Petelin v Cullen

This is an appeal from a decision of the Court of Appeal of the Supreme Court of New South Wales allowing an appeal from an order by Helsham J. dismissing a suit for specific performance brought against the appellant in respect of the alleged exercise of an option to purchase land near Liverpool. Helsham J. dismissed the suit on the ground that the appellant had made out the defence of non est factum in relation to the alleged extension in writing of an option on which the respondent relied as creating the contract in respect of which the suit was brought.

The facts are as follows. The appellant was the owner of the land at Liverpool. The respondent wished to buy that land for the purpose of development. In May 1969 he sought from the appellant an option to purchase. The respondent's agent, Mr. Clements, handed to the appellant a document in the form of a letter granting the option to purchase for a consideration of $50 and advised the appellant to take it and to consult a solicitor in regard to it. The appellant spoke little English and could not read English. The appellant took the document away and brought it back later, signed by him, with certain parts of it excised. When he gave the document to Mr. Clements he received the cheque for $50. The document provided that in consideration of the sum of $50 the appellant agreed to give the option to purchase for the sum of $31,000 net to the vendor upon conditions set out in the form of contract approved by the Law Society and the Real Estate Institute of New South Wales and upon the basis that the purchase price was satisfied as to ten per cent on the signing of the contract, and as to the balance on completion.

Six months later the respondent, who was not in a position immediately to exercise the option, desired to seek an extension of the option for a further period of six months. Provision for such an extension had been made in the original document, but it had been struck out before the document was signed. The provision was as follows:

I will for the consideration of a further $10 for each and every month extend this option if there is a delay longer than six (6) months in obtaining approvals from the necessary authorities.

As Mr. Clements had difficulty in arranging a meeting with the appellant a letter was written to him enclosing a cheque for $50. The letter was dated 11th November 1969, that is to say, shortly after the expiry of the previous option, and it read as follows:

Please find enclosed a cheque for $50.00 for a further six months' extension of the option on your property. Both Mr. Clements and myself have endeavoured to see you concerning this matter but have not been able to locate you.

It would appear that my application will be dealt with in the next two months.

According to the appellant's evidence-in-chief, accepted by the primary judge, Mr. Clements saw the appellant and said to him: "Did you receive the $50?" The appellant answered, "Yes". Mr. Clements then said to him: "Have you got a paper like that?" and showed him a form of document proposing an extension of the option in the following terms: "I hereby extend for a further period of six months the option granted to you by me for the consideration of $50 receipt of which is hereby acknowledged." The appellant replied: "Yes, I received it." Mr. Clements said either before or after that statement by the appellant: "Sign it that you received $50." The appellant signed the document. He said that he did not read it, and went on to say: "I only looked at it I can read a little bit but the problem is I don't know what it means."

The explanation given by the appellant, which was accepted by the learned judge, of this receipt of the second sum of $50 was that Mr. Clements had said to him something like this at the time when the original cheque was handed over: "Here's the $50 and after six months you will receive another $50."

The option was exercised within the period of the second six months, but the appellant refused to sign a contract on the ground that he had been deceived in some way and made it clear that there was no binding agreement with the respondent.

The primary judge found that the appellant signed the extension of the option in the belief that it was a receipt, unaware that it was an extension of the option, having been told by the agent that he "must sign" the document. His Honour also found that the appellant did not read the document and that he was incapable of reading and understanding it. The manner in which two of these findings are expressed does not conform precisely with the evidence on which they are based, that is, the testimony of the appellant. The statement that Mr. Clements said that the appellant "must sign" the document is a reference to the appellant's account of events when Mr. Clements said to him, "Sign it that you received $50". No doubt all his Honour sought to convey by his finding was that in terms the agent gave an instruction, and did not make a request, to sign. The Court of Appeal found more difficulty with his Honour's finding that the appellant signed in the belief that the document was a receipt. In fact nowhere in his evidence did the appellant explicitly state that this was his belief, although there is material in the appellant's evidence which, properly understood, testifies to the existence of such a belief. First, there is the evidence-in-chief to which we have already referred. Then there are the following questions and answers in cross-examination recorded in the transcript.

A. Well, you see, Mr. Clements said to me that this is for the $50 and I thought he was an educated man and he knows what he is talking about.

Q. But you have never thought that was a receipt, have you?

No doubt his Honour regarded the first of the two answers as amounting to a statement by the appellant that he believed that the document was a receipt when he signed it. On the other hand, the Court of Appeal relied on the last answer to support the conclusion that the appellant failed to establish that he believed the document was something radically different from the extension which it in fact was. In this difference of opinion it is of vital importance to recall that his Honour accepted the evidence given by the appellant and that this acceptance was based on a favourable view of the appellant's credibility, notwithstanding that his account of events involved some features which might have invited disbelief. It was, we think, legitimate to regard the appellant's testimony in its entirety as amounting to a statement that he believed at the relevant time that he was signing a receipt and to view the cryptic answer to which the Court of Appeal drew attention, as not qualifying or subtracting from that evidence. This conclusion to our mind, as will be seen later, disposes of the argument that the appellant failed to discharge the onus of showing that there was a radical difference between what he signed and what he thought he was signing.

The other ground on which the Court of Appeal decided the case adversely to the appellant was that he was careless in failing to take reasonable precautions to ascertain what was in the document. Consideration of this ground requires some examination of the defence of non est factum.

The principle which underlies the extension of the plea to cases in which a defendant has actually signed the instrument on which he is sued has not proved easy of precise formulation. The problem is that the principle must accommodate two policy considerations which pull in opposite directions: first, the injustice of holding a person to a bargain to which he has not brought a consenting mind; and, secondly, the necessity of holding a person who signs a document to that document, more particularly so as to protect innocent persons who rely on that signature when there is no reason to doubt its validity. The importance which the law assigns to the act of signing and to the protection of innocent persons who rely upon a signature is readily discerned in the statement that the plea is one "which must necessarily be kept within narrow limits" (Muskham Finance Ltd. v Howard [1] ) and in the qualifications attaching to the defence which are designed to achieve this objective.

The class of persons who can avail themselves of the defence is limited. It is available to those who are unable to read owing to blindness or illiteracy and who must rely on others for advice as to what they are signing; it is also available to those who through no fault of their own are unable to have any understanding of the purport of a particular document. To make out the defence a defendant must show that he signed the document in the belief that it was radically different from what it was in fact and that, at least as against innocent persons, his failure to read and understand it was not due to carelessness on his part. Finally, it is accepted that there is a heavy onus on a defendant who seeks to establish the defence. All this is made clear by the recent decision of the House of Lords in Saunders v Anglia Building Society (Gallie v Lee) [2] .

Before the learned judge no reference was made to that decision. This omission may explain why his Honour did not deal with the element of carelessness. However this may be, the Court of Appeal overruled his decision on the ground that absence of carelessness was a necessary or material element in the making out of the defence and that on the facts the appellant was careless.

It is now settled beyond any shadow of doubt that when we speak of negligence or carelessness in connexion with non est factum we are not referring to the tort of negligence but to a mere failure to take reasonable precautions in ascertaining the character of a document before signing it. The insistence that such precautions should be taken as a condition of making out the defence is of fundamental importance when the defence is asserted against an innocent person, whether a third party to the transaction or not, who relies on the document and the signature which it bears and who is unaware of the circumstances in which it came to be executed. It is otherwise when the defence is asserted against the other party to the transaction who is aware of the circumstances in which it came to be executed and who knows (because the document was signed on his representation) or has reason to suspect that it was executed under some misapprehension as to its character. In such a case the law must give effect to the policy which requires that a person should not be held to a bargain to which he has not brought a consenting mind for there is no conflicting or countervailing consideration to be accommodated - no innocent person has placed reliance on the signature without reason to doubt its validity.

On this analysis the element of carelessness has no relevance for the present case. As the learned judge found, the appellant's belief that the document was a receipt was inspired by the agent's representation that the document acknowledged the payment of the sum of $50. It is scarcely to be conceived that the respondent was unaware of what his agent said and did; but even if he was not informed by the agent he must take responsibility for his action. Consequently as against the appellant, the respondent is not to be considered as an innocent person without knowledge or reason to doubt the validity of the appellant's signature.

There are other reasons why it would be inappropriate to treat the respondent as an innocent party. It became apparent to Mr. Clements when the original option was negotiated that the appellant had little appreciation of English and no capacity to understand the option agreement. Indeed, Mr. Clements advised him to consult a solicitor. The appellant's difficulties in reading and understanding must have been present to Mr. Clements' mind when the extension was signed; yet he contented himself with a demand that the document be signed and omitted to give an explanation of its character.

The matters to which we have referred would in any event support the independent conclusion that there was no carelessness on the part of the appellant. He could not read English; it was beyond his capacity to understand what the document provided. He was therefore faced with the choice of relying on what Mr. Clements said or of incurring the expense and inconvenience of taking it to a solicitor for advice. Vis-à-vis Mr. Clements and the respondent, he was justified in relying on what he was told by Mr. Clements. After all, Mr. Clements had previously advised him to consult a solicitor when that was necessary; on this occasion no such advice was given; nor did he give any indication that the document granted rights additional to those previously conferred.

The other element in the defence which requires to be mentioned is the necessity that the appellant should show that he believed the document to be radically different from what it was in fact. Once it is accepted that the primary judge could properly find that the appellant believed it to be a receipt, this point of contention disappears from the case. The respondent urged that the evidence was so slight as not to overcome the "heavy" onus which rested with the appellant. The existence of that onus unquestionably was present to the mind of the primary judge when he came to assess the credibility of the appellant. But once he accepted the appellant's evidence the question of onus in our opinion was set at rest.