held by the Vendor's Agent to the Vendor as the Vendor may direct in its absolute discretion on the date of this Deed. (b) Agrees to pay on the date of this Deed the amount of $100,000.00 (plus GST) directly to the Vendor or as the Vendor may direct in writing, which time shall be of the essence. (c) Agrees that the Price payable under the Contract shall be increased to $17,250,000.00 (plus GST) ('Amended Purchase Price'). For the avoidance of doubt, the payment of $100,000.00 (plus GST) referred to in clause 4(b) of this Deed does not form part of the Price or the Amended Purchase Price. (d) Hereby releases the Vendor from any Claim that the Purchaser may have in relation to the Deposit. 5. TIME OF THE ESSENCE The parties agree that time is of the essence with respect to the Extended Completion Date. … 7. CONTRACT OTHERWISE UNCHANGED The parties acknowledge and agree that, other than as set out in this Deed, the Contract remains unchanged and in full force and effect."
As noted previously, although the vendors allowed further extensions to the Completion date, the purchaser did not complete. The purchaser was in default of its obligation to complete the contract by 28 April 2014. On 29 April 2014 the solicitor for the purchaser wrote to Mr Abrahamian stating that he was instructed "… to ask your client not terminate the contract until 5pm Friday, 9 May 2014 …". The email acknowledged that the vendors were entitled to terminate the contract for the purchaser's failure to complete. The purchaser was thus in breach of the contract both in failing to complete on the original Completion date and failing to complete on the extended date.
The forfeiture of a deposit does not attract principles of relief against forfeiture or penalties where the deposit is not excessive or unconscionable in amount (Ashdown v Kirk [1999] 2 Qd R 1 at 8; Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; (2006) 12 BPR 23,629 at [26]-[27]). This is so whether the deposit is payable on exchange or by instalments (Ashdown v Kirk at 8; Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367; [2003] HCA 58 at [20]). The question whether a payment made or required to be made has the character of a deposit is not determined by the description given in the contract to the payment made or required to be made. Whether the parties describe it as a deposit may be relevant, but the nature of the obligation to make the payment is more important in determining its character (Iannello v Sharpe (2007) 69 NSWLR 452; [2007] NSWCA 61 at [31]). The essential character of a deposit is that it is an "earnest" of the bargain or its performance. It was described by Jacobs J in Brien v Dwyer (1978) 141 CLR 378 at 401; [1978] HCA 50 as: "An assurance to the vendor, a security to him pending completion. He can take his property off the market and not concern himself with other offers in case the sale should go off, with the comfort at least that the deposit is there for his security."
In the Court of Appeal in Brien v Dwyer [1976] 2 NSWLR 420 Hutley JA, quoting Howe v Smith (1884) 27 Ch D 89 at 101 and Soper v Arnold (1889) 14 App Cas 429 at 435, described a deposit (at 424) as an "earnest to bind the bargain" and "a guarantee that the purchaser means business".
In Havyn Pty Ltd v Webster [2005] NSWCA 182 Santow JA (with whom Tobias JA and Brownie AJA agreed) said: "[131] The vendor's right to retain the deposit upon default is of ancient origin; so much so that by the time of Howe v Smith, it had been established that express provision to the contrary is required before the vendor's right to retain a deposit will not be implied into a contract. That right to retain the deposit is a right at law, and today is understood as resting upon the mutual intention of the parties to the contract. The common law would never have doubted the justice of the vendor retaining the deposit, even though it exceeded the measure of the vendor's true loss. [132] Equity took the view that since the intention of the parties was that the money be an earnest of due performance by the payer, if the contract was terminated for his default, there was no equity in the payer to recover the deposit thus properly forfeited at law, as long as it was not penal. Thus, although there is a well-established equitable jurisdiction to relieve against forfeiture of part-payments, that jurisdiction insofar as it applied to deposits only extended to relief against forfeiture of amounts in excess of a 'reasonable deposit': see Meagher, Gummow & Lehane, Equity: Doctrines & Remedies (4th ed) at 18-130. This principle prompted the Privy Council (Jamaica) to declare that an attempt by the vendor to retain a sum in excess of the customary deposit of 10% of the purchase price as a forfeitable deposit will require special circumstances showing why it should not be considered 'penal': Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573. [133] In taking this approach, equity effectively recognised that deposits, by virtue of their dual character, are in a sui generis category to which the general equitable doctrines of relief against penalties or forfeiture of part-payments do not precisely apply. [134] It would, for example, seem incongruous to apply principles pertaining to relief against penalties (whether the jurisdiction was based in common law or in equity) as the basis for recovery of a deposit since for a sum to be classed as a penalty, it must be payable on breach of contract (cf Export Credits Ltd v Universal Oil Products Co [1983] 1 WLR 399 at 402 per Lord Roskill). A deposit, by contrast, is payable in performance of a contractual obligation antecedent to any breach. It is difficult then to see how a provision for retention of a deposit can in any way be considered a penalty clause enlivening the jurisdiction of either the common law or equity to relieve against it. (I should add for completeness, that the distinction between penalties and genuine liquidated damages clauses may still have some relevance as to whether the deposit can in fact be considered a genuine 'earnest' of performance though that is not to say that the principle will be applied in the same way in the case of deposits). In any case, even were a deposit to be regarded as a penalty, as Lord Browne-Wilkinson pointed out in Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd (above) at 578, ancient law has established that the forfeiture of such a deposit (customarily 10 per cent of the contract price) does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract."
In Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, the High Court did not accept that for a sum to be classed as a penalty it must be payable on a breach of contract. But the High Court did not cast doubt on the proposition that a deposit that was an earnest of performance and was not unreasonable in amount was not a penalty. Neither party placed any reliance on Andrews v Australia and New Zealand Banking Group Ltd.
In Luu v Sovereign Developments Pty Ltd the sale price was $6.6 million. The front page of the contract stated the deposit to be $65,000. Special condition 5 provided: "In the event that the Purchaser pays less than ten percent (10%) of the purchase price as deposit then if the Purchaser commits a default hereunder the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed. This clause shall not merge on completion and the Vendor shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendor."
Bryson JA (with whom Handley and McColl JJA agreed) held that the sum of $65,000 paid on exchange was not only designated by the parties as a deposit, but it had the character of a deposit in that it was an earnest paid at the time of exchange. The other moneys amounting to the difference between 10 per cent of the purchase price and $65,000 were not a deposit, notwithstanding the description given in special condition 5 (at [14]-[15]). The purchase price was increased to $6,810,000 by a variation to the agreement after the plaintiff failed to complete and time for completion was extended. After the contract was terminated by the vendor for the purchaser's further default the vendor sued for the difference between 10 per cent of the amended contract price, that is, $681,000, less $65,000. It failed on that claim because the difference of $616,000 was a penalty. It was not saved from being a penalty by the language of special condition 5. Rather, special condition 5 required the purchaser to make an additional payment if it was in any way in default that was not a genuine pre-estimate of damage for breach (at [34]).
Luu v Sovereign Developments Pty Ltd was applied in Iannello v Sharpe. The question was whether a handwritten alteration to the contract made by the vendor's agent without the purchaser's authority was material. The front page of the contract as signed by the purchaser stated that the price was $4.5 million and the deposit was $225,000. This was followed by the words "five per cent of the price, unless otherwise stated and paid in accordance with special condition 14". The handwritten alteration changed the amount of the deposit to $450,000. Only $225,000 was paid on exchange. Special condition 14 provided in substance that the vendor should accept on exchange payment of $225,000 "being part of the deposit". It provided that: "If the purchaser defaults in the observance or performance of any obligation in hereunder which is or has become essential the balance of the deposit, namely $225,000 shall become immediately due and payable and the purchaser shall forfeit the whole of the sum of $450,000 pursuant to clause 9 hereof to the vendor".
The Court of Appeal held that the alteration was not material because on either version of the contract the obligation to make the second payment of $225,000 was unenforceable as a penalty. It was payable if the purchaser defaulted in the observance or performance of an obligation that was or had become essential. Hodgson JA (with whom Santow and Basten JJA agreed) said (at [32]-[33]): "[32] … There never would be a time when this second $225,000.00 (as such) would be paid so as to show that the purchaser is in earnest in committing himself to pay the rest. On the contrary, the only time when Special Condition 14 obliges the purchaser to pay this sum is when the purchaser has demonstrated that he is not in earnest, and indeed the termination of the contract means that he would not be able to complete the contract. The obligation to pay the second $225,000.00 is inconsistent with the characteristics of a deposit. In my opinion, this would equally be so whichever version of the front page was operative. [33] I do not think cases concerning payment of deposits by instalments suggest to the contrary of this. In those circumstances, there will in the normal course of performance of the contract come a time when money is paid and counts as showing the purchaser is in earnest in committing itself to pay the rest. It does not tell against this analysis that the obligation to pay may be accelerated in the event of default. Nor do I think that an unconditional promise to pay an amount on default can itself count as a deposit: that is the very sort of promise that will normally amount to a promise to pay a penalty, unless the amount in question is a genuine pre-estimate of damages."
Special condition 52 is set out at [21] above. The second so-called "instalment" of the deposit was payable on the earlier of the Completion Date and the date on which the contract was actually completed. "Completion Date" was not itself defined, but the front page of the contract referred to the "Completion date" as being "Twelve (12) months after the date of this contract".
Clause 15 of the general conditions of contract provided: "Completion date The parties must complete by the Completion date, and if they do not, a party can serve a notice to complete if that party is otherwise entitled to do so."
Clause 16 set out the parties' obligations on completion. The vendor was required to cause the legal title to the property to pass to the purchaser free of any mortgage or other interest, subject to any necessary registration, and to give the purchaser any document of title that related only to the property. The purchaser was required to pay the price, less any deposit paid and any other amount payable under the contract.
When the contract was made the parties were required to complete the contract by the Completion date. If the so-called second instalment of the deposit were paid on completion, either on the Completion date or at an earlier date if the contract were completed early, the second instalment could not be characterised as an earnest of performance. If the parties performed the contract in accordance with its terms, completion would take place on the Completion date.
But the contract might not be completed on or before the Completion date. That might be because the parties agreed to extend the date for completion. It might be because the purchaser was in default. It might be because the vendors were in default. The vendors submit that in any such case, where the Completion date passed without completion having occurred, the purchaser was obliged to pay the balance of the deposit. They had an accrued right to receive the balance of the deposit that did not depend on whether completion ultimately took place, and hence the purchaser's obligation to pay the Deposit Balance was properly characterised as an earnest of performance.
There are conflicting decisions on this question in this Court.
In Cloud Top Pty Ltd v Toma Services Pty Ltd [2008] NSWSC 568 two contracts were entered into: one for the sale of land and the other for the sale of the hotel business conducted on the land. Both contracts provided that there was to be a deposit of 10 per cent of the purchase price. Both contracts provided that the deposits were to be payable by instalments. The first instalment of $25,000 under each contract was to be paid on the date the contracts were exchanged. The second instalments of $75,000 and $180,000 were to be paid 14 days thereafter. These two instalments totalled five per cent of the purchase price. The third instalments, equal to five per cent of the purchase price under each contract, were payable on the completion date that was specified to be 42 days after the contract date. Time was of the essence in respect of the payment of the deposit (at [32] and [33]).
The first instalments of the deposit were payable on exchange. The purchaser did not pay all of the second tranche of the deposits. The amount due was $255,000. The purchaser provided a cheque for only $150,000 and the cheque was dishonoured (at [42] and [47]). The contracts were terminated by the vendor on the dishonour of the cheque for part-payment of the second instalment.
The purchaser contended that the part of the deposit specified in the contracts which exceeded five per cent of the purchase price constituted a penalty and was unenforceable (at [62]). Einstein J rejected this submission (at [65]). His Honour noted that a deposit can be paid by instalments and a vendor is entitled on termination to recover any unpaid deposit instalments. He held that the amount specified as being the deposits under the two contracts were not extravagant, excessive or unconscionable in amount, that they equated to 10 per cent of the purchase prices and, his Honour said, did not possess any of the characteristics of a penalty. The reason for the latter conclusion was: "Notably: a. the obligation to pay the remaining 5% of the deposits specified in the contracts was not to occur on the completion of the contracts. Rather, the amounts were required to be paid on the 'completion date' and the "Date of Completion" as those terms were defined in the respective contracts. The effect of the respective terms was to require the payment of the final 5% instalments on the 42nd day after the contracts were made (namely, 2 May 2007) whether or not completion of the contracts actually occurred on that date; b. the obligation to pay the remaining 5% of the deposits specified in the contracts did not arise by reason of the termination of the contracts."
Mr Mitchell, who appeared for the defendants, rightly submitted that the second observation does not support a finding that the obligation to pay the remaining five per cent of the deposits on the completion date was not a penalty. In neither Luu v Sovereign Development Pty Ltd nor Iannello v Sharpe was the balance of the deposit payable on termination of the contract, as distinct from being payable on default.
However, this does not affect the force of the first of the reasons given by Einstein J as to why the obligation to pay the remaining five per cent of the deposits was not a penalty. In essence, his Honour reasoned that the obligation to pay the deposits on the completion date, rather than the date of actual completion, meant that the payment of the deposits could be an earnest of performance if the contracts were not completed on the completion date. Moreover, the contracts might not be completed on the completion date for reasons other than the purchaser's default. This would be a ground for distinguishing Luu v Sovereign Developments Pty Ltd and Iannello v Sharpe.
The same issue was considered by Brereton J in Boyarsky v Taylor [2008] NSWSC 1415; (2008) 14 BPR 26,553.
In that case, the contract for sale provided for half of the deposit, being five per cent of the purchase price, to be payable on exchange with the balance to be payable "on the completion date" (at [6]). The vendor did not terminate the contract for the purchaser's default. Instead, the vendor sought specific performance. The issues were whether specific performance should be declined as a matter of discretion because the purchaser could not find the purchase money and whether the provision requiring payment of the second instalment of the deposit on the completion date was void as a penalty (at [1]).
Brereton J rejected the purchaser's defence of impossibility or hardship to the vendor's claim for specific performance. His Honour was unpersuaded that the purchaser would be unable to raise the purchase moneys (at [44]). His Honour rejected the vendor's claim to be paid the second instalment of the deposit, being five per cent of the purchase price. The contract had fixed a completion date of 12 weeks after the date of contract, or 14 days after the vendor notified the purchaser in writing that a certain subdivision plan, drainage easement and height restriction had been registered (at [7]). His Honour held that the special condition that half the deposit was to be payable on the completion date was void as a penalty. In reaching that conclusion his Honour said (at [48]-[50]): "[48] … Two reasons were advanced in the present case for distinguishing the present special condition from those in Luu and Iannello in that case. The first was that in each of those cases, the obligation to pay the second instalment of the deposit was in terms conditioned on default, and that is not so in the present case, where the provision does not refer to default but simply requires payment 'upon the completion date'. The second was that in this case there were circumstances in which the deposit could become payable and have effect as an earnest for performance of the purchaser's obligations under the contract. [49] As to the first of those arguments, it is correct that in this case the provision is not conditioned on breach or default under the contract. That, however, is not an answer. Where the right to receive such a payment arises on the happening of any number of events, some only of which are breaches of contract and some of which are not, but the event in the particular case is one which is a breach of contract, then the provision is a penalty and void [Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86 ; [1952] 2 All ER 915 ; [1952] 2 TLR 822; Bridge v Campbell Discount Co Ltd [1962] AC 600 ; [1962] 1 All ER 385 ; [1962] 2 WLR 439; O'Dea v All States Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 367 and 390 ; 45 ALR 632 ; [1983] HCA 3; BC8300062; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 184-185 and 211; 68 ALR 185; [1986] HCA 63; BC8601381; Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445; BC200006438 at [2]]. Even if, which for reasons to which I shall come I doubt, the second payment was exigible in events other than breach of contract, on the facts of this case it is exacted on breach of contract, and in those circumstances is a penalty and void. [50] In any event, I do not see how it could become payable under the present contract in circumstances that did not involve a breach by the purchaser of the contract. It was hypothesised that it could become payable as an earnest of the purchaser's continuing commitment to the contract where an extension was granted by the vendor of time to complete. That would itself involve either a contractual variation to the completion date or at least some allowance of an indulgence outside what was required by the contract so as to involve a departure from rather than adherence to the terms of the contract. If the contract is applied according to its terms, the only circumstance in which the second instalment would become due would be if, in breach of special condition 15, the purchaser did not complete on the completion date. Accordingly, both reasons advanced for distinguishing Iannello do not apply. As Hodgson JA said (at [33]), an unconditional promise to pay an amount on default cannot itself count as a deposit, because that is the very sort of promise that would normally amount to a promise to pay a penalty, unless it is a genuine pre-estimate of damages. In the light of Luu and Iannello, it could not seriously be argued, and indeed it was not, that the second instalment of five per cent could be seen as a genuine pre-estimate of damages."
His Honour did not refer to, and presumably was not referred to, Einstein J's decision in Cloud Top Pty Ltd v Toma Services Pty Ltd.
It is implicit in the second reason given by Brereton J at [50] that his Honour was of the view that the deposit would not be payable on the completion date if completion did not occur on the completion date due to the vendor's default. That was a reasonable construction of the contract in Boyarsky v Taylor. It is the appropriate construction of the contract in the present case. It would not be a reasonable construction of the contract that the vendors could take advantage of their own default so as to insist on payment of the balance of the so-called deposit in advance of completion.
The question of whether the balance of the deposit is a penalty is to be assessed at the time the contract for sale was entered into. Brereton J reasoned that an extension of the time for completion would involve a contractual variation. In the absence of such a variation the instalment would only become due if in breach of special condition 15 the purchaser failed to complete, it being implicit that it would not become due if non-completion on the completion date was due to the vendor's default.
I agree with this reasoning that is equally applicable to this case.
The first of the reasons given by Brereton J in Boyarski v Taylor at [49] of his Honour's reasons quoted at para [47] above is an additional ground for holding the Deposit Balance to be a penalty.
For these reasons I conclude that special condition 52.1 is a penalty and the vendors are not entitled to recovery of the deposit balance.

Claim for liquidated damages under clause 9.3.1: Election

Mr Mitchell who appeared for the defendants submitted that the vendor could not sue for liquidated damages under clause 9.3.1 because they had earlier elected to sue for damages for breach of contract under clause 9.3.2.
In their statement of claim filed on 15 October 2014 the relief claimed by the plaintiffs, relevantly, was "damages in such sum as the Court may order but which the plaintiff [sic] presently estimates to be $2,341,385.91".
At paragraphs 39 and 40 the plaintiffs pleaded: "39. As a result of the First Defendant's breach of the Contract, the Plaintiff has suffered losses, namely:- (a) non-payment of the Deposit Balance in the sum of $875,000.00; (b) Interest of $566,136.99 calculated at a rate of 10% per annum on the remaining purchase price of $16,400,000.00 in accordance with additional condition 44 of the Contract from the period 6 June 2014 to 10 October 2014 being the date of settlement of the New Contract ('New Contract Settlement Date'); (c) Holding costs and expenses in respect of the Property including: council rates for 311-315 Sussex Street, Sydney in the sum of $13,709.82 for the period 6 June 2014 to the New Contract Settlement Date; council rates for 317 Sussex Street, Sydney in the sum of $4,572.81 for the period 6 June 2014 to the New Contract Settlement Date; water rates for 311-315 Sussex Street, Sydney in the sum of $68.80 for the period 6 June 2014 to the New Contract Settlement Date; water rates for 317 Sussex Street, Sydney in the sum of $68.80 for the period 6 June 2014 to the New Contract Settlement Date; trade waste for 311-315 Sussex Street, Sydney in the sum of $12.95 for the period 6 June 2014 to the New Contract Settlement Date; and land tax in the sum [of] $23,277.89 for the period 6 June 2014 to the New Contract Settlement Date; (d) Legal fees and expenses of and incidental to the New Contract, particulars to be provided upon discovery; (e) Legal fees other than ordinary costs of the conveyance for the Contract in the sum of $40,000.00; (f) Real Estate Agent's commission on the New Contract in the sum of $792,000.00; and (g) Real Estate Advertisement costs for the New Contract in the sum of $26,537.85.
To date the Plaintiff's losses and the expenses incurred, but not yet including legal expenses of the New Contract, is $2,341,385.91."
The plaintiffs were given leave to file an amended statement of claim on terms that the grant of leave was without prejudice to the defendant's position that the plaintiffs had elected to seek common law damages under clause 9.3.2 and could not seek liquidated damages under clause 9.3.1. By their amended statement of claim the plaintiffs claim: "Liquidated Damages in the sum of $1,749,846.94, made up as follows: Plea Amount 40 $874,846.94 41 $875,000.00 $1,749,846.94"

In paras 39-41 of the amended statement of claim the plaintiffs plead: "39. Following the Termination of the Contract, there being no deficiency on resale after taking the forfeited deposit into account, the Plaintiff became entitled to be paid the following costs and expenses pursuant to clause 9.3.1 of the Contract for Sale, namely:- (a) Holding costs and expenses in respect of the Property for the period from 6 June 2014 until 10 October 2014 being the date of settlement of the New Contract ('New Contract Settlement Date') as set out in the following table including: Council rates 311-315 Sussex St at the rate of $106.58 per day for the 25 days from 6 June 2014 - 30 June 2014, and at the rate of $109.30 for 102 days being from 1 July 2014 to the New Contract Completion Date $13,813.11 Council rates 317 Sussex St calculated at the rate of $35.53 for 25 days from 6 June 2014 - 30 June 2014, and at the rate of $36.46 per day for 102 days being from 1 July 2014 to the New Contract Completion Date $4,606.69 Water rates 311-315 Sussex St calculated at the rate of $2.02 for 25 days from 6 June 2014 - 30 June 2014, for the period 1 July 2014 to 30 September 2014 $185.98, and at the rate of $2.02 per day for 10 days being from 1 October 2014 to the New Contract Completion Date $256.81 Trade waste 311-315 Sussex St calculated at the rate of $0.37 for 25 days from 6 June 2014 - 30 June 2014, for the period 1 July 2014 to 30 September 2014 $34.74, and at the rate of $0.37 per day for 10 days being from 1 October 2014 to the New Contract Completion Date $256.81 Water rates 317 Sussex St calculated at the rate of $2.02 for 25 days from 6 June 2014 - 30 June 2014, for the period 1 July 2014 to 30 September 2014 $185.98, and at the rate of $2.02 per day for 10 days being from 1 October 2014 to the New Contract Completion Date Land tax 311-317 Sussex St calculated at the rate of $184.75 for 126 days from 6 June 2014 to the New Contract Completion Date $23,277.89 Legal fees in connection with the First Defendant's default under, and the termination of, the Contract, as set out in tax invoice no. 10633 issued by Law Corporation Pty Ltd to the Plaintiffs $6,050.00 Legal fees and expenses of and incidental to the New Contract as set out in the Tax Invoice dated 14 October 2014 issued by Law Corporation Pty Ltd to the Plaintiffs $8,000.00 Real estate agents commission on the New Contract, charged by way of invoice no. 976 on 25 August 2014 pursuant to an agency agreement with Real Property Corporation Pty Ltd ACN 136 770 002 (trading as 'Kaz Property') dated 12 June 2014. $792,000.00 Real estate advertisement costs for the New Contract charged pursuant to invoice no. 967 on 21 August 2014 pursuant to an agency agreement with Real Property Corporation Pty Ltd ACN 136 770 002 (trading as 'Kaz Property') dated 12 June 2014. $26.537.85 TOTAL $874,846.94

The Plaintiff quantifies its aggregate costs and expenses incurred pursuant to clause 9.3.1 of the Contract for Sale as $874,846.94. 41. Further, the Plaintiff claims: (a) the Deposit Balance in the sum of $875,000.00 pursuant to clause 9.1. of the Contract for Sale; (b) Or in the alternative, the Deposit Balance in the sum of $875,000 pursuant to Additional Clause 52.1(d) of the Contract for Sale, together with interest on the Deposit Balance at a rate of 10% per annum."
Mr Mitchell submitted that although substantially the same holding costs and expenses, legal fees and real estate agent's commission and advertising costs as originally claimed in para 39(c)-(g) are claimed in para 39 of the amended pleading, in the amended pleading those amounts are not claimed as losses, but pursuant to a contractual right of recovery. The original pleading sought common law damages for breach of contract and the amended pleading was a claim for a contractual right of recovery, not a claim of loss. I agree with that submission, but for the reasons which follow that does not preclude the vendors maintaining a claim for liquidated damages under clause 9.3.1.
It was common ground that where a party is required to make an election between remedies that election need not be made until at least the entry of judgment and is not irrevocably made by the party initially claiming one remedy rather than the other (United Australia Ltd v Barclay's Bank Ltd [1941] AC 1 at 19, 29-30, 34; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [59]; Galafassi v Kelly (2014) 87 NSWLR 119; [2014] NSWCA 190 at [75]). Mr Mitchell argued that clause 9.3.1 required a vendor to make an election between rights, not between remedies. Clause 9.3 does not say that after termination of the contract by the vendor for the purchaser's default the vendor can recover the amounts falling within clause 9.3.1 or damages. Rather, it says that following such determination the vendor can sue the purchaser either for amounts falling within clause 9.3.1 or to recover damages for breach. Mr Mitchell argued that the contract provided for a right to sue either for the matters in clause 9.3.1 or in clause 9.3.2 and that required the vendor to make an election as what to sue for, which once made, could not be resiled from.
In my view, as a matter of substance, clause 9.3 gives a vendor who has terminated the contract for the purchaser's default the right to pursue alternative remedies of damages for breach of contract (clause 9.3.2) or a liquidated sum under clause 9.3.1 and that choice, being a choice between remedies can be kept open until judgment. Although a contract may limit or negate a party's right to sue, no contract is needed to confer a right to sue, as distinct from conferring a right to particular remedies. But the question is not free from authority.
There have been many decided cases on standard forms of contract that contained similar clauses. The form of a clause has varied over time and care must be taken before applying an authority on any one form of clause to the clause in the present case. Some cases such as Ward v Ellerton (1927) VLR 264 and on appeal [1927] VLR 494, Denby v Khyat (1931) 26 Tas LR 152 and Pitt v Curotta (1932) 48 WN (NSW) 156 apply a confused notion of rescission for breach (that is, termination) as if it were a rescission ab initio without regard to the distinction later clearly explained by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477.
In some cases the relevant clause conferred a right to retake possession after the purchaser's default (where the purchaser had gone into occupation under a contract for the payment of the purchase price by instalments) and conferred a right of rescission and a right to recover loss on a resale. In Hoskins v Rule [1952] NZLR 827 the vendor relied on its contractual rights under the special condition to retake possession and to resell the property, rather than its general common law right that could have arisen if it were entitled to terminate the contract for the purchaser's repudiation, breach of an essential term, or essential breach. It was therefore confined to the remedy associated with the exercise of that contractual right. It was a case of election between rights rather than remedies. Kinleyside v Irwin [1961] WAR 169 was a similar case.
In the present case, clause 9.3.1 does not confer a contractual right of resale on the vendor. Rather, clause 9 proceeds on the basis that if the purchaser is in default in an essential respect the vendor can terminate the contract. The vendor's right to resell is not a right conferred by the contract. Rather, it is a right that the vendor has as owner of the land that is untrammelled by the interest of the purchaser because the contract has been terminated. Clause 9.3.1 then gives (or purportedly gives) the vendor the right to recover either liquidated damages as provided for in clause 9.3.1 if the resale is made within 12 months of the termination of the contract, or unliquidated damages for breach of contract under clause 9.3.2.
Consistently with clause 9 the vendors in the present case did not purport to rely upon any right conferred by that clause to terminate the contract for the purchaser's failure to complete the contract after time had been made essential. The vendors' notice of termination of the contract after reciting the contract and the extensions for the time for completion and the service of the notice to complete stated that the vendor was ready, willing and able to complete the contract on 6 June 2014 but that the purchaser did not complete the contract on that date. The notice stated that as a result of the purchaser's default under the contract and the notice to complete dated 22 May 2014 making time of the essence for the completion of the contract, the vendors gave notice that the contract was terminated and was entirely at an end. The notice stated: "The vendor will retain the deposit and take action for recovery of damages resulting from your default."
That notice contained no election as to the basis upon which damages would be claimed.
A similar provision used in England has been characterised as putting a vendor to his election between remedies (Wallace-Turner v Cole (1983) 46 P & CR 164 at 168), although in Talley v Wolsey-Neech (1979) 38 P & CR 45 the vendor exercised a contractual right of resale that might more appropriately be characterised as an election between rights.
Tiplady v Gold Coast Carlton Pty Ltd (1984) ATPR 40-491 is an example of a claim for liquidated damages under a similar clause to clause 9.3. The Full Court of the Federal Court found that the vendor was entitled to claim liquidated damages notwithstanding that the loss was pleaded as loss or damage suffered as a result of the purchaser's repudiation of the contract, although the particulars of the loss claimed were referable to the right to liquidated damages conferred by the clause.
In Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117 clause 16 of the standard conditions of sale provided: "16. If the Purchaser defaults in the observance or performance of any obligation imposed on him under or by virtue of this agreement the deposit paid by him hereunder, except so much of it as exceeds 10% of the purchase price, shall be forfeited to the Vendor who shall be entitled to terminate this agreement and thereafter either to sue the Purchaser for breach of contract or to resell the property as owner and the deficiency (if any) arising on such resale and all expenses of and incidental to such resale or attempted resale and the Purchaser's default shall be recoverable by the Vendor from the Purchaser as liquidated damages provided that proceedings for the recovery thereof be commenced within 12 months of the termination of this agreement. The Vendor may retain any money paid by the Purchaser on account of the purchase other than the deposit money forfeited under this clause as security for any deficiency arising on a resale or for any damages or compensation (including any allowance by way of occupation fee or for rents or profits from a Purchaser who has been in possession of the property or in receipt of the rents or profits thereof) awarded to him for the Purchaser's default provided that proceedings for the recovery of such damages or compensation be commenced within 12 months of the termination of this agreement."
The vendors terminated the contract following the purchaser's failure to comply with a notice to complete and were entitled to retain the deposit and, so it was held, unliquidated damages to be assessed. The vendors did not seek liquidated damages under clause 16 and proceedings were not brought within 12 months. In its letter of termination the vendor's solicitors stated: "In accordance with the said contract the deposit paid by your client is hereby forfeited and any moneys paid by your client in excess of the deposit shall be retained in accordance with clause 16 of the said contract."
The purchaser appears to have argued that by this letter the vendors elected to pursue their rights under clause 16, but because no proceedings were commenced within 12 months the vendors either had no rights at all or at best only the right to retain the deposit (at 134-135).
Powell J rejected this contention. His Honour held that the rights conferred by clause 16 were intended to augment, rather than to restrict or remove, the rights which an innocent vendor would otherwise have following a purchaser's breach. The Full Court of the Supreme Court of Victoria said the same thing in Berry v Mahony [1933] VLR 314. Mann ACJ with whom Lowe and Gavin Duffy JJ agreed, said (at 321): "We think that the provision as to resale and as to the recovery of the difference between what is obtained by resale and what was contracted to be paid is a provision in the vendor's favour to enable him to determine, if he so desires, in a simple and convenient way the amount of his damages, instead of having recourse to a Court of law to ascertain them. We think, too, that the power to determine the contract, called in this condition a power to rescind, is a power which once exercised determines the contract for all purposes. Lastly, we are clearly of opinion … that the presence of clause 12 of the conditions of sale does not exclude other remedies available upon general principles to the vendor or the purchaser apart from and outside of this special condition."
In Taylor v Raglan Developments Pty Ltd Powell J said (at 135): "The fact that the rights provided by cl 16 are intended to be cumulative upon, rather than in substitution for, the plaintiffs' ordinary rights at common law means, in my view, that except to the extent to which those rights are inconsistent with the rights provided by the common law, and except to the extent that there has been a completed and irrevocable exercise of one or other of those inconsistent rights, there can be no room for the operation of the doctrine of 'election' upon which so much stress has been placed, in this case, by the defendant: see Johnson v Agnew [1980] AC 367, at p 394 et seq, per Lord Wilberforce (in whose speech Lord Salmon, Lord Fraser of Tullybelton, Lord Keith of Kinkel and Lord Scarman all concurred); McKenna v Richey [1950] VLR 360; cf and cp Sargent v ASL Developments Ltd (1974) 131 CLR 634, at p 641, per Stephen J, at p 655, per Mason J."
Jampco Pty Ltd v Cameron (No. 2) (1985) 3 NSWLR 391 also concerned clause 16 of the then standard contract for sale. The sale price was $485,000. The vendor terminated the contract for the purchaser's failure to comply with a notice to complete on 19 May 1982. The property was resold for $380,000 under a contract entered into on 1 November 1982.
The vendor pleaded the terms of clause 16 and pleaded that the purchaser breached the contract by failing to complete within the time specified in the notice to complete and then alleged that: "By reason of the breach by the defendants of the contract the plaintiff has suffered loss and damage. Particulars loss on resale of property $105,000 (further particulars will be provided shortly)."
Prayer 2 of the claim for relief was "damages for breach of contract".
Young J cited Powell J's decision in Taylor v Raglan Developments Pty Ltd, but nonetheless said that the time must come when the vendor has to choose which course to pursue. His Honour said (at 393) that the statement of claim: "tends towards a claim for breach of contract rather than a claim under the contract for loss on a resale except for the appearance of that phrase in the particulars of para 8. The amended particulars of damage are also more consistent with a claim for breach of contract than for a claim under the contract. In my view, although there is scant material on the matter, it has elected for breach of contract damages."
Understandably, the defendants rely upon this decision.
In Jampco Pty Ltd v Cameron (No. 2) counsel had indicated that in their view no difference arose for any practical purposes as to which of the two rights the vendor was pressing. In the result his Honour found that the market value of the land as at May 1982 was $380,000 which was the subsequent sale price (Jampco Pty Ltd v Cameron (No. 2) (1986) NSW ConvR 55-275 at 56,581).
With respect, the judgment in Jampco Pty Ltd v Cameron (No. 2) does not explain why the vendor was faced with an election between rights, as distinct from an election between remedies. No earlier decision to which I was referred or which my researches have found compelled that conclusion. It appears that the vendor, by its statement of claim, sought to pursue damages under either or both heads without any clear distinction between them.
In Cox v Parker (1987) 5 BPR 97,339 clause 9 of the contract was in materially the same terms as clause 16 considered in Jampco Pty Ltd v Cameron (No. 2). The contract was terminated on 30 September 1986 following the purchaser's failure to comply with a notice to complete. The property was resold on 13 February 1986 for $5,000 less than the original contract price.
In correspondence before suit the vendor's solicitor referred to the vendor's right to recover all expenses upon resale as liquidated damages and that the vendor would take action to recover the amount of such expenses. In an affidavit the vendor referred to incurring "the following losses and expenses of and incidental to such resale".
After referring to Young J's decision in Jampco Pty Ltd v Cameron (No. 2) Kearney J said: "My view in the present case is that the plaintiff has set out upon the course of claiming liquidated damages pursuant to CL9 but that before reaching the point of irrevocable election to pursue that course he has, albeit in terms which are not plain, altered course to render his claim one for damages. … This change of course is, of course, confirmed by the claim stated in the amended summons and I find, therefore, that the plaintiff, perhaps in the nick of time, has avoided the election relied upon by the defendant. He is accordingly entitled to relief on the basis of his claim being one for damages for breach of contract rather than for liquidated damages under the other alternative provided by cl 9."
In Taylor v Raglan Developments Pty Ltd Powell J was of the view that the vendor was not put to an election between rights. It is necessarily implicit in his Honour's reasoning that the vendor would ultimately be put to an election between remedies. Neither Young J in Jampco Pty Ltd v Cameron (No. 2), nor Kearney J in Cox v Parker sought to explain why this was not so. Faced with a choice between the views expressed by Powell J in Taylor v Raglan Developments Pty Ltd and those of Young J in Jampco Pty Ltd v Cameron (No. 2) that was followed by Kearney J in Cox v Parker on the question of election, I prefer the views of Powell J. I feel less hesitation in not following Jampco Pty Ltd v Cameron (No. 2) and Cox v Parker as a matter of comity where those decisions themselves do not follow an earlier decision of a judge of the Court.
In Delbridge v Low [1990] 2 Qd R 317 the contract provided that if the purchaser were in default: "… then the Vendor in addition to any other rights which may be conferred upon him at law or at equity may - … (c) terminate the contract and (i) elect to declare the deposit forfeited and/or sue the Purchaser for damages for breach; or (ii) elect to declare the deposit forfeited and/or resell the property hereby sold … and provided that the resale is completed within 12 months from the date of termination any deficiency arising from such resale and any expense arising from such sale shall be recoverable by the Vendor from the Purchaser as liquidated damages."
In the letter by which the vendors terminated the contract their solicitor stated: "They further elect to forfeit the deposit, and hereby reserve their rights to sue your clients for all damages they may suffer by reason of such breach and/or liquidated damages pursuant to clause 11 of the Contract." (at 332)
Derrington J held that by this letter the vendor had elected to sue for unliquidated damages and could not recover the deficiency on resale and expenses of resale as liquidated damages. The election was irrevocable. His Honour said: "The first thing to note about this is that they elected to terminate the contract under subpara. (c) of cl. 11. There is some small ambiguity as to whether it was made under subpara. (i) or (ii) of that sub-paragraph for while there was an election to forfeit the deposit, which was common to both, there was also a reservation of their right to sue for general damages, which they were entitled to elect to do under subcl. (i), and/or a reservation of a claimed right to sue for liquidated damages. There was no right to sue for liquidated damages under subcl. (ii) other than pursuant to an election to resell. The purchasers could have reserved their right to elect to resell the property, and then they would have been entitled to recover the losses and expenses as a liquidated sum for that clause is so expressed but there was no right of election as to the latter. Consequently, the letter reserved one right of election which the defendants possessed and an alleged right which was not an election and which they did not possess without the prior election necessary to it. By reserving their right to sue for damages but not reserving their right to resell, they made an election not to pursue the latter remedy. It was appropriate to reserve their election to pursue general damages because it was doubtful whether they would need to do so; and accordingly the reservation of rights in respect of that feature is neutral as to inferences. But where there are mutually exclusive elective rights and there is a reservation of one without a reservation of the other, this involves at least an election between them. Accordingly the defendants elected exclusively to the right to resell."
I do not follow this. I should have thought that by the express terms of the letter (and the use of the words "and/or") the vendors' solicitor was expressly not making an election. A course open to the vendors was to claim liquidated damages if they resold the property within 12 months and there was a deficiency and expense arising from such resale. Even if the vendors were put to an election I do not see why the vendors could have been required in making their election to set out the preconditions upon which liquidated damages might have been claimed in the future.
Derrington J did not say why the vendors were required to make an election or why, if it had purported to do so, the election was irrevocable.
In Gogard Pty Ltd v Satnaq Pty Ltd [1999] NSWSC 1283; (1999) 9 BPR 17,171 Santow J said (at [365]) that: "It seems clear that the defendant must elect to pursue one or the other form of relief", and that "having elected to pursue one right, the vendor cannot resile from the election and choose the other if it eventuates that the course chosen is the less advantageous one".
Santow J observed that no submissions were made on behalf of the cross-claimant in respect of a claim for unliquidated damages and although not made expressly the cross-claimant had elected to pursue relief under clause 9.3.1. This appears to be a case in which the cross-claimant did not actively pursue a claim for unliquidated damages and thus elected between the different remedies prior to judgment.
In my view the substance of the election provided for by clause 9.3.2 is an election between different remedies. I do not consider that authority requires a different conclusion. For these reasons I reject the defendant's submission that the plaintiff is precluded from recovering the liquidated damages sought because it initially sued for damages for breach of contract, rather than for a sum payable under the contract.

Does clause 9.3.1 apply at all?

Mr Mitchell submitted that clause 9.3.1 as a whole only applied where there was a deficiency on resale, so that a vendor is entitled to recover reasonable costs and expenses under the second limb of clause 9.3.1 if there is a deficiency on resale. He emphasised that in the first dot point of clause 9.3.1 the vendor is given the right to recover "the deficiency on resale" et cetera, not "any deficiency on resale" et cetera. He also submitted that a term should be implied to the effect that the clause does not apply in the absence of a deficiency on resale in order to give business efficacy to the contract (BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 282-283).
I do not accept this argument. Although clause 9.3.1 provides that where there is a resale the vendor can recover the deficiency on resale "and" reasonable costs and expenses et cetera, the reasonable construction of the clause is that the vendor can recover either or both the deficiency on resale and reasonable costs and expenses.
I do not accept that a commercial or business-like construction of the clause requires that there be a deficiency on resale as a precondition to the vendor's being entitled to reasonable costs and expenses under the second limb. To the contrary, if there were no deficiency on resale after credit for the deposit and allowance for input tax credits, but the vendor was nonetheless out of pocket for costs and expenses arising from the purchaser's non-compliance with the contract or the notice to complete, or was out of pocket for reasonable costs and expenses in effecting the resale, a business-like construction of clause 9.3.1 would be to permit recovery of such reasonable costs and expenses under that clause that is intended to augment the vendor's right to recover damages for breach of contract. The fact that some earlier versions of the standard clause have referred to "any deficiency" rather than "the deficiency" is not persuasive. There have been numerous drafting changes over the decades. So far as the present submission is concerned, the reference to such earlier forms of drafting demonstrates no more than that the draftsman could have used "any deficiency" instead of "the deficiency".
Nor do I accept that a term can be implied to the effect of that contended for. The term suggested is not so obvious as to go without saying. It is not necessary to give business efficacy to the contract and in some circumstances it may not be reasonable.

Credits Against Costs and Expenses Recoverable Under the Second Limb

In Buchanan v Dunstan [2007] NSWSC 248; (2007) 13 BPR 24,521 I held (at [62] and [63]): "[62] … whether the difference in calculation of damages at common law and liquidated damages under 9.3.1 is substantial or not, one cannot simply translate the principle that a forfeited deposit is set off against common law damages to cl 9.3.1. It may be that not crediting a forfeited deposit against liquidated damages under 9.3.1 gives rise to other rights (for example, relief against forfeiture), but that is not relevant to the construction of the clause. [63] Clause 9.3.1 expressly provides for the deposit to be credited only towards the deficiency on resale, and not against costs and expenses recoverable under the second limb of the clause. I do not think that if the credit for the forfeited deposit exceeds the deficiency on resale that the balance in favour of the purchaser can be carried forward in assessing the reasonable costs and expenses recoverable under the second limb. The clause could easily have provided for the forfeited deposit to be credited against both heads of recovery but did not do so."
Buchanan v Dunstan was an extempore decision. I recorded (at [60]) that I was told by counsel that there was no decision on the question of whether the forfeited deposit should be credited against costs and expenses recoverable under the second limb of clause 9.3.1. I referred to a decision of Campbell J in Consolidated Credit Network Pty Ltd v Illawarra Retirement Trust Ltd (No. 2) [2005] NSWSC 1007 where his Honour proceeded on the basis that a vendor claiming liquidated damages under clause 9.3.1 must show that he has suffered a loss after taking into account the forfeited deposit, but noted that the particular issue did not appear to have been raised.
However, contrary to my understanding when I decided Buchanan v Dunstan, the question of whether the forfeited deposit could be credited not only in determining a deficiency on resale but against a claim for costs and expenses under the second limb of clause 9.3.1 had been the subject of prior decisions in addition to that of Campbell J in Consolidated Credit Network Pty Ltd v Illawarra Retirement Trust Ltd (No. 2). There were also prior decisions on whether a surplus on resale is required to be taken into account on a claim under the second limb of clause 9.3.1. Those questions are interrelated.
In Mallett v Jones [1959] VR 122 the clause gave the vendor the right to rescind in the event of default by the purchasers in payment of the purchase money and provided that after giving the requisite notice: "(a) the contract shall thereupon become rescinded and the deposit shall be forfeited to the vendor; (b) the vendor may proceed to take or recover possession of the land sold; and (c) the vendor may at his option either - (i) retain the said land and sue the purchaser for damages for breach of contract, and pending the determination of such damages the vendor shall be entitled to retain all instalments paid hereunder; or (ii) re-sell the said land either by public auction or private contract, and any deficiency in price upon such re-sale and the expenses thereof shall be paid upon demand by the purchaser to the vendor as and by way of liquidated damages."
The purchase price was £2,050 of which £1,900 represented the amount payable for the land and £150 the amount payable for furnishings. The purchase price was payable by instalments and the purchasers went into possession. They purported to rescind for fraudulent misrepresentation. A fraudulent representation was established. Their purported rescission was ineffective because they had affirmed the agreement after they had full knowledge of the falsity of the representations (at 124). The vendor rescinded and resold the land for £1,850. The purchaser had paid a deposit of £600. The purchasers were entitled to damages for deceit, but the vendor was entitled to damages or liquidated damages.
The Full Court of the Supreme Court of Victoria (Dean and Smith JJ with whom Lowe J agreed) said (at 132): "So far as deficiency in price is concerned, it is well settled that the deposit must be brought into account in ascertaining deficiency, for a deposit is part payment of the purchase money. This is so even though the contract empowers the vendor, as CL6 of Table 'A' does, to forfeit the deposit--see Ockenden v Henly (1858) El Bl and El 485; 120 ER 590; Howe v Smith (1884) 27 Ch D 89, at p. 105, per Fry, LJ; Shuttleworth v Clews, [1910] 1 Ch 176. There can be no deficiency unless the difference between the original price and the re-sale price overtops the deposit. In this case, the difference is only 50 pounds and the deposit was 600 pounds. Even if the furniture, worth 150 pounds, be taken into account, there is still no deficiency. So far as the expenses of re-sale, 71 pounds, are concerned, it appears to us that the reference to 'expenses' is CL6(c) was included in order to cover the case where the costs of re-sale created or increased a deficiency, and that the deposit must therefore be brought into account as against the 'expenses'. The clause does not, we consider, give the vendor a right to recover the 'expenses' where, as here, he has a surplus in hand over and above such 'expenses'. In its context, including in particular the language of CL7, the word should not be construed as extending beyond moneys the vendor has to pay out of his own pocket."
Clause 7 relevantly provided: "If the vendor exercises his right of re-sale given to him by condition 4 or condition 6(2) hereof he shall be entitled to apply any instalments of purchase money paid to him in satisfaction or partial satisfaction of any deficiency …"
In Rossco Developments Pty Ltd v O'Halloran (1980) 42 FLR 236 the relevant clause was not in materially different terms from that considered in Mallett v Jones. The purchaser failed to pay the deposit. The purchase price was $55,500. The vendor resold the property for $56,000. The surplus was set off against the vendor's claim for unliquidated damages, being expenses of resale and additional rates that the vendor had to pay.
Blackburn CJ held that the vendor was not entitled to claim liquidated damages because the statement of claim omitted a required endorsement that if the plaintiff's claim was for a debt or liquidated demand it should state the amount claimed and for costs and further state that upon payment thereof within four days after service further proceedings would be stayed. The defendant did not appear and Blackburn CJ refused to allow an amendment. He nonetheless dealt with the matter in case he was wrong in rejecting the plaintiff's claim for liquidated damages on procedural grounds. There was no deficiency on resale, but a surplus of $500. Blackburn CJ said that he would have allowed as expenses of and incidental to the resale amounts due to the land agent and solicitor's costs in connection with the resale totalling $500, and $489.65 on maintenance of the property to keep it in first class condition attractive to buyers with the intention of selling it as soon as a good price was offered. Blackburn CJ then said (at 242): "These amounts allowed total $989.65. The surplus on the resale price should not be deducted from this sum. It is not a question of applying the principle that the plaintiff should not be better off than he would have been had the contract been carried out: that principle would be applicable to the assessment of general damages for breach of the contract. Here I am not assessing general damages but calculating an amount by construing cl 12 of the contract, on the assumption that the plaintiff exercised the second alternative open to him under that clause. There was no deficiency, so the amount relating to 'the deficiency (if any)' is nil. The existence of a surplus is irrelevant."
Blackburn CJ did not refer to, and was evidently not referred to, Mallett v Jones. His observations on this issue were obiter.
In Gogard Pty Ltd v Satnaq Pty Ltd the contract was in the same form as the existing contract. The purchase price was $1,347,500 and the purchaser paid a 10 per cent deposit. After the purchaser's default and termination of the contract by the vendor the vendor re-sold the property for $1,000,500. The vendor sought legal costs of $2,092.63 under clause 9.3.1 for costs and expenses on resale, and legal costs of $2,794 for legal costs incurred under the failed sale as costs and expenses arising out of the purchaser's non-compliance with the contract. The costs and expenses recoverable under the second limb of clause 9.3.1 totalled $4,886.63. Santow J held: "[381] In cases such as the present, where the claim for damages under cl 9.3.1 is directly connected with the purchaser's failure to complete, the damages must be set off as against the forfeited deposit moneys. To the extent that the amount of the deposit exceeds the amount of the damages, the purchaser is not required to pay more than the forfeited deposit: see also The Standard Contract for the Sale of Land in New South Wales, para 9.177, p 499."
Santow J found it unnecessary to decide whether the costs and expenses could also be set off as against the profit on resale because they could be set off against the forfeited deposit (at [382]-[385]).
In Havyn Pty Ltd v Webster [2005] NSWCA 182; (2005) 12 BPR 22,837 the purchaser paid a deposit of $313,000. After the purchaser failed to complete the vendor resold the land at a price that was $130,000 less than the original contract price. After crediting the deposit (if forfeited to the vendor) there would be no deficiency under the first limb of clause 9.3.1. Santow JA, with whom Tobias JA and Brownie AJA agreed, said (at [71]): "[71] Both the question of a vendor's damages for breach of contract by the purchaser, and the question of a purchaser's claim for return of a forfeited deposit under s 55(2A) only arise once it is determined that the contract was validly terminated by the vendor. The questions are interrelated, since a vendor who sues for damages because of a purchaser's failure to complete must give credit for the benefit of a forfeited deposit: Ockenden v Henly (1858) 120 ER 590 at 593; Howe v Smith (1884) 27 Ch D 89 at 100, 104-5; Shuttleworth v Clews [1910] 1 Ch 176; Real Estate Securities Ltd v Kew Golf Links Estate Pty Ltd [1935] VLR 114 at 124; Mallett v Jones [1959] VR 122 at 132; Cowan v Stanhill Estates Pty Ltd (No 2) [1967] VR 641 at 649; NLS Pty Ltd v Hughes (1966) 120 CLR 583 at 589; Carpenter v McGrath (1996) 40 NSWLR 39 at 45, 62-3 . That proposition is also found in cl 9.3.1 of the standard contract for the sale of land (2000 ed), as used in this case. The deposit, therefore, is to be set off against the damages that flow from the purchaser's failure to complete (though not against amounts that the purchaser must pay independently of any breach)." (Emphasis added.)
This statement is obiter because the Court of Appeal found that the purchaser was entitled to relief against forfeiture, although the proceedings were remitted to the Master for an inquiry as to damages. On that inquiry no question of credit for a forfeited deposit would arise because the Court of Appeal upheld the primary judge's finding (although on different grounds) that the deposit should be returned. Nonetheless, it is a considered statement and is consistent with Mallett v Jones. It must be understood as authority that if the vendor was entitled to forfeit the deposit, the balance of the deposit, after meeting the deficiency on resale, could be credited against the loss and expenses otherwise recoverable under the second limb of clause 9.3.1.
I was not referred to any of these decisions in Buchanan v Dunstan. Had I been referred to them I do not think I would have decided Buchanan v Dunstan as I did. I would have followed the considered decision of Santow J when his Honour was sitting as a primary judge in Gogard Pty Ltd v Satnaq Pty Ltd that was consistent with the reasoning of the Full Court of the Supreme Court of Victoria in Mallett v Jones and the considered dicta of the Court of Appeal in Havyn Pty Ltd v Webster.
After my decision in Buchanan v Dunstan Windeyer J considered the same question in Donnellan v Garlick [2006] NSWSC 132; (2006) 12 BPR 23,571. His Honour calculated the vendor's claim for liquidated damages under clause 9.3.1 and deducted from the loss on resale and other costs and expenses either arising out of the purchaser's non-compliance with the contract or the costs and expenses arising out of the resale at $62,046.07 from which the instalments of deposit paid to the vendor of $51,400 were deducted (at [12]). No authorities were considered, but Windeyer J's approach was inconsistent with my decision in Buchanan v Dunstan.
Buchanan v Dunstan was followed by Hall J in Hearse v Pallister [2008] NSWSC 504 at [73]-[76]. However, in that case there was no appearance for the defendant and it appears that his Honour was not referred to the authorities to which I also was not referred in Buchanan v Dunstan that were inconsistent with the approach that I took in that case.
As a matter of precedent, I think I should not follow my own decision in Buchanan v Dunstan, nor that of Hall J in Hearse v Pallister. But the question remains how the earlier decisions that I think I am bound to follow can be reconciled with the structure of clause 9.3.1 that provides that the forfeited deposit is to be credited against a deficiency on resale, but does not provide for it to be credited against costs and expenses under the second limb of clause 9.3.1.
Mr Mitchell submitted that clause 9.3.1 provides a formula so that the calculation of a sum in the first limb plus the second limb equals liquidated damages. If the sum in the first limb means that there is no deficiency but a surplus, then the result is not that the deficiency is nil but there is an amount to be offset against the second limb.
No such argument was raised in Buchanan v Dunstan. It is supported by the reasoning of the Full Court of the Supreme Court of Victoria in Mallett v Jones where there was a surplus on resale. Dean and Smith JJ said in a passage quoted at [102] above that the reference to expenses on resale was included in the clause to cover the case where the costs of resale either created or increased a deficiency. This is another way of putting the same argument advanced by Mr Mitchell.
With the benefit of Mr Mitchell's submission and citation of authority I accept that both the surplus on resale and the forfeited deposit should be credited against the costs and expenses claimed under the second limb of clause 9.3.1. It is unnecessary to decide whether the tenant's contributions to outgoings should reduce the extent to which the vendors should be taken to have incurred costs or expenses for rates, water charges et cetera arising from the purchaser's failure to complete, nor whether the purchaser is entitled to credit for the rents received.
Clause 9.3.1 is part of a standard form of contract. That is to say, it is intended to apply in a vast range of cases where the parties cannot be expected to have turned their minds to whether or not the clause is a genuine pre-estimate of loss that a vendor might suffer as a result of the purchaser's default. In Buchanan v Dunstan I said (at [62]) that "It may be that not crediting a forfeited deposit against liquidated damages under clause 9.3.1 gives rise to other rights (for example, relief against forfeiture)." In light of my conclusion that credit is to be given for both the surplus on sale and the forfeited deposit the question of whether clause 9.3.1 is an unenforceable penalty does not arise.
However, if that conclusion is wrong, then I find it difficult to see how clause 9.3.1 can be characterised as a genuine pre-estimate of damage. In earlier versions the clause merely provided an alternative measure of damages based on a difference in the resale price and expenses of resale in respect of a sale made within 12 months of termination of the contract. The vendor's alternative was to sue for unliquidated damages that would be the difference between the contract price and market value at the time of breach unless further damages could be recovered under the second limb of Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145). It would be hard to see how such a clause would not be a genuine pre-estimate of loss that the vendor might suffer, at least if the forfeited deposit were credited against the deficiency on resale.
Later iterations of the clause have provided for the vendor also to be entitled to recover costs and expenses associated with the purchaser's breach of contract and failure to comply with a notice to complete. Unless the reference to costs and expenses in the second limb of clause 9.3.1 can be construed as applying to the extent to which the vendor is out of pocket, I find it hard to see how the clause can be a genuine pre-estimate of loss, particularly as the vendor is entitled in any event to sue for unliquidated damages for its actual loss recoverable within the principles of Hadley v Baxendale.
Having regard to my conclusion it is unnecessary to resolve this issue. But had I come to a different conclusion, my prima facie opinion is that clause 9.3.1 would be void as a penalty because it could not be considered a genuine pre-estimate of damage if no credit were allowable for the surplus on sale, the forfeiture of the deposit, and at least the contributions by the vendor's tenants to the outgoings recoverable under the second limb of the clause. It would provide a measure of recovery out of all reasonable proportion the actual damages suffered and would be imposed in terorem of the defaulting purchaser. Particularly is that so because the vendor need only have recourse to clause 9.3.1 if recovery under that clause exceeds its actual recoverable loss for breach of contract.
It is also unnecessary to decide whether the vendors established that all of the amounts claimed were reasonable costs and expenses within the meaning of the second limb of clause 9.3.1. Had it been necessary to decide that question, I would not have been satisfied that the 4.4 per cent commission payable to the agent was a reasonable cost and expense. The agent and the vendor were not at arm's length. There was no evidence that the rate of commission was in accordance with industry standards or otherwise reasonable. It was substantially higher than the rate charged by the agent on the sale to the purchaser and there was no evidence that that rate of commission of 3.3 per cent was in accordance with industry standards or was otherwise reasonable.
Where commission has been negotiated between parties at arm's length it can be inferred that the commission agreed upon is reasonable in the absence of evidence to the contrary. But no such inference can arise in the circumstances of this case.
Accordingly, had it been necessary to decide the question, I would not have been satisfied that the commission charged by the agent was a reasonable cost and expense. There was no evidence as to what such a reasonable cost and expense might have been. This part of the vendors' claim would have failed. However, it is unnecessary to pursue this question.

Conclusion

For these reasons I have concluded that the plaintiff is not entitled to claim a further five per cent of the purchase price as a purported deposit because the amount purportedly described as a deposit was not a deposit and is void as a penalty. I have also concluded that the purchaser is entitled to a credit for the $850,000 deposit that has been forfeited to the vendor against the vendor's claim for costs and expenses and is also entitled to credit the surplus on resale against the vendor's claim for costs and expenses arising from the purchaser's default. It follows that the vendors' claim fails.
I order that the plaintiffs' claims for relief be dismissed. Prima facie, the plaintiffs should pay the defendants' costs. I will hear the parties on costs.

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