Plaintiff v Defendant

2 The defendant lost this case where it really mattered. On 19 February 2010, I decided that the plaintiff was entitled to a decree of specific performance of the sale contract, but I absolved the defendant as vendor from performing a special condition concerning registration of a restrictive covenant.[1] The contract price was $1 110 000. The plaintiff had paid a deposit of $111 000 which was still held by the selling agent. The land was subject to a mortgage to the National Bank("the NAB") who, by the time of judgment, had taken possession of the land.

3 Disputations then broke out over some consequential issues of substantive law, as well as the content of proposed final orders.

4 The defendant was in a parlous financial state and her mortgage debt had been accumulating. The purchaser was especially concerned that the defendant might not be able to discharge the mortgage and give him clear and unencumbered title as she was obliged to do under the contract. The balance due under the contract ($999 000) would not be enough to pay out the NAB. The plaintiff's attention turned naturally to the deposit. If that could be paid directly to the NAB then the problem would be solved.

5 But the agent swore an affidavit[2] saying he was suing the defendant in the Magistrates' Court for his commission and disbursements, and she was defending it. (That case was suspended pending the decision in this case.) He also said he had already transferred to himself $68 804.39 from the deposit in payment of his commission and disbursements, leaving $42 195.62 in trust. There was a question, not acted upon by anyone, whether the agent as stakeholder was entitled to help himself in that way under the Sale of Land Act.[3] His affidavit says he "reached agreement" with the plaintiff whereby he, the plaintiff, would ask the Court to direct the defendant to pay the balance of the deposit to the NAB. The agent said he agreed to pay another $4 000 to the NAB to assist the plaintiff to secure the property.

6 Thus, in considering the content of final orders, the plaintiff first approached the Court with a contention that the parties (vendor and purchaser) could be ordered to direct the agent to pay part of the deposit to the NAB on settlement. If the purchaser had to pay any additional sum to the NAB to discharge the mortgage, he could then claim the additional sum so paid as damages from the vendor. That is how it was put to the Court, and to the defendant.

7 But it was realised that the agent, not being a party to the proceeding, could not be compelled to go along with that course. There had to be an order personally against him. To deal with that, the agent was given notice of the matter before the Court, and was given leave to appear by counsel. On 7 May, he was content to give the Court an undertaking by counsel "to abide any orders of the Court directing the payment of the deposit." On the face of it, that could mean the whole of the deposit. Certainly, the agent did not qualify the undertaking by confining it to the reduced amount left over in his trust account. But the plaintiff was not asking for the whole deposit to be paid, only a part.

8 Then, as the plaintiff later advanced the formulation of final orders, his case was that "strictly" the agent as stakeholder must disgorge the whole deposit for the purpose of paying out the NAB. The deposit was part of the purchase price. But eventually the plaintiff told the Court he was willing to accept that the agent disgorge only $71 000 of the deposit which was regarded as about enough to ensure that the mortgage would be discharged. The remaining balance of the deposit ($40 000) would be treated as held by the agent on behalf of the vendor.[4] This was portrayed as something to which the agent and the plaintiff had agreed to do to get the contract completed, as decreed. The defendant was passive. She took no exception.

9 In so proceeding, the plaintiff did not have a pay out figure from the NAB. He tried, but the NAB would not commit themselves to a figure, and the plaintiff is not the bank's customer. To complicate things, the NAB as mortgagee decided to sell the land by public auction.

10 As for the defendant, nothing, or nothing reliable, was said about: whether the $71 000 proposed to be released would suffice; the precise amount of the mortgage debt; or her attitude to the position of the agent. As for the idea of ordering a direct payment to the NAB, the defendant confined herself to an assertion, but no more, that the Sale of Land Act does not contemplate, expressly or impliedly, an ability by the purchaser to dictate the application of deposit money directly to the mortgagee. That is true, the Act does not. But the substantive question was whether in the circumstances of this case the Court had the power, and whether it should exercise it, to direct payment that way without interfering with the Act. If so, the case was allowed to proceed on the plaintiff's stated expectation or reckoning that the additional $71 000 would bridge any shortfall to enable the mortgage to be discharged at settlement.

11 There is something that must now be emphasized. It was not said by either side that if the $71 000 turned out to be insufficient, then any additional amount could be obtained by "dipping in" to the remaining $40 000 of the deposit. If the defendant was apprehensive about the "side deal" between the plaintiff and the agent, or that she might be liable in damages to the purchaser if the $71 000 was insufficient, then it was incumbent on her to have sought contingency orders that any further amount to discharge the mortgage would come out from the $40 000 held by the agent, especially as the agent had given the Court an undertaking to do what the Court directed. And what must be remembered amidst all these details is that after a trial, she was to be ordered by a Court to complete a contract under which she was bound to give clear title.

12 This sets the scene, or describes the conditions, in which the case was conducted by the plaintiff and the defendant on this issue. So far, I have described only one of the six issues on which I had to give judgment in my second decision.

13 In a judgment published on 24 May 2010[5] I found an authoritative basis to say the Court had the power to direct the deposit to be paid to the mortgagee on settlement. I need not revisit the reasons beyond saying that, in essence, at common law and under the Sale of Land Act, the agent holds the deposit as stakeholder. The deposit remains the purchaser's money until there is a transfer and a discharge of the mortgage. A vendor is obliged to discharge outstanding encumbrances on the land. A purchaser can pay the balance of the price in discharge of encumbrances. A deposit, which is part of the purchase price, is to be treated no differently. Nothing in s 24 of the Act alters or derogated from that. Consonant with the way the case was conducted, paragraph 36 of my judgment stated

Accordingly, in my view there ought be an order ancillary to the decree for specific performance that $71,000 of the deposit, together with the balance of the purchase price ($999,000 with any adjustments) be paid to the plaintiff to be paid in turn directly to the mortgagee.

14 There was this ancillary question: what happens if the deposit and the balance of the purchase price are insufficient to discharge the mortgage and the purchaser has to "put his hand in his pocket" to get the settlement done? I decided in that situation, damages may be awarded subsequently against the vendor for that additional amount as paid, even though the judgment for specific performance had been passed and entered. There was precedent for that in Cowan v Cavanagh.[6] Looking to bring finality to this dispute paragraph 41 of my judgment said

Accordingly I think it proper and constructive to make orders recognising the prospect of the Court having to assess damages by reason of any damages suffered by the plaintiff in having to "put his hand in his own pocket" and pay out the mortgage. It may never come to that. The $71,000 may be sufficient.

15 This is consonant with the way the case was conducted. The defendant did not contend that the right to damages only arose if the whole of the deposit was insufficient. The defendant did not contend that the purchaser had to reach into the remaining $41 000 of the deposit before putting his hand in his pocket.

16 The outcome was the litany of orders made on 25 May 2010. There is no need to recite them in detail. Order 6 required the agent to deliver a cheque for the $ 71 000 to the purchaser's solicitors. Order 12 required the purchaser at settlement to tender to NAB the $71 000 and a cheque for the further amount needed to discharge the mortgage. The purchaser then had to pay the vendor the balance of the purchase price after adjustments and the payout to the NAB.

17 The present dispute turns on paragraph 16 of my orders which stated:

In the event of any shortfall between the purchase price in the Contract (after adjustments) and the sum necessary to discharge the NAB mortgage, any application for an assessment of the plaintiff's damages by reason of that shortfall shall be heard and determined by the Associate Judge making these orders on a date to be fixed and subject to any procedural directions the Court may make.

18 Settlement of the contract occurred on 9 June 2010. These are the raw transactional facts:

19 So, pausing there, the defendant views the matter as a linear equation. She looks literally to paragraph 16 of my orders and nowhere else, and disregarding how the case was conducted, says there was no shortfall by reference to the contract purchase price. Therefore, she says, the event described in paragraph 16 has not occurred and that is the end of the matter.

20 But the plaintiff adduces evidence to show there was a shortfall in fact when it came to discharging the mortgage.[7] The statement of adjustments shows that out of the $999 369.95 balance, payments had to be made to local authorities (rates and water) and to the State Revenue Office. They totalled $7 358.75. There is no question about the propriety of discharging those burdens out of the purchase price. That left $992 011.20 which was paid to the NAB. Adding the $71 000 to that gave the NAB $1 063 011.20 which was not enough to discharge the mortgage debt. The plaintiff had to therefore pay $35 075.71 of his own money to obtain clear title. He says that he is, according to the Court's orders, entitled to damages from the defendant in that sum.

21 It now emerges that on 18 May 2010 (that is, after argument on 14 May and before my orders on 25 May) the purchaser made a deed of settlement with the agent. In essence:

(a) the purchaser released the agent from any costs that he may have against the agent "in relation to the Supreme Court proceeding";

(b) in the event that the contract is "settled and completed by the vendor and the purchaser", the purchaser agreed to release the agent from all actions in relation to the $40,000 still held by the agent and "consents to [the agent] retaining that amount in partial satisfaction of fees and expenses owed to [the agent] in relation to the sale under the contract";

(c) "in the event the contract is not settled and completed as ordered by the Court and/or the contract is rescinded by the purchaser" then the purchaser reserved his rights against the agent to the deposit or any proportion of it which was required to be held by the agent as stakeholder.

22 I was not told about this deed until 24 August 2010 when I heard argument on the present dispute. As well as being shown the deed, the Court was sent a letter from the agent's lawyers. The agent's position is that as the contract has been completed then there is no doubt the agent is entitled to keep the $40 000.

23 At first I was troubled by the plaintiff's previous non disclosure of this deed, especially in the acrimony of this case. Had the plaintiff, a lawyer, shrewdly "cut a deal" to share the deposit with the vendor's agent (both having a common adversary who was in financial trouble) and fashioned its submissions around that deal, and outsmarted the defendant? I suppose that rumination has antagonised the defendant. But the non disclosure is neutralised by the fact, as I have described above, that the plaintiff conducted the second stage of the case on a revelation to the Court that he had reached agreement with the agent to have released $71 000 of the deposit. That is what the deed in substance does. The defendant does not say that had she known about the deed she might have taken a different course. I do not think she could say it any way. The case was conducted, and orders were sought by the plaintiff on the basis that he had agreed with the agent to disgorge $71 000 and no more. The agent is the defendant's agent, with duties to her at law. It is not as if the plaintiff has bargained with an undisclosed third party.

24 Under the deed, the plaintiff "released" the $41 000 balance of the deposit. The defendant says the only reason the plaintiff needed to pay the additional sum of $35 075.71 was because he did not seek to apply all of the purchase price towards the discharge of the mortgage. Instead, he agreed to a release of part of the purchase price before settlement. By "purchase price" she means deposit. She contends the deposit is part of the purchase price and the purchaser did not have to put his hand in his pocket; all the more so when the agent had given an undertaking to the Court. She says his damage flows from his decision to release funds to the agent. She points to section 27(4)(b) of the Sale of Land Act and says that a purchaser should only agree to a release of the deposit if satisfied the balance payable is sufficient to discharge encumbrances.

25 Hence, the defendant says primarily that the event in paragraph 16 of my orders has not occurred, but if it has, she agitates two new issues. First, has the plaintiff failed to mitigate his loss by not looking to the balance of the deposit? Secondly, can she claim contribution for damages from the agent?

26 How is paragraph 16 of my orders to be construed? Mr Northrop submits that the order is what is operative and it is to be differentiated from the reasons for the order. That is elementary. The order is the judicial pronouncement or curial act which creates coercive effect. A litigant appeals from an order; not the reasons. Likewise it is an order that is affirmed or set aside, not the reasons. But I cannot accept that the reasons cannot be looked at when determining the intended effect of an order, and to ensure that the order is not being misconstrued by a party or to ensure that a literal construction does not defeat the intended purposes of an order.

27 I have described in these reasons the way this case was conducted by the parties leading up to the making of my orders, and the defendant's acquiescence. That description which conforms to the explanation within my second judgment establishes, beyond peradventure, the following things. What was to be exacted from the deposit and applied towards the mortgage was $71 000 (see paragraph 6 and 7 of the orders). The entire deposit of $111 000 was credited to the vendor in the statement of adjustments, that is, in satisfaction of the plaintiff's contractual obligation under the contract (see paragraph 9), but of course that is something different to the discharge of the mortgage. It was never contended or intimated by any party that if the $71 000 was not enough then a further amount of the deposit should be exacted to meet the shortfall. To the contrary, the Court's explicit determination was that if the $71 000 was not sufficient, then damages follow (paragraph 16). When the orders are read as a whole, aided by the reasons, that is what paragraph 16 means. It was there to deal with the very situation that has come to fruition.

28 Whichever way one looks at this, the defendant is now seeking to relitigate the issue which was disposed of in my orders of 25 May 2010. First she says had the plaintiff not agreed to release part of the deposit before settlement, he could have used that money to meet the shortfall. True it is, the plaintiff's case was that on legal analysis the deposit belonged to him, and the Court could order it in the circumstances to be paid directly to the NAB. But the orders were made on the basis that $71 000 was all that could be applied and the rest would be made up in the form of damages. Further, it is not apparent to me how the plaintiff could have extracted extra from the agent. The Sale of Land Act does not give the means. It would have to be by Court order before hand, but the question had been closed.

29 Secondly, the defendant now seeks to distinguish Cowan v Cavanagh. But this Court applied that case to make the orders in question. At no time before this latest application did the defendant make submissions to distinguish that case or make submissions to say that damages should only be assessed in the event that the balance of the deposit is not enough to discharge the mortgage.

30 Thirdly, the defendant says the plaintiff has failed to mitigate his loss by not extracting more of the deposit from the agent. But this is also closed by the Court's previous orders which pre-cast the damages as being the shortfall after application of the $71 000.

31 For these reasons, I reject the submissions of the defendant on what has been called the preliminary issue of the meaning of paragraph 16. I would hold that by reason of the operation of that order and the reasons for making it, and the ancillary orders, there is no occasion or justification to consider the question whether the plaintiff has failed to mitigate his loss.

32 I wish to add that I see no apparent injustice in this outcome. The defendant was bound to give clear title. The plaintiff had to take steps to get it, including meticulous orders. He then had to put his hand in his pocket to secure title. As a matter of economic burden or deprivation, it would make no difference to the defendant whether the $35 075.71 was obtained from the rest of the deposit (which she would then miss out on for herself or as a means to meet the agents commission) or from her by an award of damages for that sum. Obtaining the amount from the deposit would have been more certain for the plaintiff, had that been the court's order. In the predicament she is in, her agent has funds. In the end (and maybe this informed the deed of settlement) it was a question of who would take the risk of the defendant's financial position: the agent or the purchaser.

33 But as was said in submissions, if the defendant's position were correct, she avoids paying $35 075.71 to the plaintiff and gets the benefit of that sum to pay some or all of the commission for which she has been sued.

34 As I do not understand there is any dispute about the computation of the shortfall sum of $35 075.71, I hold that that there has been a shortfall of $35 075.71 as intended by paragraph 16 of the Court's orders on 25 May 2010. I would also, by operation of paragraph 16 of those, assess damages in the sum of $35 075.71 together with statutory interest as from the date the plaintiff had to apply that amount to complete the settlement. The evidence shows that date to be 9 June 2010.

35 I would also reject any attempt to have the agent joined somehow as a party to this proceeding for the purposes of seeking contribution. The agent has done what he undertook to the Court to do by paying over the $71 000. Any claim by Ms Johns against him can be pursued by separate proceedings or presumably as a counterclaim or concurrent claim in the Magistrates Court.

36 Upon publication of these reasons, I would ask counsel to formulate orders. This proceeding must now come to an end.

[1] See [2010] VSC 33.

[4] Plaintiff's supplementary outline of submissions, para 32.

[5] See [2010] VSC 212 esp at [25] to [36].

[6] [1978] VicRp 61; [1978] VR 665 (Menhennit J)

[7] Affidavit of JM Hogan (the plaintiff's solicitor) sworn 9 August 2010.