Reliance Financial Services Pty Ltd v Baddock

CATCHWORDS : CONTRACT [122]- Discharge by agreement- Ambit- Difference from rescission- Difference from discharge by performance. Conveyancing Act 1919, s 37A LEGISLATION CITED : Duties Act 1997, ss 205, 211, 304 Real Property Act 1900, s 43A Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 Barry v Heider (1914) 19 CLR 197 Cunliffe v Harrison (1851) 6 Ex 903; 155 ER 813 CASES CITED : Dent v Moore (1919) 26 CLR 316 Knight Sugar Co Ltd v Alberta Railway & Irrigation Co [1938] 1 All ER 266 Montgomery v Continental Bags (NZ) Ltd [1972] NZLR 884 Twidale v Bradley [1990] 2 Qd R 464 West v Read (1913) 13 SR (NSW) 575 DECISION : See paras 47-52.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3858/02 - RELIANCE FINANCIAL SERVICES PTY LTD v BADDOCK JUDGMENT 1 HIS HONOUR: The principal order sought by the plaintiffs in these proceedings is specific performance of a series of loan agreements between one of the plaintiffs and the third defendant, John Campbell Hawkins. 2 However, the subject of these reasons is whether it is appropriate to extend the operation of caveats which have been lodged by the plaintiffs to protect those interests. The defendants say that, at least as at the date of the hearing before me, the plaintiffs had no interest in the land which would support the caveats. 3 I can simplify what I perceive to be the facts which are relevant on the current application. Of course, it may well be that at the trial some of these so-called "facts" will not be established, and other facts may appear which may neutralize them. However, for present purposes, I proceed on the following basis:

(1) The plaintiffs are in the business of making short term loans.

(2) Between 16 March and 10 May 2001, the plaintiffs made six such loans to Mr Hawkins, the third defendant, totalling $185,000.

(3) The loans were recorded in a series of loan agreements each of which included the following clauses: "6. The Borrower grants a charge in favour of the Lender in respect of any real or personal property owned by the Borrower either solely or jointly with any other person/s in order to secure repayment of the loan amount or any subsequent loans. 7. The Borrower agrees to grant to the Lender a legal Mortgage of any real property which the Borrower may own in his/her name or jointly with any other person/persons or entities from time to time to secure payment of all monies owed to the Lender."

(4) On 21 June 2002, there was settlement, in the conveyancing sense, of a purchase of 98 Riley Street, Darlinghurst by Mr Hawkins from Ronald William Baddock and Richard Dabbs as the registered proprietors who are the first and second defendants in these proceedings.

(5) The purchase appears to have been financed by monies provided by Inhold Pty Ltd, the fourth defendant, who on settlement took a mortgage.

(6) On about 21 June 2002 the plaintiffs lodged the subject caveats against the title. Those caveats did not prevent registration of any transfer to Mr Hawkins.

(7) The transfer to Mr Hawkins and the mortgage to Inhold were not registered. The latter because of the plaintiffs' caveats; the former, presumably because it was lodged together with the mortgage.

(8) On 2 August 2002 this Court extended the caveats for a period.

(9) On 6 August, a deed of "rescission" was executed between the registered proprietors and Mr Hawkins. The deed recited that the vendors were unable to convey the property due to the plaintiffs' caveats and that all parties had agreed to rescind the contract. 4 The proceedings to extend further the caveats came before me when I was duty judge. Mr R Parsons appeared for the plaintiffs, Mr J Kelly SC and Mr P Lowe appeared for the first and second defendants, Mr J T Johnson for the third defendant and Mr T Duggan for the fourth defendant. It seemed to me that the case raised sufficiently important questions that I should extend the caveats further whilst I considered the matter in depth. Counsel were kind enough to provide additional written submissions for me to consider along with their oral argument. 5 The prime contention of the defendants is that, at least as from 6 August 2002, the rescission was effective, Mr Hawkins has no interest in the land, and accordingly the plaintiffs who claim under Mr Hawkins have no interest in the land and cannot maintain a caveat. 6 There is a secondary submission by counsel for the third defendant that as there is no evidence that any of the loan agreements were ever stamped as a mortgage, they are not effective to provide any charge over the land in question. 7 Mr Parsons submitted that the defendants could not rescind on 6 August because:

(a) The contract had been discharged by performance on the conveyancing settlement on 21 June 2002 and thereafter was incapable of being rescinded;

(b) His clients had obtained rights which could not be nullified by any rescission. 8 Mr Parsons also submitted:

(i) that Mr Kelly SC's analysis of Montgomery v Continental Bags (NZ) Ltd [1972] NZLR 884, was flawed; and

(ii) the rescission was bad as a fraud on creditors under s 37A of the Conveyancing Act 1919. 9 I will deal with the submissions under the following heads:

Was the contract between the defendants discharged by performance on 21 June 2002?

Was it competent for the defendants to rescind on 6 August 2002?

Did what happened on 6 August affect the plaintiffs' interest in the land?

Is s 37A of the Conveyancing Act 1919 applicable?

Is there significance in the loan agreements being unstamped?

I will deal with each of these matters in turn. 10 1. Mr Parsons submits that a contract is discharged by performance. Discharge by performance takes place where a party has done everything that he or she has promised to do under the contract, notwithstanding that there may be some mechanical actions to be taken by a party in his or her own interests after performance has been completed. He refers to Cheshire and Fifoot on Contract 4th Australian edition (Butterworths, Sydney, 1981) pp 589 and following. The same passage appears in the 5th edition (1988) pp 607 and following, and in a modified form in the 6th edition (1992) pp 723 and following. It has been omitted altogether from the 7th Australian edition (1997). The reason appears to be that whilst the corresponding passage appeared in all the English editions up to the 10th, in the 11th edition (1986) at p 515, the learned authors considered that performance and breach were more conveniently dealt with together. 11 Mr Parsons says that whilst other writers and editors of the leading books on contract do not deal with termination by performance, the Cheshire and Fifoot approach is correct. This submission is probably a little weakened when one sees that probably under the influence of Professor Furmiston the chief English editor, the approach has been completely revised in later editions. 12 However, some of the other leading textbook writers on contract recognize the concept. Thus, Carter and Harland Contract Law in Australia 4th ed (Butterworths, Sydney, 2002) para [1812] on p 653, state the proposition, without authority: "Where both parties have fully performed their contractual obligations, the contract is discharged by performance."

The subject is also dealt with in Corbin on Contracts (West Publishing Co, St Paul Minn, 1952) [1230] and [1245]. At the latter section the learned author notes that there can be situations where there is discharge by defective performance if there is an assent to a defective performance, and if that occurs, there is not a discharge by mutual rescission or agreement but a discharge by performance. 13 Williston on Contracts 3rd ed (The Lawyers Cooperative Publishing Co, Rochester New York, 1972) Vol 15 pp 386-7 lists 19 methods of discharging contracts, number 1 of which is "Performance according to its terms". However, there is not that much in the text which fleshes out what is meant by performance. 14 Most of the books make the point which is obvious enough, that without assent by the other contractual party, performance must be exact, at least subject to the de minimis rule or the doctrine of substantial performance. It is not necessary to look at these exceptions. As is said in the 4th Australian edition of Cheshire and Fifoot at 589 (and in almost identical words in the 9th English edition (1976) p 522): "As a general rule the law does not regard a promisor as discharged unless he has completely and precisely performed the exact thing that he has agreed to do."

The illustration given is that a seller must make delivery of goods in exact accordance with the terms of the contract so that if he delivers more goods than have been ordered, the buyer may reject the whole consignment: Cunliffe v Harrison (1851) 6 Ex 903; 155 ER 813. 15 However, the question remains, is it correct to say that once a person has done all that he or she has promised to do under the contract the contract is discharged by performance notwithstanding that some mechanical matters still have to be performed by the other side? 16 If the answer to this question is "Yes", then as soon as there was completion in the conveyancing sense of the contract in the instant case, it was discharged and thereafter nothing for the parties to rescind. If the answer is "No", then the contract was still on foot until such time as it might merge in a registered transfer. That event did not occur so that it was open to the parties to rescind (subject to the matters I will deal with shortly) on 6 August. 17 If I had to determine finally the point as a matter of law, I would continue the caveats and set the matter down for a final hearing as soon as the parties were ready. However, it does seem to me that the legal argument, interesting though it is, may not be material to the solution of the real question before the Court. 18 Even though the parties had, as far as they knew, carried out all the promises to be performed by them under the contract for sale, there were still some implied obligations that remained up until the time that the transfer is registered. If, for instance, the transfer had been destroyed by mistake or accident, there was probably an implied obligation pursuant to the contract to sign a fresh transfer. If the local authorities had required the legal owner to be the applicant for development consent, there would probably be an implied obligation on the vendor, at least on proper indemnity from the purchaser to execute that consent. 19 Even though in the instant case none of these events happened, because potentially they could occur, it seems to me that as a matter of fact the contract could not be said to be fully performed by the parties and so discharged by performance until the transfer was registered. 20 Accordingly I reject Mr Parson's submission. 21 2. Mr Kelly SC for the first and second defendants puts that even though there had been settlement of the transaction in the conveyancing sense, as the land involved was Real Property Act land, it was still open to the parties to rescind the contract up until the time when the transfer was registered. Thus, the rule reflected in Knight Sugar Co Ltd v Alberta Railway & Irrigation Co [1938] 1 All ER 266, that there can be no rescission after conveyance was not infringed. 22 Counsel relied on what appears in Meagher Gummow and Lehane Equity Doctrines and Remedies 3rd ed (Butterworths, Sydney, 1992) p 863 and the cases there cited, namely West v Read (1913) 13 SR (NSW) 575 and Montgomery v Continental Bags (NZ) Ltd [1972] NZLR 884. 23 I should note that I said in Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374, that probably for the reasons given in Montgomery's case, a contract with respect to Torrens system land could be rescinded before registration as there was no need for reconveyance. The point was a side issue in the case being considered which was whether there could be rescission by agreement of an executed contract for the transfer of shares where there had been registration of a transfer. 24 The principal arguments for the contrary point of view are:

(a) Montgomery's case does not go as far as Mr Kelly SC says it does;

(b) that s 43A of the Real Property Act 1900, which was not in force when either Read's case or Montgomery's case was decided brings about a different result; and

(c) that the standard form of contract for the sale of land which the parties have employed also brings about a different result. 25 Mr Parsons argued that Montgomery's case did not bar him from relief. In essence, he puts that certainly West v Read (supra) and probably as well Montgomery's case, merely deal with the question as to when a contract for the sale of Torrens system land merges in the transfer. In West's case it was held that an action for the failure to make title was still possible until registration of the transfer as there had been no merger, and in Montgomery's case rescission for mistake was still possible. See also Twidale v Bradley [1990] 2 Qd R 464, 477. 26 I do not consider that one should read down Montgomery's case in the way in which Mr Parsons suggests. After all it was a case of rescission for mistake. 27 Section 43A(1) of the Act provides: "For the purpose only of protection against notice, the estate or interest in land under the provisions of this Act, taken by a person under a dealing registrable … shall, before registration of that dealing, be deemed to be a legal estate." 28 Mr Kelly SC and Mr Lowe say that under no stretch of the imagination can s 43A assist the present problem. It is directed solely to the question of notice as the section itself says, and the mere fact that the purchaser with a registrable transfer before registration may be protected against notice of a third party's interest does not affect at all the question as to whether there has been a fully executed contract between the vendor and the purchaser. 29 Although during the oral hearing I was attracted to the idea, on further reflection I do not consider that the artificial advancement of the time of getting the legal estate for the purposes of notice under s 43A of the Real Property Act or the usual fact that an equitable fee simple is obtained once the purchase money has been fully paid and a registrable transfer obtained (if not at some earlier point), see Barry v Heider (1914) 19 CLR 197, 213, assists in the resolution of the present point. 30 However, as will appear, it is not a matter that is of any moment in the decision of the present case. 31 The contract is in the 2000 edition of the standard form. Clause 15 requires the parties to complete by the completion date. Clause 16 specifies what is to happen on completion including the purchaser paying the vendor by cash or settlement cheque the adjusted price. Clause 17 provides normally for vacant possession to be given on completion. 32 Mr Parsons submits that NSW conveyancing practice virtually universally observed is that on settlement the vendor obtains payment of the purchase price, authorisation to obtain the balance of deposit from any stakeholder, and delivers a registrable transfer. Adjustments are calculated as at the settlement date, possession is taken by the purchaser, and for all intents and purposes a contract is completed and fully executed. 33 To this could be added the matter that very often new rights will be created in the land, for instance, rights of the incoming mortgagee. 34 Ordinarily, if a third party has obtained rights in the subject matter of the contract of which the parties have notice, they cannot rescind the contract, see Carter & Harland on Contracts 4th ed (Butterworths, Sydney, 2002) para [1052] pp 398-399. 35 This point caused me considerable trouble for a while, but then I realized, for the reasons set out in 3, that what the defendants had called "rescission" was not rescission at all but discharge by agreement. 36 3. The next matter is whether it is clear or even arguable that the so-called rescission of 6 August 2002 operated as a rescission ab initio, or whether it must be subject to the property rights of the plaintiffs. 37 Meagher, Gummow and Lehane Equity Doctrines and Remedies 3rd ed (Butterworths, Sydney, 1992) paras [2401] to [2405] point out that the word "rescission" is used in five different senses in various legal texts and reported cases. First, it is used improperly as a synonym for terminate. Secondly, it is used to describe a contractual right to put an end to a contract. Thirdly, it is an equitable right to dissolve a contract ab initio for fraudulent misrepresentation. Fourthly, it is an equitable remedy to deal with situations of equitable fraud such as undue influence; and fifthly, there is statutory rescission such as pursuant to the Trade Practices Act 1974. 38 The present "rescission" is not within any of those five categories. That is because it is really termination by agreement. 39 If the rescission being considered was allied to the third type of rescission, then a stumbling block may well have been that the plaintiffs had obtained third party rights of which the parties had notice at the time of rescission. However, with discharge by agreement that type of consideration is immaterial. 40 Parties can, of course, make any contract they like. That contract can affect the rights of the contracting parties with some exceptions that need not be discussed here. 41 It was competent for the parties to declare or agree that in so far as they were capable of doing so, their contract should be set aside as if it had never been. However, such an arrangement could not have the effect of removing rights in property which had accrued to other persons before that setting aside. Particularly will this be the case where there was notice of the rights of a third party. 42 Accordingly, in my view, the transaction of 6 August 2002 could not affect any right in the land which the plaintiffs may have acquired before 6 August. 43 4. Mr Parsons also submitted that the transaction culminating in the alleged rescission of 6 August was void in fraud of creditors under s 37A of the Conveyancing Act 1919. 44 This submission must be rejected, at least at this stage, because there is not the evidence which would amount to a strongly arguable case that there has been fraud of creditors generally or even fraud in respect of the plaintiffs. At the moment there are two equally consistent possibilities: (a) that the transaction was aimed at the plaintiffs; or (b) that the caveats put on by the plaintiffs were sufficient to frustrate consummation of the conveyancing transaction. There may be other scenarios exposed when all the facts are in. 45 5. Likewise, there is not the material at this stage to support the submission of Mr Johnson for the third defendant, that because of s 304 of the Duties Act 1997, the plaintiffs have no interest in the land. It appears that no duty has been paid on the loan documents. However, it is not clear to me that the documents are a mortgage within the meaning of s 205 of the Duties Act, or whether s 211 of the Act displaces s 304. It is not for the Court, if the point is taken under the Duties Act to itself work through the intricacies of the Act. The person taking the point must clearly demonstrate (a) that the document is dutiable; and (b) that the duty has not been paid, though this latter will usually become obvious. Accordingly, I do not uphold Mr Johnson's point at this stage, though it may be agitated at a later stage of these proceedings. 46 It is, I must confess, always a matter of great surprise to me that so many unstamped documents are now attempted to be tendered in proceedings involving property rights in this Court. Although s 304 of the Duties Act 1997 is in slightly different terms to its predecessor, it still makes it clear that an instrument is not available for use in law or equity for any purpose unless it is duly stamped. The mere giving of an undertaking allows the document to be tendered in evidence, but it still does not make it available for use in law or equity. That phrase was the subject of an exegesis by Isaacs J, giving the judgment of the High Court in Dent v Moore (1919) 26 CLR 316 at 324, where his Honour says that until the instrument is duly stamped: "The instrument (except in criminal proceedings) is not 'available' and not 'effectual' - that is, it has no effect - for any purpose whatsoever at law or in equity: in other words, it cannot be considered as an instrument giving title, or as one which could be made the means of compelling anyone to give title. It is in the eyes of the law a nullity, except for criminal proceedings and, of course, for the purpose of being stamped." 47 6. These conclusions mean that the plaintiffs should succeed in having the caveats extended. 48 There is currently in place an order that the caveats be extended until further order. However, three things need to be done, namely (1) to consider whether an undertaking as to damages should be required; (2) to provide for the costs of this part of the case; and (3) to provide for its ongoing management. 49 As to (1), my provisional view is that this is a case where an undertaking as to damages is required in order to keep the status quo pending the hearing. Such undertakings are not always required by the Court in caveat cases, but it seems to me the present is one where such should be given. However, as no notice of this requirement was given, nor was the matter ventilated at the oral hearing, I should deal with it on the next mention date. 50 (2) My provisional view is that the costs of this episode should be costs in the cause as it is like a situation where the plaintiff succeeds in obtaining an interlocutory injunction to keep the status quo pending the trial. 51 (3) The matter might perhaps be a fit one for the expedition list. If not, then it should be put in the Registrar's list at a convenient time to make sure that it is progressed with due diligence. 52 In order to consider finally the matters (1), (2) and (3) listed above, I will have the matter listed before me at 9.30 am on Tuesday 1 October 2002 with the provision that should this date be inconvenient to counsel, provided my Asociate is given due notice, some other Tuesday or Thursday morning can be substituted.

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