Kern Corporation Ltd v Walter Reid Trading Pty Ltd

Kern Corporation Ltd v Walter Reid Trading Pty Ltd - [1987] HCA 20 - HCA 1985 case summary — Zoe

[56]

Where, as in this case, a vendor has insured himself against loss or destruction of a building by fire, the purchaser does not acquire any right to the benefit of that insurance. A policy of that kind is a contract of indemnity which entitles the insured to recover his actual loss up to the amount insured or, to use the words of s. 58, "the money for which the building is insured". Ultimately settlement by the purchaser, who is bound by contract to complete, means that the vendor suffers no loss. Nevertheless, putting to one side any question arising under s. 58 of the Property Law Act, when the fire occurs after the contract of sale has been entered into but before completion, the insured vendor is entitled to be paid, within the limits of the insurance policy, the amount of the damage, at all events if completion does not take place before the time for adjustment of the amount due under the policy. Upon such a payment being made, the insurer becomes entitled, by subrogation, to the vendor's rights against the purchaser. Thus, if the vendor does not enforce his rights against the purchaser, the insurer is entitled to do so. If, on the other hand, the purchaser pays the vendor, the insurer is entitled to recover the insurance moneys from the vendor providing the vendor has been fully indemnified. Whilst recovery in the latter way is somewhat of an extension of the ordinary doctrine of subrogation, it is a necessary remedy to prevent the insured receiving more than a full indemnity, that being something which subrogation is designed to avoid. So much is, we believe, established at common law and it is convenient to state the principles compendiously as we have endeavoured to do: see Collingridge v. Royal Exchange Assurance Corporation [38] ; Rayner v. Preston [39] ; Castellain v. Preston [40] ; Phoenix Assurance Co. v. Spooner [41] (which was overruled on another point in West Midland Baptist Association v. Birmingham Corporation [42] ; Kennedy v. Boolarra Butter Factory Pty. Ltd. [43] ; British Traders' Insurance Co. Ltd. v. Monson [44] .

[92]

In the present case, once it is established that Kern was, at all material times, ready willing and able to complete the contract in accordance with its terms, it is clear that Walter Reid suffered no loss. Indeed, any purchaser who, in seeking to establish an interest in property for the purpose of making a demand against the vendor's insurer under s. 58, relies on the facts that he is ready willing and able to pay the full purchase price on completion of the contract of sale and that completion of the contract is specifically enforceable destroys the foundation on which his s. 58 demand must rest, namely, that the insured has suffered an indemnifiable loss. There are some cases where it has been held, erroneously in my respectful opinion, that a vendor under an unconditional contract of sale suffers an indemnifiable loss though the price is not subject to abatement, the contract is specifically enforceable and the purchaser is ready willing and able to pay the full price on completion: see Collingridge v. Royal Exchange Assurance Corporation [71] and Kennedy v. Boolarra Butter Factory Pty. Ltd. [72] . Collingridge v. Royal Exchange Assurance Corporation was decided before Castellain v. Preston and its authority cannot be regarded as surviving that decision. And in Kennedy v. Boolarra Butter Factory Pty. Ltd. no distinction was drawn between the vendor's insurable interest in the property (which exists while the contract is executory since the vendor may possibly have the property back on his hands if the contract is not completed) and the vendor's loss (which is not suffered unless the purchaser ceases to be ready willing and able to pay the purchase price in full in accordance with the terms of the contract) [73] . When there is an unconditional and specifically enforceable contract for the sale of a property and the property is damaged by fire, a purchaser who is ready willing and able to complete the sale by payment of the full purchase price faces a dilemma in making a demand under s. 58: by establishing his own interest in the property, he establishes that the vendor has suffered and will suffer no loss by fire. The dilemma is fatal to his claim. Such a purchaser must protect his interest under another policy or under the provisions of s. 63 of the Property Law Act if he has obtained the cover available pursuant to its terms.

[95]

For limited purposes, the distinction between legal title and beneficial ownership may provide a useful reference point in describing the position of the ordinary unpaid vendor of land under an uncompleted contract of sale. However, and with due respect to some past statements of high authority to the contrary, it is wrong to characterize the position of such a vendor as that of a trustee. True it is that, pending payment of the purchase price, the purchaser has an equitable interest in the land which reflects the extent to which equitable remedies are available to protect his contractual rights and that the vendor is under obligations in equity which attach to the land. None the less, the vendor himself retains a continuing beneficial estate in the land which transcends any "lien" for unpaid purchase money to which he may be entitled in equity after completion. Pending completion, he is beneficially entitled to possession and use. Pending completion, he is beneficially entitled to the rents and profits. If the purchaser enters upon the land without the vendor's permission and without authority under the contract, the vendor can maintain, for his own benefit, an action for trespass against the purchaser. While the practical significance of those continuing beneficial rights of the vendor may vary according to particular circumstances (e.g. whether completion is already overdue or is not due for some lengthy period), it is both inaccurate and misleading to speak of the unpaid vendor under an uncompleted contract as a trustee for the purchaser: see, generally, per Brett L.J., Rayner v. Preston [74] and Waters, The Constructive Trust (1964), p. 74ff. There is authority for the view that, after completion has actually taken place, some of the equitable rights of the purchaser, which (in their entirety) then constitute beneficial ownership, relate back to the date of the contract. But there is no relation back of beneficial ownership in the sense that the vendor is retrospectively deprived of his beneficial right, pending payment of the full purchase price, to the possession, use, rents and profits of the land. Regardless of whether his rights be viewed in the perspective of foresight (i.e. before completion) or hindsight (i.e. after completion), the ordinary unpaid vendor of land is not a trustee of the land for the purchaser. Nor is it accurate to refer to such a vendor as a "trustee sub modo" unless the disarming mystique of the added Latin is treated as a warrant for essential misdescription.

[97]

At material times, there existed current policies of insurance ("the policy") whereby a group of insurance companies ("the insurers") agreed to indemnify Reid against loss as specified therein including destruction of or damage to real and personal property belonging to Reid. The liability of the insurers was subject to certain limits in amount (both minimum and maximum) which it is unnecessary to explore and to exclusions which are not here relevant. It is common ground that, within the specified limits, the policy extended to indemnify Reid according to its terms in respect of the destruction by fire of the building. According to the terms of the policy, the insurers agreed, in the event of any "Destruction or Damage happening to" the insured building, to "indemnify [Reid] in accordance with the applicable Basis of Settlement". The "Basis of Settlement" in that event was defined by the policy as being that the insurers "may at [their] option reinstate, replace or repair or pay the cost of such reinstatement, replacement or repair". In other words, the effect of the terms of the policy was, within the limits of the indemnity, that Reid was entitled to insist upon the reinstatement of the building at the cost of the insurers and that, if Reid so insisted, it was a matter for the insurers whether they themselves reinstated or paid to Reid, as the insured, the cost of reinstatement. Putting to one side for the moment the effect of s. 58 of the Property Law Act 1974 Q., there is nothing in common law principle or statutory provision which precluded the policy from having that effect. If the building had been reinstated at the cost of the insurers, Reid would have derived no advantage from the occurrence of the fire notwithstanding the receipt of the full purchase price upon completion. The result of such reinstatement would have been, no more and no less, the restoration of the position which existed before the occurrence of the damage against which (among other things) the insurance had been taken out. If it be relevant, one could instance many examples of circumstances in which the owner of land might legitimately be concerned to have the protection of insurance to cover reinstatement of a building damaged during the period between the making and completion of a contract for the sale of the land upon which the building is erected. One such example is where the use of the building by the vendor up to the time of completion is necessary for business reasons. Another is where the vendor is not prepared to run the risk of intervening insolvency of the purchaser. Another is where, because of fear of litigation or for reasons of family affection or moral obligation, the vendor is not prepared to seek to enforce a contractual entitlement that the purchaser pay the full purchase price for premises which have been destroyed or substantially damaged by fire.

[98]

In fact, however, Reid did not seek or desire to have the building reinstated. It was content to rely on its contractual right that Kern accept the land with the building in its damaged condition. It is argued that, in the absence of any desire on the part of Reid to have the building reinstated and in the light of the subsequent completion of the sale, Reid did not ultimately sustain any loss against which the insurance policy provided indemnity. That argument seems to me, with respect, to represent a half-truth which conceals rather than elucidates the problem involved in the application of s. 58 to the circumstances of the present case. It may be that, with the benefit of hindsight, it is arguable that Reid was not ultimately, in so far as is presently relevant, financially worse off because of the fire. But the fact remains that Reid sustained loss or damage of the kind covered by the terms of the policy in that the insured building which it legally owned and beneficially occupied for the purposes of its business was destroyed by fire. Indeed, it seems to me that to enunciate the proposition that a person who is the legal and (subject only to the equitable interest of a purchaser under a contract which is not due for completion within the ensuing six months) beneficial owner of a building which he beneficially occupies for the purpose of carrying on his business does not sustain loss or damage for the purposes of a reinstatement policy when the building is destroyed or damaged by fire is to demonstrate its unacceptability as a statement of general principle. The most that can be said is that the circumstances that Reid did not seek to or desire to have the building reinstated and that it ultimately sustained no relevant financial loss have produced a situation where, subject to the effect of s. 58 of the Act, the liability of the insurers under the policy to bear the cost of reinstatement was eventually waived by Reid or, if not waived, deprived of content. The fact that events absolved the insurers of any continuing liability to Reid does not, however, provide an answer to the question whether the insurers are under any continuing liability as a consequence of a notice given by Kern under the provisions of s. 58 of the Act at a time when the insurers remained liable to Reid for any costs of reinstatement. The answer to that question is to be found in the terms of s. 58 and the decision of the Court in Royal Insurance Co. Ltd. v. Mylius [75] .

[101]

The first step in the chain of reasoning that led the majority of the Court to that answer in Mylius was the identification of the duty owed by the insurer to the mortgagees under the policy. Isaacs J., with whom Knox C.J. and Starke J. agreed, defined that duty [76] as "a duty to restore the building burnt substantially as it was before the fire, so far as the money owing by the insurer will allow that to be done". The fact that the mortgagees would not ultimately sustain financial loss by reason of the fire unless default was made in payment of the moneys owing under the mortgage did not, on the view of the majority, preclude the existence of that liability on the part of the insurer. The reason for that [77] was that the subject-matter of the insurance had been the building and the mortgagees were entitled to insist upon reinstatement notwithstanding that they would ultimately suffer no relevant financial loss if the building was left in its damaged state and the mortgagor paid the full amount under the mortgage when it became due. In relevant respects, the interest of the unpaid vendor (Reid) in the building at the time of the fire in the present case was more substantial than that of the mortgagees in Mylius in that, as has been said, Reid was beneficially entitled to the possession, use, rents and profits of the building. Reid's position would, for present purposes, have closely corresponded with that of the mortgagees in Mylius if the contract had already proceeded to the stage of completion but part of the purchase money had been allowed to remain outstanding on the security (whether written mortgage or, ignoring the effect of s. 97 of the Real Property Act 1861 Q., equitable charge) of the land. The reasoning accepted by the majority in Mylius directly supports the conclusion (reached above) that, in the present case, the insured (Reid) was, immediately after the fire, entitled to insist upon reinstatement of the building at the cost of the insurers notwithstanding that it would ultimately suffer no relevant financial loss if the building was left in its damaged state and the purchaser (Kern) paid the full amount under the contract when it became due.

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Court

Decision date

Before

Source

Judgment (107 paragraphs)

Parties

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