Plaintiff v First Defendant

Supreme Court of Victoria|2014-08-28|Before: WARREN CJ

REAL PROPERTY - Removal of caveat - Whether serious question to be tried that the first defendant had a caveatable interest in property the subject of contract of sale - Where interest claimed a constructive trust resulting from unjust enrichment of the plaintiff - No serious question to be tried - Balance of convenience favourable to the removal of caveat - Transfer of Land Act 1958 s 90(3).

2 The plaintiff and the first defendant jointly operated a scrap metal business through the company, A1 Metal Recyclers Group Pty Ltd ('A1') from 1 August 2007. By late 2011 the plaintiff and the first defendant resolved to split the scrap metal business through the vehicle of a sale of business agreement ('the agreement'). The agreement provided:

(c) that the plaintiff transfer 50 per cent of the shares in A1 to the defendant upon payment of the balance of either $130,000 or $80,000 (as disputed) ($80,000 of which had been paid leaving a disputed balance of $50,000);

(d) that properties at 52 Malcolm Place, Campbellfield ('Malcolm Place') and 41 Sarah Street, Campbellfield ('Sarah Street') which were jointly owned as tenants in common be partitioned.

(e) that the plaintiff become the sole owner of Malcolm Place and the first defendant become the sole owner of Sarah Street.

3 On 15 January 2013 the plaintiff and the first defendant executed two transfers of land to effect the partition of the properties. The consideration expressed in both transfers was 'Desire to Partition Land'. On 4 April 2013 the two properties were partitioned in accordance with the agreement.

4 Sometime in 2011, likely on or around 28 October 2011, the plaintiff entered into a lease with A1 for the properties at 52 Malcolm Place and the land described in Certificate of Title Volume 9910 Folio 297. The lease was for a term of two years.

5 In October 2013 the plaintiff commenced proceedings in the Magistrates' Court against A1 and the first defendant, as guarantor under the lease, for arrears of rent under the lease. On 27 October 2013 the term of the lease expired and thereafter the company, A1 continued in possession of the properties as a month to month tenant.

6 The first defendant lodged a counterclaim in the Magistrates' Court proceeding alleging breach of fiduciary duty and claiming damages in the order of $300,000. As a result, the Magistrates' Court proceeding was uplifted to the Supreme Court and subsequently an order was made for the filing of pleadings. The plaintiff filed a statement of claim claiming in the order of $50,000 from the first defendant under the agreement. The first defendant failed to file a defence and counterclaim. On 14 July 2014 the plaintiff obtained judgment in default against the first defendant for the sum of $46,048.47 plus costs.

7 Prior to the entry of the default judgment, two developments occurred of potential significance. First, the first defendant lodged a caveat on 29 April 2014. Under the caveat, the first defendant claims an estate in fee simple in the Malcolm Place property. The ground of the claim is recited as 'constructive trust'. Secondly, on 5 June 2014 the plaintiff entered into a contract of sale for Malcolm Place which is to settle on 29 August 2014. It is a term of the contract of sale that the Malcolm Place property requires vacant possession. The company, A1, as tenant under the lease remains in possession of the property. It is not clear how the plaintiff will obtain possession of the property in order to complete the sale of the property. However that was not a matter before the court.

8 It was acknowledged by the plaintiff that the transfer of his fifty per cent of the shares in A1 had not been effected. This had been withheld pending the payment of the disputed balance under the agreement of $50,000. The first defendant alleges that the stipulation of the value of the assets in the agreement at $130,000 was an 'administrative error' made by the lawyers acting for him at the time. He asserts that the correct amount is $80,000 which he has paid.

9 The first defendant alleges that in about May 2012 he became aware of discrepancies in the financial records of A1. He alleges that the plaintiff had caused payments to be made to unknown persons or for goods not purchased. The alleged inappropriate payments exceeded $300,000. The first defendant ceased to pay rental payments under the lease from about May 2012 when he made his discovery as to the alleged inappropriate payments.

10 The first defendant deposed that the default judgment obtained by the plaintiff against him and A1 on 14 July 2014 in the sum of $46,048.47 occurred as he had changed his lawyer and a Supreme Court notice was, therefore, sent to the incorrect address. Both he and A1 failed to appear in the Supreme Court. Further, the first defendant deposed that no defence or counterclaim was filed in the Supreme Court as the lawyers then acting for him believed that the defence and counterclaim filed and served in the Magistrates' Court proceeding would stand in the uplifting to the Supreme Court. The plaintiff deposed that his lawyers were only informed of the default judgment on 13 August 2014. Finally, the first defendant deposed that his lawyers were proceeding to make an application in the Supreme Court to set aside the default judgment. This is yet to occur.

11 In support of his application the plaintiff submitted the following:

1. If the first defendant is entitled to a transfer of the fifty per cent shareholding in A1 his remedy lies in specific performance for the delivery up of a share transfer form in a registrable form.

2. The first defendant has not taken any steps to compel delivery up of a share transfer in registrable form.

3. Although the first defendant has not asserted a caveatable interest as an unpaid vendor, any such lien is confined to unpaid purchase money and does not constitute a caveatable interest.

4. The proceedings between the plaintiff and the first defendant are properly characterised as a claim in debt and damages and therefore do not constitute or create a caveatable interest.

12 The plaintiff seeks an order for the removal of the caveat forthwith. The second defendant, the Registrar of Titles, has given notice of an intention to abide the outcome of the proceeding in the usual manner.

13 The agreement was not produced by the plaintiff. It was produced by the first defendant. Some observations need be made about the agreement. The agreement:

2. is between the plaintiff and the first defendant;

$80,000 including stock, equipment, plant and machinery, tools and vehicles, [and then by handwritten entry] Vendor's [the plaintiff] shares in A1 Metal Recyclers Group Pty Ltd and ½ share in 41 Sarah Street, Campbellfield and 52 Malcolm Place, Campbellfield owned by the Vendor;

4. required the plaintiff to transfer the business and stock to the first defendant and take appropriate steps to effect the transfer by the 'settlement date' (it being 30 days from the signing of the agreement, presumably, by 9 June 2011);

5. required both parties to perform their obligations by 30 days from the signing of the agreement (presumably by 9 June 2011);

6. provided that the plaintiff sold the shares in A1 for the contract price of $80,000 to be paid on the settlement date (presumably by 9 June 2011);

7. required the plaintiff to transfer his fifty per cent interest in the relevant property, the transfer to be effected within 30 days of settlement (presumably by 9 July 2011).

14 The agreement included schedule A which listed the assets included in the price specifying an amount attached as '$130,000' with a hand-written amount next to it of '$80,000'.

15 The agreement also provided that if the plaintiff as vendor defaulted, upon notice, unpaid monies under the agreement became due. If unpaid, the agreement was at an end. If the first defendant ended the agreement, the plaintiff must repay any money paid by the first defendant plus expenses.

16 There was no dispute between the parties that aside from the transfer of the plaintiff's shares all steps under the agreement were completed; much of the 'price' (consideration) paid and all transfer of property as part of the price was effected. The only outstanding matter was the transfer of the shares by the plaintiff to the first defendant and the disputed sum of $50,000 said by the plaintiff to be payable by the first defendant under the agreement. It is unexplained as to how obligations under the agreement were met. However, I note that the transfer of the properties occurred on 15 January 2013, well after the settlement date. The first defendant made nothing of this. Furthermore, the transfer of the properties reflected that the Sarah Street property was transferred wholly to the first defendant and the Malcolm Place property was transferred wholly to the plaintiff. It is not clear that a hand-written entry in the 'price' section of the agreement reflects what in fact occurred.

17 In any event, there has been substantial performance of the agreement. Notwithstanding, on 15 August 2014, some three years after the settlement date under the agreement by when obligations were to be performed, the first defendant purported to accept the plaintiff's repudiation of the agreement and declared the agreement at an end. This was done by a letter of the first defendant's lawyers dated 25 March 2014. No evidence as to rejection or otherwise of the purported termination was put in evidence. In any event, the first defendant's lawyers asserted in the letter of termination:

As the transfer of property in relation to Certificate of Title Volume 9879 Folio 883 [the Malcolm Place property] was in consideration of the parties agreeing to the contract of sale of business this transfer is not supported by consideration. Accordingly, our client retains his proprietary interest in this property and will lodge a caveat shortly.

18 The first defendant asserted a constructive trust and, therefore, a caveatable interest on the following grounds:

1. The plaintiff had failed to transfer his shares in A1, therefore, a failure of consideration had occurred.

2. Upon the failure of consideration a proprietary remedy was available to the first defendant as a response to the plaintiff having been unjustly enriched by the receipt of the price under the agreement.

3. An alternative remedy was inappropriate as there was no guarantee a claim in specific performance or some other claim sounding in damages would succeed.

19 The unjust enrichment claim was put on the basis that the plaintiff had been enriched by the receipt of the $80,000 at the first defendant's expense. The 'unjust factor' was a failure of consideration as the $80,000 was paid to secure the performance of the transfer of the plaintiff's shares, which did not occur.

20 As the first defendant recognised, failure of consideration typically requires that there be a total failure of the promised performance. Here, as the first defendant accepted, there has been substantial performance of the agreement. The first defendant relied on the High Court's decision in Roxborough v Rothmans of Pall Mall Australia Ltd[1] as an example of a case where a remedy was awarded where there was a total failure of only part of the consideration underpinning the transaction. There, the majority held:

[T]here are cases, of which the present is an example, where it is possible, both to identify that part of the final agreed sum which is attributable to a cost component, and to conclude that an alteration in circumstances, perhaps involving a failure to incur an expense, has resulted in a failure of a severable part of the consideration.[2]

21 The first defendant identified the plaintiff's enrichment as the $80,000. In the event that the claim succeeded, the usual remedy would be personal restitution of the $80,000. Furthermore, in order to rely on failure of consideration in the circumstances, the first defendant must show that the payment of $80,000 was attributable to the transfer of shares and this component was a severable part of the consideration for the agreement.

22 The first defendant did not make clear why he should be entitled to the additional benefits that flow from a proprietary remedy. Although he referred to the English decision of Neste Oy v Lloyds Bank plc[3] as an example of a decision where a constructive trust was recognised in response to an unjust enrichment where the unjust factor was a failure of consideration, this decision does not assist the first defendant. In Neste Oy, six payments were made to an agent, PSL, to discharge the claimant's liabilities. When PSL became insolvent, £58,872 remained in the claimant's account. In relation to five of the six payments, it was held that the claimant had no proprietary interest. However, unlike the first five payments, the Court held that the sixth payment was held on constructive trust for the plaintiff, essentially because it was received after PSL had resolved to cease trading. It could not in good conscience receive the sixth payment because it was inevitable that there would be a total failure of consideration in respect of that payment.

23 Here, there was nothing to suggest that at the time of the payment a total failure of consideration was inevitable.[4] There was also nothing to suggest that the first defendant had not taken the risk of the plaintiff's insolvency[5] and nothing to suggest that under the agreement the plaintiff was not able to deal with the money as his own after having received it.[6]

24 As the learned authors Bant and Bryan observed[7] a prima facie entitlement to proprietary relief should arise prior to the making of any court order. Here the first defendant has not provided any evidence to establish a proprietary right. There is a contractual dispute where the plaintiff says he is owed $50,000of the $130,000 agreed. The plaintiff also says he has no obligation under the agreement to transfer the fifty per cent shareholding because he has not been paid. The first defendant on the other hand, says the amount owed under the agreement was only $80,000 which he has paid and thus the plaintiff should effect the transfer. The exchange of correspondence between the plaintiff's and the first defendant's lawyers concerning amending the amount payable in the agreement was not explained by the plaintiff. Even so, insofar as the first defendant asserts a mistake in the contract, the evidence is vague. He deposed:

Schedule A to the Contract of Sale of Business incorrectly describes the value of the assets as $130,000.00 however this was an administrative error by [name] solicitors then acting for the plaintiff in respect of the transaction.

25 Correspondence of the plaintiff's lawyers dated 23 January 2012, sent some eight months after the agreement was signed, on 10 May 2011, asserted that there was an error in the contract, acknowledging the monetary sum should have been $80,000 not $130,000 and subsequently the first defendant's lawyers agreed to an amendment to the agreement.

26 In any event, even if the first defendant were to succeed in its claim in unjust enrichment, the first defendant has not shown that a proprietary remedy should flow from such a claim.

27 Insofar as the first defendant might assert a constructive trust relying on alleged dishonesty perpetrated by the plaintiff, for example, relying on Barnes v Addy principles[8], there was no evidence beyond very broad assertion. The first defendant deposed:

In approximately May 2012, I became aware of discrepancies in the financial records of A1 Metal Recyclers Group P/L in that the plaintiff had caused payments to be made to persons unknown and/or for goods not purchased in excess of $300,000.00.

28 The assertion in such broad terms is insufficient to establish any interest in the nature of a constructive trust created as a result of dishonest dealing. In any event, there is no suggestion that any misappropriated money can be traced into the Malcolm Place property. Even if it were found that this money was held on trust for the first defendant, it would not assist him in this application.

29 As I comprehend the situation, the first defendant seeks that the shares be transferred. A restitutionary remedy acts to reverse an enrichment of the plaintiff, it would not provide for the full performance of the agreement. The plaintiff submits that the first defendant's remedy lies in seeking specific performance. Specific performance commands three elements. First, a binding and enforceable contract. Secondly, actual performance or willingness to do so on the part of the party seeking specific performance.[9] Thirdly, that damages are an inadequate remedy.[10] Here, there is no dispute that the agreement is binding. There is however the purported termination by the first defendant. He says he has fulfilled his obligations under the agreement (although there is a dispute as to the total monies payable). The first defendant wants the fifty percent shareholding in A1 still held by the plaintiff and so, it seems, damages are not an adequate remedy. As to whether any remedy will succeed will usually be irrelevant to the analysis. That is a matter for the ultimate arbiter of any specific performance claim.

30 It is not appropriate for me to address the prospects of these various claims, suffice to say that I do not consider that the first defendant has established an entitlement to a proprietary right sufficient to support his caveat in this proceeding.

32 First, all that underpins the first defendant's claim to a caveatable interest is the non-transfer of the fifty per cent shareholding in A1. Even if the first defendant succeeds in a claim in unjust enrichment, the appropriate remedy would appear to be personal restitution of the value of the enrichment.

33 Secondly, the proprietary interest, if any, of the first defendant would be in the $80,000, not the Malcolm Place property. Insofar as any constructive trust arose, and I do not consider it did, it arose over the $80,000 or its traceable proceeds. Even if it were found that the $80,000 was held on trust for the first defendant, such a trust cannot support a caveatable interest in the Malcolm Place property as there is no suggestion that the money can be traced into the property.

34 Thirdly, I consider that the failure of consideration relied on by the first defendant is an assertion not properly open to him. The consideration for the price paid under the agreement was multi-faceted. It consisted not only of the transfer of shares, but also the transfer of properties and the taking of relevant transfer steps and the payment of monies. All or most of the consideration has occurred such that there has been substantial part-performance by both parties. I do not consider that the payment of the $80,000 can be held to have been made in consideration for the transfer of shares alone, therefore I do not consider this payment can be severed from the consideration under the agreement as a whole.

35 Fourthly, whether the parties continue to bear obligations under the contract is unclear in light of the first defendant's purported termination and rescission of the agreement. It was not suggested that the contract was improperly procured such that it should be set aside ab initio, rather the purported termination occurred in response to the alleged breach with respect to the failure to transfer the fifty per cent shareholding. Were such a termination effective, both parties would be discharged from any further obligations under the contract, however any party in default would remain liable in damages. I observe also that the agreement provides that in the event that the first defendant ends the agreement, the plaintiff must repay any money paid by the first defendant plus expenses. As the matter presently stands, however, I do not consider it is clear on the evidence that the termination of the agreement has been effective. In other words, the question whether the parties are still subject to obligations under the contract remains open and may affect the remedies available to the first defendant.

36 Fifthly, and relevantly, there is in any event alternative relief that may be available to the first defendant with respect to the failure to transfer the shares, for example, through a claim for specific performance, contractual damages or personal restitution. The right of the plaintiff, if any, is in the nature of a contractual right to the shareholding, not a right in the estate in the Malcolm Place property. The rights are quite different.[11] In any event, nothing in the nature of a joint venture was asserted by the first defendant in his affidavit or in submissions.[12]

37 In summary, the first defendant, who carries the onus,[13] has not sufficiently demonstrated an arguable proprietary interest. More so, the proprietary interest asserted does not lie with the Malcolm Place property. There is, or may be, alternative relief available to the first defendant and the consideration under the agreement has largely been paid or performed.

38 I am satisfied that the caveat should be removed. The first defendant has not made out that there is a serious question to be tried that they have the interest which they claim in the property in question. However, even if that were not so, I would find the balance of convenience falls in the plaintiff's favour for two reasons. First, a contract of sale for Malcolm Place is due to settle with a purchaser without notice for value - nothing to the contrary was suggested. Secondly, alternative remedies are available to the first defendant whereby, if an entitlement is established, compensation or restitution could be ordered.

[2] Ibid [17] (Gleeson CJ, Gaudron and Hayne JJ).

[4] Cf Neste Oy v Lloyds Bank plc [1983] 2 Lloyd's Rep 658.

[5] Cf Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; see Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] AC 669, 683-4.

[6] See Re Goldcorp Exchange Ltd [1995] 1 AC 74, 101.

[7] E Bant and M Bryan, Principles of Proprietary Remedies (Lawbook Co. 2013),221.

[8] Barnes v Addy (1874) LR 9 ch App 244.

[9] See Bahr v Nicolay [1988] HCA 16; (1988) 164 CLR 604.

[10] See Trident General Insurance Co Ltd v McNiece Bros Ltd [1988] HCA 44; (1987) 165 CLR 107, 119.

[11] Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530, 573 [125], 577 [135].

[12] Such an interest may have arisen if it was analogous to the circumstances and subject to the principles in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89.

[13] Piroshenko v Grojsman (2010) 27 VR 489.

At a glance

Court

Decision date

Before

Source

Judgment (70 paragraphs)

Parties

Legislation Cited (8)

Cases Cited (6)