S T Investment Pty Ltd v Geng

Supreme Court of NSW|2019-10-30|Before: Darke J, Mr J

Determination

In accordance with the agreement of the parties, the question of damages is to be approached on the basis that the plaintiff validly terminated the contract on 30 October 2019, pursuant to cl 9 of the contract, following a failure on the part of the defendant to complete the contract in accordance with a Notice to Complete.
Provisions such as cl 9 have been held to be intended to augment, rather than restrict or remove, rights which a vendor would otherwise have had upon breach (see Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117 at 135; cited in Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353 at [69]-[73] and [84]).

Clause 9.1

Clause 9.1 operates upon a termination of the contract due to the purchaser's breach of the contract in an essential respect. Regardless of the extent to which the deposit has actually been paid, cl 9.1 operates to enable the vendor to keep or recover the amount of the deposit, up to a maximum of 10% of the purchase price. It has been held that the provision enables the vendor to recover the deposit following termination even if the deposit has not actually been paid (see, for example, Golding v Vella (2001) 10 BPR 18,919; [2001] NSWSC 567 at [30]-[32]). This accords with the position at general law where the amount of a deposit that should have been paid to a stakeholder can be recovered by a vendor as part of its damages for the purchaser's breach (see Socratous v Koo (1993) 6 BPR 13,226; (1993) NSW Conv R 55-685 at 59,916-7).
I do not accept that cl 9.1 is unenforceable as a penalty. The defendant's submission in that regard was to the effect that where, as here, a deposit is not actually paid, it does not obtain the character of a deposit, being a payment made in earnest of performance, and thus falls outside the exception to the penalties doctrine afforded to provisions that allow for forfeiture of reasonable deposits in contracts for the sale of land. It was put that cl 9.1 operated upon breach so as to require the payment of the deposit, and did so without reference to any calculation of the maximum damage that may be suffered by the breach. The defendant submitted that, in the circumstances, cl 9.1 operated in the same manner as the provision (Special Condition 5) found to be a penalty in Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40.
The question whether a provision of a contract is penal in nature is to be judged as at the date of the making of the contract, not at the time of the breach (see Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 86-7). Accordingly, the circumstance that the defendant failed to comply with his obligation to pay the deposit does not itself bear upon the determination of whether cl 9.1 should be characterised as a penalty.
In Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 it was stated by the High Court (at [10]): In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation.
To the extent that cl 9.1 can be seen as collateral to a primary stipulation, the primary stipulation must be the obligation of the purchaser to pay the deposit in accordance with the terms of the contract. However, in contracts for the sale of land, it is well established that provisions for the forfeiture of a reasonable deposit upon termination for the purchaser's breach are regarded as standing outside the general principles of relief against penalties and forfeitures (see Havyn Pty Ltd v Webster (2005) 12 BPR 22,837; [2005] NSWCA 182 at [130]-[133]; Luu v Sovereign Developments Pty Ltd (supra) at [24]-[27]; Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; [2008] HCA 22 at [26]; Andrews v Australia and New Zealand Banking Group Ltd (supra) at [43]). It is further well established that a deposit of no more than 10% of the purchase price is regarded as reasonable in a contract for the sale of land (see Havyn Pty Ltd v Webster (supra) at [132]; Commissioner of Taxation v Reliance Carpet Co Pty Ltd (supra) at [26]). In my opinion, cl 9.1, which provides for the keeping or recovery of an amount of deposit up to a maximum of 10% of the purchase price, falls within the established exception to the penalties doctrine. I do not accept that the failure of the defendant to comply with his obligation to pay the deposit leads to a different conclusion.
It would be anomalous if the operation of the exception depended upon whether the defendant complied with his obligation to pay the deposit. After all, a failure to pay the deposit on the making of the contract is itself a breach of the contract in an essential respect. In any case, as I have said, the question whether a contractual provision is penal is to be determined as at the time of the making of the contract. At that moment, the defendant became obliged to pay a 10% deposit that was plainly intended to be an earnest of performance. It is the character or nature of that obligation that underpins the exception to the doctrine of penalties (cf Iannello v Sharpe (2007) 69 NSWLR 452; [2007] NSWCA 61 at [31]-[32]). The exception operates regardless of whether the defendant proceeds to discharge the obligation.
I should add that I do not accept that cl 9.1 is in substance the same as Special Condition 5 of the contract under consideration in Luu v Sovereign Developments Pty Ltd (supra). In that case, the contract provided for a deposit of $65,000 (about 1% of the purchase price). That amount was paid on exchange. Special Condition 5 operated in the event that the purchaser paid a deposit of less than 10% of the purchase price, and provided that if the purchaser committed any default under the contract "the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed". It was held (at [17] and [23]) that Special Condition 5 should be read as requiring the purchaser to pay 10% of the purchase price if the purchaser commits any default under the contract. It was further held (at [34]) that the essential character of the obligation under Special Condition 5 was "an additional payment which the purchaser must make if the purchaser is in any way in default". That is to say, a payment additional to the deposit of $65,000. Clause 9.1 of the present contract, which allows the keeping or recovery of the deposit, stands in a very different position.
For the above reasons, cl 9.1 entitles the plaintiff to recover from the defendant the amount of the unpaid deposit, namely, $435,000.
As noted earlier, the defendant, by means of his Cross-Claim, sought orders for either relief against forfeiture or the return of the deposit. However, these claims were ultimately not pressed.

Clause 9.2

Clause 9.2 of the contract may be put to one side as no other money (or indeed any money at all) was paid by the defendant under the contract.

Clause 9.3

Clause 9.3 of the contract provides further remedies for a vendor that has terminated the contract following breach by the purchaser in an essential respect. The remedies given by cll 9.3.1 and 9.3.2 are expressed as alternatives. These alternatives present a choice that can be kept open by the vendor until judgment (see Kazacos v Shuangling International Development Pty Ltd (supra) at [60]-[61] and the discussion of the authorities which follows).
Broadly, the choice is between: 1. liquidated damages pursuant to cl 9.3.1 where a resale occurs within 12 months of the termination, together with certain costs and expenses; and 2. unliquidated damages for breach of contract pursuant to cl 9.3.2. (see Galafassi v Kelly (2014) 87 NSWLR 119; [2014] NSWCA 190 at [177]; Kazacos v Shuangling International Development Pty Ltd (supra) at [64]).

Clause 9.3.1

The cause of action for liquidated damages under cl 9.3.1 arises on the date of resale, being the date the resale contract is made (see Galafassi v Kelly (supra) at [180]; Jampco Pty Ltd v Cameron (No 2) (1985) 3 NSWLR 391 at 395).
Where liquidated damages are sought pursuant to cl 9.3.1, it is necessary to calculate "the deficiency on resale". This calculation is based upon a comparison between the price under the first (terminated) contract and the price under the second (resale) contract. The starting point is the price of the first contract if it had been completed according to its terms; that amount, less the vendor's cost of sale on the first contract, is to be measured against the gross price on the second contract (see Galafassi v Kelly (supra) at [193]).
It is clear from the terms of the first dot point of cl 9.3.1 that any deposit kept or recovered pursuant to cl 9.1 must be credited against any deficiency on resale (see Buchanan v Dunstan [2007] NSWSC 248 at [46], and the cases there cited, including Cooper v Ungar (1958) 100 CLR 510 at 514). It further appears that the amount of a forfeited deposit should also be credited against costs and expenses that fall within the second dot point of cl 9.3.1 (see Havyn Pty Ltd v Webster (supra) at [71]; Donnellan v Garlick (2006) 12 BPR 23,571; [2006] NSWSC 132 at [12]; Kazacos v Shuangling International Development Pty Ltd (supra) at [97]-[117]).
The plaintiff adduced little evidence of its costs of the first sale. There was only evidence of property decoration and styling costs in the amount of $10,800. That amount was paid by the plaintiff on 4 September 2018. Presumably, other costs (including legal costs and agent's commission) would have been incurred on the sale, but there is no evidence of their extent. Leaving that evidentiary problem aside for the moment, and assuming a deficiency on resale of $339,200 (being the difference between the $4.35 million price the plaintiff would have received had the first contract completed on 10 December 2018 less costs of $10,800, and the price of $4 million under the resale contract), once the deposit of $435,000 is taken into account there would be no entitlement to liquidated damages under cl 9.3.1 unless the costs and expenses that fall within the second dot point of the clause exceed $95,800.
The defendant did not dispute that those costs and expenses included the $2,086.38 for legal costs and disbursements of the second sale, and $175 for cleaning in relation to the second sale. The claimed decoration and styling costs in relation to the second sale of $10,989 were not so accepted. The defendant also challenged the $23,988.31 for land tax, Council rates and water rates, and the $312,962.26 for interest costs. It is apparent, therefore, that the plaintiff's claim for liquidated damages under cl 9.3.1 depends upon establishing that at least $93,538.62 of those contested amounts fall within the second dot point as reasonable costs and expenses: 1. arising out of the purchaser's non-compliance with the contract; or 2. of resale.
In Jampco Pty Ltd v Cameron (No 2) (supra) at 395-6 Young J (as his Honour then was) considered a claim to recover the interest paid on mortgages that were not discharged due to the purchaser's failure to complete the contract. His Honour held that they were not expenses of and incidental to a resale (within an earlier version of cl 9.3.1). Young J further stated that at common law such interest would not be damages flowing from the purchaser's default, except in cases where the second limb of Hadley v Baxendale (1854) 9 Exch 341 applied. His Honour said that there was no proper analogy between such interest and rates, as "rates inevitably attach to the land, but whether a mortgage is kept on the land or not, depends upon the economic decisions made by the proprietor".
The plaintiff submitted that the distinction drawn between rates and mortgage interest was artificial in a case where the proprietor has no capability to discharge the mortgage other than through a sale of the property. It was submitted that the mortgage interest expenses of a corporate vendor "selling a newly developed mansion in Strathfield" should be regarded as falling within the first limb of Hadley v Baxendale (supra), being losses that may fairly be considered to arise naturally from a delay in completion. There is some force in this submission. In any case, it is clear that the parties expressly contemplated that the plaintiff would suffer substantial loss if completion was delayed.
This is shown by the terms of Special Condition 39 which provides: If for any reason not solely attributable to the Vendor the balance of the purchase moneys shall not be paid by the Purchaser to the Vendor by the Completion Date referred to in Clause 15 the Purchaser shall on completion pay by way of liquidated damages: a sum equal to the rate of ten percent (10%) per annum on the said balance from the Completion Date until actual completion without prejudice to the Vendor's rights under Clause 9 to exercise the Vendor's rights and remedies therein mentioned or its other rights to damages by virtue of the default of the Purchaser hereunder; and a sum of $300.00 plus GST which is agreed to be a genuine pre-estimate of expenses of both Legal and associated costs incurred by the Vendor for urgent works due to the Purchaser's default in not completing by the Completion Date and shall form part of the balance of the purchase monies and adjustments and be payable by the Purchaser to the Vendor on completion as an essential term of this Contract.
In these circumstances it seems to me that it is open to the plaintiff to claim under cl 9.3.1 any reasonable costs and expenses that arise out of a failure on the part of the defendant to complete the contract by 10 December 2018. I note that Special Condition 39 is expressed to be without prejudice to the vendor's rights and remedies under cl 9 of the contract. It is clear that at all times the defendant remained unwilling and, it seems, unable to complete the purchase. Completion was thus delayed, and ultimately did not take place at all.
The plaintiff established that in the period from 10 December 2018 to 3 February 2020 (when the resale contract settled), it incurred interest costs totalling $312,962.26 on three finance facilities that I am satisfied were drawn upon for the purpose of the acquisition and development of the property. The plaintiff also established that in that period it incurred land tax, Council rates and water rates totalling $23,988.31. In my opinion, these amounts (which total $336,950.57) fall within cl 9.3.1 as reasonable costs and expenses arising out of the defendant's non-compliance with the contract in failing to complete it in accordance with its terms.
When the legal costs and disbursements and cleaning costs in relation to the resale are added, the total amount of costs and expenses that fall within the second dot point of cl 9.3.1 becomes $339,211.95.
Assuming a deficiency on resale of $339,200, the total amount recoverable under cl 9.3.1 would be $678,411.95, or $243,411.95 once credit is given for the amount of the deposit recoverable under cl 9.1. However, this amount would need to be reduced to take into account the full extent of the plaintiff's costs of the first sale. It is not necessary to further consider the question of the amount recoverable under cl 9.3.1 (including whether the plaintiff should be permitted to adduce further evidence of the costs of the first sale) because, as will be seen, the plaintiff is entitled to recover a greater amount pursuant to cl 9.3.2.

Clause 9.3.2

It is next necessary to consider the plaintiff's claim for damages pursuant to cl 9.3.2. Here, the damages recoverable will be governed by general law principles.
In circumstances where the contract is terminated due to the purchaser's breach, the vendor is entitled to seek damages for loss of the bargain. The general principle is that the innocent party is to be placed in the same position as if the contract had been performed (see, for example, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13]). Damages for breach of contract are generally assessed as at the date of breach. In the context of a claim for loss of bargain damages upon termination for breach, the date of breach should be understood as the date of termination for breach (see Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146 [2014] NSWCA 389 at [26] and [44]). The right to loss of bargain damages only arises at that time (see Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260; Ronnoc Finance Ltd v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 633-4).
The termination in the present case is agreed to have occurred on 30 October 2019. That date is thus the appropriate date for the assessment of damages.
The prima facie measure of the damages to which the plaintiff is entitled is the difference between what the plaintiff would have received under the contract had it been completed on that date, and the value of the property that in fact remained in the plaintiff's hands.
The purchase price was $4.35 million. As no deposit was to be paid to the vendor prior to completion, the balance of the purchase moneys required to be paid on completion was $4.35 million (subject to usual adjustments). On that basis, Special Condition 39 would operate so that if, for any reason not solely attributable to the plaintiff, completion did not occur by the Completion Date referred to cl 15, the defendant would be obliged to pay on completion a sum equal to the rate of 10% per annum on $4.35 million from the Completion Date until actual completion. The Completion Date referred to in cl 15 should be construed as the date for completion as described on the front page of the contract. There, reference is made to both cl 15 and Special Condition 50. As previously noted, by the operation of Special Condition 50, the date of completion became 10 December 2018. There is no suggestion that the plaintiff was solely responsible for completion not occurring in the period from 10 December 2018 to 30 October 2019. On the contrary, at all relevant times the plaintiff seems to have been ready, willing and able to complete, whereas the defendant was never ready, willing or able to do so.
In Carpenter v McGrath (1996) 40 NSWLR 39, a case concerning a vendor's damages for loss of bargain, it was held that an amount of interest payable by the purchaser on completion should be included in the calculation of the purchase price for the purpose of assessing the damages (see Sheller JA at 59-60 and Cole JA at 72; cited by Gleeson JA in Galafassi v Kelly (supra) at [188], as was Tiplady v Gold Coast Carlton Pty Ltd (1984) 54 ALR 337 at 378). That was so even though the interest was not expressed in the relevant provision (cl 24(b)) to be part of the purchase price. Here, an amount payable under Special Condition 39 (which, in essence, is an amount of interest) is expressed to be payable "by way of liquidated damages". Such an amount is nonetheless payable under the terms of the contract upon completion. Assuming that Special Condition 39 is not unenforceable as a penalty, it seems that had the contract been performed so as to be completed on 30 October 2019 (some 324 days after 10 December 2018), the defendant would have been obliged to pay, in addition to the outstanding price of $4.35 million, the sum of $386,136.98 pursuant to Special Condition 39. The total amount payable on completion (leaving adjustments aside) would thus have been $4,736,136.98.
In my opinion, Special Condition 39 is not unenforceable as a penalty. I do not think it can be said that an amount payable by the purchaser pursuant to the condition on completion is extravagant or unconscionable, or out of all proportion either to the losses that might be sustained by the vendor due to a delay in completion, or to the interest the vendor has in achieving timely completion (see Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 at [29]-[34], [256], [318]-[319]). Neither do I think that, viewed objectively, it should be concluded that the only purpose of Special Condition 39 is to punish the purchaser for delaying completion (see Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [158]-[159] and [164]).
When the contract was entered into in October 2018, the plaintiff had three finance facilities associated with the acquisition and subsequent development of the property. Two of the facilities were with the National Australia Bank. The first was for an amount of about $837,000, and the prevailing interest rate was 5.35% p.a. The second was for an amount of about $1.31 million, and the prevailing interest rate was 4.9% p.a. The other loan was from a related family controlled entity known as Able Harvest Development Ltd. As at October 2018, the amount drawn down on this facility was about $2.032 million, and the prevailing interest rate was 8% p.a. A delay in completion would not only prevent the plaintiff from using the proceeds of sale to reduce or eliminate those debts, it would also expose the plaintiff to further liabilities or charges associated with the property such as land tax and rates.
The plaintiff adduced evidence, which I accept, that in the period from 10 December 2018 to 3 February 2020 (when the resale contract settled), it incurred interest costs of almost $313,000, and incurred liabilities for land tax and rates totalling almost $24,000. The defendant did not attempt to show, by reference to those or any other calculations, that Special Condition 39 should be seen as providing for a payment that was extravagant, unconscionable, or out of all proportion to possible losses flowing from a delayed completion. Whilst Special Condition 39 appears to provide for ample compensation for the plaintiff, I am not satisfied that it is so lacking in proportion that it ought be characterised as a penalty (see Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 at [31]-[32]; Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [220]). Accordingly, the total amount that would have been payable to the plaintiff had completion of the contract occurred on 30 October 2019, is $4,736,136.98.
I am prepared to accept, based on the resale price achieved, after some negotiation, about 5 weeks later, that the value of the property as at 30 October 2019 was about $4 million (see Murdaca v Fisher (1981) 2 BPR 9287 at 9299). From that figure, the costs of the resale should be deducted (see Carpenter v McGrath (supra) at 59). Those costs are the $2,086.38 for legal costs and disbursements, and $11,164 for cleaning, decoration and styling costs. I am satisfied that the claimed decoration and styling costs of $10,989 were adequately proven by the plaintiff, and reasonably incurred. That yields a figure of $3,986,749.62. It would not be appropriate to deduct the amount of $23,988.31 for land tax, Council rates and water rates because Special Condition 39 is intended to provide the compensation in respect any loss arising from a delay in completion.
Based on the above, the prima facie measure of damages pursuant to cl 9.3.2 would be $749,387.36 (being the difference between $4,736,136.98 and $3,986,749.62). That amount exceeds the amount of the deposit which the plaintiff is entitled to recover pursuant to cl 9.1. If credit is given for the amount of the deposit so recovered, the damages would become $314,387.36. Either way, the plaintiff is entitled, pursuant to its rights under cl 9 of the contract, to recover from the defendant a total amount of $749,387.36. Interest should run on that amount pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 30 October 2019 until judgment, at the rates prescribed by General Practice Note 16. Interest has been calculated on that basis, up to today, at $15,557.48. Accordingly, judgment will be entered in favour of the plaintiff in the sum of $764,944.84.

Other matters

It is not strictly necessary to deal with some of the arguments advanced by the defendant. However, I will briefly state my findings and conclusions in relation to them.
First, I do not accept that any of the costs and liabilities incurred by the plaintiff after 10 December 2018, or the loss on resale, were not truly caused by the defendant's breach, but rather by the plaintiff's decision to pursue relief in the nature of specific performance. Those losses can readily be seen to flow from the defendant's failure to complete, which continued after the commencement of the proceedings. The plaintiff was not guilty of any delay in either the institution or prosecution of the proceedings. It should be noted that the hearing was not able to conclude on 20 August 2019 due to the recent service of affidavits by the defendant. The hearing was adjourned to 30 October 2019, by which time the plaintiff had determined that seeking specific performance was futile. Following the agreement of the parties on that day, the plaintiff promptly proceeded to resell the property.
Secondly, whilst there is evidence that at least one of the accounts held by the plaintiff with the National Australia Bank was occasionally used to hold and disburse funds not associated with the property, the loan facilities do not seem to have been used for extraneous purposes. Further, one of the plaintiff's directors, Mr Shen, gave evidence, which I accept, that the plaintiff undertook no business apart from the purchase and development of the property. In these circumstances, I do not accept that not all of the interest costs claimed by the plaintiff were attributable to the property.
Finally, whilst it is true that the loan agreement between the plaintiff and Able Harvest Development Ltd cannot be regarded as an arm's length transaction, the interest rate of 8% p.a. does not strike me as unreasonably high. The loan was not secured and would in any event rank behind the National Australia Bank in priority. Further, even though interest was to accrue from the outset, it was not payable until six years after the drawdown of the loan. There was plainly a degree of commercial risk for the lender in the transaction.

Conclusion

Judgment will be entered for the plaintiff against the defendant in the sum of $749,387.36 plus interest of $15,557.48 pursuant to s 100 of the Civil Procedure Act from 30 October 2019 until the date of judgment. The judgment sum is thus $764,944.84. The defendant's Cross-Claim will be dismissed. Costs should follow the event. Accordingly, the Court will further order that the defendant/cross-claimant pay the plaintiff/cross-defendant's costs of the proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 March 2020

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