Morton v Kim

Factual background

1. In 2016 Mr Morton was the owner of a parcel of land in Greenwich which he proposed to subdivide into two lots. In July 2016 he contracted to sell Lot 2, as identified in an unregistered plan of subdivision, to Jing Hu and Linda Yao (the first contract).
2. In November 2016 Mr Morton contracted to sell the entire property to Ms Kim (the second contract). The second contract envisaged a novation of the first contract so that Ms Kim would become the vendor under the first contract, in place of Mr Morton.
3. The sale of the whole of the land under the second contract was completed in February 2017. However, there was a delay in executing a deed of novation, which caused the purchasers under the first contract (Mr Hu and Ms Yao) to commence proceedings against Ms Kim and Mr Morton.
4. The settlement, which was agreed to at the hearing of the claim on 27 March 2019, involved both Ms Kim and Mr Morton agreeing to take steps to execute the deed of novation. With respect to the unresolved issue of costs, the trial judge held that neither defendant had a reasonable basis to refuse or fail to execute the deed and accordingly each was ordered to pay the plaintiffs' costs of the settled proceedings. There is no challenge to those orders.

Mr Morton's cross-claim

1. The cross-claim by Mr Morton relied upon an indemnity clause in the second contract as a basis for recovery of the costs he was required to pay to Mr Hu and Ms Yao. Special condition 32.1 in the second contract noted that the contract was "subject to and conditional upon the novation of the contract for sale …" between Mr Morton and Mr Hu. (The contract was annexed and the failure to refer to Ms Yao as a purchaser was not material.) Pursuant to special condition 32.2, Ms Kim acknowledged that on signing the contract she was immediately bound by the terms of the first contract, even if a formal novation had not been executed. The key element of special condition 32 for present purposes read as follows: "32.3 The Purchaser shall indemnify and shall keep indemnified the Vendor against any and all claims, actions, proceedings or demands that arise or may arise as a result of the Contract referred to in this Special Condition 32."
2. In order to succeed on his cross-claim, Mr Morton had to establish that the costs incurred by him in the proceedings brought by Mr Hu and Ms Yao arose "as a result of" the first contract. The trial judge held that the costs did not arise from that contract, but from his default in undertaking his implied obligation under the second contract to execute the deed of novation. The reasoning was summarised in the following passage: "[76] In this case the relationship between Mr Morton's obligation under the Second Contract and the First Contract is no more than the anterior existence of the First Contract. In other words, the obligation in the Second Contract to novate the First Contract would not have been contracted if the First Contract did not exist. So understood, any liability which Mr Morton may have arising from his failure to novate the First Contract does not arise 'as a result of' the First Contract because there is not a sufficiently causal or consequential relationship and, further and alternatively, it is too remote."
3. Further, the primary judge stated [2] that his conclusion was "fortified by considering the commercial purpose of the indemnity", adopting the following summary of submissions made on behalf of Ms Kim: [3] "(3) Limiting the indemnity to the First Contract makes commercial sense. At the time Mr Morton entered into the Second Contract, he was already in breach of his obligations under the First Contract. As such, Mr Morton was intending to be indemnified in relation to any claims that might be made against him by the plaintiffs in relation to his failure to perform his obligations to them under the First Contract. It would not be within ordinary contemplation that Ms Kim intended to indemnify Mr Morton for his own failure to novate, and this is reflected in the language that the Second Contract was 'subject to and conditional upon the novation of' the First Contract."

Application for leave to appeal

1. The principles to be applied in considering a grant of leave to appeal from a judgment involving an amount of less than $100,000 are well established. As explained in Joo v Yoo, [4] leave to appeal will not be granted absent demonstration of "an issue of principle, a question of general public importance or an injustice which is reasonably clear". Where the amount in issue is well below the statutory threshold, the need to have regard to the likely disproportion between the costs of an appeal and the amount in issue is reflected in s 60 of the Civil Procedure Act 2005 (NSW). Unless the amount is close to the statutory threshold, the potential disproportion will be a factor weighing heavily against a grant of leave: Be Financial Pty Ltd (atf Be Financial Operations Trust) v Das. [5]
2. Implicitly acknowledging the operation of this principle, the applicant contended that the appeal would provide "an opportunity to authoritatively state the principles of construction of indemnities in a commercial context, and thereby resolve a perceived tension between the businesslike construction of commercial contracts and the principles of construction of indemnities."
3. There are a number of reasons for rejecting this invitation. First, there is a settled principle that an ambiguous contractual provision will be construed in favour of a surety or an indemnifier. [6] Nor is it clear that any tension is created by reference to "commercial context" in relation to commercial contracts.
4. Secondly, so far as the case involved the application of established principles, an applicant must establish an error which is more than merely arguable. In the present case the conclusion reached by the trial judge as to the operation of the indemnity was clearly open given the language of the special condition and relevant contextual considerations. The applicant submitted that "[a] valid novation serves to release a party from future obligations under an agreement where another party is substituted into their role". However, as the trial judge correctly noted, Ms Kim was not responsible for the execution of the deed of novation by Mr Morton. His expenses resulted from his failure to take a step under the second contract which only he could take. On its face, there was no error in the finding of the trial judge that the indemnity did not extend to Mr Morton's failure to execute the deed of novation.
5. Thirdly, there is no issue of general public importance; the proper construction of the contract affects only the parties to it in the particular circumstances of the case. The small amount in issue militates against a grant of leave in these circumstances.

Conclusion

1. For these reasons leave to appeal should be refused. Mr Morton accepts that the usual order as to costs should be made.
2. It remains to note that identifying appropriate parties seems to have given rise to problems. Special condition 32 failed to refer to one of the purchasers under the first contract, namely Ms Yao; the summons seeking leave to appeal joined not only Ms Kim, but Mr Hu and Ms Yao. The cross-claim had correctly identified Ms Kim as the cross-defendant. There was no reason to join Mr Hu and Ms Yao to the proceedings in this Court. They filed a submitting appearance, and should have their costs on that basis.
3. The Court makes the following orders: 1. Dismiss the summons seeking leave to appeal from the judgment of Kunc J in the Equity Division dismissing the applicant's cross-claim. 2. Order that the applicant pay the costs of the first respondent (Ms Kim) on the usual basis and one set of costs with respect to the second and third respondents (Mr Hu and Ms Yao) on a submitting basis.

Endnotes

1. Hu v Kim [2019] NSWSC 448 at [64]-[79].
2. Hu v Kim at [77].
3. Hu v Kim at [63].
4. [2016] NSWCA 172 at [40] (Ward JA, Payne JA and Sackville AJA).
5. [2012] NSWCA 164 at [39].
6. Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; [2004] HCA 28 at [23]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 November 2019