McDonald v Dennys Lascelles Ltd [1933] HCA 25;

[1933] HCA 25

High Court of Australia|1933-05-15|Before: McTiernan JJ, Rich J, Starke J

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Source facts

Court

High Court of Australia

Decision date

1933-05-15

Before

McTiernan JJ, Rich J, Starke J

Source

Original judgment source is linked above.

Judgment (63 paragraphs)

[1]

McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457 (15 May 1933)

[2]

McDonald and Another Defendants, Appellants; and Dennys Lascelles Limited Plaintiff, Respondent.

[3]

In this case I have had the advantage of reading the judgment prepared by my brother Dixon and I agree with his conclusion and reasons. I desire to add that, although, upon examination, the decisions as to relief of sureties by reason of the discharge of the original debtor appear to draw no clear lines between the discharge, on the one hand, of the surety because the creditor has altered the relations between himself and the principal debtor, upon the subsistence of which the surety is entitled to rely, and, upon the other hand, cases in which the surety is relieved regardless of any fault in the creditor simply because, through the failure of the principal liability, the groundwork of the accessory obligation has disappeared, yet I cannot doubt that English law, like the civil law, does not insist upon the fulfilment of the surety's liability where the creditor has become disentitled to the benefit intended to be secured by the principal obligation. In cases in which the bankruptcy law, or the law relating to the winding up of companies, or the law authorizing compromises and schemes of arrangement among shareholders and creditors of companies, absolves the principal debtor from liability, the object is not to disentitle the creditor from the benefit which the principal obligation was intended to secure, but merely to change the nature of his right, in the interests as well of himself as of all others who have claims of like degree against the debtor. Once it is decided, as upon the authority of [] I think it must be decided, that as between purchaser and vendor the vendor cannot retain, let alone recover, an overdue instalment of purchase money after the contract has come to a premature end even by his own fault, I think it follows that no guarantee of such an instalment could be enforced by the vendor. I do not see upon what principle a vendor's assignees can stand in any different position. The obligation in this case incurred by the appellants was that of guarantors. I have not been able to see any reason for treating it as an independent, as opposed to a collateral, obligation. It secures the same sum of money: it is described as a guarantee and, to the knowledge of the creditor, as between the appellants and the purchasers, the purchasers' liability was primary and the appellants' secondary. Of course there was nothing to prevent a contract being made between the appellants and the respondent imposing upon the latter an absolute liability to pay the sum of £1,000 whatever happened as between the respondent and the purchasers, but it would be contrary to principle, I think, to treat a document described as a guarantee, by which due payment of a sum described as an instalment is guaranteed, as having such an independent and absolute operation.

[5]

This was an action upon a guarantee under seal, dated 19th February 1930, in the following terms: "In consideration of Dennys Lascelles Limited Geelong agreeing to postpone payment of the sum of one thousand pounds the instalment now due under the contract of sale made between C. H. Besley and others with E. W. Dunkley and the Rye Grazing Company Proprietary Limited and the benefit of which has now been assigned to Dennys Lascelles Limited until the twenty-fourth day of January 1931 We John McDonald and Arthur Henry Holdsworth ... being two of the directors of the said Rye Grazing Company Proprietary Limited do hereby jointly and each of them separately guarantee to Dennys Lascelles Limited the due payment by the said E. W. Dunkley and the Rye Grazing Company Proprietary Limited of the said sum of one thousand pounds on the said twenty-fourth day of January 1931." Besley and others, by a contract of sale dated 23rd June 1927, had sold certain lands to Dunkley and the company for £23,462. The deposit on the sale was £6,000, and the balance was to be met by payments of £1,000 on 24th January in each of the years 1928, 1929 and 1930, and of £14,462 on 24th January 1931. The conditions of sale provided for forfeiture of the deposit and rescission of the contract in case the purchasers made default in payment of the purchase money or any part of it, and that time should be considered of the essence of the contract. By an assignment dated 14th August 1929, Besley and others, in consideration of the sum of £2,000, assigned to Dennys Lascelles Ltd. all that the said contract of sale of 23rd June 1927 and all their right, title, benefit, advantage, property, claim and demand whatsoever in or to the same and in the property therein and the moneys then or thereafter payable thereunder. Notice of this assignment was given to Dunkley and the Rye Grazing Co. Pty. Ltd., the purchasers named in the contract of sale. These purchasers did not pay the instalment of £1,000 falling due under the contract on 24th January 1930, and an arrangement was made, extending the time to 24th January 1931, upon the execution of the guarantee above mentioned. But the purchasers did not pay this instalment on 24th January 1931, or the balance of the purchase money, £14,462, due under the contract on that date. And on 5th June 1931 Dennys Lascelles Ltd. brought this action on the guarantee above set forth. At this time, their right to recover was perfectly clear. But on 19th June 1931 the purchasers, though in default, having discovered that a contract of sale under which their vendors had acquired the land sold to them (the purchasers) had been rescinded for non-payment of purchase money, intimated that they treated their contract as at an end, because their vendors, and the assignee, Dennys Lascelles Ltd., were no longer able, ready or willing to complete the contract.

[6]

I do not stay to consider whether the purchasers had any right so to rescind the contract, for their vendors and Dennys Lascelles Ltd. accepted the renunciation and acted as if the contract were ended. The rescission of the contract, however, did not operate to extinguish it ab initio, but in futuro, so as to discharge obligations under it unperformed (Salmond and Winfield, Law of Contracts, (1927), p. 320). It is of no little importance in the present case to ascertain the consequences of the rescission. The precise terms of the contract often determine those consequences. But, apart from any special stipulations of the contract, I apprehend that a purchaser who is not himself in default is discharged from further performance of the contract and is entitled to recover any money paid or property transferred by him thereunder; he is entitled to take proceedings in equity to assert his right and secure restitution, or to sue at law (Palmer v. Temple[2]; Mayson v. Clouet[3]; Williams on Vendor and Purchaser, 3rd ed. (1923), vol. 2, pp. 1012, 1013). On the other hand, a vendor who is not himself in default is discharged from further performance of the contract, and is entitled to the return of his land the subject matter of the contract, or his interest therein, but is bound to restore any moneys paid or property transferred to him thereunder: the vendor cannot have the land and its value too (Laird v. Pim[4]; Williams on Vendor and Purchaser, 3rd ed., vol. 2, p. 1013). A deposit paid as security for the completion of the contract stands perhaps in an exceptional position, because the intent of the parties is that, if the contract goes off by default of the purchaser, the vendor shall retain it (Howe v. Smith[5]). On the other hand, stipulations providing for forfeiture of instalments of purchase money in case of default have been treated as in the nature of a penalty and relief given against them (In re Dagenham (Thames) Dock Co.; Ex parte Hulse[6]; Kilmer v. British Columbia Orchard Lands Ltd.[7]; and cf. Palmer v. Moore[8]). Relief against forfeiture is no doubt an equitable remedy. But, in the case of a rescission of a contract of sale of land by a vendor, moneys paid under the contract by a purchaser in default that are not forfeited can be recovered at law. That is recognized, I think, in Palmer v. Temple[9] and in Ockenden v. Henly[10]; and, if it be not a legal remedy, still the equitable remedy is clear and well established. Consequently, after the rescission of the contract, about June 1931, an action or proceeding for the recovery of the instalment of £1,000, the payment of which had been extended to 24th January 1931, and of the balance of purchase money, could not have succeeded, for the vendors were not entitled to both the land (or their interest therein) and the purchase money. The assignee of the vendors stands in no better position, for it accepted or acted upon the renunciation of the contract as well as the vendors; it cannot be affirmed that it was, after the date of the purchaser's rescission, ever ready or willing to carry out the contract or make title to the property sold.

[7]

I now turn to the guarantee. Ex facie, the appellants, McDonald and Holdsworth, contract with the respondent, Dennys Lascelles Ltd., to be responsible to it by way of security for the payment of £1,000 by Dunkley and the Rye Grazing Co. Pty. Ltd. on 24th January 1931. The obligation is that of a surety, and therefore "a collateral obligation postulating the principal liability" of Dunkley and the Rye Grazing Co. Pty. Ltd. And, apart from the express terms of the contract, Dennys Lascelles Ltd. knew that the relationship between the appellants and Dunkley and the Rye Grazing Co. Pty. Ltd was that of surety and principal debtor (Rouse v. Bradford Banking Co.[11].) A surety, however, is not liable on his guarantee where the principal debt cannot be enforced, because the essence of the obligation is that there is an enforceable obligation of a principal debtor (De Colyar on Guarantees, 3rd ed. (1897), p. 210). A surety is discharged where the principal debtor is released without his (the surety's) consent. Again, where the principal is entitled to a set-off against the creditor's demand, arising out of the same transaction as the debt guaranteed and in fact reducing that debt, the surety is entitled to plead it in an action by the creditor against the surety alone (Bechervaise v. Lewis[12]). But the generality of the rule is subject to some modifications. A release in bankruptcy does not discharge a surety, for that is the act of the law (Ex parte Jacobs; In re Jacobs[13]; In re London Chartered Bank of Australia[14]). Again, a person who becomes surety for another under a known disability may be treated as the principal debtor (Wauthier v. Wilson[15] - the case of an infant), and a person who becomes surety for the repayment of money borrowed by a company beyond its powers has been held liable (Yorkshire Railway Wagon Co. v. Maclure[16]; Garrard v. James[17]), either because "the obligation of a mere guarantee for a debt can be satisfied by payments by the surety, who may be considered as prepared to lose his right over against the corporation, if the law forbids it to pay" (Rowlatt, Principal and Surety, 2nd ed. (1926), p. 166, note (d)), or because the surety's liability arises from the failure or omission of the company, from whatever cause, to meet its obligations (Garrard v. James). The present case, however, stands clear of these modifications of the rule, for there has been no discharge of the obligations of the contract, in bankruptcy or analogous proceedings, and no question of disability or incapacity arises. The principal debt cannot here be enforced owing to the acts of the parties in rescinding the contract of sale. It is true, I think, that the cause of the breakdown in carrying out the contract of sale was the default of the purchasers, Dunkley and the Rye Grazing Co. Pty. Ltd., in payment of the instalment of £1,000 and of the balance of the purchase money on 24th January 1931. The defendants - the sureties - who were directors of the Rye Grazing Co. Pty. Ltd., were no doubt aware of this default, and probably appreciated its consequences, both to the vendors and to their assignee, the plaintiff. But do those facts make it inequitable for the sureties to rely upon the fact that the principal debt is no longer recoverable owing to the rescission of the contract? It does not appear to me that they affect the vital position, which is that the principal debt is no longer enforceable or recoverable, by reason of the rescission of the contract; and the legal consequence of that position is that the sureties are not liable.

[12]

Even if it arose apart from the second question, the first could not be answered satisfactorily without some examination of the nature of the liability incurred by a purchaser under an agreement to prepay before conveyance part of the purchase money and of the responsibility of the vendor to repay instalments so prepaid when the contract comes to an end and no conveyance is to be made. But, in addition, it will be found material to the second question to ascertain the principle upon which the purchasers' liability is discharged; because it is evident that a surety might remain responsible for a debt which simply ceases to be recoverable by legal process from the principal debtor, while his responsibility would terminate if the principal obligation were annihilated upon grounds going to the just right to the enjoyment of the sum in question as between the parties to the primary contract. It thus appears necessary to consider with some degree of exactness what are the material rights and obligations of vendor and purchaser with respect to instalments. It must be borne in mind that the instalment in dispute was overdue when the contract came to an end. According to the terms of the contract, it was originally due and payable on 24th January 1930. Was it then recoverable as a sum certain in money? Convincing reasons for an affirmative answer have been given in Victoria and in New Zealand. Sir John Salmond has stated the principles determining this conclusion: - "As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly. This general rule is sufficiently illustrated and established by the case of Laird v. Pim1(1841) [1841] EngR 237; 7 M. & W. 474; 151 E.R. 852.. The sale of land is in this respect similar to the sale of goods. In the case of goods sold and delivered, and of goods bargained and sold, the property in each case having passed to the buyer, the seller's remedy is to sue for the price. But if under any executory contract the buyer wrongfully refuses to accept the goods the seller's only remedy is an action for damages. The general rule, however, that in an executory contract for the sale of land the vendor cannot sue for the price is excluded whenever a contrary intention is shown by the express terms of the contract. And it seems established by authority that a contrary intention is sufficiently shown in all cases in which by the express terms of the contract the purchase money or any part thereof is made payable on a fixed day, not being the agreed day for the completion of the contract by conveyance. In all such cases the purchase money or such part thereof becomes, on the day so fixed for its payment, a debt immediately recoverable by the vendor irrespective of the question whether a conveyance has been executed and notwithstanding the fact that the purchaser may have repudiated his contract. Notwithstanding such repudiation the vendor is not bound to sue for damages or specific performance, but may recover the agreed purchase money" (Ruddenklau v. Charlesworth[19]). In Reynolds v. Fury[20], the Full Court of Victoria, after a very full examination of the authorities, decided that instalments of purchase money, which, by the conditions of a contract of sale of land are payable at fixed times before conveyance, become immediately recoverable as debts or liquidated demands, notwithstanding that the sale has not yet been completed by conveyance.

[13]

From this it follows that after 24th January 1930, subject to the vendors' agreement to forbear between a date about 18th March 1930, when the conditions stipulated for their forbearance were complied with, and 24th January 1931, the instalment might have been recovered from the sub-purchasers as a liquidated demand. Did the subsequent discharge of the second contract relieve the sub-purchasers of this liability? When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach. (See Boston Deep Sea Fishing and Ice Co. v. Ansell[21]; Hirji Mulji v. Cheong Yue Steamship Co.[22]; Cornwall v. Henson[23]; Salmond and Winfield, Law of Contracts, (1927), pp. 284-289; Morison, Principles of Rescission of Contracts (1916), pp. 179, 180.) It does not, however, necessarily follow from these principles that when, under an executory contract for the sale of property, the price or part of it is paid or payable in advance, the seller may both retain what he has received, or recover overdue instalments, and at the same time treat himself as relieved from the obligation of transferring the property to the buyer. When a contract stipulates for payment of part of the purchase money in advance, the purchaser relying only on the vendor's promise to give him a conveyance, the vendor is entitled to enforce payment before the time has arrived for conveying the land; yet his title to retain the money has been considered not to be absolute but conditional upon the subsequent completion of the contract. "The very idea of payment falls to the ground when both have treated the bargain as at an end; and from that moment the vendor holds the money advanced to the use of the purchaser" (Palmer v. Temple[24]). In Laird v. Pim[25], Parke B. says: "It is clear he cannot have the land and its value too"; the case, however, was one in which conveyance and payment were contemporaneous conditions (see Laird v. Pim[26]). It is now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract (Mayson v. Clouet[27]). Although the parties might by express agreement give the vendor an absolute right at law to retain the instalments in the event of the contract going off, yet in equity such a contract is considered to involve a forfeiture from which the purchaser is entitled to be relieved (see the judgment of Long Innes J. in Pitt v. Curotta[28]). The view adopted in In re Dagenham (Thames) Dock Co.; Ex parte Hulse[29] seems to have been that relief should be granted, not against the forfeiture of the instalments, but against the forfeiture of the estate under a contract which involved the retention of the purchase money: and this may have been the ground upon which Lord Moulton proceeded in Kilmer v. British Columbia Orchard Lands Ltd.[30], notwithstanding the explanation of that case given in Steedman v. Drinkle[31] and Brickles v. Snell[32]. However, these cases establish the purchaser's right to recover the instalments, other than the deposit, although the contract is not carried into execution. If a vendor under a contract containing an express power to forfeit instalments at first determined the contract and retained the instalments but afterwards resiled from his former election to treat the contract as discharged and insisted that, if the purchaser was unwilling to forfeit his instalments according to the tenor of the agreement, he should at least carry out the sale, perhaps the purchaser as a term of equitable relief against forfeiture would be required to carry out his contract. But, where there is no express agreement excluding the implication made at law, by which the instalments become repayable upon the discharge of the obligation to convey and the purchaser has a legal right to the return of the purchase money already paid which makes it needless to resort to equity and submit to equity as a condition of obtaining relief, the vendor appears to be unable to deduct from the amount of the instalments the amount of his loss occasioned by the purchaser's abandonment of the contract. A vendor may, of course, counterclaim for damages in the action in which the purchaser seeks to recover the instalments.

[15]

The second question remains, namely, whether the cesser of the sub-purchasers' liability for the instalment of £1,000 operates to discharge the sureties. Their liability had, like that of the sub-purchasers, become immediately enforceable, and it is said that it could not be discharged by a subsequent failure of the obligation guaranteed. The consequences of the dissolution of the principal obligation are described in Pothier on Obligations, Evans' translation (1806), vol. i., p. 235, as follows: - "It results from the definition of a surety's engagement, as being accessory to a principal obligation, that the extinction of the principal obligation necessarily induces that of the surety; it being of the nature of an accessory obligation, that it cannot exist without its principal; therefore, wherever the principal is discharged, in whatever manner it may be, not only by actual payment or a compensation, but also by a release, the surety is discharged likewise; for the essence of the obligation being, that the surety is only obliged on behalf of a principal debtor, he therefore is no longer obliged, when there is no longer any principal debtor for whom he is obliged." In the civil law this general proposition is subject to qualifications and exceptions, but it formulates a leading principle. As a general principle, subject to similar qualifications and exceptions, it appears to be well recognized in English law, although it is evidenced by decisions giving it particular applications and by dicta rather than by formal pronouncements (Lakeman v. Mountstephen[33], Bechervaise v. Lewis[34], Finch v. Jukes[35], Mortgage Insurance Corporation v. Pound[36], Stacey v. Hill[37], and Morris & Sons Ltd. v. Jeffreys[38]). It does not extend to a discharge of the principal debtor's personal liability by operation of law when the discharge is for the purpose of liquidating his affairs or transforming the rights of the creditor against him into rights against or in respect of his assets. The doctrine should be understood to look rather to the continuance of a just claim in the creditor to receive payment in respect of the principal debtor's obligation than to the latter's relief from actual personal liability.

[17]

The judgment appealed from, however, treats the case as depending upon very special facts and as much affected by the construction to be given to the guarantee in the light of the circumstances existing at the time. I have been unable to find, either in the terms of the instrument or in the surrounding circumstances, any sufficient reason for considering the promise of the defendants anything other than a collateral or secondary undertaking securing the fulfilment of the principal or primary liability under the contract. The fact that the promisee, the plaintiff, was assignee of the principal obligation does not appear to me a reason for treating the guarantee as a detached or independent liability. The consideration that the discharge of the principal obligation did not proceed from any act or default of the creditor is not, in my opinion, an answer to the consequential discharge of the accessory liability of the surety, because the case is one in which at law and in equity the creditor became disentitled to the benefit or advantage the principal obligation was designed to give him. The contention, apparently adopted by Cussen A.C.J., that the result would be the same as it would be if the defendants had paid the money and were seeking to get it back, I also have assumed to be correct, except that I have, for the reasons given, considered it unnecessary to decide whether the defendants should have recourse in such an event to the assignors or to the assignee. But, proceeding upon this assumption, I think the defendants could have recovered the instalment thus supposed to be paid from one or the other. The conduct of the purchasers in bringing about the destruction of both transactions through their failure to pay the balance of purchase money under the second contract does not, upon the cases, disentitle them from recovering the instalments other than the deposit, and I, therefore, do not see how it can give rise to equitable considerations which preclude the guarantors, whose participation in the default of the purchaser company was only in the character of directors, from relying upon the ordinary doctrines affecting their liability as sureties.