Plaintiff v Defendant

Supreme Court of Victoria|2011-03-09|Before: KAYE J

VENDOR AND PURCHASER - Rescission of Contract of Sale by vendor - Whether notice of rescission effective - Vendor's damages.

1 The plaintiff claims damages against the defendant for breach of a contract for the sale of land.

3 The defendant duly paid the deposit of $60,000 to the plaintiff. However, he failed to pay the balance of the contract price to the plaintiff. Accordingly, on 17 December 2008, the plaintiff's solicitors served on the defendant (and his solicitors) a notice entitled "Notice of Default and Rescission". The notice specified (inter alia) that the vendor intended to exercise its rights under the contract, unless, by Friday 16 January 2009, the defendant remedied the "default" under the contract, and paid interest and legal costs. The defendant did not remedy his default under the agreement. Accordingly, the plaintiff's solicitor sent to the defendant a letter dated 19 January 2009, noting that the default had not been remedied, and that "accordingly the contract is rescinded".

4 In the present proceedings, the plaintiff claims damages for breach by the defendant of the contract.

5 Until May 2010, the defendant was represented by a firm of solicitors. Since that date he has acted for himself. In that capacity, he has attended at a number of pre-trial directions hearings, and he represented himself before me.

6 At the commencement of the trial, the defendant stated that he did not have representation, that he would concede that the plaintiff should succeed in its claim, and that he would "live by" whatever decision I made. Mr Klempfner, who appeared for the plaintiff, then proceeded to open the case. He called two witnesses on behalf of the plaintiff, each of whom were cross-examined by the defendant. Mr Klempfner then closed the plaintiff's case.

7 When I informed the defendant that he was then entitled to call evidence on his behalf, he responded by seeking an adjournment, in order that he would be able to obtain expert evidence concerning one aspect of the valuation of the property. That application was opposed by Mr Klempfner. After hearing arguments from both sides, I made a ruling, in which I rejected the defendant's application. However, I stood the matter over until the next day, in order to enable the defendant to obtain evidence which, he then considered, he might have available.

8 On the second day of the trial, the defendant did not appear. However a solicitor, Mr J Dunne, appeared on his behalf. Mr Dunne had only just received instructions. He applied for an adjournment, on the same basis upon which the application had been made by the defendant on the previous day. After hearing from Mr Dunne, I again rejected the application to further adjourn the trial. Mr Dunne, with my permission, then withdrew from the case. The defendant having not presented any evidence in opposition to the plaintiff's claim, I then heard submissions from Mr Klempfner on behalf of the plaintiff.

9 In the defence which had been served on his behalf, the defendant had taken issue with the validity of the notice of rescission dated 17 December 2008. At the commencement of the hearing before me, he stated that he accepted that the notice of rescission was valid. He further stated that, even if the rescission notice had not been properly served, if the plaintiff now re-served it, he could not settle the transaction.

10 Notwithstanding that concession by the defendant, Mr Klempfner properly accepted that, in light of the issues raised by the defence, the question of the notice of rescission should be addressed. Apart from that issue, the plaintiff has established each of the elements necessary to prove the liability by the defendant to it for damages for breach of contract. Thus, the main issue in the trial before me concerned the quantification of the plaintiff's claim for damages. Before I turn to that issue, I shall first deal with the question of the validity of the notice of rescission.

11 Clause 1 of the notice contained definitions of a number of terms used in the balance of the notice. In particular, it specified the vendor, the purchaser, the contract of sale, the land description, the property address and the "due date" (16 December 2008). It then provided meanings of the following three terms:

"Particulars of default the failure of the purchaser to pay the balance of $1,540,000 plus GST on 16 December 2008.

Interest Rate 13%.

Legal Costs $450 plus GST."

12 The next three clauses of the notice of default and rescission are as follows:

Take Notice that you are in default under the Contract as specified in the Particulars of Default.

Take Notice that the Vendor intends to exercise its rights unless by Friday 16 January 2009:

the default is remedied
the interest due is paid
the Legal Costs are paid.

Take Notice that unless the Default is remedied the Contract will be rescinded pursuant to General Condition 6(2) of Table A of the Seventh Schedule of the Transfer of Land Act 1958."

13 By the defence delivered on his behalf, the defendant did not specify the basis upon which it was pleaded that the notice of rescission was ineffective, save that it was pleaded that the notice did not give sufficient notice to the defendant of all the matters required under Conditions 5 and 6 of Table A of the Seventh Schedule of the Act. As I stated, the defendant did not address any submissions to me about the validity of the notice.

14 Mr Klempfner informed me that on the hearing of the summons for summary judgment, it was contended on behalf of the defendant that the notice of rescission was not valid, because it was unclear in the notice whether the interest, payable upon the default, was payable on the sum of $1,540,000, or whether it was payable on the sum of $1,540,000 plus GST.

15 Clause 5 of Table A of the Seventh Schedule of the Act specifies what must be contained in a notice of rescission. That clause provides:

"Time shall be of the essence of this contract. However, if either party defaults under this contract the offended party shall not be entitled to exercise any of his rights arising out of the default other than his right to sue for money then owing until he has served the offender with a written notice specifying the default and his intention to exercise his rights unless the default is remedied and the proper legal costs occasioned by the default and any interest demanded are all paid within 14 days of service of the notice and the offender fails to comply with this notice."

16 The first question is whether there is any relevant ambiguity or uncertainty in the amount of interest required by the notice to be paid by the defendant. The second question is, if there is any such ambiguity or uncertainty, whether the notice is thereby rendered ineffective.

17 The principles, relevant to the construction of notices of rescission, are now well established. A notice under condition 5 is not valid unless it is, in relation to its essential features, clear and unambiguous, so that a reasonable reader, in the position of the purchaser, having given the notice fair and proper consideration, would be left in no doubt as to its meaning. For that purpose, the reasonable reader is understood to be a reasonable purchaser who is knowledgeable, not only of the terms of the contract, but also of the circumstances in which, and the purposes for which, notices of default might be given pursuant to conditions 5 and 6 of Table A.[1]

18 By general condition 4 of the Seventh Schedule, if either party defaults in a payment of any money under the contract, interest, at the rate of 2 percent higher than the rate for the time being fixed under s 2 of the Penalty Interest Rates 1983 "computed upon the money overdue during the period of default", shall be paid on demand made by the other party.

19 At the time of the service of the notice of default, the "money overdue" by the defendant to the plaintiff under the contract was the balance of the purchase price of $1,540,000 plus GST. That amount was specified in the notice of default in the "Particulars of Default". Condition 4 of the Table A conditions provides for the interest to be computed on that sum. Thus, it follows, that a reasonable reader, in the position of the purchaser, who was knowledgeable of the terms of the contract, would have been left in no doubt by the notice of rescission that he was required to pay interest at the specified rate on the monies which were overdue under the contract, namely, the balance of the purchase price of $1,540,000 plus GST. Thus, in my view, there was no relevant ambiguity or uncertainty in the notice of default.

20 The conclusion, which I have just reached, makes it unnecessary for me to consider the second argument made by Mr Klempfner, namely, that any ambiguity in the notice relating to the interest, which was demanded in the notice, would not affect the validity of the notice of default. Mr Klempfner submitted that clause 5 of Table A required that the notice specify "the default". No ambiguity has been pointed to in relation to the "default" specified in the notice, namely, the failure of the defendant to pay $1,540,000 plus GST on the settlement date. Thus, Mr Klempfner submitted that any ambiguity relating to what interest was payable under the notice did not affect the validity of the notice.

21 The submission by Mr Klempfner, to which I have just referred, was not the subject of any argument on behalf of the defendant. In the absence of argument, it is not desirable for me to express any views relating to it, unless it were necessary to do so. I shall therefore do no more than note the argument which was capably made by Mr Klempfner in that respect.

22 For the reasons which I have stated above, I have concluded that the notice of rescission in this case was valid and effective. The principal question, which was raised before me, concerned the quantification by the plaintiff of its damages.

23 At the commencement of the hearing before me, the plaintiff claimed five separate items of loss and damage, namely:

(a) Damages consisting of the difference between the contract price ($1,600,000) and the value of the property at the time of termination of the agreement

(d) Unpaid "security" under Condition 6(3)(b) of Table A of the Seventh Schedule of the Act

24 The agent's commission and charges claimed by the plaintiff consisted of the commission paid to the agent in respect of the sale of the property by the plaintiff to the defendant. Those charges did not constitute damages suffered by the plaintiff as a consequence of the breach of the contract by the defendant. Accordingly, Mr Klempfner, correctly, accepted that those items could not be claimed as a separate head of damage in this proceeding.

25 The legal fees, claimed by the plaintiff, consisted of the professional costs and disbursements of the plaintiff's solicitors in respect to the contract, and also in respect of the notice of rescission. Mr Klempfner correctly accepted that the damages, to which the plaintiff is entitled, do not include costs incurred by the plaintiff in respect of the contract. However, there is evidence, adduced on behalf of the plaintiff, that the costs of the notice of rescission amounted to the sum of $495 ($450 plus GST). That amount is recoverable by the plaintiff as damages arising out of the breach by the defendant of the contract of sale.

26 The unpaid "security" deposit is claimed by the plaintiff pursuant to Condition 6(3)(b) of the conditions prescribed by Table A of the Seventh Schedule of the Act. Mr Klempfner accepted that, if I were to award the plaintiff a sum of damages in excess of $160,000 (comprising the deposit of $60,000 and the amount of security of $100,000), the plaintiff would not be entitled to the security as a separate head of claim. Thus, in essence the claim for the security was made as an alternative to the larger claim by the plaintiff for damages arising out of loss of the sale upon breach of the contract by the defendant.

27 The claim for interest is made under General Condition 7(b) of the contract, which provides that a party, who breaches the contract, must pay to the other party on demand "any interest due under this contract as a result of the breach". By the notice of rescission the plaintiff made an appropriate demand for that interest. Accordingly, the plaintiff is entitled to judgment against the defendant for the sum of interest claimed by it.

28 I turn, then, to the principal part of the claim by the plaintiff for damages, namely, the difference between the contract price and the value of the property at the time of rescission of the contract.

29 The plaintiff based its claim for that aspect of its damages on the evidence of Mr Anthony Falvo, a licensed real estate agent and registered property valuer. Mr Falvo inspected the property on 19 February 2009. For the purpose of valuing the property, Mr Falvo adopted a hypothetical development approach. He applied that approach to a hypothetical subdivision of the property into 82 lots. As part of that exercise, he allowed a sale price, for each lot, of $60,000. He also allowed for a commercial development of 7,031 square metres which, he estimated, would produce a sale price of $400,000. From that amount, he subtracted a profit risk percentage (25%), development costs ($35,000 per lot), interest on development costs for two years ($46,000), selling costs (3.5%), and holding costs on land for two years ($179,000). Those inputs in the hypothetical development approach resulted in Mr Falvo estimating the current fair market value of the property at $940,000.

30 In his report, which was tendered in evidence, Mr Falvo noted that he had been advised by local agents that the proposed lot sizes (to produce 82 residential lots) might be too small, and that they should be increased to an approximate minimum size of 750 square metres, since there might not be any market demand for the smaller proposed lots.

31 Mr Falvo was cross-examined by the defendant on that aspect of his report. As a result of that cross-examination (which, I interpolate, was conducted with some skill), it emerged that Mr Falvo did not favour a hypothetical subdivision of 82 residential lots. He expressed the view that such a subdivision would produce lots, which were too small to attract sufficient purchasers, particularly from the outer suburban areas of Melbourne. Rather, he expressed the view, in cross-examination, that the highest and best use of the property would be to subdivide it into lots each of a minimum size of approximately 2,400 square metres. Based on that approach, he estimated that the subdivision would produce some 30 residential lots. He also stated that, because of the reduction of the number of residential lots, a commercial development on the property would no longer be sustainable. He estimated that the residential lots of such a subdivision would each be able to be sold for approximately $140,000. That price is based on a number of comparable sales referred to by Mr Falvo in his report. Accordingly, he estimated that the subdivided property, when developed, would produce a sale price of $4,200,000.

32 In expressing those views in cross-examination, Mr Falvo also estimated that such a subdivision (of 30 lots) would involve development costs of approximately $50,000 per lot. He explained that, while the reduction in lots would produce some economies in respect of the development costs, nevertheless there are a number of fixed development costs (such as roads and water lines) which would, in effect, be shared between less lots. In expressing the view that the appropriate amount to be allocated for development costs would be $50,000 per lot, Mr Falvo said that the broad brush approach in Melbourne is to allow development costs of approximately $55,000 to $65,000 for an average suburban lot of approximately 500 square metres. Applying that yardstick, he concluded that it would be appropriate to allow a development cost of $50,000 per lot, based on a subdivision of 30 lots each of approximately 2,400 square metres.

33 The other witness who gave evidence on behalf of the plaintiff was Ms Susan Kelly, the business manager of the plaintiff company. She gave evidence that the property was purchased by the plaintiff in December 2007 for the sum of $780,000 plus GST. After the sale to the plaintiff was rescinded, the property was again put on the market. In August 2009, it was sold for $920,000 plus GST. However, in cross-examination, she conceded that the property was not advertised for sale, and that the only publicity given to the sale was a sign board placed on the property. Thus, I do not regard her evidence as being of any assistance in determining the fair market value of the property at the time at which the contract between the plaintiff and the defendant was terminated.

34 It is fundamental that damages for breach of contract are awarded in order to place the injured party, so far as money can do it, in the same situation as if the contract had not been breached but had been performed.[2] Thus, the basic measure of damages is constituted by the difference between the position, in which the plaintiff would have been, if the defendant had performed the contract of sale, and the position which has resulted as a consequence of the defendant failing to complete the contract of sale.

35 The onus of proof of damages lies on the plaintiff. Nevertheless, difficulty and uncertainty in assessing damages is not a reason for a court refusing to award damages to an injured plaintiff.[3] Generally damages are assessed at the time of the breach of the contract.[4] However, where the breach has not simultaneously led to termination of the contract, it may be appropriate to calculate the damages at the time at which the contract was ultimately terminated.[5] In this case, the point is somewhat academic, since the breach occurred in December 2008, the contract was rescinded on 16 January 2009, and Mr Falvo performed his valuation as at 20 February 2009. It has not been suggested that there was any relevant change in the value of the land between the date of breach, the date of termination of the contract, and the date of Mr Falvo's valuation.

36 Bearing those principles in mind, it is necessary to consider the evidence of value given by Mr Falvo. Based on the qualification expressed by Mr Falvo in his report, and the concessions he made in cross-examination, I do not consider that the highest and best use of the property would be a subdivision into 82 lots. Indeed, Mr Falvo stated that he only performed that hypothetical exercise, because he had been provided with a document containing that subdivision by the plaintiff. Ms Kelly stated that that subdivisional plan was the original creation of the person, from whom the plaintiff had purchased the property in 2007. Accordingly, I accept Mr Falvo's evidence that the highest and best use of the property would be to subdivide it into 30 residential lots. I accept Mr Falvo's evidence that, because of the lower population involved in such a subdivision, it would not be feasible to undertake any commercial development on any of the land. I also accept Mr Falvo's evidence that it would be appropriate to allow a selling price of $140,000 for each of the residential lots produced by that subdivision. Such a selling price is consistent with the comparable sales evidence recited by Mr Falvo in his report.

37 I have had some hesitation about the evidence of Mr Falvo concerning the development costs of $50,000 for each of the lots in such a hypothetical subdivision. However, as Mr Klempfner pointed out in final address, that estimate does have a factual basis in the "rule of thumb" adopted by valuers for subdivisions in the outer Melbourne suburbs. Further, there is a sound basis for allowing a higher development cost per lot for a 30 lot subdivision, than the development cost, per lot, for the larger subdivision of 82 lots. Taking those matters into account, and accepting that valuation is not a precise science, I am prepared to accept the evidence of Mr Falvo that, in performing a valuation based on the hypothetical development approach, it would be appropriate to allow a development cost of $50,000 for each of the 30 residential lots in the subdivision.

38 By applying the foregoing conclusions to the formula set out in Mr Falvo's report, the following valuation of the property, as at February 2009, results:

On that basis, I conclude that the appropriate value of the land, on termination of the contract was $1,300,000.

39 The plaintiff accepts that the deposit of $60,000 paid to it by the defendant, must be brought into account in determining the damages payable to it.[6]

40 Accordingly, it follows that the plaintiff's claim for the loss of the sale to the defendant consists of the following:

41 The foregoing analysis makes it unnecessary for me to deal with the other aspect of the plaintiff's claim, namely, its claim for payment of the "security" referred to in condition 6(3)(b) of Table A of the Seventh Schedule to the Act. That condition provides that where the contract is rescinded by the vendor, then an amount equal to one-tenth of the price ("the security") shall be "forfeited" to the vendor as his absolute property. In the course of submissions, I raised with Mr Klempfner whether such a condition would apply, where the money, totalling the "security", had not yet been paid by the purchaser to the vendor. It is not necessary for me to determine this matter. It is sufficient that I note that Mr Klempfner contended that the effect of Condition 6(3)(b) is that, where the amount had not yet been paid by the purchaser to the vendor, it was payable under that clause upon rescission. However Mr Klempfner, correctly, accepted that such a security, if received by the vendor, would be credited to any amount of damages payable by the purchaser upon rescission by the vendor.

42 For the foregoing reasons, I have reached the conclusion that the plaintiff's damages in this case should be calculated as follows:

Difference between contract price and value of property (taking into account deposit)

Interest payable by the defendant between default and rescission payable by the defendant to the plaintiff pursuant to General Condition 7(b)

43 I shall hear counsel on the question of interest and costs.

[1] See Catley & Anor v Watson & Anor (1983) V Conv R 54-003 at 62, 115 (Brooking J); Central Pacific (Campus) Pty Ltd & Anor v Staged Developments Australia Pty Ltd (1998) V Conv R 54-575 at 66, 903 (Ormiston JA); Greydae Pty Ltd & Robertson v Malilane Pty Ltd & Registrar of Titles [2003] VSCA 203, [30]-[31], [35] (Winneke P); Umbers v Kelson & Anor [2010] VSCA 227, [37] (Hansen JA).

[2] See for example Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454, 460 (Barwick CJ), 471 (Gibbs J).

[3] Chaplin v Hicks [1911] 2 KB 786, 792 (Vaughan Williams LJ); McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, 411 (Dixon J, Fullagar J).

[4] Wenham v Ella (above) 459, 463, 470.

[5] See for example _Wood Factory Pty Ltd v Kiritos Pty Lt_d [1985] 2 NSWLR 105, 126 (Priestley JA); Ronnoc Finance v Spectrum Network Systems Limited (1997) 45 NSWLR 624, 637 (Santow J).

[6] See for example Mallett v Jones [1959] VicRp 21; [1959] VR 122; Shuttleworth v Clews [1910] 1 Ch 176, 178 (Joyce J); Real Estate Securities Limited v Kew Golf Links Estate Pty Ltd [1935] VicLawRp 23; [1935] VLR 114, 123 to 124 (Lowe J).

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