Lee & Ors v Ross & Ors

1 On 11 April 2003 I delivered judgment in these proceedings: Lee v Ross [2003] NSWSC 289. I held that no contract for the sale of land had come into existence between the Defendants as Vendors and the Plaintiffs as Purchasers. Alternatively, I held that even if such a contract had come into existence, it had been validly terminated by the Vendors on 7 March 1997 for wrongful repudiation by the Purchasers. I stood the matter over for the bringing in of Short Minutes of Order reflecting my reasons for judgment. 2 When the matter came back for the making of orders, Ms Sofroniou, who appears for the Vendors, sought an order for compensation under s.74P(1) of the Real Property Act 1900 (NSW). That section provides, in so far as is relevant: "Any person who, without reasonable cause … lodges a caveat with the Registrar-General under [Part 7A of the Act] …is liable to pay to any person who sustains pecuniary loss that is attributable to [the lodgment of the caveat] … compensation with respect to that loss." The facts

3 Many of the facts relevant to the present question are the subject of findings which I have made in my earlier judgment or are not in dispute. I will recount them briefly here, for convenience. 4 The parties purportedly entered into a contract for sale of the Defendants' land at Turramurra pursuant to a written contract dated 24 January 1997. I have held that no contract in fact came into existence because the parties were not agreed upon all of the material terms prior to exchange of contracts and because there was no change of identical counterparts which, in itself, brought about a concluded agreement. The Purchasers' solicitor had made a material amendment to the Purchasers' signed counterpart of the contract, to which the Vendors did not agree. Because the Vendors did not have a solicitor acting for them on the conveyance but were being represented by Mr Ross, the legal consequences of the change to the Purchasers' signed counterpart were not appreciated by Mr Ross. Mr Ross believed that a contract had come into existence which contained the terms of the counterpart signed by the Purchasers but also contained an inconsistent material term which had previously been agreed orally. 5 After the purported exchange of contracts, both sides acted on the basis that a contract was in existence. Requisitions on title were sent and answered. However, shortly before settlement of the contract was due to take place, the difference in the parties' beliefs as to what the contract provided became apparent. 6 On 5 March 1997, the Purchasers' then solicitor, Mr Kwon, sent a letter to Mr Ross to the effect that the terms of the contract did not include any entitlement on the part of the Vendors to retain sandstone blocks which formed the foundations of the house and garage on the land. Mr Kwon insisted that the contract stipulated that the Purchasers were entitled to have a house and garage "including sandstone foundation" . 7 This assertion on the Purchasers' behalf was completely contrary to Special Condition 45 of the contract as signed by the Purchasers, which provided that the Vendors were to retain ownership of the sandstone blocks and were entitled to have them removed from the subject land. 8 How the Purchasers came to take a position completely contrary to Special Condition 45 has not been the subject of direct evidence from Mr Kwon. He was not called by the Purchasers as a witness. From the contents of the Purchasers' conveyancing file which was taken over by their present solicitor, Mr Svir, in March 1997 the following facts can be deduced. 9 Mr Ross sent to Mr Kwon for the purposes of exchange only one copy of the contract, an original executed by the Vendors. Mr Kwon apparently photocopied the original contract, including Special Condition 45, which he himself altered. Mr Kwon used the photocopy contract as the Purchasers' counterpart for execution. He returned the executed photocopy counterpart to the Vendors' real estate agent by way of exchange but did not retain in his file the page of the contract on which Special Condition 45 appeared. 10 When a dispute arose prior to settlement of the contract as to the ownership of the sandstone blocks forming the foundations to the house and garage on the land, it is possible that Mr Kwon reviewed the contract which he had in his file and, not seeing Special Condition 45, came to the view that the Vendors' position was incorrect. This is one inference which can be drawn from the evidence as to the state of Mr Kwon's conveyancing file at the time that it was taken over by Mr Svir; indeed, the Purchasers in their submissions seem to have accepted it as correct the explanation of Mr Kwon's actions. 11 When Mr Ross received Mr Kwon's letter of 5 March 1997 he decided to terminate the contract. He sent to Mr Kwon on 7 March 1997 a Notice of Termination and a covering letter. I have held that those documents, taken together, would have constituted a valid termination of the contract, had a contract then been in existence. 12 On 14 March 1997, the Purchasers lodged a caveat against the subject land, claiming an interest as purchasers under the contract for sale. On 11 June 1997, the Purchasers commenced these proceedings in the Equity Division, seeking specific performance of the contract. 13 On 19 January 1998, while the caveat was still on the title, the Vendors entered into an agreement to sell the land to Mr Ross's sister for $291,000, the price at which they had agreed to sell to the Purchasers. Mr Ross's unchallenged evidence was that at the time that the Vendors had agreed to sell to the Purchasers the land was, in fact, mortgaged to various members of his family to secure a number of loans upon which he was obliged to pay interest at the rate of 11.8% per annum. The agreement which he made with his family and his sister in January 1998 was that the Vendors would transfer the land to Mr Ross's sister and the Vendors' liability for loans from Mr Ross's family would be reduced by the amount of the purchase price, that is, $291,000. 14 In view of the existence of the caveat lodged by the Purchasers, the Vendors were not able to register a transfer to Mr Ross's sister in accordance with the family agreement and the Vendors continued to accrue liability for interest on the family loans. 15 There is no evidence that the Purchasers were made aware of the position between the Vendors and Mr Ross's family either before or after the lodgement of the caveat. 16 On 9 October 1998, Mr Ross lodged an application for a lapsing notice in respect of the caveat. The lapsing notice did not come to the attention of the Purchasers, for reasons which are no longer relevant. The caveat lapsed and was removed from the title to the land on 11 May 1999. The land was transferred to Mr Ross's sister on 2 June 1999 in accordance with the family agreement which had been made in January 1998. Shortly thereafter, Mr Ross's sister sold the land to a third party for $360,000. Whether caveat lodged without reasonable cause

17 I turn now to the question whether the caveat was lodged by the Purchasers "without reasonable cause" , within the meaning of s.74P(1) Real Property Act . 18 The history of s.74P(1) of the Act is of some significance. Its predecessor was s.98 of the Real Property Act , which was repealed on 1 August 1988 by the Real Property (Caveats) Amendment Act 1986 . Section 98, in essence, provided that any person who lodged a caveat "without reasonable cause" should be liable to pay to any person who may have suffered damage thereby such compensation as might be just. One sees, therefore, that as far as the test of liability for compensation is concerned, s.98 was in the same terms as the present s.74P(1). 19 The Real Property (Caveats) Amendment Act 1986 repealed s.98 and introduced a new Part 7A into the Act, in which s.74P(1) appeared. That section provided a new test for liability for compensation. The section commenced: "Any person who, wrongfully and without reasonable cause: (a) lodges a caveat …" 20 The new test for liability posited by the insertion of the word "wrongfully" was considered by the Court of Appeal in Beca Developments Pty Ltd v Idameneo (No 92) Pty Ltd (1990) 21 NSWLR 459. Clarke JA, with whom Kirby P was in general agreement, concluded that liability for compensation now depended upon two tests, namely, whether the caveat was lodged "without reasonable cause" and, in addition, whether it was lodged "wrongfully" . 21 His Honour reviewed the law prior to the amendment of the Act as to what constituted lodgement of a caveat "without reasonable cause" . His Honour noted some difference of judicial opinion but concluded (at 471C, 472G) that the test propounded by Wootten J in Bedford Properties Pty Ltd v Surgo Pty Ltd [1981] 1 NSWLR 106 was correct. That test, which is expressed in the affirmative rather than in the negative as it is expressed in the section itself, is that "reasonable cause" for the lodgement of a caveat exists where the caveator has an honest belief, based upon reasonable grounds, that the caveator has a caveatable interest. 22 Clarke JA was of the view that the addition of the word "wrongfully" in s.74P(1) was made "in order to restrict claims for compensation to those cases in which it could be shown that the caveat was lodged deliberately by a person knowing that he had no interest in the land" : see at 472G. Kirby P was in agreement with this proposition: see at 462E-G. The other member of the Court, Waddell AJA, dissented. 23 It will be seen that the test for liability introduced by the addition of the word "wrongfully" in s.74P(1) placed a much higher hurdle in the path of those seeking compensation for wrongful lodgement of a caveat than had been the case under the former s.98. Apparently, the legislature did not consider that such a high hurdle was justified because by the Real Property Amendment Act 1996 (NSW) (which took effect on 1 February 1997), s.74P(1) was amended by the deletion of the words "wrongfully and" . The opening words of the present s.74P(1) as to the test for liability are now the same as they were in the former s.98. It is therefore legitimate to proceed upon the basis that the law as to the test for liability is as stated in the cases dealing with the former s.98 of the Act and that that law is as stated by Clarke JA in Becker in his discussion of those cases. This is the conclusion at which Young J (as his Honour then was) arrived in Collingridge v Sontor Pty Ltd (1997) 141 FLR 440, at 452 - a conclusion in which I respectfully agree. 24 As the caveat in this case was lodged on 14 March 1997, shortly after the Real Property Amendment Act 1996 took effect, the test of liability for compensation is as stated in Bedford Properties and decisions to the like effect. 25 Mr Blank, who appears for the Purchasers, submits that the test is entirely subjective: one must look to what the caveator believes. I am unable to accept that submission. In my opinion, the test is twofold: it is subjective in that it requires an examination of the caveator's actual belief and whether that belief is honestly held. The latter part of that question will often overlap the examination of the objective element of the test, namely, whether the caveator's belief is held on reasonable grounds. 26 Ms Sofroniou accepts that the onus is upon the Vendors to establish the elements to their claim for compensation, that is, that the caveat was lodged without reasonable cause and that the loss claimed by the Vendors is "attributable" to its lodgement: see Bedford at 107G and the cases there cited; Horswell v Paul (1983) NSW ConvR 55-126, at 56,942. 27 Ms Sofroniou does not submit that the Purchasers did not have an honest belief that they had a caveatable interest in the land at the time that they lodged the caveat. No questions were directed to the Purchasers in cross examination which suggested that they did not believe that there was a contract in existence or that they did not believe that it continued to exist after Mr Ross had given the Notice of Termination. 28 Ms Sofroniou submits, however, that the Purchasers could not have had reasonable grounds to believe either that a contract came into existence on 24 January 1997 or that it had not been validly terminated by the Vendors on 7 March 1997, prior to the lodgement of their caveat. 29 I am unable to accept that the Purchasers did not have reasonable grounds to believe that a contract came into existence on 24 January 1997. The fact that a contract had not come into existence was due to two factors, in my opinion: first, a laxity on the part of Mr Kwon in failing to ensure that the amendments which he had made to the contract, and in particular to Special Condition 45, were explicitly and directly drawn to the attention of Mr Ross himself, especially when Mr Kwon must have known that Mr Ross was not a lawyer. The second factor was that Mr Ross, not being a lawyer, failed to understand the legal effect of the variations made to the contract by Mr Kwon and the absence of an exchange of counterparts containing identical terms. 30 Those two factors produced a mistaken belief on both sides of the transaction that a contract had come into existence, but each side believed it contained a significantly different term. As I have said, after 24 January 1997 the parties acted on the basis that a binding contract had come into existence: requisitions on title were sent by the Purchasers' solicitor and were answered by Mr Ross, the contract was stamped and an appointment was made for settlement. 31 At the time of lodgement of the caveat, I conclude, with some hesitation having regard to the proper conveyancing steps which Mr Kwon should have taken to ensure an effective exchange, that the Purchasers and Mr Kwon would have had reasonable grounds to believe from the conduct of the Vendors that the Vendors regarded a valid contract as having been brought about by the purported exchange on 24 January 1997. 32 I conclude, however, that as at the time of lodgement of the caveat the Purchasers could not have had reasonable grounds for concluding that the contract which they believed was in existence had not been validly rescinded by the Vendors. My reasons are as follows. 33 It is important to recognise that for the purpose of liability for compensation under s.74P(1) of the Act the position of a party to a contract for sale who caveats the title to protect an interest under the contract is not always separate and distinct from the position of the solicitor or conveyancer who is acting for that party in the conveyance. Such a solicitor or conveyancer is the agent of the party who employs him or her in the transaction and the acts and omissions of the agent in the transaction are usually taken as those of the principal. 34 So, for example, a party to a contract whose solicitor or conveyancer insists on a completely unsupportable construction of the contract cannot be heard to say as against another party to the contract that he or she is relieved of the legal consequences because he or she personally had no view one way or another and simply acted on legal advice. If the advice given by the solicitor or conveyancer without reasonable ground causes the client to be in breach of contract, the client is not exonerated from liability to the other party to the contract and if the client thereby suffers loss, it may be that the client's remedy is against the solicitor or the conveyancer. 35 These observations are not, of course, addressed to a situation such as came before Powell J in Horswell v Paul (supra). There, prior to the lodgement of a caveat, the purchaser's solicitor had obtained the advice of Counsel that a caveatable interest existed. In those circumstances, his Honour said that the vendor failed to show that the caveat had been lodged without reasonable cause. No doubt his Honour was of the view that Counsel whose advice was sought was simply expressing a tenable legal opinion on the facts presented in the brief. His Honour does not discuss what would have been the result if, for example, the purchaser's solicitor had deliberately or negligently misstated critical facts in the brief to Counsel. 36 In my view, for the reasons more fully explained in my earlier judgment, after Mr Ross had asserted orally and in his correspondence prior to 5 March 1997 that the Vendors had a contractual right to retain the sandstone foundations to the house and garage, Mr Kwon could have had no reasonable grounds for insisting that no such right existed. Either Mr Kwon had in his file a complete copy of contract, containing Special Condition 45, which would clearly show Mr Ross to be correct, or he did not have a copy of Special Condition 45. If he did have a copy of Special Condition 45 he could not reasonably have advised the Purchasers to take the position which they did in Mr Kwon's letter of 5 March 1997. If he did not have a copy of Special Condition 45 in the file and accordingly advised the Purchasers upon the basis of an incomplete version of the contract, that was entirely due to fault on his part in failing to ensure that he had a complete copy of the contract after the purported exchange. 37 Whichever of the two possibilities is correct, in my view, Mr Kwon could have had no reasonable ground for advising the Purchasers that Mr Ross was acting inconsistently with the contract and that his termination on 7 March 1997 was, therefore, invalid. To hold that any advice which Mr Kwon might have given to the Purchasers was reasonable because Mr Kwon did not have a copy of Special Condition 45 in his file at the time would be to reward neglect and to punish diligence. Unfortunately for the Purchasers, they are visited with the consequences of acting on Mr Kwon's advice; as he had no reasonable ground to believe that a contract was still in existence on 14 March and that the Purchasers therefore had a caveatable interest in the land under that contract, neither did the Purchasers have a reasonable ground for such a belief for the purposes of s.74P(1). 38 It follows from the above that I am satisfied that the caveat was lodged without reasonable cause, so that the Vendors have made out a basis for the Purchasers' liability under s.74P(1).

39 The question then arises: is the loss claimed by the Vendors, being interest accumulating on the loans from Mr Ross's family from the time of lodgement of the caveat until its removal, "attributable" to the lodgement of the caveat. Mr Blank says that, as the position between the Vendors and Mr Ross's family was never made known to the Purchasers, they cannot be liable for the loss claimed. 40 I do not think it is necessary to show that the precise loss suffered by an owner of land as a consequence of the wrongful lodgement of a caveat is known to or foreseeable by the caveator at the time of lodgement. So to hold would be to introduce into the statutory remedy afforded by s.74P(1) notions of causation and loss which are highly developed in the law of tort and contract. The section itself does not use words which invoke or suggest those notions: it seems deliberately to avoid the use of the words "caused by" and uses, instead, the more general word "attributable". In my view, a practical commonsense approach to the identification of compensable loss "attributable" to the wrongful lodgement of a caveat is what is required under s.74P(1). 41 One starts with the basic proposition that a caveat, particularly one preventing any dealing at all with the subject land, prohibits during its currency the owner of that land from dealing with it as that owner would otherwise be free to do. In the normal course of a contract for the sale of land between parties at arm's length, the vendor does not usually inform the purchaser of the vendor's own financial position and of the vendor's plans for the use of the proceeds of sale of the property and as to how those plans might be affected if a dispute arises, the contract is not completed and the purchaser places a caveat on the title so that the vendor has neither the right to deal with the property nor any monetary compensation for the loss of that right. 42 In my view, when a purchaser places a caveat on the title to property in such a case, the purchaser accepts the risk of liability to compensate the vendor for whatever loss can realistically be shown to be attributable to a wrongful lodging of the caveat, whether or not the purchaser knows what that loss is likely to be. 43 In the present case, the evidence is undisputed that, had the caveat not been placed on the title, the land would have been transferred to Mr Ross's sister in early January 1998. The transfer could not be effected until the lapse of the caveat on 11 May 1999. I do not think that interest payable by the Vendors on the loans from Mr Ross's family prior to the agreement with Mr Ross's sister in January 1998 is attributable to a lodgement of the caveat. Mr Ross says that if the contract with the Purchasers had been completed on 28 February 1997, he would have reduced the loan amount from the proceeds of sale and would not have had to pay interest at the same level thereafter. But this inability to reduce the family loan was the result of the Purchasers' failure to complete a non-existent contract; it was not the result of the lodgement of the caveat on 14 March 1997. 44 There is no evidence that the Vendors would have entered into a contract for sale with another purchaser between 14 March 1997 and 19 January 1998 but for the existence of the caveat. The inability of the Vendors during that time to deal with the land is not shown, therefore, to have resulted in any particular loss. 45 However, but for the existence of the caveat, the Vendors could have transferred the land to Mr Ross's sister on or shortly after 19 January 1998, which would have effected a reduction in the principal of the family loan by $291,000. They were unable to effect the transfer until 12 May 1999. The existence of the caveat during the period from 19 January 1999 to 12 May 1999 therefore resulted in a loss to the Vendors of interest payments on the principal amount of $291,000 which they would not otherwise have had to make.

46 Mr Blank submits that no loss should be regarded as attributable to the existence of the caveat because the Vendors failed to take any step to mitigate such loss. He says that if the Vendors had sold the land at current market prices in May 1998, the property would have realised about $400,000, which would have repaid the family loan and all interest. The Purchasers have procured valuation evidence which supports the current market price of $400,000 in May 1998. 47 I accept that an owner of land against which a caveat is lodged is under a duty to mitigate the loss which may thereby arise. In Nelson v Kimberley Homes Pty Ltd (1988) NSW ConvR 55-394, Young J said at 57,657: "The next factor to deal with is the question of mitigation of damage. In an ordinary contract action, a plaintiff is debarred from claiming any part of the damage flowing from the defendant's breach which is due to the plaintiff's failure to take all reasonable steps to mitigate his loss. There is no reason why this principle should not apply to the statutory cause of action under sec 98 of the Real Property Act , and in my view it does. The judgment of Brinsden J in Hooke v Holland (supra) reinforces this view.

In the instant case the caveat was lodged in November 1985 and there is not shown any reason why the plaintiffs took a year to lodge a summons to remove it. When they did lodge a summons, the caveat was removed in about three months. It seems to me that this gives a good guide as to how long one should allow damages to run in favour of the plaintiffs, namely, that it would take about three months at the very outside if the plaintiffs moved at the tail end of the court year to have the caveat removed from their title. Of course, in an urgent case the court is able to handle a caveat removal application in far quicker time than that, but on mitigation issues, the court gives the plaintiff the benefit of any doubtful period." 48 This passage shows that the steps to mitigate loss which an owner of land must take when a caveat is lodged are to move promptly to have the caveat extinguished, either by lodging a lapsing notice or by bringing the matter to Court. I do not think that the obligation to mitigate requires the owner to do much more than that: if it were otherwise, the Court would be required to conduct a general investigation into the owner's financial position and to enquire what other transactions might have been available to the owner to hedge against possible loss. This would place an unreasonable burden on owners of land subjected to caveats. When a caveat is lodged and a dispute as to the disposition of the property is on its way to the Court, the owner of the land can be paralysed by the inherent uncertainty of the position in which he or she is placed. It is not easy to know how long it will take for the dispute to be realised; lawyers may advise that the prospects of success are good while adding the cautionary rider that the results of litigation are never predictable. 49 In the present case, there may well have been good reasons within Mr Ross's family which motivated the Vendors to sell to Mr Ross's sister in January 1998 rather than placing the property on the market, either earlier or later. Those reasons were never explored in cross examination of Mr Ross. In my opinion, it is now too late to speculate on what the Vendors might have done and to criticise them for what they actually did. 50 As to whether the Vendors have moved promptly enough to bring the proceedings before the Court, as discussed in Nelson v Kimberley Homes Pty Ltd , I bear in mind that it was the Purchasers who commenced proceedings to enforce the interest which they sought to protect by their caveat. As I have recorded, the caveat was lodged on 14 March 1997 and the Purchasers filed their Summons on 11 June 1997. There was no point in the Vendors lodging a lapsing notice when it was clear that, as matters then stood, the dispute was going to be resolved ultimately by the Court. 51 The Plaintiffs' solicitor filed an affidavit sworn 18 October 2001 in these proceedings in which he sought to explain the delay in bringing the proceedings to hearing, in order to meet a Defence of laches. The affidavit shows that from 30 July 1997 to June 1999 (that is, virtually during the whole of the currency of the caveat) there were concerted efforts by both parties to the proceedings to settle the matter through mediation. In those circumstances, I do not think that the Vendors can be blamed for failing to force the matter into Court for determination. 52 In the particular circumstances of this case, therefore, I am satisfied that the Vendors did not fail to mitigate their loss attributable to the wrongful lodgement of the caveat, in the sense discussed in Nelson .

53 In the result, I am satisfied that the Vendors have made out their case that the caveat was lodged without reasonable cause and that they have suffered loss attributable to the caveat. That loss is the interest payable by the Vendors to Mr Ross's family which would not have been payable had the caveat not prevented the transfer of the land for a price of $291,000 to Mr Ross's sister from the period 19 January 1998 to 12 May 1999. The amount of the interest for such period is the loss for which I will enter judgment against the Purchasers. 54 I will stand the proceedings over for a short time to enable calculations of the amount of compensation, together with interest thereon under s.94 of the Supreme Court Act 1970 (NSW), to be made in accordance with these reasons. 55 I will order that the Plaintiffs pay the Defendants' costs of these proceedings - oOo -

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