REW08 Projects Pty Ltd v PNC Lifestyle Investments Pty Ltd

Judgment

1. BEAZLEY P: I have had the advantage of reading in draft the reasons of Macfarlan JA. I agree with his Honour's reasons and proposed orders.
2. MACFARLAN JA: REW08 Projects Pty Ltd, the appellant, is involved in the development of land for subdivision and sale. On 13 December 2013 it entered into a contract to sell a lot in a subdivision at Schofields in Sydney to PNC Lifestyle Investments Pty Ltd, the respondent. The front page of the contract stated the purchase price to be $485,000, with a $250,000 deposit to be paid.
3. Special Conditions 53 and 55 of the contract were in the following terms: "53 RIGHT TO RESCIND AND SIMULTANEOUSLY ENTER INTO A NEW CONTRACT 53.1 The purchaser acknowledges that the Vendor will allow him/her to Rescind this Contract and simultaneously enter into a new contract on identical terms with updated Plan documents quarterly until the Plan of subdivision is finalized. A fee of $150.00 is payable by the Purchaser to each rescission. 53.2 At the time the Plan of subdivision is registered the purchaser may rescind the Contract and enter into an updated land Contract on identical terms and a home building contract. … 55 REBATE 55.1 A price reduction of $235,000.00 will be made at Settlement provided that the Purchaser has met all obligations under the contract."
4. On or about 17 June 2014 the parties signed and dated two sale contracts in relevantly identical terms to that of the 13 December 2013 contract. One contract was dated 13 March 2014, the other 13 June 2014. On the same date they signed deeds of rescission relating to the 13 December 2013 and 13 March 2014 contracts. A draft deed of rescission of the 13 June 2014 contract was prepared, but was not executed by both parties.
5. Following disagreements between the parties, on 22 April 2016 the respondent commenced proceedings in the Equity Division for specific performance of the contract dated 13 June 2014, and for other relief. After the appellant filed a defence alleging that the contract had been entered into "for the express purpose of avoiding stamp duty" payable on it and was therefore "void for illegality", the respondent paid to the Office of State Revenue the full amount of stamp duty referable to the transactions, together with interest calculated from 13 December 2013. The payment was made by a bank cheque enclosed with a letter from the respondent's solicitors dated 21 August 2016. That letter also enclosed copies of the various contracts for sale and deeds of rescission, and drew attention to Special Condition 53.
6. In a judgment of 2 February 2017 ([2017] NSWSC 27), Darke J rejected the appellant's illegality argument and other defences. His Honour found that the contract for sale dated 13 June 2014 should be specifically performed.
7. By notice of appeal filed on 30 March 2017 the appellant contended that his Honour erred in not finding that the contracts for sale and deeds of rescission were "unenforceable for illegality". Alternatively, the appellant contended that his Honour erred in not holding that the respondent had engaged in conduct giving rise to a lack of clean hands that disentitled it to equitable relief. The conduct of the respondent that the appellant relied upon was the entry into those contracts and deeds, and the inclusion of Special Condition 55 in the contracts.

The judgment at first instance

1. It is unnecessary to refer to the primary judge's detailed description of the dealings between the parties as his Honour's factual findings are not challenged on appeal. Nor is it necessary to refer to the detail of his Honour's conclusions that the respondent duly paid the deposit specified in the 13 June 2014 contract and that the appellant had no justification for its purported termination of that contract.
2. Turning to the appellant's illegality defence, the primary judge noted that the appellant did not contend that the 13 June 2014 contract breached any statutory provision, that its making was prohibited by statute or that its performance would (I add, necessarily) involve any act prohibited by statute. Rather, the contention was that the contract was unenforceable because it was "associated with or in furtherance of illegal purposes" (Judgment at [91]).
3. His Honour found that the primary purpose of the form of the transaction, constituted by the various contracts and deeds between the parties, was to avoid any immediate liability for stamp duty. His Honour also found however that the respondent always intended to pay the required duty, its intention only being to delay payment (at [97]). His Honour continued: "The cardinal purpose of the comprehensive legislative regime to which I have referred is to ensure that the proper amount of duty is received by the State in respect of dutiable transactions. I consider that such purpose will be fulfilled without holding the 13 June 2014 contract to be unenforceable. Moreover, it is my view that holding the contract to be unenforceable would be incongruous with the legislative regime. Finally, it is my view that holding the contract to be unenforceable would be a disproportionate sanction having regard to the scale of any benefits that PNC might have expected to obtain, or in fact obtained, as a result of the transaction whereby the contract was entered into" (at [100]).
4. His Honour noted the appellant's submission that Special Condition 55 constituted a fraud on the Chief Commissioner for Stamp Duties. His Honour stated however that if duty were assessed on the basis of the price shown on the face of the contract, more duty would be payable, not less (Judgment at [90]). His Honour concluded that in these circumstances such a clause should not be regarded as having the purpose of defrauding the Chief Commissioner.
5. His Honour proceeded to reject the appellant's submission that the inclusion of Special Condition 55 in the contract must have been for the purpose of misleading others about the true price at which the property was sold. In this context, his Honour accepted that "the price shown on the front page of the contract accurately reflected the value of the property to be sold, and that the rebate provided for in Special Condition 55 reflected the discount which was given to certain initial purchasers (including [the respondent]), who were prepared to pay a large deposit which would be immediately released to [the appellant]" (at [102]). His Honour held that in these circumstances the Special Condition did not assist the appellant's illegality argument.
6. The primary judge also rejected the appellant's submission that the respondent should be refused relief upon the basis of its lack of clean hands, stating: "There are aspects of the conduct of PNC in relation to this transaction which are less than satisfactory. The suggestion of, and later the participation in, the backdating of documents to avoid an immediate liability for stamp duty falls within that category. However, I take into account that Mr Cseh [the director of the respondent] was, throughout that process, guided by lawyers and had no strong reason to think that what he was doing was improper. Moreover, I have accepted that Mr Cseh always intended to pay the required stamp duty, and that his intention was only to delay such payment. The stamp duty, as assessed, has now been paid. Finally, I do not think that PNC engaged in any improper conduct by entering into agreements that included Special Condition 55. In these circumstances, I do not think that a lack of clean hands defence has been made out such as would justify the withholding of a decree of specific performance" (at [105]).

Determination of the appeal

1. In Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 at [23], French CJ, Crennan and Kiefel JJ stated, by reference to earlier decisions, that an agreement may be unenforceable for statutory illegality where: "(i) the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute; (ii) the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute; (iii) the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a 'contract associated with or in the furtherance of illegal purposes. In the third category of case, the court acts to uphold the policy of the law, which may make the agreement unenforceable. That policy does not impose the sanction of unenforceability on every agreement associated with or made in furtherance of illegal purposes. The court must discern from the scope and purpose of the relevant statute 'whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable'" (ibid).
2. This passage was cited with approval by the plurality in Gnych v Polish Club Ltd (2015) 255 CLR 414; [2015] HCA 23 at [35].
3. In the present case, the appellant did not assert that the 13 June 2014 contract was unenforceable by reason of statutory illegality. Rather, it contended that the contract was one to commit an unlawful act (being an act in breach of a statute) and was therefore unenforceable under the general law by reason of public policy considerations. This is substantially the same as an allegation of statutory illegality in the third sense referred to in [14] above, although the judgment of Gageler J in Gnych at [59]-[60] and [70]-[71] suggests that there may be a distinction. If there is, it is not of any present significance.
4. In its pleading the appellant relied on an allegation that the 13 June 2014 contract was "entered into for the express purpose of avoiding stamp duty". On appeal however, in light of the primary judge's factual findings (see [10] above), of necessity it confined its allegation to one that the purpose of entry into the contract (apparently of both parties but at least of the respondent) was to delay payment of stamp duty. Again, it does not assert that the contract itself was prohibited by statute.
5. Under the general law "the court will not enforce [a] contract at the suit of a party who has entered into [it] with the object of committing an illegal act" (Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 427; [1978] HCA 42 per Mason J). Where the contract cannot be formed otherwise than illegally, the contract will be treated as unenforceable, irrespective of the parties' knowledge and intention (S A Hutchinson v Scott (1905) 3 CLR 359 at 369; [1905] HCA 59; N Seddon, R Bigwood and M Ellinghaus, Cheshire and Fifoot Law of Contract, (10th ed 2012, LexisNexis Butterworths) at [18.22]-[18.23]). However that is not what occurred in the present case because the respondent, upon whom the obligation to pay stamp duty lay, could have chosen to pay the requisite duty in accordance with the Duties Act 1997 (NSW). Thus the contract could have been performed lawfully.
6. Nevertheless, the appellant contended that the June 2014 contract should be treated as illegal and therefore unenforceable because the transactions between the parties gave rise to a liability of the respondent to pay stamp duty on the December 2013 contract, which liability the respondent did not intend to meet when it arose. Rather, the appellant contended that the respondent intended to rely upon the artificial and allegedly ineffective scheme erected by the parties, consisting of quarterly rescissions and subsequent re-entry into new contracts, to claim that any liability for stamp duty was deferred.
7. There are a number of circumstances in which the court might allow enforcement of a contract even if its formation or performance was associated with illegal purposes. In Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 at 229; [1997] HCA 17, McHugh and Gummow JJ identified some of these by citing with approval the following passage from the judgment of McHugh J in Nelson v Nelson (1995) 184 CLR 538 at 604-5; [1995] HCA 25: "First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant's fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect" (citations omitted).
8. Their Honours continued in Fitzgerald: "Even if the case does not come within one of those exceptions, the courts should not refuse to enforce contractual rights arising under a contract, merely because the contract is associated with or in furtherance of an illegal purpose, where the contract was not made in breach of a statutory prohibition upon its formation or upon the doing of a particular act essential to the performance of the contract or otherwise making unlawful the manner in which the contract is performed. Rather, the policy of the law should accord with the principles set out by McHugh J in Nelson v Nelson" (citations omitted).
9. Their Honours then quoted the following further passage from McHugh J's judgment in Nelson v Nelson: "Accordingly, in my opinion, even if a case does not come within one of the four exceptions … to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies" (citations omitted).
10. These statements and the other authorities to which I refer below identify a number of reasons why the primary judge was correct in finding that the respondent should not be denied an order for specific performance of the subject contract.
11. First, as the primary judge noted, the legislative regime for the payment and collection of stamp duty (in Chapter 11A of the Duties Act and Part 5 of the Taxation Administration Act 1996 (NSW)) does not expressly render an agreement made for the purpose of avoiding duty unenforceable. Rather, s 26 of the Taxation Administration Act provides for the imposition of a penalty tax where tax is not paid in accordance with the law, and other sections create various offences relating to the provision of false or misleading information (ss 50, 55-57). That the legislature stopped short of providing the sanction of unenforceability is a powerful indication that it did not intend that outcome to eventuate, even by implication. In my view (and that of the primary judge) a finding of unenforceability would not be congruent with the statutory scheme (see Gnych at [75]). The "cardinal purpose" of the statutory scheme, as found by the primary judge, is "to ensure that the proper amount of duty is received by the State in respect of dutiable transactions" (Judgment at [100]). In this regard, the following observations of McPherson J in Boulevarde Developments Pty Ltd v Toorumba Pty Ltd [1984] 2 Qd R 371, made in the context of Queensland legislation relating to stamp duty, are pertinent: "Approached on this footing, [the relevant section] is not to be regarded as impliedly rendering illegal or unenforceable an instrument that offends against its provisions. Indeed, for it to do so might very well tend to defeat the purpose of the enactment by making void the very instrument that it is sought to charge to duty" (at 376).
12. Secondly, the appellant does not have the benefit of any finding by the primary judge that the respondent (through its director Mr Cseh) was conscious in December 2013 (or ever) that the proposed arrangements to delay the need to pay stamp duty, involving the execution of multiple contracts and deeds, would not be legally effective to do so. I make no comment as to whether they would have been legally effective if complied with: for example if the December 2013 contract had in fact been rescinded within three months of its making. To the contrary, the primary judge made the finding that "I take into account that Mr Cseh was, throughout that process, guided by lawyers and had no strong reason to think that what he was doing was improper" (at [105]). As Dawson and Toohey JJ said in Fitzgerald at 221 "whilst persons who deliberately set out to break the law cannot expect to be aided by a court, it is a different matter when the law is unwittingly broken". The appellant has not established that the respondent knowingly broke the law.
13. Thirdly, delaying the payment of stamp duty was not essential to the parties' bargain for the purchase and sale of the property, rather it was only an incidental consequence. As in Neal v Ayers (1940) 63 CLR 524; [1940] HCA 21 where the parties' intention was to engage in unlawful trading after completion of a hotel purchase, in the present case the intent to engage in conduct prohibited by statute was "extrinsic to the dealing which form[ed] the foundation of the contract and of the inducing causes" (Neal v Ayers at 532). As that intent did not go to the "substance of the transaction", it did not "corrupt the contract", nor did it "invalidate the whole transaction" (ibid). In the words of Mason J in North v Marra Developments Ltd (1981) 148 CLR 42 at 60; [1981] HCA 68 (and unlike the illegality in that case), it was "collateral only".
14. Fourthly, the supposed illegal purpose "has not been carried into effect" (see [20] above). Stamp duty has been paid, with interest, and the appellant did not establish that any penalties which were levied remain unpaid.
15. The appellant contended that the respondent's disclosure to the Office of State Revenue at the time of payment of stamp duty (see [5] above) was deficient because it did not disclose that the deed of rescission relating to the 13 December 2013 contract was backdated. Due to this backdating the deed of rescission appeared, contrary to the fact, to have been executed within three months of the December 2013 contract (three months being the period for payment of stamp duty set out in s 17 of the Duties Act). The appellant did not establish that such a disclosure would, or might, have made a difference to the Office of State Revenue's attitude to the respondent's communication. In any event the point is of no consequence because, in the course of the hearing before this Court, the respondent gave an undertaking to the Court to make the relevant disclosure.
16. Fifthly, as the primary judge held, to deprive the respondent of the benefit of the 13 June 2014 contract would impose a penalty upon it disproportionate to its assumed wrong, particularly bearing in mind that the respondent has now paid applicable stamp duty and interest (see [20] above and Gynch at [75]).
17. To free the appellant of the obligation to perform the contract for sale of the subject property at a December 2013 price, when it has suffered no loss by reason of the respondent's alleged impropriety, would likely confer a windfall on the appellant. This was a factor that Mason J in Yango Pastoral Company found weighed against a finding that the contract was unenforceable (at 428).
18. To support its illegality argument, the appellant also relied upon the following statement of Windeyer J in Miro v Fu Pty Ltd [2003] 11 BPR 21,231; [2003] NSWSC 1009 at [15], which it said was applicable to Special Condition 55 of the present contract (see [3] above): "I have said before and say again that this type of clause is quite improper. It can be inserted for no purpose other than to mislead persons such as lending authorities and purchasers of other units in that development. In my view it is likely that solicitors who purposely prepare contracts with contradictory clauses such as this may be guilty of professional misconduct. It is more serious when the solicitor is a party to the contract as vendor. Unreal stated consideration for reduction, although that is not the case here, does not improve the position. Instructions of clients cannot excuse such conduct."
19. Windeyer J did not make this statement in the course of considering an issue concerning the illegality of a contract. Further, his Honour made the statement in relation to a clause in different terms to that presently relevant. The clause considered in Miro simply provided for a rebate, without any qualifying condition. In the present case, Special Condition 55 provided for a rebate in the event of the respondent's compliance with its obligations under the contract. Thus, Special Condition 55 did not provide for a rebate in an artificial manner which could equally have been reflected in a deduction from the purchase price shown on the front page of the contract. Rather, as the primary judge held, according to the evidence before him the purpose of Special Condition 55 was to reflect "the discount which was given to certain initial purchasers (including [the respondent]), who were prepared to pay a large deposit which would be immediately released to [the appellant]" (at [102]). Moreover, the primary judge found that "the price shown on the front page of the contract accurately reflected the value of the property to be sold" (at [102]).
20. Special Condition 55 does not therefore evidence an intent of the parties to mislead others and does not assist the appellant in its illegality defence. In these circumstances, it is unnecessary to deal with other reasons why its presence in the contract may not have rendered the contract illegal, nor to express a view as to the undesirability of clauses in the form of that before Windeyer J in Miro.
21. I add that I do not regard the respondent's participation in the backdating of the deed of rescission of the 13 December 2013 contract as of assistance to the appellant's illegality argument. The backdating was an incidental matter that had no direct relationship to the 13 June 2014 contract. In any event, it was done on legal advice that it was proper. Mr Cseh had no basis for thinking that the advice was erroneous (see Judgment at [105]).
22. Likewise, a belated assertion by the appellant that Special Condition 55 might be used to misstate the cost basis of the property for capital gains tax purposes should be rejected, at least for the reason that there was no basis for concluding that any such misstatement might occur.
23. Finally, I turn to the appellant's defence alleging an absence of clean hands on the part of the respondent.
24. Not every act of wrongful conduct on the part of a plaintiff gives rise to this defence. For the impropriety to be relevant it must have "an immediate and necessary relation to the equity sued for" (Dewhirst v Edwards [1983] 1 NSWLR 34 at 51). That is not so in relation to the respondent's supposed impropriety, which was, as noted in [26] above, incidental or collateral to the contract in relation to which specific performance was sought. The supposed impropriety was thus insufficient to taint the whole transaction. Moreover, the impugned conduct has ceased because the respondent has paid stamp duty and interest.
25. These and the other factors referred to in [24] to [35] above indicate that the primary judge correctly rejected this discretionary defence.

Orders

1. For the reasons I have given, the appeal should be dismissed with costs.
2. GLEESON JA: I agree with Macfarlan JA.

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