One Spencer St P/L v Maryland International P/L

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 Fitzgerald v Masters (1956) 95 CLR 420 Sasson & Partners Pty Ltd v Fehevu Pty Ltd [1999] NSWCA 400 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 CASES CITED : Sargent v ASL Developments Ltd (1974) 131 CLR 634 Romanos v Pentagold Investments Pty Ltd (2003) 77 ALJR 1882 Stern v McArthur (1988) 165 CLR 489 Tanwar Enterprises Pty Ltd v Cauchi (2003) 77 ALJR 1853 Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268 Wilson v Kingsgate Mining Industries Pty Ltd [1973] 2 NSWLR 713 Terry v Permanent Trustee Australia Ltd (1995) 6 BPR 14,091

One Spencer Street Pty Limited PARTIES : v Maryland International Pty Limited

Plaintiff: CRC Newlinds SC & T Wong COUNSEL : Defendant: F Lever SC & R Glasson

Plaintiff: Duncan Cotterill Lawyers SOLICITORS : Defendant: Martin Legal

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2210/05 ONE SPENCER STREET PTY LIMITED v MARYLAND INTERNATIONAL PTY LIMITED JUDGMENT 1 HIS HONOUR: The Issues These proceedings concern a deposit of $1,598,000 paid by the defendant to the plaintiff. The plaintiff is the owner of land at 46-54 Court Road and 356-358 Horsley Drive, Fairfield. On 3 August 2004, it entered into a contract for the sale of the land to the defendant for $15,980,000. Completion of the contract was due to take place either nine months from the date of the contract, or three months from the date of notification by the vendor's solicitors to the purchaser's solicitors of approval by Fairfield City Council of a development application referred to in Special Condition 65 of the contract, whichever was the earlier. On 11 November 2004, the vendor's solicitors gave notice to the purchaser's solicitors that the vendor had on that day received notification from the Council that the development application had been determined on 3 November 2004 to become operative on 4 November 2004. On the plaintiff's case, completion was due on 11 February, 2004. On 21 February, 2005 it served a notice to complete requiring completion on 10 March 2005. 2 On 9 March, 2005, the purchaser purported to rescind the contract pursuant to Special Condition 65. 3 On 11 March 2005, the plaintiff's solicitors said that the purported notice of rescission was a repudiation giving its client the right to terminate the contract. It did not immediately do so. However, on 21 March 2005, the plaintiff, through its solicitors, gave notice that it treated the defendant's purported rescission as a repudiation of the contract and advised that it considered that both parties were discharged from performance of the contract and that it would be instituting proceedings for damages in respect of the repudiation. The plaintiff thereby accepted the alleged repudiation and purportedly terminated contract. 4 The principal issue therefore is whether the contract was validly rescinded by the purchaser, that is the defendant, or whether the defendant's purported rescission was a repudiation of the contract which was accepted by the plaintiff which itself validly terminated the contract. Neither party contended that the contract was still in existence. The plaintiff did not rely on its notice to complete. It did not purport to terminate the contract for the purchaser's non-compliance with that notice. Neither party contended that the contract had been terminated by abandonment. (Compare DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 434). The defendant had a fallback position, that if it were found that it had not validly rescinded the contract, it was nonetheless entitled to relief against forfeiture of the deposit, or to an order for repayment of the deposit pursuant to s 55(2A) of the Conveyancing Act 1919 (NSW). Special Condition 65 5 Special Condition 65 provided as follows: " Completion on this contract is subject to and conditional upon the approval by Fairfield City Council of a Development Application for the construction of 250 home units and some commercial and retail shops as shown on attached drawings on the property within 9 months from the date hereof. The Development Application shall be substantially in accordance with the drawings attached annexure "B" or in the alternate substantially in accordance with the drawings attached annexure "C" whichever is approved by Council. The Vendor shall use his best endeavours to obtain the councils (sic) approval to the Developments Application and shall be entitled to make such changes as may be necessary to obtain the Development Application to satisfy either Councils or any other authorities (sic) requirements provided that the conditions of approval are substantially in accordance with the proposed Development Application. In the event that the Development Application is refused or not approved with nine (9) months from the date hereof then either party may by 14 days notice in writing served on the other party may rescind this contract whereupon the provisions of clause 19 shall apply. In the event that the Development Application is approved but its terms are not reasonably acceptable to the Purchaser shall have such a right of rescission. In the event that the Vendor and Purchaser are in dispute over what constitutes "reasonably acceptable" then the parties agree that the matter shall be referred to an Arbitrator such person being a person agreed upon between both the Vendor and the Purchaser and in the absence of such agreement by a person approved by the President of the Law Society of New South Wales for the time being and whose decision shall be final and the cost of such Arbitration shall be borne by the party against whom the decision found. The Vendor will sign whatever may be submitted by the Purchaser to assign the benefit of such Development Application to the Purchaser at settlement. The Purchaser shall make no objection requisition or claim for compensation in relation to the Development Application or any matter disclosed thereby. " 6 The drawings which were referred to as annexure "B" to the contract provided for the construction of 250 home units on the property. The drawings which were annexure "C", provided for the construction of 204 units on the property. 7 On 3 November 2004, the Council granted approval to the development comprising 204 residential apartments, together with a retail shop and associated basement car parking. The approval was to the development in annexure "C" to the contract. The Competing Arguments on Rescission 8 It was submitted for the defendant that it was entitled to rescind pursuant to Special Condition 65 on two grounds. First, it submitted that it was entitled to rescind because development approval was not obtained for the construction of 250 home units. Secondly, it submitted that the terms of the development application were not reasonably acceptable to it and it therefore could rescind. Although Special Condition 65 provides that a dispute as to whether the terms were reasonably acceptable to the defendant be referred to arbitration, senior counsel for the defendant submitted that the parties had abandoned arbitration. He submitted that it was clear that the terms of the development application were not acceptable to the defendant and that the evidence showed that there were reasonable grounds for this. 9 Senior counsel for the plaintiff submitted that the development approval contemplated by Special Condition 65 was not confined to one for the construction of 250 home units. The relevant approval could be either for the construction of 250 home units and commercial and retail shops substantially in accordance with the drawings which were annexure "B", or, it could be for the construction of 204 units and a retail shop, substantially in accordance with the drawings which were annexure "C". It was the latter approval which was given. Counsel submitted that when the clause was read having regard to what he contended was part of the objective matrix of facts which could be taken into account in construing the contract, it could be seen that the reference to 250 home units was a mistake which could be ignored or corrected to avoid absurdity or inconsistency. (Fitzgerald v Masters (1956) 95 CLR 420 at 426-427). However, even if words could not be amended or deleted, or other words added, to the first sentence of Special Condition 65, the plaintiff submitted that the rest of the clause applied to whatever development application was approved by the Council, being a development application substantially in accordance with either of the drawings which were annexure "B" or in accordance with those which were annexure "C". Hence, the plaintiff submitted, the only ground upon which the defendant could rescind under Special Condition 65 was if the terms of the approval of the development application were not reasonably acceptable to the defendant. However there was a dispute as to whether the terms of the approval were reasonably acceptable to the purchaser which had to be resolved by arbitration. It was submitted that as the defendant had purported to rescind without submitting the dispute to arbitration, the rescission was ineffective and not made in good faith. 10 The plaintiff also submitted that whatever rights the defendant may have had to rescind under Special Condition 65, it had elected to affirm the contract. Background to the Contract of 3 August 2004 11 On 8 May 2003, the plaintiff lodged a development application with the Fairfield City Council for the construction of three 9-storey towers and one 8-storey tower development. The proposed development involved 262 residential apartments and four retail shops. 12 On 14 August 2003, the Council identified what it considered to be numerous deficiencies in the application. On 1 September 2003, the Council advised the plaintiff that the proposed development should be amended to have regard to a master plan prepared by the Council's consulting urban designers for the site. The master plan building envelope enclosed with the Council's letter of 1 September 2003 contained little detail. It provided for the construction of one 9-storey tower block and other high rise blocks of between four and six storeys. A note to one of the sketches suggests that about 200 units could be constructed under the proposed development. 13 At some time after 22 September 2003, and after a number of meetings with Council officers and the Council's consulting urban designers, the plaintiff decided to amend the development application in accordance with the master plan prepared by the Council's consulting urban designers. It is not clear when that decision was made. 14 On 27 October 2003, the plaintiff and the defendant (then called Maryland Group Pty Limited) entered into a contract for the sale of the subject property for the price of $18,540,000, such price to be subject to adjustment depending upon the number of units for which development approval was given. Special Condition 65 of that contract provided that its completion was subject to and conditional upon the approval by the Council of a development application for the construction of 250 home units and some commercial and retail shops as shown on attached drawings of the property, such development application to be substantially in accordance with the drawings attached as annexure "B". The purchase price was said to be based upon the approval of 250 units. Special Condition 68 provided that should the approval permit a lesser or greater number of units, then the purchase price would be varied according to a formula whereby 200 units would equate to a purchase price of $16,000,000, 250 units would equate to a price of $18,540,00, and 300 units would equate to a price of $20,000,000. 15 An amended development application was considered by the Council on 9 December 2003. The plaintiff's architect, Mr O'Brien of Opra Architects, tabled a set of drawings and explained that the amended proposal had been designed in accordance with the preferred building envelope for the site as prepared by the consulting urban designers. The amended design produced a total yield of 198 residential apartments. However the proposal was still being worked on. The plaintiff requested that the Council not determine the application at that time. 16 I infer that from at least October 2003 there were discussions between the plaintiff and the defendant in relation to the development application being pursued with the Council. As the defendant had agreed to purchase the site, and would be expected to pursue the development if approval were given, it would be surprising if the defendant had not insisted on being kept abreast of the discussions with the Council. 17 On 25 January, 2004 the parties entered into a new contract for the sale and purchase of the site. Although it does not appear that the October contract was expressly rescinded, I infer that the contract of 25 January 2004 was intended to replace the contract of October 2003. Some parts of the January contract involve simply photocopying executed pages of the special conditions of the October contract. In the January 2004 contract, Special Condition 65 was amended. The first sub-paragraph provided that: " Completion on this contract is subject to and conditional upon the approval by Fairfield City Council of a development application for the construction of 250 home units and some commercial and retail shops as shown on attached drawings on the property within twelve months of the date hereof. The development application shall be substantially in accordance with the drawings attached annexure "B" or in the alternate substantially in accordance with the drawings attached annexure "C" whichever is approved by Council . " (Emphasis added) 18 The third sub-paragraph of clause 65 was also amended in 2003 to provide that either party could rescind if the development application were refused or not approved within nine months from the date of the contract, instead of twelve months as provided for in the October 2003 contract. It is apparent from clause 67 of the January contract that $600,000 of the deposit had already been paid and accounted to the vendor. The clause made provision for the payment of the balance of the deposit. The formula for calculating the purchase price remained the same as it had been under the October 2003 contract. 19 On 28 January 2004, the plaintiff's architect, Mr O'Brien, met with three representatives of the defendant. These included two of its directors. A note of Mr O'Brien's in relation to that meeting records "skem 1 198 revised 202". I infer from this note that by that date the application previously lodged with the Council for 198 units had been revised to 202 units, or that it was proposed that such a revision be made. 20 On 7 February 2004, Mr Jiang, who acted as a director of the defendant, wrote to Mr Jamal of the plaintiff in relation to the development. He said that the marked-up drawings provided to Opra Architects dated 6 February 2004 were the defendant's preferred layout and unit mix. He asked Mr Jamal to instruct the architect to make amendments based on those drawings. After referring to the defendant's requirements for unit mix, he said that: " In regard to the total purchase price of the land, we confirm our agreement that it will be assessed on the final approval from the Fairfield Council at $74,000 per IoAt. " 21 There was no evidence as to what was contained in the drawings provided by the defendant to Opra Architects dated 6 February, 2004. On 27 February 2004, an alternative design was lodged with the Council. That design was discussed between Mr O'Brien and representatives of the defendant at two meetings after 27 February. Mr O'Brien had already discussed the concerns Council had raised in relation to the original application and the changes made to address those concerns, at the meeting on 28 January 2004. 22 During May 2004, there were further communications between Mr O'Brien and representatives of the defendant in relation to the development. On 3 May 2004, Mr Adam Huang, who described himself as an architect and a director of the defendant, asked Mr O'Brien to provide him with, amongst other things, the area schedule showing each unit's internal area, external area, total area, aspect etc and the latest architectural designs including floor plans, sections and elevations. The evidence was silent as to whether the information requested was provided. I infer that it was, as the parties continued to work together on the project and ultimately made a new contract for the sale and purchase of the site. Amended architectural plans were lodged with the Council on 21 June, 2004. In the meantime further payments towards the deposit were made as to $100,000 on 23 April 2004, and as to $300,000 on 9 July 2004. 23 On 2 August 2004, Mauric & Doyle, the plaintiff's solicitors, wrote to Kemp Strang, who acted for the defendant, and advised that they understood from their client that there had been substantial alterations to the proposed development in order to satisfy the Council's requirements and that agreement had been reached to rescind the existing contract simultaneously with the exchange of a fresh contract incorporating the amended plans, a reduced contract price, and consequent amended contract terms to reflect the terms of the new agreement. 24 On 3 August 2004, the parties entered into what was called a deed of rescission. As originally typed it provided for the contract of 27 October 2003 to be rescinded. However, the words "and a subsequent contract dated 25 January 2004" were inserted and the date 27 October 2003 was crossed out and 25 January 2004 inserted. Clearly the 25 January 2004 contract was rescinded. I think it is clear the parties had also rescinded the contract of 27 October 2003, if they had not already done so by the contract of 25 January 2004. 25 On 3 August 2004, the parties entered into a new contract. It contained Special Condition 65 which I have quoted in paragraph [5]. The contract price was $15,980,000 and was not subject to variation according to the number of units for which development approval was given. The plans which were annexure "B" were all dated 2 September, 2003. The plans which were annexure "C" were dated between 10 June, 2004 and 22 June, 2004. 26 On 3 November 2004, the Council gave notice of its determination of the development application No. 799/2003. It advised that the application had been approved. The development which was approved was for the construction of 204 residential apartments, substantially in accordance with the plans which were annexure "C". 27 On the same day, Kemp Strang wrote to Mauric & Doyle, advising that their client understood that the development application included a requirement for the construction of a two-storey underground car park. They said that their client had obtained a geotechnical groundwater report dated 2 November 2004 and that their client understood it would be costly and technically difficult to construct such two-storey underground parking. 28 On 4 November 2004, Mauric & Doyle advised that they had not at that stage received the development approval conditions. They were not received until 11 November 2004. Mauric & Doyle advised the purchaser's solicitors that their client had on that day received notification from the Council that the development application had been determined on 3 November 2004, to become operative on 4 November 2004. 29 In the meantime, on 9 November 2004, the defendant (purchaser) wrote directly to the plaintiff. The letter was headed "without prejudice" but it was not written for the purpose of seeking to settle any dispute and it was tendered without objection. The defendant said, amongst other things: " Maryland International entered into the contract for the purchase of the above properties on the condition that cost-effective construction could take place in accordance with either of the two sets of drawings attached to the contract. That is reflected in condition 65 of the contract. That condition provides Maryland International with the right to rescind the contract in the event that the development application is approved on terms not reasonably acceptable to it."

The cost to Maryland International of dealing with the construction obstacles will be critical to its assessment of whether the terms of the development approval are reasonably acceptable to it. Those obstacles include the level of the groundwater table, the drainage easement required by the Council and the sewer lines running through the property.

Any proposal that involves the reduction in the number of units will be unacceptable to Maryland International given the substantial construction cost which will be incurred in dealing with just the groundwater table difficulty. …..

If development approval is granted on terms which are not reasonably acceptable to Maryland International, it will have no option other than to rescind the contract. …. " 30 The plaintiff relied on the first sub-paragraph which I have quoted as an admission by the defendant that Special Condition 65 did not mean that the contract was conditional on development approval being given for 250 units. Although there is authority that a contract can be construed using post-contractual admissions (Sasson & Partners Pty Ltd v Fehevu Pty Ltd [1999] NSWCA 400 at [31]; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 at [58]), it is not easy to see why reliance on such admissions does not face the same difficulty as attends reliance on other post-contractual conduct to construe the meaning of the words used, namely, that such conduct only shows what the party thought the contract meant, (L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 269; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 164). However, the defendant's understanding of the contract, while not in my view, relevant to its construction, is relevant to its claim for the return of the deposit. 31 On 17 November Kemp Strang replied to Mauric & Doyle's letter of 11 November 2004. They advised that their client was reviewing the DA, which I take it to be the conditions upon which the Council had approved the development application. 32 On 7 December 2004, Mr Jiang of the defendant wrote to Mr Jamal of the plaintiff and advised that the Fairfield project was not economically viable. He said that the potential investors in the project from China would only make the investment if issues relating to land price, construction costs of the basement, the Sydney Water issue and other issues could be sorted out. He added the following: " To enable our co-operation on Fairfield project, I strongly suggest you take the following actions: 1. If you can't reduce the land price, alternatively, increase the total units from 204 to 230. (based on our previous discussion, section 96 applies). 2. Push up basement one level. 3. Find solutions to Sydney Water issue. I understand this might bring about some inconvenience to you, however this is my LAST option. …." 33 On 13 December 2004, Mr Jamal of the plaintiff wrote to Mr Jiang of the defendant suggesting a meeting to discuss the defendant's concerns. That meeting was held on the morning of 17 December 2004. After the meeting Mr Jamal wrote to the defendant and referred to the plaintiff's need to re-finance. He said that if there were to be an extended settlement, the vendor would need to be paid $1,500,000 by 3 January 2005. He made an offer in general terms for an extended settlement and a new joint venture arrangement. That proposal was rejected by the defendant on 20 December 2004. Mr Jiang advised that the defendant was not able to form a final opinion upon the proposal at that stage. 34 On 21 December 2004, Kemp Strang wrote to Mauric & Doyle. The letter was headed "Without Prejudice to Purchaser's Right of Rescission". The letter stated: "Please be advised that in accordance with Special Condition 65, we are instructed to notify your client that the terms of the Development Approval granted on 3 November 2004, with respect to the above property are not reasonably acceptable to the purchaser." 35 The letter went on to give reasons for the development approval not being acceptable to the vendor including that the vendor had received a quantity surveyor's report projecting a loss on the project of $4,965,627. 36 The letter concluded by asking whether the vendor agreed with "our client's determination", or whether it required that the arbitration provisions under Special Condition 65 be applied. 37 On 22 December 2004, Mauric & Doyle wrote to Kemp Strang and rejected the purchaser's contention that the terms of the development approval dated 3 November 2004 were not reasonably acceptable to the purchaser. However the directors of the vendor were then absent from Sydney and the plaintiff's solicitors said that they would communicate further upon their return. 38 On 5 January 2005, Kemp Strang sent a further letter which was headed "Without Prejudice to Purchaser's Right of Rescission". Kemp Strang again asked the vendor's solicitors to seek their client's instructions as to whether it wished to proceed with the arbitration process pursuant to Special Condition 65 of the contract, and if so, to contact them regarding the arbitrator to be appointed. They requested a response within seven days. 39 There was no response within seven days. On 13 January 2005, Kemp Strang wrote again to Mauric & Doyle and purported to fix 4.00 pm on the following day, 14 January 2005, as a time by which, if the vendor's solicitors did not respond, the purchaser would take it that the vendor had waived its right to proceed with the arbitration process and would "rely on your clients waiver to determine its rights and obligations under the contract including but not limited to those provided under special condition 65." 40 Mauric & Doyle replied on the following day. They advised that the vendor's director had returned from holidays. The letter continued: " It is our belief that the conditions of the DA are reasonable and accordingly we propose to proceed with the matter. In the event that your client still disputes the terms of the approval then our client will proceed to the arbitration process. …. Please advise if your client still disputes the terms of the approval and we will determine an arbitrator. "

Mauric & Doyle rejected the purchaser's asserted right to unilaterally fix times by which the vendor would be taken to have waived its rights. 41 Kemp Strang responded on 18 January 2005, advising that the purchaser still disputed the terms of the development approval and asked that the vendor submit details of the arbitrator which it proposed to appoint. 42 On 21 January 2005, Kemp Strang again wrote to Mauric & Doyle. The letter was headed "Without Prejudice to Purchaser's Right of Rescission". They stated that the purchaser continued to reserve any right of rescission under the contract. They noted the vendor's wish to refer to arbitration the dispute between the parties as to whether the terms of the approval of the development application were reasonably acceptable to the purchaser. They sought the vendor's confirmation that the completion date of the contract would be extended to a reasonable time after the arbitration process had been fully completed, and that in addition to any other rights under the contract, the purchaser should have the right to rescind the contract within a reasonable period after receiving a decision of the arbitrator that the terms of approval of the development application were not reasonably acceptable to the purchaser, or a decision of the arbitrator which had the effect that the purchaser had a right of rescission on that ground. 43 On 25 January 2005, Mauric & Doyle nominated a Mr Cornelius to be appointed as arbitrator and suggested that the matter proceed by way of written submission to him. They noted that he was on the Law Society's panel of arbitrators. As to Kemp Strang's request for confirmation as to the extension of the completion date until a reasonable time after the arbitration process had been completed, and a confirmation as to the purchaser's rights of rescission in the event that it was successful in the arbitration, Mauric & Doyle replied as follows: " Our client is agreeable to the 2 proposed terms submitted provided that - (a) Clause 1 is amended by deleting the words 'a reasonable time' and substituting the words '6 (six) weeks' and adding the following words to the end of the clause 'provided that the purchaser pays interest from the due date under the Contract to the date of settlement in accordance with the terms of the Contract'; and (b) Clause 2 is amended by deleting the words 'a reasonable period' and substituting the words '21 (twenty-one) days' and deleting from 'or a decision of the arbitrator … are not reasonably acceptable to it. '" 44 These incomplete negotiations to vary the terms of the contract for sale did not affect the parties' obligations to submit a dispute under Special Condition 65 to arbitration. The parties had embarked upon such a course. It was up to the purchaser either to accept the nomination of Mr Cornelius as the arbitrator, or require the President of the Law Society to nominate an arbitrator and, in any event, to proceed to arbitration. However, the purchaser did not take either course. Instead, on 10 February 2005, a Mr George Markos wrote as a director of the defendant, to Mr Jamal of the plaintiff in the following terms: " RE: EXTENSION OF TIME FOR COMPLETION OF CONTRACT FOR 46-54 COURT ROAD AND 356-358 HORSLEY DRIVE FAIRFIELD NSW I wish to inform you that I was recently elected director of Maryland International. I now have the responsibility of the day to day operations of Maryland International and in turn will oversee all aspects of the completion of contracts entered into prior to my involvement with Maryland. Firstly I would like to discuss the most urgent matter, the Fairfield site. We would like to request a time extension to complete the purchase. We are in the process of obtaining finance in order to complete the contract to purchase the site. Furthermore, I wish to advise you that we are willing to proceed in accordance with the conditions within the contracts. We look forward to a long and prosperous working relationship together. Please contact me if you require any further information. " 45 The defendant did not dispute Mr Markos' authority to send the letter of 10 February 2005. However, it submitted that the letter was not an unequivocal election by the defendant to affirm the contract which precluded its rescinding the contract. It was submitted for the defendant that when it stated that it was "willing to proceed in accordance with the conditions within the contracts", this included proceeding to rescind the contract in accordance with Special Condition 65, either on the ground that development approval for 250 units had not been given, or, on the ground that the terms of the development approval were not reasonably acceptable to it. I do not consider that the letter admits of such a construction. The letter expressed the defendant's intention to complete the contracts and sought an extension of time for that purpose. Its willingness to complete the contracts was not expressed to be conditional upon an extension of time being granted. No particular period of extension was sought. Pursuant to Special Condition 66 completion was due to take place on 11 February 2005, or perhaps the following business day, 14 February 2005. The letter is inconsistent with the vendor seeking to exercise any right of rescission. It was an election to affirm the contract. 46 On 15 February 2005, the Mauric & Doyle wrote to Kemp Strang advising that they had received no response to their letter of 25 January 2005 and that the time for settlement of the matter under the contract had elapsed. They advised that they had been instructed to issue a notice to complete. 47 By a reply on the same day, Kemp Strang denied that the vendor was entitled to issue a notice to complete. They asserted that the vendor had agreed to extend the completion date under the contract to six weeks after the arbitration process had been fully completed. This was a reference to Mauric & Doyle's letter of 25 January to which Kemp Strang had not responded. In any event, that letter had been overtaken by the defendant's letter to the plaintiff of 10 February 2005, by which the plaintiff had elected to affirm the contract and not exercise any right it may have had under Special Condition 65 to rescind. Kemp Strang went on to say that the proposed amendments contained in paragraphs (a) and (b) of Mauric & Doyle's letter of 25 January 2005 were acceptable to the purchaser. They also said: " Please note if your client serves a Notice to Complete, our client will take it that your client has elected not to proceed with the arbitration process and our client will rely on your client's waiver to determine its rights and obligations under the contract, including but not limited to those provided under special condition 65. We are further instructed that the vendor's nomination of Peter Cornelius as its appointed arbitrator is not acceptable to our client. Our client is in the process of appointing its arbitrator and we shall advise you of our client's nomination shortly. We have asked for our client's urgent response. " 48 Kemp Strang made no reference to the defendant's letter to the plaintiff of 10 February 2005. The evidence is silent as to whether either Kemp Strang or Mauric & Doyle knew of that letter. 49 Mauric & Doyle replied on the same day to Kemp Strang. They also did not refer to the purchaser's letter of 10 February 2005. They rejected Kemp Strang's contention that the vendor had elected not to proceed with the arbitration and had waived its rights under the contract. They said that the vendor had not agreed to go to arbitration in order to enable the purchaser a further three weeks to consider whether or not to approve of the arbitrator proposed by them and noted that the purchaser had still not nominated an alternative arbitrator. They continued: " Accordingly we believe that as the time provided under the Contract has now expired and still your client is not ready to appoint an Arbitrator it is your client who has waived his right to do so thus we believe we are entitled to proceed with the issue of a Notice to Complete. " (sic).

They did not do so immediately. 50 Also on 15 February, 2005 Mr Markos wrote on behalf of the defendant to Mr Jamal of the plaintiff. He said: " RE: FURTHER CORRESPONDENCE FOR 46-54 COURT ROAD AND 356-358 HORSLEY DRIVE FAIRFIELD NSW Further to our recent meetings we would like to reiterate some of the matters regarding completion of the above contract. 1. We confirm that we have no dispute with the contract of sale. 2. Maryland International Pty Limited will hereby arrange adequate funds to assist One Spencer Street Pty Limited to payout the registered second mortgage on the above site. Furthermore, we anticipate having the facility paid within 12 days from the date of this letter. 3. In light of the above, Maryland International Pty Limited require an extension of time to complete the contract to purchase the above site. The estimated time required to complete is 3 months from the 18th February 2005. Please confirm in writing at your earliest convenience you (sic) agreement to the above. " 51 This letter is also inconsistent with the defendant keeping on foot any right which it may have had under Special Condition 65 to rescind the contract. In confirming that "we have no dispute with the contract of sale" the defendant was confirming that it would not claim that it was entitled to rescind the contract. 52 On 16 February 2005, Mauric & Doyle wrote to Kemp Strang advising that they understood that the parties had had a meeting since the correspondence between the solicitors and that certain matters had been agreed upon. They were: " 1. The Purchaser has no dispute with the Contract and accepts the terms and conditions unconditionally. As a result arbitration will no longer be required. 2. The Purchaser shall advance to our client a further instalment of the purchase price of $1,200,000.00 on or before 28th February 2005 time being of the essence. 3. The time for completion of the Contract shall be extended to 18th May, 2005 time being of the essence. 4. Interest will accrue from the due date for settlement of 12th February, 2005 until settlement in accordance with Special Condition 38 of the Contract. " 53 Mauric & Doyle said that subject to the purchaser's prompt confirmation of the above terms, they had been instructed to withhold the service of the notice to complete but reserved their client's right to do so. 54 Kemp Strang replied on 21 February 2005 to say that the principal of their client company, Mr Peng Jiang, was in China and it was a week of public holidays for the Chinese New Year. He was expected to return early the following week, at which time Kemp Strang would try to obtain instructions and contact Mauric & Doyle. 55 This response was unsatisfactory to the vendor. They replied on the same day by saying that the vendor was not prepared to delay settlement of the matter any further and that they had been instructed to issue a notice to complete without further delay. They did so. The notice to complete was dated 21 February 2005 and required completion by 3.00 pm on 10 March 2005. 56 On 22 February 2005, Mr Martin of Martin Legal Pty Limited, wrote to Mauric & Doyle advising that he now acted for the defendant and that Kemp Strang's retainer had been terminated. He said that he was instructed that Maryland "wishes to proceed to settle the purchase of the properties described above, subject to satisfactory consultant's report(s)". He said that his client's "offer to perform the contract" was subject to the vendor rescinding its notice to complete. 57 Unsurprisingly, this was not satisfactory to the vendor. On the following day Mauric & Doyle wrote to Mr Martin and asserted that the contract was no longer conditional as all conditions had been fulfilled. They asked for the purchaser to submit a transfer for execution without delay. 58 On the same day the defendant wrote directly to the plaintiff. The letter was signed by Mr Markos and Mr Nahed for the defendant. They advised that the consultants reports were nearly complete and that unless the consultants made a major material change to their figures "we do not need to make completion of the purchase contract subject to same." 59 On 26 February 2005, the defendant wrote again to the plaintiff. The letter was sent by Messrs Markos and Nahed and said: " I wish to advise you that we are happy to proceed to settlement of the above site as follows: 1. We propose to make a down payment of $1,200,000 by the 11th March 2005 which will be secured by a second mortgage and/or caveat. 2. We seek an extension on the above purchase contract to settle the abovementioned in accordance with our previous letters. " 60 This was not a separate election to affirm the contract, as what was proposed was a variation of the existing contract. 61 At 6.14pm on 9 March 2005, Mr Martin on behalf of the purchaser served a notice of rescission of the contract on Mauric & Doyle. Paragraphs 2 to 4 of the notice stated as follows: " 2. Special Condition 65 of the Contract provides that completion of the Contract is conditional upon the approval by Fairfield City Council of a Development Approval in respect of the Property. Special Condition 65 further provides that in the event the Development Application is approved but its terms are not reasonably acceptable to the Purchaser than the Purchaser shall be entitled to rescind this Contract whereupon the provisions of clause 19 shall apply. 3. The terms of the Development Approval are not reasonably acceptable to the Purchaser. 4. As solicitor for and on behalf of the Purchasers, the Purchasers HEREBY GIVE YOU NOTICE THAT the Contract is rescinded. "

62 The vendor also changed its solicitors. Its new solicitors were Duncan Cotterill. On 11 March 2005, Duncan Cotterill wrote to Martin Legal Pty Limited asserting that the Notice of Rescission was invalid. They referred to a number of communications including the letters from the defendant of 10, 15 and 26 February 2005 as indicating that the terms of the approval of the development application were acceptable to the purchaser which had expressed the wish to proceed with the contract. They noted that the notice to complete had expired on 10 March 2005 and they reserved their client's rights pursuant to that notice. They continued however: " By virtue of your client's conduct it is evident that your client has repudiated the Contract for Sale of Land. Our client is entitled to accept that repudiation and to terminate the Contract, but in sending this letter, does not do so at this time. Again, our client's right to take this action is reserved. In the event of such termination, the deposit would be forfeited to the vendor ." 63 The defendant was thus given an opportunity to reconsider its position. 64 Ultimately, on 21 March 2005, Duncan Cotterill wrote to Martin Legal Pty Limited and accepted what it described as the defendant's repudiation of the contract arising from the service of the notice of rescission. Duncan Cotterill said that the vendor was entitled to avail itself of the remedies referred to in clause 9 of the contract. Those remedies included keeping the deposit. Rescission on the First Ground 65 The first ground upon which the defendant contended it was entitled to rescind was that the Council had not given its approval to the construction of 250 home units and some commercial and retail shops. 66 I do not accept that submission. There is an inconsistency between the first and second sentences of Special Condition 65. Only the drawings in annexure "B" provided for the construction of 250 home units. The second sentence of Special Condition 65 required the development application to be substantially in accordance with the drawings in either annexure "B" or annexure "C", whichever was approved by the Council. The drawings in annexure "B" are all dated 2 September 2003. Before the parties entered into the contract of 3 August 2004, they both knew that the Council had required amendments to be made to the development application. That was part of the mutually known objective matrix of facts against which the contract was entered into. The plans, which were annexure "C" to the contract were dated between 10 June 2004 and 22 June 2004. Both parties were aware that the changes reflected in the later drawings were made to seek to accommodate the Council's objections to the original plans. Although the evidence does not show that the defendant was notified of the terms of the Council's correspondence of 14 August 2003, it is clear from the information which the defendant did have, and from the inferences to be drawn from the three contracts of sale and the plans attached to each, that the defendant, as well as the plaintiff, knew that an amended development application had been submitted to the Council prior to 3 August 2004 which provided for fewer than 250 units. 67 Although Special Condition 65 leaves open the possibility that the Council might approve a development application for the construction of 250 home units, the parties agreed to be bound if the Council approved the development application substantially in accordance with either set of drawings, provided that the conditions of such approval were reasonably acceptable to the purchaser. Words may be supplied, omitted or corrected where it is clearly necessary to do so to avoid absurdity or inconsistency. (Fitzgerald v Masters (1956) 95 CLR 420 at 426-427). To avoid inconsistency with the balance of the clause, it is clearly necessary either to delete the number 250 and the words "some commercial and retail" in the first sentence of Special Condition 65, or, to add the words "or 204 home units and a retail shop" to the first sentence after "retail shops". 68 I also agree with the plaintiff's submission that Special Condition 65 cannot be read as if the words "of 250 home units and some commercial and retail shops" were inserted after each reference to "Development Application". In the third sub-paragraph the reference to "the Development Application" is to an application substantially in accordance with the drawings which are annexure "B" or "C". In the fourth sub-paragraph the reference is to whichever application was approved by the Council, either the application substantially in accordance with the drawings in annexure "B", or that substantially in accordance with the drawings in annexure "C". It follows that the defendant cannot rescind on the ground that the approval was not for the construction of 250 home units. 69 In reaching this conclusion as to how Special Condition 65 should be construed, I do not have regard to the subsequent correspondence from the defendant. However, as it is relevant to the defendant's claim for repayment of the deposit, I note that at no time did the defendant suggest the interpretation of Special Condition 65 for which its counsel contended at the hearing. The defendant's position as expressed in its correspondence was that it entered into the contract on the condition that cost-effective construction could take place in accordance with either of the two sets of drawings attached to the contract. It did not purport to rescind on the ground that approval was not given for the construction of 250 home units. 70 Even if the defendant were entitled to rescind on this ground, it elected to affirm the contract by its correspondence of 10 and 15 February 2005. An election to affirm requires unequivocal words or conduct by which a party elects to exercise one set of rights in a way which is inconsistent with the exercise of another. (Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646.) The defendant elected to exercise its right to complete the contract. It is clear that the defendant knew of the matters by reason of which it claims that it had the right to rescind on the ground that approval was not given for the construction of 250 home units. Its correspondence unequivocally expressed an intention to complete the contract, albeit that it sought an extension of time in which to do so. It unequivocally elected to keep the contract on foot.

Second Ground for Rescission 71 The second ground upon which the defendant claimed it was entitled to rescind was that the terms upon which the development application was approved were not reasonably acceptable to it. If the matter had proceeded to arbitration, the arbitrator would have had to decide whether the terms were not acceptable to the purchaser, and if not, whether its non-acceptance of those terms was reasonable. But, it was submitted, the parties had abandoned arbitration prior to the defendant serving its notice of rescission, and the evidence clearly established both that the terms of the development approval were not acceptable to the purchaser and that it had reasonable grounds for that position. 72 I do not consider that the parties had abandoned arbitration as a means of resolving the dispute as to whether the conditions of the development approval were reasonably acceptable to the purchaser. They only abandoned arbitration to the extent that the purchaser abandoned its claim to be entitled to rescind on that ground. Up to Mauric & Doyle's letter to Kemp Strang of 25 January 2005, both parties proceeded on the basis that the dispute as to whether the terms of the approval were reasonably acceptable to the purchaser would be determined by arbitration. On 10 February 2005, the defendant said that it was willing to proceed in accordance with the conditions of the contract, to complete the contract. Whilst Kemp Strang, in its letter of 15 February 2005, attempted to keep the arbitration procedure on foot, the defendant did not nominate its own proposed arbitrator or ask the President of the Law Society to nominate an arbitrator. On the same day it confirmed that it had no dispute with the contract of sale. 73 That correspondence does not show that the plaintiff had abandoned its right to have the dispute under Special Condition 65 determined by arbitration, if the defendant maintained that the terms of the development approval were not reasonably acceptable to it. To the contrary, the plaintiff only abandoned the idea of arbitration after the defendant had confirmed that it had no dispute with the contract, that it intended to proceed with it, and took no steps itself to proceed to arbitration.

74 For the defendant then to seek to terminate the contract under Special Condition 65 on the basis that the terms of the development approval were not reasonably acceptable to it, without referring the matter to arbitration was a repudiation of the contract.

75 In any event, for the same reasons as given above, the defendant elected to affirm the contract. It was not entitled to rescind on this ground. Conclusion on Termination of the Contract 76 For these reasons, the defendant was not entitled to serve a notice of rescission. Its service of the notice of rescission was a repudiation of the contract which the plaintiff was entitled to accept. The plaintiff accepted the repudiation on 21 March 2005 and terminated the contract. 77 It is unnecessary to consider whether the plaintiff would have been entitled to terminate the contract for the failure of the defendant to comply with the notice to complete. If, as the plaintiff asserted, an agreement had been made between the parties to extend the time for completion, then the plaintiff was not entitled to serve the notice to complete. On the other hand, the plaintiff was placed in an awkward position by the defendant's failure to acknowledge the agreement which the plaintiff contended had been reached. As the plaintiff did not purport to terminate the contract on the ground that the defendant had failed to complete after time for completion had been made essential, it is unnecessary to pursue the issue. 78 I therefore conclude that the contract was terminated on 21 March 2005 by the plaintiff's acceptance of the defendant's repudiation of the contract. Subject to any right to obtain relief against forfeiture of the deposit or to obtain an order for its repayment pursuant to s 55(2A) of the Conveyancing Act 1919 (NSW), the plaintiff is entitled to keep the deposit. It is also entitled to damages, although it must give credit for the deposit in calculating any such damages, unless of course it is required to return it. Claim for Repayment of the Deposit 79 Initially the defendant put its claim for repayment of the deposit on the ground that it was entitled to relief against forfeiture. It claimed that the plaintiff had failed to obtain development approval for 250 units, it failed to amend the development application to increase the number of units for which approval had been given, and had thereby had caused or contributed to a circumstance rendering it unconscientious for it to insist on its legal rights. It cited Romanos v Pentagold Investments Pty Ltd (2003) 77 ALJR 1882 at [25], Stern v McArthur (1988) 165 CLR 489 at 502-503 and Tanwar Enterprises Pty Ltd v Cauchi (2003) 77 ALJR 1853. Ultimately however it rested its claim on s 55(2A) of the Conveyancing Act 1919. That subsection provides: " (2A) In every case where the court refuses to grant specific performance of a contract, or in any proceeding for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit with or without interest thereon. "

Having regard to the way the defendant ultimately put its case, it is only necessary to consider that provision. The defendant accepted that if it failed to obtain relief under s 55(2A), it could not obtain relief under the alleged jurisdiction to relieve against the forfeiture of a deposit after the valid termination of a contract which provides for its forfeiture. 80 Subsection 55(2A) confers a wide discretion to relieve a purchaser against an unjust and inequitable consequence of forfeiture of a deposit. In Lucas & Tait (Investments) Pty Ltd v Victoria Securities Ltd [1973] 2 NSWLR 268 Street CJ in Eq (as his Honour then was) said (at 272): " The jurisdiction under s 55(2A) does not give to a court an overall discretionary supervision of monetary adjustments between parties to a contract under which a deposit was paid but which is being terminated. A vendor who forfeits a deposit in strict enforcement of his legal rights is not to be deprived of it under s 55(2A) unless it is unjust and inequitable to permit him to retain it. If the court would not, in its discretion, specifically enforce the contract against the purchaser, then it may follow that it would be unjust and inequitable to allow the vendor to retain the deposit. In appropriate cases he should be left to prove the damages payable to him by the defaulting purchaser in accordance with the established rules governing the measure of damages, rather than simply pocketing the deposit, which might in some cases exceed the damages which would properly be recoverable by him at law. ….. " 81 His Honour deprecated any attempt to put a limit or gloss upon the provision, or to narrow its scope by attempted classification of the instances which might attract its operation. 82 The grounds upon which the defendant contended that the deposit should be repaid were:

(a) that by not obtaining development approval for 250 units, and by not applying to increase the number of units, for which development approval was obtained, it was unconscientious for the plaintiff to insist upon its legal rights;

(b) the aim of the deal between the parties was that the purchaser would make a profit from the development on the basis that it could construct 250 units, and it acted reasonably to try to negotiate with the vendor to try to resolve the difficulties which arose for it when the Council gave approval only for the construction for 204 units;

(c) that the purchaser was misled in entering into the contract in the belief that the vendor would seek development approval for the construction of 250 units when in fact it intended only to pursue the application in respect of 204 units;

(d) it is probable that the defendant could have rescinded the contract on the ground that the terms of the development approval were not reasonably acceptable to it, even if arbitration was necessary to decide that that was so. The defendant's predicament arose from incautious language used by its directors amounting to an election to affirm the contract, when the defendant was seeking a commercial resolution to keep the deal on foot; and

(e) the plaintiff could make a windfall gain if it were able to keep the deposit. 83 Most emphasis was placed on the first three of these grounds. However they are without substance. The defendant did not lead any evidence to establish that when the contract of sale was entered into, it believed that the development application then before the Council was for the construction of 250 units. It led no evidence to substantiate its submission that it had been misled. Such evidence on the topic as there is suggests that the defendant was kept informed of the progress of the development application through the Council. 84 As to the fourth ground, I am not satisfied that it was by accident or mere carelessness that the defendant elected to affirm the contract by its correspondence of 10 and 15 February 2005. No evidence was led by the defendant to explain the change to its attitude to keeping the contract on foot at that time. It had asserted that the conditions of the development approval were not reasonably acceptable to it, and it was pursuing a reference of the dispute about that issue to arbitration. It was, however, dragging its heels. In the absence of any evidence from the defendant, I infer that the change of approach evidenced by the correspondence from Mr Markos of 10 and 15 February, 2005 was due to the defendant perceiving that it could turn the situation to its commercial advantage, in particular, by negotiating an extension of time for completion. 85 Nor do I think it is as clear as the defendant would have it that it considered in good faith that the terms of the development approval were not acceptable to it, and that it had reasonable grounds for that position. That was not an issue which was explored beyond the most superficial level. If that were the position, one must ask why the defendant said on 15 February 2005 that it had no dispute with the contract of sale and why it expressed itself on 10 February 2005 to be willing to proceed in accordance with the conditions of the contract, which, in context, meant proceeding to complete the contract in accordance with its conditions. 86 As to the contention that the plaintiff could make a windfall gain, there was no evidence as to the current market value of the site. It is impossible to say what the plaintiff's damages might be. 87 This is not a case of fraud, accident, surprise or mistake. Had the vendor not accepted the defendant's repudiation of the contract, I see no reason why it would not have been entitled to an order for specific performance. The plaintiff was not guilty of any misconduct or unfair dealing. It was the defendant who dragged its heels in submitting the dispute to arbitration and in responding to the plaintiff's request that it confirm what the plaintiff claimed was the agreement made on 15 or 16 February 2005. There is therefore nothing in the conduct of the respective parties which makes it unjust or inequitable that the plaintiff retain the deposit. In exercising jurisdiction under s 55(2A), it is important to recognise that deposits perform a legitimate role as providing an earnest for the purchaser's performance of the contract. In Wilson v Kingsgate Mining Industries Pty Ltd [1973] 2 NSWLR 713 Wootton J said (at 735): " The purpose of a deposit is that, in addition to being a part payment, it is also an earnest to bind the bargain so entered into, and creates, by the fear of its forfeiture, a motive in the payer to perform the rest of the contract: per Fry L.J. in Howe v. Smith (1884) 27 Ch. D. 89, at p. 101 approved in Sprague v. Booth [1909] A.C. 576, at p. 580 . It is a guarantee that the contract shall be performed, (1884) 27 Ch. D. 89, at p. 95 per Cotton L.J. Its forfeiture may also operate as damages to compensate the vendor for the loss of his contract, and he may also have a right to sue for damages: Halsbury's Laws of England, 3rd ed., vol. 34, pp. 323-324. It is no doubt important that the court should not adopt an attitude in ordering the return of deposits under s. 55 (2A) which would weaken the proper function of a deposit in providing a sanction for purchasers treating the making and completion of a contract with due seriousness and good faith. On the other hand there seems every reason to exercise the discretion in favour of a purchaser who was willing and anxious to complete, but lost his opportunity through the temporary inadvertence of those he had properly employed to act for him." 88 This passage has frequently been applied. In Terry v Permanent Trustee Australia Ltd (1995) 6 BPR 14,091 Santow J, (as his Honour then was), after citing it, said (at 14,106): " Thus in order to prevent the weakening of the deposit as a sanction to ensure purchasers treat completion with due seriousness and good faith, it is necessary that a vendor who has forfeited a deposit in conformity with the contract and that vendor's legal rights not be deprived of it, (sic) unless it is definitely shown to be unjust and inequitable that it be retained in the circumstances. Such considerations apply to the deposit in the current circumstance, where such a deposit of 10 per cent of purchase price is generally accepted as an appropriate earnest for the due performance of a contract for sale of land. ….. " 89 In that case the vendor had re-sold the subject property for a higher price. That however was not a sufficient circumstance to make it unjust or inequitable that he be permitted to retain the deposit. His Honour held that where a vendor was not seeking to make a "windfall profit" at the expense of an innocent purchaser, financial benefit to the vendor was not itself sufficient to justify an order for the return of the deposit (at 14,108). 90 In this case there is no evidence that the vendor would make a windfall profit, or indeed any profit, if it is permitted to retain the deposit. If, as the defendant contends, a developer in its position could only develop the property on the basis of the approved plans at a substantial loss, it is unlikely that the plaintiff could sell the development site with the current development approval for the same sum as the defendant was prepared to pay. It is also clear that the plaintiff has substantial borrowing secured by the property and it has incurred interest costs whilst the property has been tied up by the defendant's claim to an equitable lien over the property to secure its claim for repayment of the deposit. 91 In all of these circumstances, I do not consider that it would be inequitable or unjust for the plaintiff to retain the deposit. 92 Accordingly, I refuse the defendant's claim for repayment of the deposit. 93 For these reasons, the plaintiff is entitled to declarations that by serving the notice of rescission of 9 March 2005 the defendant repudiated the contract and that the plaintiff has validly accepted that repudiation and thereby terminated the contract. It is entitled to a declaration that it is entitled to keep the deposit which has been paid to it. If it wishes to pursue a claim for damages, that claim will be referred to a Master. The defendant's cross-claim should be dismissed. Consequential orders should be made for removal of the defendant's caveat which was lodged to support its claim to an equitable lien to secure the deposit to which it claimed to be entitled. 94 The defendant should pay the plaintiff's costs of the proceedings and of its cross-claim. Exhibits may be returned 28 days after the making of final orders. 95 I direct the plaintiff's counsel to bring in short minutes in accordance with these reasons.

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