SCHENK & ANOR v. ACN 081 123 140 P/L [2002] NSWSC 123

No building contract had been entered into or builder engaged. 17 The terms of the pre-sale contracts and the task of obtaining finance were interrelated because financiers imposed conditions under which they would examine pre-sale contracts closely. As an example, an offer of finance by the Bank of Western Australia Ltd (BankWest) dated 13 February 2001 imposed among other conditions of the initial drawdown a condition requiring pre-sale contracts to a minimum of $30,000,000, which were to conform and to be certified by the bank's solicitors to conform with requirements including the sunset clause no earlier than 31 July 2002, 10% deposits, arm's-length contracts, negotiated purchase price at a minimum of 95% of the lender's valuation and other conditions, with detailed progress reports. The bank finance finally obtained was obtained from ANZ Bank, not BankWest. Multiplex was involved in the ANZ Bank finance. The first draw-down was in July 2001. The terms imposed by ANZ Bank on its finance included exacting conditions precedent to drawdowns. Mr Heap's view was that a number of the pre-sale contracts had issues which would make them unacceptable to a new financier including (1) the sales were not at arm's-length: (2) some included vendor finance provisions: (3) some included buy-back provisions: (4) some provided for 5% deposits, and (5) some were exchanged at prices considerably less than original list prices. 18 Mr Heap said in evidence that following his review of the pre-sale contracts Mr Widdup and consultants made decisions in early 2001 as to which contracts Satellite Pyrmont should seek to rescind and which it should seek to extend and keep on foot. However a decision about Apartment 106 and the contract with the plaintiffs must have been taken earlier because the defendant entered into a contract for the sale of Apartment 106 and its related car-parking space for $480,000 to Richard Graham Bach and Christine Moira Witlock on 19 December 2000. On 10 April 2001 solicitors representing Satellite Pyrmont wrote to the plaintiffs' conveyancing agents and said "We have now received instructions from our clients that they do not intend proceeding with the sale to your clients and at the expiry of the sun-set clause date in August of this year will exercise their rights of rescission. Alternatively if your client wishes to rescind now rather than wait until August our client will consent to a mutual rescission immediately." 19 The plaintiffs then retained solicitors who initiated correspondence challenging the proposed rescission; Satellite Pyrmont's solicitors did not reply, but on September 2001 wrote again to the purchasers' conveyancing agents referring to the right of rescission, stating that the strata plan had not been registered and that the vendor exercised its right to rescind pursuant to cl.4.2; they went on to propose return of the deposit (without admitting that the deposit had been paid). The purchasers' solicitors again sent correspondence disputing entitlement to rescind and the effect of the purported rescission; the purchasers also lodged a caveat. The vendor then appointed new solicitors who stated the vendor's position fully on 12 November 2001, maintained the effectiveness of the rescission, acknowledged that the deposit had been paid and authorised its release to the purchasers, and called for withdrawal of the caveat. They forwarded a Lapsing Notice on 22 November 2001 and the purchasers initiated these proceedings on 12 December 2001; they have been heard with expedition. The plaintiffs claim a declaration that their contract is valid and subsisting, extension of their caveat, damages and ancillary orders. 20 Challenges to rescissions of "Off-the-Plan" contracts for the sale of residential units which are yet to be constructed frequently come before the Equity Division. The primary matter for consideration is the rights of the parties under the terms, express and implied, of their contract of sale. In this case the standard form, Printed Clause 28, was excluded and the special conditions which the parties adopted establish their relationship. Each of many decisions in this field is a decision on the particular contract in question, but some recurringly important general principles, which are applicable in the present case, were stated in Plumor Pty Ltd v. Handley (1996) 41 NSWLR 30 at 34 and 35 by McLelland CJ in Eq. The principles there stated and now relevant are to the effect that a party to a contract is not entitled, as against the other party, to rely on an event resulting from the first party's wrongful act; that if the failure by the rescinding party to obtain some relevant consent or registration within the contractual period resulted from any default by him in the performance of express or implied obligations, that party is not entitled to exercise a right of rescission otherwise available; and that causation of the failure to obtain consent or registration by the wrongful act must be proved unless the terms of the contract make obtaining the consent or registration a condition for the exercise of the right of rescission. Another important principle, stated by McLelland CJ in Eq at pp35 and 36, is that the plaintiff bears the onus of proof on the issue of whether not obtaining the requisite consent or registration within the period specified resulted from a breach by the rescinding party of contractual obligations. This principle must be taken with the qualification, expressed by McLelland CJ in Eq in Hunyor v. Tilelli (1997) 8 BPR [97667] 15,629 at 15,631: "It is necessary however to bear in mind that all evidence is to be weighed according to the proof which it was reasonably within the means of one party to produce or of the other to contradict. This has particular significance in respect of evidentiary facts which are peculiarly within the knowledge of one party rather than the other …" (and McLelland CJ in Eq referred to authority). 21 A further important principle is that the law implies an obligation of a contracting party to do all things necessary on that party's part to enable the other party to have the contracted benefit, and a negative covenant not to hinder or prevent the fulfilment of the purpose of the express promises; see Peters (W.A. Ltd) v. Petersville Ltd (2001) 75 ALJR 1385 at 1393 [36]. The relevant operation of this implied obligation is that it was the obligation of the vendor to do all such things as are necessary on its part to bring about registration of the strata plan before the date stated in Special Condition 4.2 or any extension thereof, and there was a negative obligation not to hinder or prevent the fulfilment of the purpose of proceeding to completion of the sale. This is an obligation implied by law and is additional to the warranty of constructing the development with reasonable expedition in Special Condition 2.3, and breach of either the implied obligation or of the warranty, causing the strata plan not to be registered within the prescribed time disentitles the vendor from reliance on its right of rescission. 22 There are also circumstances in which the purchaser may be entitled to equitable relief against a rescission even though the rescission was made in accordance with the terms of the parties' contract. There are a number of grounds for equitable intervention. In summary the right of rescission must be exercised reasonably but this summary should not be substituted for the law as stated in Selkirk v. Romar Investments Ltd [1963] 1 WLR 1415 at 1422; and see Woodcock v. Parlby Investments Pty Ltd (1988) 4 BPR 9568 (Young J). Part of the passage in Selkirk was referred to and followed by Gibbs J in Pierce Bell Sales Pty Ltd v. Frazer (1973) 130 CLR 575 at 590. 23 Predictions made by and on behalf of Satellite Pyrmont at about the time the contract was entered into and later, and the terms of the warranty in Special Condition 2.3, taken with the provisions of Special Condition 4 relating to the completion date, constitute admissions by Satellite Pyrmont that if work on the development including construction work proceeded with reasonable expedition it was quite feasible to complete the work and register the strata plan long before 16 March 2001. The defendant is no less bound by those admissions because there has been a change in its ultimate control and the individuals managing its affairs, and no evidence has been led to suggest that the admissions were wrong or that there were any reasons why reasonable expedition would not have produced the clearly contemplated outcome. Although the burden of proof of breach of the warranty is on the plaintiffs, regard has to be paid to the opportunity of each party to adduce relevant evidence dealing with this subject, and the plaintiffs are in no position to do more than rely on the admissions which I have referred to, whereas the defendant notwithstanding the change of control is in a position to establish any matter of fact which might explain delay. Indeed the defendant addressed the question of delay by obtaining the architect's certificate and justifying an extension of time to 15 August 2000. 24 No explanation has been given in evidence for the elapse of 29 months between Development Approval and Building Application, or for the time taken to perform the Early Works Contract, which took about eight months although the construction period provided for was eight weeks and the architects certified for an extension of 109 days. No explanation is forthcoming for not proceeding to make a Construction Contract, which the Early Works Contract shows was contemplated in May 1999. Correspondence from Consolidated Construction called attention to this need in February 2000, nothing significant had occurred at the time of the takeover of control in July 2000, no arrangement for any other builder to do work had effect until December 2000, and no building contract was made until March 2001. These unexplained delays are to be contrasted with predictions emanating from the defendant about the expected time of completion. There is no reason to think that the defendant was overcome or impeded by adverse circumstances; the only reasonable inference is the defendant did not have the resources or the capacity to carry the development forward at a reasonable rate of progress, and never acquired the resources or capacity until the new management had been in control for almost half a year. 25 The defendant's own correspondence in Exhibit 1 shows a number of matters bearing on delay. On 14 September 1998 the defendant informed Consolidated Construction that the defendant looked favourably towards formally appointing Consolidated Construction as the builder, required commencement on site in November and asked Consolidated Construction to expedite finalisation of funding. In March 1999 (Exhibit 1 p.66) Consolidated Construction received a finance proposal from its bank which contemplated first draw-down to finance construction no later than 31 May 1999 and the term of the loan of 90 weeks, suggesting completion in the early months of 2001. On 17 March 1999 (Exhibit 1, p.70) Satellite Pyrmont told Consolidated Construction that given the time frame it was imperative that Satellite Pyrmont now move to commence construction. On 30 June 1999 (Exhibit 1, p.78) Satellite Pyrmont stated "We anticipate the finalisation of the building contract and associated finance facilities in the next few weeks" and also said "… we are approaching the final stages of documentation of this transaction …". Communications with Consolidated Construction continued, inconclusively. On 23 May 2000 (Exhibit 1, p.86) Consolidated was predicting signing a contract by 1 June 2000 and achieving completion on 1 September 2001. 26 The correspondence throughout shows that the defendant had no economic strength, and had entered into commitments with the plaintiff and others which could not be carried out with the defendant's own resources, and depended for execution on finding a builder which would design and construct the works and obtain financing. The defendant's troubles and delays arose from having made contractual commitments without having appropriate resources. In my finding, with reasonable expedition the building would have been completed at the latest in the early months of 2001, and could well have been completed about six months earlier than that. 27 The burden of the evidence adduced by the defendant was directed to explaining events from the time of change of control in July 2000. By that time there had already been in my finding serious failures to observe reasonable expedition, as the defendant had been in a position to enter into the Early Works Contract in May 1999 for early works which according to the contract would take eight weeks, but by July 2000 the early works had been completed, no construction contract had been entered into, and early works had not been paid for which (if nothing else had done so) would have disrupted any expectation that Consolidated Construction would enter into a construction contract and carry out the proposed Design and Construct turn-key operation. Further the defendant had not by July 2000 made financing arrangements which could carry the construction project forward, but was involved in six mortgages, and in disputes, threats of a mortgagee sale and litigation which were resolved with extended negotiations and significant difficulty. Apart from the early works, construction did not start until 4 December 2000, almost 30 months after contracting with the plaintiffs, less than four months before the original date for strata plan registration and less than 10 months before the extended date, in a building project estimated to take 13 months. 28 In my finding then the vendor was, by July 2000, and thereafter always remained in breach of its warranty that it would cause the development to be constructed with reasonable expedition, and I also find that this breach of warranty caused the strata plan's not being registered by the extended date of 15 August 2001, and remaining unregistered at the date of the hearing. This breach disqualified the vendor from reliance on or exercise of its right of rescission in Special Condition 4.2. 29 The defendant led a considerable body of evidence which, as well as being directed to explaining events bearing on carrying out the Bauhaus Development and the use of time, was directed to explaining, insofar as it can be explained, the defendant's decision to rescind its contract with the plaintiffs and to enter into another contract for the sale of Apartment 106 at a higher price. The defendant's evidence was directed to showing that its new management acted under practical constraints relating to the availability of finance and the need to conform with requirements of financiers relating to pre-sale contracts. Evidence, particularly that of Mr Heap, was directed to showing that many of the pre-sale contracts preceding the change of control had features which would not be satisfactory to a financier, and that this explains the decision to rescind the plaintiff's contract and seek the commercial advantages available from sale to some other purchaser. Mr Heap listed in his affidavit some features which would make contracts unacceptable. These do not apply to the plaintiffs' contract. It was an arm's-length contract; or in any event there was no reason, either in facts shown by evidence or in facts shown to be known to the defendant, to think that it was not, or to think that there was some association between the plaintiffs and The Satellite Group which would place the matter in any doubt. The plaintiffs' contract included no vendor finance provision or buy-back provision, and provided for a 10% deposit; the effect of Special Condition 16 was that the purchasers could have deferred paying half the deposit until completion, but in fact they did not, but paid the full 10% deposit in or before October 1998. By paying the full deposit before they were contractually obliged to they gave an unusually strong indication that they were purchasers in earnest. 30 Another matter mentioned by Mr Heap was that contracts had been exchanged at prices considerably less than original list prices. He sought to maintain that this was true of the plaintiffs' contract. There were suggestions in documents preceding the exchange of contract that the price was below list price; the sales advice notice dated 19 June 1998 Exhibit 2 included a statement "Exchange by Friday 26 June '98 at this price or price changes to list price" and a letter from the defendant's solicitors to the plaintiffs' agents of 22 June 1998 Exhibit 3 stated "We are instructed that contracts for sale must be exchanged by Friday 26 June 1998 failing which the purchase price of $420,000 shall revert to the higher list price." The second plaintiff Ms Lazzaro produced in evidence two price lists which were provided to the plaintiffs by sales representatives of the defendant in 1998; one dated 20 May 1998 showed the list price of Unit 106 at $420,000 and the other dated 18 August 1998 after the sale shows its list price as $490,000. There is no evidence that up to the time of exchange of contracts any other price list or list price for Apartment 106 ever existed. Cross-examination of Mr Heap showed that his reasons for the view that the sale of the plaintiffs was under list price related to consideration of the value of the unit, and of its value in relation to other units, after the change in control. Transcript t.5, l.20 apparently recording a concession by Ms Lazzaro the second plaintiff that the sale was at a discount is not accurate; the witness did not make that concession. The indications to the plaintiffs, in Exhibits 2 and 3 and otherwise, that the sale price was less than the list price have not been borne out by evidence of any price list which then existed, and the probability is that the suggestion that there was some discount was made to the plaintiffs as part of some puffing activity in support of effecting the sale. 31 Other matters on which ANZ Bank required to be satisfied, as set out in the bank's Terms Sheet, and not mentioned by Mr Heap among the issues which he considered, were not adverse to the plaintiffs' contract either; they were Australian residents, and they were not multiple buyers. They also had a right of rescission under clause 4.2 but there is no practical prospect of rescission by them. 32 It should be said, by the bye, that the matters listed by Mr Heap, and by Mr Byrnes who also dealt with this subject, or the requirements of a bank for finance in an arrangement made two years or so after entering into a contract of sale are not good grounds on which to decline to observe contractual arrangements, which are no less binding if they are not at arm's-length or are entered into with low deposits, or contain unusual special conditions, and so forth. It was plain from his evidence as a whole that Mr Byrne's view that the sale to the plaintiffs was under the market value was based on his view of market values at the time when he addressed the question and not at the time of the contract more than two years earlier. 33 Mr Byrne's evidence showed that the decision as to which of the pre-sale contracts were to be rescinded, and which were to be left to take effect was based on what he and others responsible for Satellite Pyrmont's affairs believed to be achievable prices at the time of decision in 2000 or 2001 and said "Our motivation for rescinding that contract was that we felt we could achieve a higher price." Attempts in cross-examination to obtain estimates by Mr Byrnes of the times required for early stages in the development produced answers which did not deal with the subject in a concrete way. 34 I am satisfied that, although the conditions imposed by ANZ Bank and other financiers on the kinds of pre-sales which were acceptable to the financiers may well have influenced the decisions whether or not to rescind some pre-sale contracts or to leave them into effect, the requirements of financiers had no real impact on the decision to rescind the contract with the plaintiffs, which had no significant unsatisfactory feature. Mr Byrnes conceded that the predominant factor was the price; that the basis of the decision was "simply dollars". If any other matter such as the amount of deposit, or the sale not being at arm's-length, or the sale being discounted or at less than list price was taken into account, it was unreasonable to take it into account as it had no basis in fact. The plaintiffs' contract was not rescinded under the influence of some necessity to comply with the requirements of a financier. The rescission was not a response to any difficulty in Satellite Pyrmont's dealings with the purchasers, either a difficulty which existed in substance and reality or a difficulty which existed in the vendor's concept of what made a pre-sale contract eligible for rescission because of the need to satisfy the vendor's financiers. Long before the vendor rescinded or had any apparent right to rescind the vendor had chosen its course and acted on it by entering into a second pre-sale contract at a higher price. The pursuit of the higher price was the only thing which in reality moved the vendor to rescind. If the rescission had been otherwise effective, the vendor acted unreasonably and the purchasers would have been entitled to be relieved in equity against the rescission. 35 I find that the defendant rescinded its contract with the plaintiffs for the purpose of selling the unit at a higher price, and not for the purpose of escaping from any dilemma or difficulty encountered in endeavours to conform to its contractual obligations. 36 It was suggested that the plaintiffs were guilty of delay or failure to take steps at an appropriate time to challenge the threatened rescission from April 2001 onwards. The plaintiffs sought to uphold their position in that Ms Lazzaro had several telephone conversations in February and March 2001 with Mr Geoffrey Davey, a consultant engaged in the defendant's affairs. Mr Davey, after speaking to Mr Widdup, told her that the defendant considered that the Apartment was underpriced and would resell at a higher price; Mr Davey made some expressions of sympathy. Mr Davey was unable to give evidence in the proceedings because he had suffered a stroke and he was disabled. Ms Lazzaro then sought her solicitor's advice, tried to have a meeting with the director of the defendant and got no significant response. She also spoke to a solicitor then acting for Satellite Pyrmont seeking a Deed of Variation. The plaintiffs' solicitors were active in challenging the purported rescission by correspondence, some months passed before any reply was received which engaged with their contentions, and it was appropriate to deal with the matter by correspondence and a caveat until litigation was precipitated by the Lapsing Notice. In my finding the plaintiffs did everything that could reasonably be expected of them. In any event the activity or inactivity of the plaintiffs had no effect on the course taken by the defendant, which had decided to sell to someone else and had agreed to do so the previous December. 37 ORDERS:

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