Ryde Ex Services Memorial and Community Club Ltd v Kaloriziko Ryde Pty Ltd [2017] NSWSC 1576 | Case summary

Specific performance

At the hearing, the purchaser accepted that the vendor was entitled to an order for specific performance and that it bore the onus of establishing futility as an affirmative defence.
The purchaser was incorporated in May 2015 as a shelf company at the instance of Mr Gav, who is a property developer, for the purpose of a transaction which he was then contemplating. Its paid-up capital is $100. Following its incorporation, Mr Gav became the sole shareholder and director of the company. The transaction which had been contemplated did not take place and the company remained dormant but under Mr Gav's control.
Mr Chanine is also a property developer. In October or November 2016, Mr Gav and Mr Chanine decided to acquire the property in question in these proceedings as a business venture. Mr Gav gave affidavit evidence, which was not contested by Mr Chanine, as follows: 4. During the course of that discussion, Mr Chanine and I said words to the effect that we both agreed that: a) the Purchaser [the first defendant] would be used as vehicle for the purchase of the Land; b) Mr Chanine and I would each contribute half the monies (including deposit monies) to be paid for the purchase of the Land; c) Mr Chanine and I would each contribute half the monies required to develop the Land; d) Mr Chanine would become a 50% shareholder in the Purchaser and a director; and e) Mr Chanine would perform certain operational tasks, do the due diligence for the purchase of the Land and other tasks to realise the development potential of the Land, including making and over-seeing the application for Development Approval.
Mr Gav and Mr Chanine provided $300,000 for the initial instalment of the deposit. That amount is recorded in the books of the purchaser as a loan.
Subsequently, Mr Gav and Mr Chanine fell out. They have not spoken since June 2017. Mr Chanine has not been made a shareholder or director of the purchaser, and Mr Gav remains the sole director and shareholder.
Mr Gav is unwilling to continue to work with Mr Chanine and is unwilling to provide the necessary funds to allow the purchase to proceed. In his affidavit, he said: 12. If the Purchaser is ordered to specifically perform the Contract of Sale, it would be unable to raise the full cost to complete the purchase of the Land. If so ordered, in the circumstances, I would appoint a voluntary administrator to, or commence a creditors' voluntary winding up of, the Purchaser.
Counsel referred to a number of Australian authorities on whether inability, for financial reasons, to complete a contract could be a reason for declining specific performance, including Boyarsky v Taylor (2008) 14 BPR 26,553 where Brereton J considered prior authorities at [34]-[38]. In that case, his Honour would have declined specific performance on that ground if inability to pay was made out on the facts, but it was not: at [39]-[44].
Stevenson J in Wong v Van Vlymen [2016] NSWSC 161 expressed doubt as to whether financial "difficulty" could alone suffice for the refusal of an order for specific performance: at [46]. In that case, the Court found, in any event, that the evidence of the purchaser's financial position was deficient: at [47]. Counsel submitted that, in the present case, it was clear that the purchaser lacked the ability to complete the contract and I should refuse specific performance accordingly.
At the 12 October hearing, I asked counsel whether there were any decisions in which specific performance had actually been refused on the ground of the purchaser's inability to pay. Subsequently, counsel provided me with a further list of authorities. These further authorities were all from other jurisdictions, including Queensland (Evans v Robcorp Pty Ltd [2015] 2 Qd R 111), Ireland (Aranbel Ltd v Darcy [2010] IEHC 272; Park East South East Construction Ltd v Benesch [2013] IEHC 464), the United Kingdom (Titanic Quarter Ltd v Rowe [2010] NICh 14; North East Lincolnshire BC v Millennium Park (Grimsby) Ltd [2002] EWCA Civ 1719), and New Zealand (Prime Resources Company Ltd v Pardeep and Sharyn Anita Kumar [2007] NZHC 439).
Clarke J of the High Court of Ireland in Aranbel was faced with three related proceedings in which defendants had entered into contracts to purchase apartments off-the-plan in 2006 as part of a development by Aranbel. When the case was heard in 2010, the Irish property market had crashed. Aranbel sought orders for specific performance. The defendants resisted those orders on the ground of impossibility arising from lack of funds, and contended that damages in lieu of specific performance ought to be ordered. The Court found for the defendants and said (at [2.10]): I am satisfied that, as a matter of principle, where a purchaser demonstrates that fact, i.e. demonstrates that the purchaser concerned does not have the assets or borrowing capacity sufficient to allow them to purchase the property concerned at the contracted price, then a court should not make an order for specific performance for such an order would be in vain…While the established jurisprudence seems to be concerned with impossibility arising from title difficulty and the like, I am satisfied that impossibility arising from lack of funds on the part of a purchaser provides an equal reason for refusing specific performance. A decree of specific performance is no less in vain if it is made against a purchaser with no access to the necessary funds as if it is made against a vendor with no title. Equally just as a title problem that can (or may) be solved is no barrier, a lack of funds that can be remedied will also not be a barrier.
Aranbel was quoted with approval by Laffoy J of the High Court of Ireland in Park East South East Construction Ltd: at [51]; see also Wynn Clons Development Ltd v Cooke [2012] IEHC 385 at [31]-[34]. In Park East, three days into the hearing the plaintiffs conceded that the Court could award damages in lieu of specific performance, such that the Court did not have to decide the question. Nevertheless, the Court indicated that it would have refused to make orders for specific performance as it was clear that the defendants did not have the financial ability to fulfil their contractual obligations: at [49]-[51].
The remaining further authorities that I was referred to concerned summary judgment applications. In Evans, the Queensland Supreme Court, having referred to Boyarsky, refused a summary judgment application for specific performance of a contract for the sale of land in light of evidence that the purchaser lacked the financial capacity to complete the contract: cf Lindaning Pty Ltd v Goodlock [2011] QSC 266 (where the evidence of the purchaser's financial position was deficient and specific performance was ordered by way of summary determination). The New Zealand High Court in Prime Resources Company Ltd and the Northern Ireland High Court in Titanic Quarter Ltd came to similar conclusions also in the context of summary judgment applications for specific performance of agreements to purchase property: see also Ngai Tahu Property Ltd v Dykstra [2009] NZHC 1474; cf Great Northern Land Company Ltd v Crowley [2010] NZHC 1944. In North East Lincolnshire BC, the England and Wales Court of Appeal allowed an appeal from a summary judgment for specific performance of an aspect of an agreement requiring the development of a roundabout on a public highway, on the ground that impossibility due to lack of funding was an arguable defence: at [14]-[15].
In the present case, I accept that the purchaser lacks monies of its own to complete the contract. It is dependent upon support from Mr Gav and Mr Chanine in that regard. However, the financial resources of the purchaser are not limited to monies it holds. It may have rights against its shareholders for financial support.
Counsel for the purchaser argued that the agreement made between Mr Gav and Mr Chanine was an agreement only between them. Counsel characterised it as an "internal" agreement, not an agreement to which either the purchaser or the vendor was party.
Clearly, the vendor was not party to the agreement. But I am not sure that counsel is correct in submitting that the purchaser was not a party to the agreement. At the time the conversation took place, the purchaser was in existence and Mr Gav would have had authority to act on its behalf. There is no difficulty in principle with construing the agreement as one to which Mr Gav and Mr Chanine, as well as the purchaser, were party. The question is whether, in the circumstances, it should be so construed.
In my view, a relevant factor in construing the agreement is that, by entering into the contract to purchase the property, the purchaser would be subjecting itself to an obligation to pay the purchase price. For Mr Gav to have put the purchaser in the position of committing itself to pay that purchase price without an assurance of support from its shareholders would have been irresponsible, and might well have involved for him a liability for insolvent trading should the purchaser subsequently be wound up. While the question whether the company was a party to the agreement is an objective one which does not depend upon Mr Gav's subjective intention, in my opinion this circumstance is one which the Court would be entitled to take into account as part of the factual matrix. Ultimately, I do not think the question needs to be finally determined in order to decide whether to order specific performance. In my opinion, there is at least a possibility that the agreement is one to which the purchaser is party. Accordingly, I do not think that the purchaser has established definitively that it lacks the means to settle the contract.
Even if the purchaser has no legal right to compel Mr Chanine and Mr Gav to contribute to the purchase price, Mr Gav would apparently have the right to compel Mr Chanine to contribute his share. It was not suggested that Mr Gav is unable to pursue Mr Chanine, or that, even without Mr Chanine's contribution, Mr Gav lacks the means to fund the acquisition. It appears that he simply does not now wish to do so.
I acknowledge Mr Gav's statement of intention not to proceed even if specific performance is ordered. However, I do not think that I should treat this as establishing as a certainty that it will not happen. I would assume that, like any sensible person, Mr Gav would ultimately make up his mind based on the circumstances as they then exist.
If the purchaser were placed in liquidation, Mr Gav and Mr Chanine would face the possibility of the liquidator seeking to exercise rights against them arising out of the agreement. Should the liquidator choose not to do so, then it would be open to the vendor to sue the purchaser for damages and to sue Mr Gav and Mr Chanine on the guarantee. It may be that Mr Gav and Mr Chanine will ultimately consider that it is worth incurring the costs and taking the risks involved in this course; but I do not think that it is sufficiently certain that they will do so to treat the granting of relief in the nature of specific performance as futile.
The very fact that Mr Gav took the trouble and incurred the expense of causing the purchaser to defend the claim for specific performance suggests to me that the making of such an order has some value. Otherwise, why defend the proceedings at all? If Mr Gav had decided finally and irrevocably that he would in no circumstances pursue Mr Chanine or provide funds himself to the purchaser to allow it to complete the purchase, the purchaser would be insolvent and Mr Gav could (and should) already have applied for it to be wound up.
Of the authorities discussed above, only Aranbel is an actual decision to refuse specific performance following a contested final hearing. At the time the purchasers (who were apparently ordinary individuals) entered into the contracts in question, they would never have expected the scale and severity of the property collapse which ensued. The circumstances were quite exceptional.
It may be that specific performance may be refused on the ground of the purchaser's inability to raise the purchase price. But in my view, the Court should be very slow to do so in a commercial transaction of the type in issue in this case. There is no legal obstacle to the purchaser completing the transaction and there has been no significant change in the property market. It is simply that, for reasons internal to the purchaser, it does not wish to proceed. If the Court were to refuse specific performance in such circumstances, it would be allowing purchasers an arguable basis for escaping from compliance with virtually any contract for the sale of land. All purchasers would have to do would be to assert an inability to raise the necessary funds to complete. An order for specific performance would cease to be something granted almost as of course in cases of sale of property. This would lead to unprofitable disputes about the likelihood or otherwise of the defaulting purchaser obtaining finance and it would undermine certainty in the property market.
My conclusion is that, on the evidence at the hearing, the purchaser has not established that the grant of specific performance would be futile. It follows that the purchaser has not suffered any forensic disadvantage from the late application to discontinue. If I refused leave to discontinue as the purchaser and the other defendants urge me to do, I would make an order for specific performance against the purchaser. But, given the purchaser's continuing attitude that it will not comply (which was reiterated at the hearing of the discontinuance application) and the vendor's change of heart, this would be a wasteful exercise. Accordingly, I will grant leave to discontinue the claim for specific performance.

Damages for delay

The contract was made up of the standard Contract for the Sale of Land in New South Wales (2016 edition), supplemented by special conditions. Under cl 16.7 of the Contract, the purchaser was obliged to pay the purchase price on the date for settlement, being 30 June 2017. This breach would have permitted the vendor to terminate the contract, but instead, consistently with its attempt to obtain specific performance, the vendor claimed only damages for the delay in settlement. The damages claimed consisted of the vendor's ongoing financing costs (pursuant to a mortgage secured on the property) from 1 July onwards, together with fees and other charges associated with the failed settlement.
In making this claim, the vendor did not rely upon any express provision of the contract. Rather, the vendor relied on its general law right to damages for breach.
Counsel for the defendants advanced three grounds of objection to this claim. First, counsel relied on special conditions 9.1 and 9.2. Special condition 9 provides: 9 Damages for failure to complete 9.1 Damages Subject to Special Condition 18 and in addition to any other rights the Vendor may have should completion not take place on or before the Completion Date (other than due to the fault of the Vendor) then the Vendor has the right (in addition to all other monies payable to the Vendor pursuant to this Contract) to require the Purchaser to pay damages on actual completion calculated on the balance of the purchase price at a rate of 8% per annum from and including the day after the Completion Date up to and including the date that completion in fact occurs. 9.2 Assessment of loss The Parties agree that the damages payable by the Purchaser pursuant to this Special Condition represent a fair and reasonable assessment of the loss occasioned to the Vendor due to the Purchaser's failure to complete within the specified time. 9.3 Vendor not liable The Vendor shall not be liable to the Purchaser for any damage or loss suffered by the Purchaser due to the Vendor's failure to complete unless such failure constitutes a breach of an essential term of this Contract.
The clause only comes into effect once "actual completion" has occurred, and, therefore, the vendor's rights under the clause cannot have yet accrued. The clause does not expressly supersede the general contractual right to damages for delay. But counsel argued that implicitly it displaced any entitlement the vendor would otherwise have had to claim such damages.
The second argument for the defendants was that the damages claimed were too remote. It was said that the vendor's interest and finance charges did not naturally or usually arise from the breach, and nor were they known to the purchaser or reasonably within the purchaser's contemplation.
Thirdly, the defendants argued that the quantum of the losses had not been established. Counsel suggested that, based on correspondence between the vendor and its financier, the financier remained open to negotiation and it might be that the vendor would not ultimately have to pay all of the fees or interest claimed.
The first and second of these defences were not argued in any detail at the hearing before me, but I was later provided with a list of authorities from the defendants and supplementary submissions by the plaintiff. The arguments give rise to issues of some complexity and I had not completed my research and consideration when the vendor notified that it wished to discontinue the proceedings. But it was submitted for the defendants that the appropriate course, given that the claim for damages was not pursued, was to dismiss the claim. It was argued that the defendants in future proceedings might rely on res judicata, either in its strict sense or in the extended sense discussed in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, and that this is a forensic advantage which ought to be preserved.
I will assume for the sake of argument that the dismissal of the proceedings at this point would be a dismissal "following a determination on the merits" so that it would attract the doctrine of res judicata: Civil Procedure Act 2005 (NSW), s 91. But even so, it would only be a final decision on the vendor's claim for contractual damages for delay to date.
If the vendor, as it contemplates, now proceeds to terminate the contract, the vendor may have a right to claim interest up to the date of termination under special condition 9.1 (assuming that, for the purposes of special condition 9.1, termination can be equated with "completion", as in Cox v Parker (1987) 5 BPR 97,339). Termination of the contract would also bring into play the vendor's rights under cl 9 of the Contract, which provides: 9. Purchaser's default If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can - 9.1 keep or recover the deposit (to a maximum of 10% of the price); 9.2 hold any other money paid by the purchaser under this contract as security for anything recoverable under this clause - 9.2.1 for 12 months after the termination; or 9.2.2 if the vendor commences proceedings under this clause within 12 months, until those proceedings are concluded; and 9.3 sue the purchaser either - 9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover - ● the deficiency on resale (with credit for any of the deposit kept or recovered and after allowance for any capital gains tax or goods and services tax payable on anything recovered under this clause); and ● the reasonable costs and expenses arising out of the purchaser's non-compliance with this contract or the notice and of resale and any attempted resale; or 9.3.2 to recover damages for breach of contract.
Any rights the vendor has under special condition 9 are rights to a liquidated sum under the contract; such a right is quite different to a right to recover interest (at a different rate) as a head of unliquidated damages for delay. The contractual right to recover the deficiency on resale together with "reasonable costs and expenses", and the common law right to recover damages preserved by cl 9.3.2 (which would be damages for loss of bargain) are also conceptually quite distinct from the claim advanced by the vendor in these proceedings.
Furthermore, the vendor's rights under special condition 9 will only accrue on termination. The vendor's rights under cl 9.3.1 will not accrue until the property is resold. Nor has the vendor's general contractual right to damages (preserved by cl 9.3.2) for loss of bargain accrued; that entitlement will only accrue upon termination. I find it very difficult to see how the doctrine of res judicata (either in its strict sense or in its extended sense) could ever operate so as to prevent the vendor from litigating causes of action which had not even accrued at the time the earlier proceedings were dismissed.
Counsel for the defendants acknowledged the difficulties in relying on res judicata in any future proceedings, but nevertheless submitted that the opportunity to make such a claim was a forensic advantage which should be preserved. I do not agree. It is one thing for a plaintiff to run a case to trial, find the evidence has not turned out as had been hoped, and then seek to discontinue in the hope of coming back with an improved version of the case in due course. In such a situation, if the plaintiff does not wish to continue, the Court should insist on the proceedings being dismissed rather than merely discontinued. But the present situation is quite different. The reason for the discontinuance is not the exposure of a forensic weakness in the vendor's case but a change in the vendor's attitude which I consider to be reasonable in the circumstances. If further proceedings ensue, the scope and nature of those proceedings will be quite different. I do not think that the just, quick and cheap determination of the parties' rights would be promoted by insisting on the dismissal of these proceedings so that a tenuous and technical argument is saved up for use in such further proceedings, should they eventuate.

Ryde Ex Services Memorial and Community Club Ltd v Kaloriziko Ryde Pty Ltd

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