Supreme Court of SA|2001-03-09|Before: Mr J, McHugh JJ, Gray J

SMITH v PISANI No. SCGRG-00-470 [2001] SASC 21 (9 March 2001)

BREACH OF CONTRACT Whether Magistrate's findings of credit were in error - effect of `subject to finance clause' on purchaser of property - implied term to act honestly and reasonably - whether failure to mitigate loss - delays in discovery - whether magistrate erred in assessing costs.

Devries v Australian National Railways Commission (1992-93) 177 CLR 472;
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) [1999] HCA 3; ;

Judgment No. [2001] SASC 21

1 GRAY J This is an appeal against the decision in an action for breach of contract.

2 Ms Pisani, the respondent wished to sell her residential investment property at Elizabeth East. She instructed a real estate agent, Mr Courage, to act on her behalf. Mrs Smith, the appellant, inspected the property, negotiated with Mr Courage and on 5 October 1995 signed a contract to purchase the property.

3 Various conditions were contained in a schedule to the contract, including a condition making the contract subject to finance. The learned magistrate, Mr J R Harry SM ("the magistrate") found that Mrs Smith obtained finance through the Bank of South Australia's "Homestart" scheme. She was obliged to settle on 30 November 1995 pursuant to the terms of the contract. Her refusal to settle amounted to a breach of contract.

4 When it became apparent to Ms Pisani that Mrs Smith was not going to settle, she put the property back on the market. By this time it was unoccupied and remained that way until it was sold in October 1996.

5 Mrs Smith was unrepresented at trial and on appeal.

6 The magistrate entered judgment against Mrs Smith for $13,554.98. The amount comprised:

- the deficiency in the sale price of the property ($1,500.00)

- interest at the default rate specified by clause 1.6 of the contract ($8,028.98)

- Mrs Smith was entitled to terminate the contract as the finance condition had not been satisfied.

- the magistrate erred in fixing the amount of costs.

8 The magistrate rejected Mrs Smith's evidence. He said:

"I find the defendant well knew that she would acquire the responsibility for a home loan. I find that the defendant felt insecure about that fact, and not the mortgage conditions for a Homestart loan. I disbelieve her evidence to the contrary... I find the defendant was simply being untruthful, asserting that she seriously looked for other avenues of financing ... She complied merely to conceal the truth that she no longer felt confident to service the loan attached to the purchase of the plaintiff's property, and had been commercially naïve in the first place."

9 Mrs Smith faces considerable difficulty when seeking to overturn the magistrate's findings about credibility. Brennan, Gaudron and McHugh JJ in Devries v Australian National Railways Commission[1] said at (479):

"More than once in recent years, this Court has pointed out that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact. If the trial judge's finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge 'has failed to use or has palpably misused his advantage' or has acted on evidence which was 'inconsistent with facts incontrovertibly established by the evidence' or which was 'glaringly improbably'."

10 These principles were approved in State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq)[2]. Kirby J said at (323):

"Appellate judges must necessarily perform their statutory function. They must rehear the matter and form their own conclusions on the evidence recorded at the trial. Rising to their duty, they must condescend to a re-examination of the facts, if their statutory charter so requires or permits. Yet that re-examination obliges appellate judges to take into account, and give full weight to, the advantages which the trial judge had and which, in the nature of their different functions and purpose, they may not have."

Kirby J acknowledged the many advances, both technological and social, that have increased an appellate court's ability to assess witness credibility. At (330) he stated:

"None of the foregoing considerations requires the abandonment of the respect which appellate courts, by present legal authority, must pay to the advantages enjoyed by the trial judge. Instead, they require renewed attention to precisely what the advantages are which the trial judge has over those enjoyed by the appellate court, conducting a second look at the facts, usually with more opportunity to evaluate particular facts than is possible in the midst of a trial and with the appellate advantage of viewing such facts in the context of the record of the complete trial hearing."

11 I have reviewed the evidence. This review confirms that the findings of the magistrate were open to him and were supported by the evidence. No basis has been established for undermining his findings on credit. It has not been demonstrated that he acted on evidence which was inconsistent with facts incontrovertibly established. His conclusions were not glaringly improbable. He has not failed to use, or palpably misused his advantage.

12 Following some additions and alterations by Mr Courage, the standard form contract and schedule of special conditions were signed on 5 October 1995.

13 Mrs Smith contended that she had satisfied the finance condition in clause 6 of the schedule to the contract:

The Lender agreeing on or before the 20th day of October 1995, to advance not less than $59 000 to the Purchaser, and the Purchaser obtaining that advance on or before the Settlement Date. The advance to be for a term of 27 years at an interest rate not exceeding current % per annum, repayable monthly and otherwise on such terms and conditions as the lender requires."

The object of this clause was to protect Mrs Smith. It attempted to ensure that she was not legally bound to complete the transaction in the event that she was unable to obtain finance.[3]

14 In my view, the clause carried an implied obligation to act honestly and reasonably. Mrs Smith was obliged to act in this way when accepting proposals for finance.[4] She was obliged to endeavour to obtain finance.

15 The judicial debate about the meaning of subject to finance clauses and the nature of a purchaser's right to decide what is satisfactory, is of limited relevance in this case. The clause in question includes the phrase:

"... and otherwise on such terms and conditions as the lender requires".

16 The express intention of both parties was that Mrs Smith would obtain finance. Obtaining finance on specified terms or as the "lender requires" was necessary to give the transaction efficacy. Mrs Smith was obliged to do all that was reasonable to obtain finance. If the specified terms were unavailable, then this meant accepting other reasonable terms, as required by the lender.

17 Such a construction is given some support by Zieme v Gregory[5]:

"..it was not intended by the parties to this contract that the vendor's rights should depend on the will or whim of the purchaser irrespective of what his conduct might be, and that there must be implied some requirement to be observed by the purchaser in relation to the obtaining of the loan. In its broadest form that requirement may be stated to be that he shall have taken all reasonable steps on his part to obtain the loan."

18 The court went on to comment that there were two aspects to this requirement, one of which was the purchaser:

"should not unreasonably refuse or fail to take advantage of any such mortgage loan that was available to him".

19 Mrs Smith submitted that she had not obtained finance on terms satisfactory to her. She therefore had not obtained finance within the meaning of clause 6.

20 Mrs Smith approached and obtained approval from her financier. There was nothing extraordinary about the terms of the finance agreement and there were no conditions which imposed unfair restrictions on her. The terms do not appear to be commercially unreasonable.

21 Mrs Smith conceded that she would have been able to meet the repayments of the loan. However, she claimed that the commitment would have constrained her financially and that hardship would have followed.

22 The finance was offered on terms and conditions as required by the lender. Those terms were reasonable. The magistrate found that Mrs Smith simply changed her mind about entering into the loan:

"I find the defendant seized upon the terms to explain her embarrassment while conferring with Courage. In short, the defendant changed her mind about buying the plaintiff's property simply because she lacked self-confidence to proceed with the transaction."

23 The contract obliged Ms Smith to act reasonably in obtaining finance, and she failed to do so. On the magistrate's findings she used her late complaints about the terms of finance to avoid her contractual obligations. In doing so, and in refusing to settle, she acted in breach of her contractual obligations.

24 The magistrate's findings were reasonably open to him. I reject this ground of appeal.

25 The obligation to mitigate loss is based on the principle that victims of a breach of contract are required to respond reasonably to a defendant's wrong. In this case, Ms Pisani was bound to take all reasonable steps to mitigate her loss.

26 Counsel for Ms Pisani submitted that an alleged failure to mitigate was not raised by Mrs Smith before the magistrate and could not be considered on appeal. Counsel is correct in asserting that mitigation was not pleaded. However, the issue was raised during the course of the hearing without objection. An example during cross-examination of Ms Pisani is as follows:

"Q. Do you think the loss of $1 500.00 had anything to do with the fact that you had no furniture in the house?

A. No, because I actually put my spare furniture in the house to sell it."

I reject counsel's submission that the issue could not be raised on appeal.

27 Ms Pisani stated in her evidence that the property was hard to sell without furnishings. After nearly twelve months, she moved items of furniture into the house. This was in response to a suggestion by Mr Courage. Within three months of this, the property sold. Mrs Smith asserted that Ms Pisani's failure to move furniture into the property sooner fell short of doing all things reasonable to reduce her loss.

28 The duty to act reasonably was described in Banco de Portugal v Waterlow & Sons Ltd[6] at (506) as follows:

"Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does no come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."

29 Whether Ms Pisani acted reasonably is a question of fact to be determined in all of the circumstances of the case. The onus lies on the defendant to show that the plaintiff failed to mitigate.

30 Mrs Smith did not provide any evidence of such a failure on the part of Ms Pisani. There was no evidence that moving the furniture into the house at an earlier stage would have led to an earlier sale. There is no evidence that Ms Pisani acted unreasonably in trying to sell the property without furniture, or that she should reasonably have known the property would not sell in the absence of such furniture.

31 As was said in Metal Fabrications (Vic) Pty Ltd v Kelcey[7]

"So long as the respondents can be seen to have acted reasonably and justifiably in the circumstances, they should not be debarred from recovering the actual loss flowing to them simply because it is asserted that, by taking some other course, the loss might well have been lower."

32 Mrs Smith asserted that there were delays in the process of discovery. She said these delays were caused by Ms Pisani and that she should not have to bear the costs which resulted. Legal costs were fixed in the presence of Mrs Smith at the hearing and there was no objection from her at the time. There is no basis for suggesting that the magistrate acted improperly in his assessment of costs. I reject this complaint.

33 The order of the court is that the appeal is dismissed.

3 Zieme v Gregory [1963] VicRp 34; [1963] VR 214 at 216, 222; Meehan v Jones [1982] HCA 52; (1981-82) 149 CLR 571 at 588

4 Meehan v Jones [1982] HCA 52; (1981-82) 149 CLR 571 at 588

[3] Zieme v Gregory [1963] VicRp 34; [1963] VR 214 at 216, 222; Meehan v Jones [1982] HCA 52; (1981-82) 149 CLR 571 at 588

[4] Meehan v Jones [1982] HCA 52; (1981-82) 149 CLR 571 at 588

SMITH v PISANI No. SCGRG-00-470 [2001] SASC 21

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Judgment (69 paragraphs)

SMITH v PISANI No. SCGRG-00-470 [2001] SASC 21 (9 March 2001)

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Cases Cited (1)