McKenry v White

5633/02 KEITH McKENRY & ANOR v ARTHUR LESLIE WHITE JUDGMENT 1 HIS HONOUR: The subject matter of these proceedings is whether there is or is not a binding contract for the sale by the defendant to the plaintiffs of a lot of farmland near Yass. The relevant land is known as lot 173 in a proposed subdivision and is of about 80 hectares (200 acres) ("the property"). 2 The plaintiff, Dr McKenry, is a Doctor of Philosophy and holds or has held office as an Assistant Taxation Commissioner of the Commonwealth. His wife, who is the second plaintiff, also holds high office in the Commonwealth Public Service. The defendant is a farmer of little education. However, I should say that I do not think that any disparity between the educational or other backgrounds of the parties plays any real part in this case. Despite a lack of higher education, the defendant struck me as an ordinary man with a reasonably good grasp of affairs. 3 Oral evidence was given by Dr McKenry and Mr White. No serious damage was done to the credit of either in the short cross examination which occurred and they both appeared to me to be inherently believable witnesses. The only thing that might be said, insofar as it matters, is that the recollection of relevant events and conversations of Dr McKenry and Mrs McKenry appeared somewhat more detailed than that of Mr White. 4 The plaintiffs are both approaching retirement. They have already entered into some activity relating to the raising of alpacas and their desire to acquire the property was for the purpose of expanding that activity in their retirement. Mr White had for some time been trying to sell the property and had had two earlier prospective sales fall over. The latter of them was a contract, the rescission of which was confirmed at about the time of his negotiations with the McKenrys. 5 The property was first viewed by Dr McKenry on 10 July 2002 and he returned with his wife on 15 July 2002. The evidence shows there was some negotiation between the parties out on the property as to price and other terms. This culminated, said Dr McKenry, in the following exchange: "I said: 'Bearing all this in mind, will you accept a purchase price of $160,000'. He said, 'Yes'. We then shook hands on the deal."

This conversation having taken place out on the property, the three then retired to Mr White's house on a nearby property. Dr McKenry said that the following was then said: "I said: 'Let's exchange the names of our solicitors and we can each tell our solicitors of the terms of our agreement. The solicitors can then be instructed to carry the matter forward'. He said: 'Agreed'."

It was after that that there was written out the document to which I shall shortly come, which is central to this case. 6 Mrs McKenry's version was that out on the property the discussions finished with Mr White saying, "Agreed". In the house she says that the following was said during the process of writing out the document: "Keith said: 'I have written down the terms of our agreement. After we sign it, we can brief each of our solicitors to go through the formalities.' Mr White said: 'Yes. Write down what we have agreed to so I can hand it to my solicitors.' After he had read the document he said, 'That is what we have agreed to. I am happy to sign it." 7 The only significant difference in Mr White's version is that he said in the house at the dining room table: "You can write it down (the terms of the deal) to make sure I get the things right to give to my solicitor to draw up the contract." 8 Mr White denied that there was any mention of a deposit. Dr McKenry gave evidence that the following was said in the house: "I said: 'Les, do you want me to provide in the agreement for a deposit?' He said: 'No, it is not necessary. We can leave matters like that to our solicitors. It does not need to be included as part of the agreement.'"

The mention of a deposit is not corroborated by Mrs McKenry's evidence, which is silent on this subject. 9 The document was written in duplicate in Dr McKenry's handwriting. Both copies were signed by Mr White and initialled by Dr and Mrs McKenry. The terms of the document are as follows: "Purchase from ARTHUR LESLIE WHITE of PO BOX 337 YASS

by KEITH & JENNIFER ROSE MCKENRY of 5 BONNEY ST, AINSLIE ACT 2602

of a 200 acre property on Black Range Road (block 172)

Purchase Price $160 000 [sic], settlement by 1 Nov 2002

Work to be completed by present owner 1 Fencing of Western boundary 2 Clearance of Blackberries 3 Connection of electric power to the block 4 Removal of rabbit burrows.

Noted that a building permit exists for block. Noted also that present owner retains free agistment on block for two years after settlement, and thereafter agistment arrangements will be by agreement." 10 Two things are plain on the evidence. As I have said, both counterparts were signed or initialled by all three parties and one counterpart was retained by each side. Secondly, it is quite plain from things said on both sides that it was anticipated that a formal contract would be drawn up by solicitors. The issue in the case is whether or not there was to be a binding legal agreement pending the drawing up and exchange of the formal contracts or whether there was to be a valid binding contract pending that exchange. 11 At one stage it was suggested that Mr White had some difficulty with hearing and that that may have some bearing on the situation. However, Mr White conceded that he had no difficulty in hearing in the dining room of his house during the discussion there on 15 July 2002 and any difficulty he has with hearing has no bearing upon the case. 12 Four days later, on 19 July 2002, the defendant's solicitor, Peter Murphy of Elrington Boardman Allport of Yass, wrote to the plaintiffs' solicitors, O'Connor Harris of Canberra, forwarding a contract for approval and execution. The letter continued: "Kindly note that the full deposit should be paid in accordance with the Contract on or before exchange.

No legal obligations are to arise until such time as an exchange of Contracts has taken place."

O'Connor Harris replied by fax on 25 July 2002, referring to "previous correspondence and discussions" and thanking them for submission of the "draft counterpart contract". Neither at this, nor any other stage, was there any suggestion by O'Connor Harris that the statement in Elrington Boardman Allport's letter of 19 July 2002 that were to be no legal obligations until exchange was incorrect. There was no demur to this proposition at all, despite further correspondence between the solicitors. Dr McKenry denied that he had seen the solicitors' correspondence at the time, but there is no doubt this correspondence was conducted between the solicitors appointed by the respective parties to perfect the transaction on their behalf. 13 On 30 July 2002 Mr White wrote to Country Energy in Queanbeyan asking for the connection of electricity supply to the property. He indicated that the settlement date "for the sale of the land" is 1 November and that it would be appreciated if approval could be had by that time. In the letter he also stated: "As you are aware, the original purchasers have withdrawn from sale and another buyer has a contract in place with us for the sale". 14 The matter proceeded in due course until a telephone conversation between Dr McKenry and Mr White on 4 September 2002. In that conversation of 4 September 2002 Mr White stated that he did not intend to proceed with the sale and was selling the property to other purchasers. That transaction was said to be "fairly well through". It is apparent that what had occurred was: first, it had become plain that the electricity connection was going to cost Mr White some $25,000, rather than being without cost to him, as he had anticipated; secondly, the new purchasers had offered him $200,000 plus the cost of the electricity connection, instead of $160,000 inclusive of that cost. Contracts for the subsequent sale have in fact been entered into and it awaits completion. 15 When informed of Mr White's changed intentions in the telephone conversation of 4 September 2002, Dr McKenry, who sets out in an affidavit a lengthy version of the conversation, was equivocal in his reaction. At one point he records himself as having said: "So the other offer was higher. That is irrelevant to the point of view that we had an agreement. And you did not even give us the option of matching the other offer."

This is typical of equivocal reactions throughout his version of the conversation to the effect that, on the one hand, there was a binding agreement between them, on the other, that the McKenrys should have been given an opportunity to match the higher offer. It has been put to me that the equivocation arises from his shock at being presented with the new situation. I do not doubt that Dr McKenry, who, with his wife, was very keen to have this property, was shocked, but that does not alter the fact that there was equivocation. 16 There is a large body of authority as to the circumstances in which contracts for the sale of land may be regarded as binding without exchange of formal contracts, both before and after the decision of the High Court in Masters v Cameron (1954) 91 CLR 353. That decision is pivotal in this field of jurisprudence, and particularly the classic analysis at 360 - 362 concerning the categories into which cases in this area may fall. A recent statement of the law which is adequate for present purposes is to be found in the judgment of McHugh JA (as his Honour then was) in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634 - 635: "However, the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at 638; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-334, 337. If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.

Even when a document recording the terms of the parties' agreement specifically refers to the execution of a formal contract, the parties may be immediately bound. Upon the proper construction of the document, it may sufficiently appear that 'the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms': Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 317.

Thus, in Niesmann v Collingridge (1921) 29 CLR 177, the defendant made a 'firm offer' of his land to the plaintiff at a specified price part of which was payable 'on the signing of contract'. The plaintiff verbally accepted the offer. The High Court upheld a finding that there was a binding contract. Rich J and Starke J said (at 185) that the signing of the contract was a term of the bargain which could be specifically enforced. That decision was applied in Godecke v Kirwan where a document signed by the vendor and the purchaser offered to buy the vendor's land at a specified price subject to the conditions of the Transfer of Land Act 1893 (WA) and eleven special conditions. Possession was to be taken 'upon the signing and execution of a formal contract of sale within 28 days of acceptance of this offer'. One of the special conditions provided for 'a further agreement to be prepared ... by (the vendor's) solicitors containing the foregoing and such other covenants and conditions as they may reasonably require'. The High Court held that the document constituted a contract. Walsh J, with whose judgment Mason J agreed, said that the parties did not intend to make the execution of a formal contract a condition of the existence of a binding contract. He held (at 641) that '... there should be implied a promise by each of the parties that he would sign a formal contract within the twenty-eight days and would do everything necessary to enable this to be done within that time'.

In my opinion the grounds in this case for holding that a binding contract was made are stronger than in either of the last two cases. The effect of the correspondence was to create an immediately binding contract which was to continue until formal contracts were exchanged."

His Honour in that case proceeded to find, by reference, in the context of all its facts, to the statement by solicitors that if certain conditions were met (which were met) there would be "a legally binding agreement in principle" until the exchange of contracts. Despite the use of the words "in principle", his Honour found that there was a legally binding contract before exchange in that case. 17 I have taken into account all the matters that were put into evidence in this case. The strengths of the plaintiffs' case, which are not contemptible, are the careful and considered preparation in counterpart form of the document of 15 July 2002, its authentication by execution, its firm language of purchase and the detailed recording of special conditions. In addition, there is the apparent admission in the defendant's letter to Country Energy of 30 July 2002 of the new "contract in place". So far as that admission is concerned, I bear in mind the caveats uttered by Gleeson CJ in his judgment in the Commonwealth Games case supra (at 547) as to the caution with which material in communications between a party to the transaction and third parties must be approached and also as to what exactly ought be taken to be admitted by statements about contractual intention in the language of laymen. 18 The strengths of the defendant's case in the overall context are the presumption in New South Wales in favour of there being no binding contract before exchange; the equivocal nature of what was said about the document of 15 July as to whether it was regarded by the parties at that time as a binding contract or only clear instructions to their respective solicitors; and the defendant's solicitor's clear statement in his letter of 19 July 2002 that there were to be no legal obligations until exchange, which was not demurred from on the plaintiffs' side. 19 The subsequent correspondence can be taken into account in inferring whether or not the parties intended a binding agreement before exchange. As Gleeson CJ (when Chief Justice of this Court) said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 547 - 548: "There is ample authority for the proposition that reference may be made to the correspondence between the parties subsequent to 13 June 1986 for the purpose of showing that 'it was not in the contemplation of either party that they were to be bound until all the essential preliminaries had been agreed to, nor until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature': Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 669 per Griffiths CJ; see also Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68; Hussey v Horne-Payne (1879) 4 App Cas 311; B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 and Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251." 20 The matter is not without some difficulty but, taking into account all the above matters, I have come to the conclusion that I do not draw the inference that the parties intended to enter into binding legal obligations on 15 July 2002. There is no doubt both parties contemplated the preparation and exchange of formal contracts, nothing that passed between them indicated that they were to be bound in the meantime and their solicitors proceeded in the ordinary course treating the handwritten documents as instructions to them for the contract, which I infer is how the parties intended them. 21 The defendant took in his pleading and enunciated at the trial a number of defences in addition to the denial of a binding contract. Those pursued at the trial were:

(1) That rectification was not possible because the rights of innocent third parties were involved. (2) That there was an implied condition of the contract that the obligations of the defendant under it were to arise only if the defendant were able to have electric power connected to the property under a particular policy of Country Energy known as the "shared asset policy" at little or no expense to the defendant. (3) That the plaintiffs were estopped from asserting that there was a legally binding contract effective from 15 July 2002 by reason of the representation arising from silence in the face of the defendant's solicitor's assertion in his letter of 19 July 2002 that there were to be no binding legal obligations before exchange and reliance upon that representation by the defendant to his detriment in exchanging a contract with third parties. 22 The conclusion that I have come to as to the existence of a binding contract renders unnecessary any formal finding on my part in relation to these defences. I shall say only the following concerning them. 23 As to the rectification point, it is quite clear on all the evidence that the property which the parties intended to deal with between themselves was correctly described as lot 173, not lot 172. There was absolutely no confusion between them concerning this. In general terms the plaintiff, if otherwise successful, would be entitled to rectification. The only point which the defendant takes depends upon the proposition which is stated as follows in Meagher, Gummow and Lehane's Equity Doctrine and Remedies (4th ed, 2002) at [26-095] as follows: "Rectification will not be decreed if to do so would prejudice the bona fide purchaser for value who has acquired an interest in the property dealt with in the instrument sought to be rectified."

Mr I E Davidson, of counsel for the defendant, pressed on me that the new purchasers from the defendant had an interest in land which fell within that principle. I shall say only that I do not accept that the interest already acquired by those purchasers is the interest of a "bona fide purchaser for value" so as to bring the defendant within that rule. 24 So far as the question of an implied term is concerned, I need say no more than that there is nothing in either the documentation or in the evidence of what passed between the parties from which such an implied term could possibly arise; there is no evidence of discussion of the quantum of the cost of the electricity connection or what the defendant or anyone else anticipated that cost would be. 25 However, the case may well be different in relation to the estoppel defence were it necessary for the defendant to rely upon it. It seems to me that the conduct of the plaintiffs' solicitor, acting as their agent, in failing to respond to or demur from the proposition put by the defendant's solicitor that there were to be no legal relations until exchange amounted to a representation that the plaintiffs accepted that situation. The evidence indicates that the defendant consulted his solicitor about his position before proceeding to exchange with fresh purchasers. I do not doubt that that solicitor directly relied upon this representation in giving advice and that the defendant, through him, relied on the representation in proceeding to exchange the fresh contract, a situation which would certainly be to his detriment if the agreement reached on 15 July 2002 were now to be treated as legally binding. 26 It seems to me that the appropriate orders to be made arising from the foregoing are that there should be judgment for the defendant on the plaintiffs' claim. That appears to me to resolve the matters between the parties and it does not seem to me necessary to make any order on the defendant's cross claim, which should therefore be dismissed. I find it difficult to imagine that there can be a result as to costs other than that the plaintiffs should pay the defendant's costs of the proceedings, unless there is some matter relevant to costs which has not yet been laid before me. 27 I should not leave the case without making some comment on the way in which it was conducted. The evidence, including cross examination, was presented and submissions made in one day, enabling me to deliver judgment at ten o'clock on the morning of the second day reserved for the hearing of this case. The conduct of the case by Mr I E Davidson and by Mr P T Newton, of counsel for the plaintiffs, was succinct in the extreme. Despite its succinctness, each counsel put his client or clients' case forcibly and, it seemed to me, to the utmost effect. In my view it was a model of how legal proceedings can be conducted in a succinct and forceful fashion whereby clients' interests are in no way compromised but the cheap and quick administration of justice is fostered. 28 The orders of the Court will be:

(1) There will be judgment for the defendant on the plaintiffs' claim. (2) Dismiss the defendant's cross claim. (3) Order that the plaintiffs pay the defendant's costs of the proceedings. (4) Order that Caveat 9056168 be withdrawn from folio identifier 17/237298 forthwith. (5) Discharge the plaintiffs from their undertaking as to damages as of this day. (6) Liberty to apply on three days' notice. (7) Direct that these orders be entered forthwith. **********

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