Nassif & Ors v Caminer; Caminer v Nassif & Ors

Supreme Court of NSW|2008-05-01|Before: Jagot AJ

CITATION : Nassif & Ors v Caminer; Caminer v Nassif & Ors [2008] NSWSC 412

CATCHWORDS : CONTRACT - REAL PROPERTY - contract for sale of land - claim by purchaser for part of purchase price to be set aside - vendor did not rescind and refused to set aside part of purchase price - whether purchaser's claim a claim under cl 7 of the standard contract for sale of land (2005 ed.) - whether special conditions excluded claim - whether purchaser validly terminated for vendors' anticipatory breach - whether vendor validly terminated for purchaser's repudiation by purported termination - claim for repayment of the deposit

CASES CITED : Lucantonio v Ciofuli [2002] NSWSC 509 Simring v Marinchek [1999] NSWSC 35

TEXTS CITED : Butt, The Standard Contract for Sale of Land in New South Wales, 2nd ed., 1998

2777 of 2007 PLAINTIFF Sarkis Nassif & Ors

DEFENDANT David Martin Caminer PARTIES : 2782 of 2007 PLAINTIFF David Martin Caminer

DEFENDANT Sarkis Nassif & Ors

COUNSEL : Mr D L Warren - plaintiff (2777/07) - defendant (2782/07) Mr D H Murr SC with Ms T Baw - defendant (2777/07) - plaintiff (2782/07)

SOLICITORS : Osbornes - defendant (2777/07) - plaintiff (2782/07) Advance Legal - plaintiff (2777/07) - defendant (2782/07)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2777 of 2007 SARKIS NASSIF v DAVID MARTIN CAMINER 2782 of 2007 DAVID MARTIN CAMINER v SARKIS NASSIF JUDGMENT 1 HER HONOUR: This dispute concerns whether the purchaser (David Caminer) or vendors (Sarkis Nassif and others) validly terminated a contract entered into on 17 November 2006 for the sale of land known as 80 - 84 New South Head Road, Edgecliff. This issue turns on whether the purchaser could make a claim under cl 7 of the contract. If the purchaser could make a claim under cl 7 then the vendors accepted that their refusal to set aside the lesser of the amount claimed and 10% of the purchase price was an anticipatory breach entitling the purchaser to terminate. If the purchaser could not do so then the purchaser accepted that the vendors were entitled to insist on completion regardless of the claim and to terminate for the purchaser's failure to complete as required. The purchaser also made a claim in the alternative for repayment of the deposit under s 55(2A) of the Conveyancing Act 1919.

3 The property was subject to a lease commencing on 1 May 2005 for a term of five years with an option to renew for another five years. The tenant was Simply Beautiful Laser and Cosmetic Surgery Clinic Pty Ltd. Rent was payable monthly in advance. In year 2 of the lease the rent was $384,000 per annum inclusive of outgoings. The purchaser is a plastic and reconstructive surgeon. In early November 2006 he saw a signboard advertising the property as a "high investment opportunity". He had some familiarity with the property as he had performed four operations in the premises at the request of the principal of the tenant. After inspecting the property he called the selling agents, Metro Property Commercial Group, and spoke to Mr Levy. Mr Levy told him that there was a long-term lease in place and a lot of interest in the property. The selling agent sent him the draft contract (including the lease) and a brochure about the property identifying the property as an "ideal investment with future rental growth", with a "secure lease to 2009 to well established tenant", and referring to "Gross income: $384,000 per annum". The brochure noted that the property was subject to auction on 28 November 2006.

4 The purchaser made arrangements with his financial adviser (Mr Pashut) to attend a meeting with the selling agent on 17 November 2006. By that time the purchaser understood the tenant's rent was in arrears and asked the selling agent whether the tenant was a good tenant and if they owed anything. The selling agent replied to the effect that the tenant was keen on purchasing the property and had a first option that lapsed in March but was playing "silly buggers" with the owner. The agent also said "I feel this tenant is a secure tenant, he is only in arrears for the last month. Also, the provision for a 4% increase of the rent for each year is a very good leasing arrangement". The purchaser then discussed the matter with his financial adviser in the absence of the selling agent and decided to enter into the contract. Contracts were exchanged during the meeting.

5 The contract specified a sale price of $5,600,000 including the payment of a deposit of $280,000. The deposit was paid to the agent. Completion was to occur on 16 March 2007. The contract is in the 2005 standard edition. Clauses 6 and 7 of the contract are as follows: 6 Error or misdescription 6.1 The purchaser can (but only before completion) claim compensation for an error or misdescription in this contract (as to the property , the title or anything else and whether substantial or not). 6.2 This clause applies even if the purchaser did not take notice of or rely on anything in this contract containing or giving rise to the error or misdescription. 6.3 However, this clause does not apply to the extent the purchaser knows the true position. 7 Claims by purchaser The purchaser can make a claim (including a claim under clause 6) before completion only by serving it with a statement of the amount claimed, and if the purchaser makes one or more claims before completion - 7.1 the vendor can rescind if in the case of claims that are not claims for delay - 7.1.1 the total amount claimed exceeds 5% of the price; 7.1.2 the vendor serves notice of intention to rescind ; and 7.1.3 the purchaser does not serve notice waiving the claims within 14 days after that service ; and 7.2 if the vendor does not rescind , the parties must complete and if this contract is completed - 7.2.1 the lesser of the total amount claimed and 10% of the price must be paid out of the price to and held by the depositholder until the claims are finalised or lapse; 7.2.2 the amount held is to be invested in accordance with clause 2.9; 7.2.3 the claims must be finalised by an arbitrator appointed by the parties or, if an appointment is not made within 1 month of completion, by an arbitrator appointed by the President of the Law Society at the request of a party (in the latter case the parties are bound by the terms of the Conveyancing Arbitration Rules approved by the Law Society as at the date of the appointment); 7.2.4 the purchaser is not entitled, in respect of the claims, to more than the total amount claimed and the costs of the purchaser; 7.2.5 net interest on the amount held must be paid to the parties in the same proportion as the amount held; and 7.2.6 if the parties do not appoint an arbitrator and neither party requests the President to appoint an arbitrator within 3 months after completion, the claims lapse.

6 Defined terms appear in italics in the contract. The word "claim" is not defined.

7 Clause 10.1.9 provides that the purchaser cannot make a claim or requisition or rescind or terminate in respect of anything the substance of which is disclosed in the contract (except a caveat, charge, mortgage or writ).

8 The contract included special conditions. The special conditions amended cl 7.1.1 of the contract so that 5% became 1%. They reduced the period of 14 days in cl 7.1.3 to seven days. They also replaced the word "substance" in cl 10.1.9 with the word "existence". Clause 49 concerns the lease and is in these terms: 49. LEASE Sale subject to Lease 49.1 The Property is sold and the purchaser takes title subject to the Lease affecting the Property.

Lease terms 49.2 The purchaser acknowledges that it has undertaken extensive sue (sic) diligence of the Lease and represents and warrants that it has satisfied itself in all aspects and made its own investigations and enquiries as to all matters relating to the terms, nature, status and enforceability of the Lease. Acceptance of Lease 49.3 The purchaser is not entitled to rescind, terminate or delay completion of this Contract, nor to object, requisition or make any claim in relation to any matter relating to the Lease including: (a) by reason of any term of the Lease; or (b) in relation to the use of the premises the subject of the Lease; (c) in relation to any outstanding breach of the Lease, the Retail Leases Act 1994, the Conveyancing Act 1919 or the Real Property Act 1900; (d) on the grounds that any term of the Lease is or may be unenforceable or open to termination or being avoided; No Warranty 49.4 The vendor does not warrant or represent: (a) that the Lessee will not be in breach under the Lease, as at completion; (b) that the Lease is legally binding; (c) the ability of the Lessee to comply with its obligations under the Lease; (d) that the Lease complies with all relevant legislation including the Retail Leases Act 1994, the Conveyancing Act 1919 and the Real Property Act 1900. 49.5 The purchaser is not entitled to rescind, terminate or delay completion of this Contract, nor object, requisition or make any claim because of any matter referred to in clause 49.4 occurring on or before completion.

9 The contract also annexed two letters (a letter from the purchaser's financial adviser to the vendors' solicitor and the reply both dated 17 November 2006, the date of exchange). The letter said that cl 49.4 was of some concern and asked whether the vendors were prepared to warrant: - (a) the lease is subsisting, (b) the lessee is not in breach of the lease, (c) there is no litigation in relation to the lease, (d) to the best of the vendors' knowledge the lease is enforceable, and (e) there are no other agreements that are not disclosed in the lease which vary or alter the terms of the lease? The reply from the vendors' solicitors said: - (a) yes, (b) yes, only in rental arrears, (c) yes, (d) yes, and (e) yes.

10 Administrators were appointed to the tenant on 8 March 2007. The administrators notified the vendors of the appointment by notice on 9 March 2007. On 12 March 2007 the principal of the tenant called the purchaser to advise they were going into voluntary liquidation. The administrators informed the purchaser on 13 March 2007 that the tenant had ceased trading. On 15 March 2007 the purchaser's solicitor received a draft settlement statement from the vendors' solicitor showing rental, interest and outgoings payable up to 16 March 2007 as $253,850. The purchaser queried the position on the rental arrears by letter to the vendors' solicitor on the same day, including the arrears at the contract date. The vendors' solicitor then sent another draft settlement sheet with the figure for the rental arrears deleted.

11 The purchaser's solicitor, also on 15 March 2007, forwarded another letter noting that the tenant was placed in liquidation on 8 March 2007 and the property had been marketed as having a "secure lease until 2009". The letter concluded that the purchaser would need a few days to ascertain what was going to happen, particularly whether the liquidators proposed to vacate the premises. The vendors' solicitor responded on the same day noting that the purchaser was not ready to complete on 16 March 2007 and referring to cl 49 of the contract. The letter required completion by 19 March 2007 or else penalty interest would be charged under cl 33 of the contract. The purchaser's solicitor responded the following day to the effect that the property was sold as a "high income investment" with a "secure lease until 2009 with option for a further 5 years to a well established tenant", the contract disclosed that the tenant was in arrears but not the extent, and the solicitor's view was that the vendors' disclosure was inadequate and tantamount to a misrepresentation. The letter said the vendors' position was unreasonable, noted the purchaser had arranged to meet the receiver that afternoon, and reserved the purchaser's rights under the contract.

12 The vendors' solicitor served a notice to complete on 19 March 2007. The notice required completion by 3 April 2007, failing which the vendors would terminate the contract. By letter dated 21 March 2007 the purchaser's solicitor contested the validity of the notice, asked about the position of the liquidator with respect to disclaimer of the lease, and requested withdrawal of the notice to complete. In response on 22 March 2007 the vendors' solicitor offered to extend the time for completion until 10 April 2007. The purchaser's solicitor informed the vendors' solicitor on 29 March 2007 that the purchaser would be able to complete by 5.00pm on 5 April 2007. The vendors' solicitor confirmed that the vendors would extend the notice to complete until 5.00pm on 5 April 2007 and requested updated settlement figures.

13 On 4 April 2007 (amongst other communications between the solicitors for the purchaser and vendors) the purchaser's solicitor forwarded a letter noting his instructions to make a claim under cl 7 of the contract. The letter said: The claim concerns: - 1. The fact that the tenant, Simply Beautiful Cosmetic Surgery & Laser Clinic Pty Limited was placed in liquidation on or about 8 March 2007; and 2. That on or about 15 March 2007 the liquidator disclaimed the lease; 3. That as a result of the disclaimer of the lease there has been a substantial diminution in the value of the property; 4. That Metro Commercial Property Group Pty Limited (A.C.N. 074 696 727), Alan Levy, and the vendors under the Contract engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, in respect of the tenant of the property and the tenant's financial affairs; and 5. That as a result of the conduct referred to in paragraph 4 the purchaser has suffered damage. The amount claimed is $840,000.

14 The sum of $840,000 was reached by consultation between the purchaser, his solicitor and financial adviser. The purchaser did not obtain any valuation advice. The sum claimed represented an estimate of the loss of rental income if the purchaser was unable to find an alternative tenant for one to two years.

15 The purchaser's solicitor sent a further letter shortly thereafter asking whether the vendors intended to exercise their rights under cl 7.1 to rescind the contract or wished to complete. The solicitor said that if the vendors wished to complete then in accordance with cl 7.2.1 of the contract one cheque should be drawn in favour of the agent's trust account for $560,000 (this being the lesser amount of the claim and 10% of the purchase price). The vendors' solicitor responded (also on 4 April 2007) recording their instructions to reject the purchaser's claim and noting that the vendors would be relying on the contract and notice to complete. The letter annexed the vendors' cheque directions and settlement sheet making no allowance for the purchaser's claim. The solicitors spoke to each other. The purchaser's solicitor said the vendors could disagree with the claim but could not reject it in the sense of refusing to put the money aside, referring to cl 7. The vendors' solicitor said those were his instructions. The purchaser's solicitor confirmed the purchaser's position by a further letter on 4 April 2007 advising that: If the vendors refuse to comply with their obligations under clause 7 of the Contract to set aside 10% of the price, the purchaser will treat the failure as an anticipatory breach of the vendors' obligations under the Contract to complete within an essential time, and in those circumstances the purchaser will terminate.

If the vendors otherwise fail to complete this matter tomorrow by 5.00pm in accordance with the terms of the contract and the Notice to Complete, the purchaser will terminate.

16 On 5 April 2007, before the time for completion, the vendors' solicitor forwarded another letter with cheque directions and a settlement sheet again making no provision for the payment of $560,000 to the agent. On the same day the purchaser's solicitor responded by letter to a telephone call from a representative of the vendors' solicitor about attendance for settlement shortly thereafter. This letter, amongst other things, dealt with other discrepancies in the settlement figures that had not been corrected by the vendors' solicitor. The letter noted the vendors' refusal to provide for retention of 10% of the purchase price as required by cl 7, which the purchaser would regard as repudiation giving the purchaser a right to terminate as previously indicated. The letter confirmed that the purchaser had been and was ready, willing and able to complete before 5.00pm in accordance with the terms of the contract.

17 By a separate letter on 5 April 2007, also before the time for completion, the purchaser's solicitor said the purchaser regarded the vendors' refusal to set aside 10% of the price in accordance with cl 7 of the contract as a repudiation of the vendors' obligations under the contract and, accordingly, the purchaser terminated the contract and required the return of the deposit (amongst other things). The vendors' solicitor responded, also before the time for completion, to the effect that the vendors regarded the purchasers' purported termination as a repudiation of the contract and thus terminated the contract and claimed the deposit (amongst other things). The purchaser's solicitor forwarded a separate letter on the same day, without prejudice to the purchaser's earlier termination, advising that the purchaser had elected to terminate because of the vendors' failure to complete the sale on or before 5.00pm, 5 April 2007, in accordance with the vendors' notice to complete dated 19 March 2007 as extended by the letter of 30 March 2007. On 10 April 2007 the vendors' solicitor served on the purchaser's solicitor a notice of termination stating (amongst other things) that the purchaser had forfeited the deposit to the vendors and the vendors would resell the property. The vendors sold the property by contract dated 31 May 2007 for $6.2 million (with the contract being completed on 12 July 2007).

18 The vendors made the following submissions with respect to the principal issue: - (i) there was no error or misdescription in the contract within the meaning of cl 6, (ii) cl 7 does not give purchasers a right to claim compensation for facts arising after the date of exchange, (iii) the purchaser's complaint related to events after exchange outside the control of the vendors (namely, the appointment of administrators to the tenant and their subsequent disclaimer of the lease), giving rise to the question of the party on whom the loss falls, (iv) subject to provision to the contrary (such as Div 7 of Pt 4 of the Conveyancing Act), the risk in the property passes to the purchaser on exchange, and (v) accordingly, the purchaser could not make any claim under cl 7 but was obliged to bear the loss associated with the liquidation of the tenant and disclaimer of the lease.

19 The vendors submitted further and alternatively that: - (i) clauses 49 and 10.1.9 precluded the purchaser's claim in any event, (ii) either way the purchaser's claim was not a valid claim within the meaning of cl 7, (iii) clause 7 cannot be construed as authorising a purchaser to make any claim, no matter how spurious, and thereby bind the vendor to put aside the lesser of the amount of the claim or 10% of the price as that would undermine both conveyancing law generally and the very purpose of provisions such as cll 10.1.9 and 49, (iv) a claim made in breach of a contract (in this case in breach of cl 49) can never be a claim within the meaning of cl 7, and (v) properly understood, a claim within the meaning of cl 7 is a claim with some legal basis that there is a right under the contract to make.

20 The vendors also suggested that the fact that the purchaser had obtained no formal valuation advice undermined the efficacy or bona fides of the claim. The vendors said that this, together with the fact that the purchaser had obtained senior counsel's advice after the administrators disclaimed the lease and before the date for completion, indicated the purchaser simply wanted to get out of the contract. They observed that the purchaser had not claimed or established any misleading or deceptive conduct in these proceedings. In any event, according to the vendors, the purchaser's claim had no legal basis and was precluded by the provisions of the contract. The vendors were thus entitled to insist on completion without regard to the invalid claim. The purchaser's purported termination was a repudiation of the contract.

21 The purchaser responded as follows on the principal issue: - (i) the proposition that a claim must be "valid" to be made is self-evidently wrong as many claims must ultimately fail at arbitration, (ii) a claim under cl 7 is any claim that has a proper or reasonably arguable basis and is not frivolous, vexatious or made in bad faith, (iii) the purchaser's claim was based on pre-contractual conduct that was misleading or deceptive or likely to be so and on which the purchaser relied to enter into the contract (namely, that the tenant was a secure long-term tenant which was only in arrears for one month when, in fact, a back calculation from the arrears notified by the vendors' solicitor of $253,850 as at 16 March 2007 indicated that the tenant had ceased meeting its obligations in about July 2006), (iv) cl 7, in terms, contemplates claims outside the scope of cl 6 and for matters arising after the contract that sound in damages (delay in completion), (v) Peter Butt, The Standard Contract for Sale of Land in New South Wales (2nd ed., 1998) paragraph 7.3 adopts a broad approach to claims under cl 7, including claims for damages under trade practices legislation for misleading or deceptive conduct, (vi) this broad approach is consistent with the development of the provisions of the standard contract for sale that show a widening of the scope for claims over time and the concomitant role of arbitration to finalise those claims (for example, the 1988 standard contract limited cl 7 to errors and misdescriptions and authorised the arbitrator with respect only to the "amount to be settled"), (vii) a narrow approach to claims under cl 7 would be inimical to the scheme of the contract, as it would tend to encourage unilateral rejection of a purchaser's claim (as occurred in this case) rather than resolution by the process of arbitration the contract expressly contemplates, (viii) the claim in this case was made in good faith and on a reasonably and properly arguable basis, this being sufficient to bring the claim within cl 7, and (ix) the fact that the purchaser was ultimately proved wrong about the effect on the value of the property (the property having sold with vacant possession some months later for a substantially increased price) does not undermine the efficacy of the claim when made.

22 With respect to the operation of the contractual provisions relied on by the vendors as excluding the claim, the purchaser submitted that: - (i) even if the vendors' construction of the contractual provisions excluding claims were correct the scheme of dispute resolution established by cl 7 is broad enough to encompass the question whether a claim may be made at all (see, in particular, the words "the claims must be finalised by an arbitrator", which are as apt to enable resolution of the capacity to make a claim as to resolve the amount in dispute), (ii) this operation of cl 7 better reflects the scheme of the contract as a whole than the vendors' approach encouraging unilateral adjudication of the validity of a claim, (iii) cl 49, properly construed, is directed to the leasehold estate whereas the claim was directed to pre-contractual misleading and deceptive conduct by the vendors' agent, and (iv) in any event the purchaser did not have to establish that the claim would have succeeded, merely that there was a proper or reasonably arguable basis for the claim and the claim was made in good faith.

23 The purchaser also submitted that an approach to value based on loss of rental for a period was orthodox when dealing with an investment property. Further, that under pressures of time, it was appropriate for the purchaser to have formulated the claim in consultation with the two experts advising him (his solicitor and financial adviser). The suggestion that the purchaser simply wanted to escape the contract is inconsistent with the purchaser's conduct, particularly the trouble to which he went to obtain finance to be ready to settle as required.

24 With respect to the repayment of the deposit under s 55(2A) the purchaser submitted that such repayment represented the irreducible minimum of his position having regard to the combination of the following factors: - (i) the basis for the claim was pre-contractual misleading and deceptive conduct, being a claim made in good faith (as set out above), (ii) there was a reasonable basis for the claim given the representations about the secure lease to 2009 to a well established tenant only being one month in arrears, when the vendors must have known the tenant stopped payments under the lease by about July 2006, (iii) although the purchaser disclosed the basis of the claim to the vendors, the vendors rejected the claim outright with no explanation for their position, and (iv) the property was resold for $600,000 more than the price under this contract (which, even with estimated expenses, indicates a material net gain for the vendors). The vendors submitted that it was not unjust or inequitable for the vendors to retain the deposit given the important function of the deposit as an earnest of the bargain between the parties. There was nothing unconscionable in the vendors' actions in this case.

25 The purchaser also claimed damages for breach of contract (limited to interest charges, legal costs, financial adviser's fees, and valuation fees payable to the financier). The parties agreed that there were issues in the damages claim that required further consideration by the purchaser and could probably be resolved by agreement if necessary.

26 As the purchaser's submissions disclose, the fact that risk generally passes to the purchaser on exchange (subject to statutory or contractual provision to the contrary) is not an answer to the issue in this case. The purchaser's claim was for pre-contractual misleading and deceptive conduct about the status of the tenant and tenant's financial affairs as a consequence of which the purchaser alleged he had suffered damage. Clause 7, as the purchaser submitted, includes but is not limited to claims under cl 6 (and, unlike cl 6, the word "claim" in cl 7 is not linked to the word "compensation", but rather a "statement of the amount claimed"). Clause 7 extends to claims for delay (which sound in damages). If the claim exceeds 5% (or 1% in this case) of the purchase price the clause enables the vendor to elect whether to rescind or not. If not, cl 7.2 establishes a scheme by which the claim is finalised through arbitration.

27 The ordinary meaning of "claim" is wide (to demand by or as by virtue of a right; Macquarie Dictionary, Revised 3rd ed.). The claims a purchaser may make under cl 7 are necessarily limited by the context of the contract read as a whole. The scheme under cl 7 is apt for resolution of claims for damages for misleading and deceptive conduct alleged to have induced entry into a contract either at all or for a higher price than might otherwise have been paid. The clause thus enables such a claim to be resolved through the money set aside from the purchase price (and, importantly, limits the purchaser to no more than the amount claimed and costs in cl 7.2.4). By this method claims for money related to the contract are brought within the overall contractual scheme rather than being left for later resolution by some other method. This approach is consistent with the observation in Lucantonio v Ciofuli [2002] NSWSC 509 at [39], that the word "claim" is of broad scope. Although Austin J also referred to a claim "arising out of the contract for sale and leading to an adjustment of the purchase price" that reference was expressed to be inclusive rather than an exhaustive statement of the scope of claims under cl 7.

28 The purchaser's acceptance of the need for any claim to be one made in good faith and on a reasonably arguable basis is also generally consistent with the observation in Simring v Marinchek [1999] NSWSC 35 at [14] - [15] (relating to an earlier version of the standard form contract) that: 14 However, it does seem to me that the parties can't have intended that whenever the purchaser states that he or she has a claim for compensation for an error that cl 7 must automatically apply. The words must be read down to some extent and it would seem to me the very minimum that one reads them down is that there must be an arguable claim for compensation or a claim for compensation which is not so unarguably bad that it must fail. Unless there is a claim for compensation with at least a ghost of a chance of succeeding, then it could not have been the intention of the parties to subject themselves to an expensive arbitration process which may involve them in not only the hearing fees for both advocates but also the costs of the arbitration. 15 It is thus necessary to see whether the existing claim is one which could possibly succeed. This is not to evaluate it, but merely to see whether if the facts relied on by the purchaser are established, whether it would be possible for the arbitrator to find that there is compensation due.

29 A claim that was not reasonably arguable or made otherwise than in good faith could not be a claim within the meaning of cl 7 for the reason identified in Simring. Consistent with the purchaser's submissions, however, it is difficult within the scheme of the contract to place any heavier burden on a purchaser before a claim relating to the contract may be made (such as that the claim must be "valid" if, by that, it means a claim that would have succeeded or been likely to do so). The scheme established by cl 7 must contemplate that some claims will be finalised against a purchaser including on the basis that the claim could or should not have been made at all. The fact that a claim might ultimately fail cannot mean that it was not a claim given the purpose of cl 7 to protect the position of both parties (if the vendor decides not to rescind) pending the claim being finalised.

30 Whether a claim related to a contract is reasonably arguable and made in good faith is to be determined objectively on all of the relevant facts. In this case there are two aspects that require consideration. First, the nature of the claim made. Secondly, the operation of the contractual provisions on the capacity to make that claim. Both aspects are relevant to the status of the claim.

31 With respect to the first aspect, the purchaser did not need to establish in these proceedings that he in fact suffered (or, on completion, would have suffered) loss and damage by reason of misleading or deceptive conduct or conduct likely to mislead or deceive. He needed to establish facts making a claim to that effect reasonably arguable when the claim was made. I accept the purchaser's submissions that such a claim was reasonably arguable having regard to the facts recorded above and the purchaser's (unchallenged) evidence of pre-contractual representations by the vendors' agent about the tenant being secure, well established and only one month in arrears. As the purchaser submitted, the subsequent sale with vacant possession at a higher price does not undermine the purchaser's claim when considered in the light of the circumstances at the time the claim was made.

32 The second aspect is more difficult given cll 49 and 10.1.9 of the contract as relied on by the vendors. The difficulty arises because it cannot have been intended that cl 7 oblige a vendor to do anything under that clause in relation to a claim about some matter or thing if the contract excludes the capacity to make a claim under cl 7 about that very matter or thing. Such a claim would be in breach of the contract. In those circumstances it would not be possible to characterise the claim as one made on a reasonably arguable basis and in good faith. Accordingly, I do not accept the purchaser's submission that even a claim made in breach of the contract is necessarily one within the scope of cl 7. But, as the purchaser said, it is not necessary to go so far. The word "claim" in cl 7 is sufficiently broad to encompass claims about the operation of the contract. The function of cl 7 as the dispute resolution provision in this contract leads to the conclusion that the parties intended that a reasonably arguable view about the operation of the contractual provisions would suffice to enliven a potential claim within the meaning of the clause. If it were otherwise the vendors could impose on the purchaser the vendors' views (whether reasonably arguable or not) about the proper construction of the contract and thereby avoid the arbitration process provided for by the contract. Contrary to the vendors' submissions this result does not undermine the law of contract. It gives effect to the intention of the parties as determined by the contractual provisions.

33 The problem for the vendors in this case is that the claims excluded by the contract are not identical to the claim made by the purchaser. In this regard it is important to recognise that the purchaser's claim, although prompted by the administrator's disclaimer of the lease, was not based on the fact of disclaimer. The purchaser's claim related to damage alleged by reason of the pre-contractual representations discussed above.

34 The contractual provisions excluding claims relate, first, to the terms, nature, status and enforceability of the lease (cl 49.2). This is a different matter from the security of the tenant. Secondly, cl 49.3 also relates to "any matter relating to the lease" including the nominated matters in (a) to (d). The purchaser's description of this clause as one dealing with the leasehold estate is reasonably arguable when the clause is construed as a whole. I do not accept the vendors' suggestion that cl 49.3 excludes any claim relating to avoidance of the lease as a whole. In any event, avoidance of the lease is not the same as the status of the tenant. Clauses 49.4 and 49.5, however, are broader in scope. Clause 49.4(c), in particular, concerns the ability of the tenant to comply with its obligations under the lease. Claims about that matter are excluded by cl 49.5. The terms of the exclusion, however, are confined to any matter referred to in cl 49.3 "occurring on or before completion". It is reasonably arguable that these clauses operate on a lack of ability on the tenant's part to meet its obligations after exchange and before completion (as in fact occurred here), whereas the purchaser's claim concerned pre-contractual representations about the security of the tenant. For the same reasons cl 10.1.9 does not assist the vendors because the matters disclosed in the contract related to the lease and the arrears of rental whereas the claim related to the pre-contractual representations identified.

35 Insofar as the vendors suggested that the purchaser's claim was simply a method to get out of the contract (and thus was not made in good faith) the evidence is to the contrary. The purchaser's evidence disclosed that the claim was formulated in consultation with his solicitor and financial adviser by reference to anticipated loss of rental income. The purchaser took substantial steps to ensure he was ready to complete the contract as required on 5 April 2007 and, indeed, the purchaser was ready, willing and able to complete on that day as required by the notice to complete.

36 Similarly it is no answer that the clause cannot be construed as requiring a vendor to set aside part of the purchase price having regard to the fact that the whole of the purchase price might be required to discharge a mortgage. Clause 7 gives a vendor the capacity to elect to rescind if the claim exceeds 5% or such other percentage of the purchase price as the parties might agree. A vendor can protect their position with respect to any mortgage by adjusting the percentage that gives rise to the right to rescind (as the vendors did in this case by reducing the percentage to 1% of the purchase price).

37 In these circumstances the purchaser made a claim within the meaning of cl 7 on 4 April 2007. That claim entitled the vendors either to rescind or not. If the vendors decided not to rescind, they were bound on completion to set aside the lesser amount of 10% of the purchase price (or $560,000) for payment to the deposit holder.

38 As the purchaser submitted, the vendors could not decide both not to rescind the contract and to unilaterally reject the claim in the face of the obligation, on completion, to pay the $560,000 to the deposit holder until the arbitrator had finalised the claim. The vendors unequivocally communicated their intention not to complete the contract in accordance with its terms as required by their notice to complete. Consistent with the purchaser's submissions (and as acknowledged by the vendors if the claim was a claim within the meaning of cl 7) this constituted an anticipatory breach entitling the purchaser to terminate the contract. The purchaser thus validly terminated the contract by the letter of 5 April 2007.

39 For these reasons I make the following orders: Proceedings 2777 of 2007 (1) The summons is dismissed. Proceedings 2782 of 2007

(1) Declare that the contract for the sale of land dated 17 November 2006 between the plaintiff, as purchaser, and the first, second, third and fourth defendants, as vendors, for property at 80 - 84 New South Head Road, Edgecliff, New South Wales (having the particulars lot 1 DP 181565, lot 4 DP 171284, lot 5 DP 171284 and folio identifier 1/181565, 4 and 5/171284) was terminated by the plaintiff on 5 April 2007.

(2) Declare that the plaintiff is entitled to the return of the deposit of $280,000 paid under the contract.

(3) Order that the defendants forthwith sign all documents and do all things required of them to cause the stakeholder, Metro Commercial Property Group, to repay the deposit to the plaintiff, together with any interest earned on it.

40 This leaves the issue of damages and interest in proceedings 2782 of 2007 (the claim under s 55(2A) being redundant) and costs in both proceedings. In accordance with the common position of the parties I propose to give them an opportunity to resolve the damages issue by agreement and further directions to this end are appropriate. Costs may also be dealt with at that time.

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At a glance

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Before

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Judgment (55 paragraphs)

Cases Cited (2)