Stern v McArthur

Stern v McArthur - [1988] HCA 51 - HCA 1969 case summary — Zoe

[12]

After discussing the judgments of this Court in Legione v. Hateley [29] , especially the questions identified by Mason and Deane JJ. [1] , his Honour based his rejection of the case for relief against forfeiture on findings which may be shortly stated. The first finding was that the appellants did not contribute to the respondents' breach, except that Mr. Stern was somewhat careless in keeping an eye on whether payments were being made and did not notice that they had fallen into arrear. Secondly, the respondents' breach was neither trivial nor slight because it involved a failure to pay instalments for one year. Although it was not wilful, it was not inadvertent so far as Mr. McArthur was concerned. He failed to ensure that the payments were made and gave no proper explanation for this failure. Thirdly, the damage which the appellants suffered as a result of the breach was not considerable in that all the appellants lost was the use of the money outstanding which was not large. Fourthly, if the forfeiture were to stand the appellants would gain the increase in land value of the property which is something which the respondents would have gained had they complied with the contract. The respondents would lose that increase in value because of their failure to comply with the contract. Finally, his Honour adverted to the question whether specific performance with compensation would be an adequate safeguard for the appellants, but did not answer the question. Apart from making these findings his Honour went on to make the point that there was no unconscientious or unconscionable conduct on the part of the appellants in insisting that the termination of the contract should stand. Moreover, his Honour considered that if relief against forfeiture were to be granted in the instant case, it would constitute a first step in establishing a general rule that a vendor, who had acted reasonably and patiently and in all respects properly before giving a notice to complete and terminate the contract for a failure of the purchaser to comply with it, is liable to lose the benefit of having done so as a consequence of the purchaser obtaining relief against forfeiture on the footing that the land the subject of the sale has increased substantially in value.

[19]

It is convenient to examine first the respondents' broad submission. It seems that in some, but certainly not all, jurisdictions in the United States the retention by the vendor of legal title under an instalment contract is regarded essentially as security for the payment by the purchaser of the purchase price, the provision for cancellation and forfeiture upon default by the purchaser in payment of the purchase price being a further assurance that the purchaser will perform his part of the bargain. This view proceeds on the footing that the real object sought to be attained by the vendor's retention of legal title and the inclusion of the forfeiture provisions is the performance by the purchaser of his promise to pay. Thus, the penalty of forfeiture is designed as a mere security and relief will be granted on the basis that the vendor will obtain the benefit of his bargain if he receives his money and damages: see, e.g., the discussion in Jenkins v. Wise [5] . There the Court said that, absent gross negligence and bad faith on the part of the purchaser, relief will be granted and specific performance ordered when the vendor can be adequately compensated. At the same time the Court asserted that "a key factor" in the Court's determination is "whether forfeiture would be harsh and unreasonable under the circumstances": Jenkins v. Wise [5] (footnote omitted). A significant element underlying the approach adopted in such cases as Jenkins v. Wise was that the purchaser was entitled to possession and required to pay taxes and keep the property in repair under the contract. His position is therefore more readily equated to that of an owner and thus to a mortgagor. Indeed, the instalment contract is sometimes described as "a mortgage substitute": see Nelson and Whitman, Real Estate Finance Law, 2nd ed. (1985), ss3.26-3.27. This description signifies that in some jurisdictions the instalment contract has been employed in order to avoid restraints on foreclosure by mortgagees. Under the standard form of contract in the present case the vendors were entitled to possession and rents and profits until completion but were liable for rates, taxes and outgoings.

[54]

In September 1979 the vendors commenced an action in the Supreme Court of New South Wales. By their amended statement of claim they sought, inter alia, a declaration that they had validly terminated the contract and an order for possession of the land. By an amended defence and cross-claim the defendants sought, inter alia, a declaration that the vendors' notice of termination was ineffectual either to determine the contract or "to forfeit the equitable interest of the [purchasers] in the said land" and a decree of specific performance. Waddell J. found that "the contract was effectively terminated on or shortly after 26 February 1979". He held that the vendors' conduct had not contributed to the purchasers' breach, that the breach involved a failure to pay instalments for one year, that the breach was not slight nor was it inadvertent so far as Mr. McArthur was concerned. He found that the vendors had not suffered a large loss by the breach but they would gain the considerable increase in land value if the purchasers lost their interest in the land; conversely, the purchasers would lose the increase in land value if they were denied relief. The purchasers were willing to submit to payment of compensation for their breach as a condition of a decree of specific performance. His Honour gave judgment for the vendors. On appeal, the Court of Appeal set aside the substantive orders of Waddell J., declared that the purchasers should be relieved against the forfeiture of their estate and interest in the land and decreed that the contract for sale be specifically performed and put into execution. Before Waddell J. the vendors accepted that, if successful, they were bound to allow the purchasers the value of the improvements they had made and they accept that, if successful in this Court, the up-to-date value of those improvements must be allowed. The vendors' acceptance of that obligation reflects a purchaser's entitlement in equity to compensation for the permanent improvements he has made with the vendor's consent while the purchaser was in possession if the vendor should rescind the contract of sale: see Lexane Pty. Ltd. v. Highfern Pty. Ltd. [23] and cases there cited. I respectfully agree with McPherson J. that the measure of that compensation is "the extent to which the value of that land has been enhanced".

[56]

area of exceptional circumstances in which, in accordance with Legione v. Hateley, relief against forfeiture of the purchaser's estate will be granted after a rescission, which in all other respects is valid, of a contract for sale. As all the majority Justices in Legione joined in this conspectus of the decision, it can be accepted that the means by which equity protects a purchaser's estate in land in a Legione case and relieves against its forfeiture is by denying validity to the vendor's act of rescission. In principle, that must be so. Though the jurisdiction to relieve may be confined to cases where the party in breach had a proprietary interest which equity would enforce by a decree of, or in the nature of, specific performance, the proprietary interest ceases to exist once the contract is validly rescinded. Then, the sometime contract ceases to support the purchaser's equitable estate and there is no contract susceptible of specific enforcement. But if the validity of the act of rescission is denied in equity, the contract is kept on foot: it supports the purchaser's estate in the land and its specific performance can be decreed. A right to rescind arises when a purchaser repudiates the contract or otherwise commits a breach going to the root of the contract or does not observe an essential condition. Such a right to rescind in futuro arises under the general law: see McDonald v. Dennys Lascelles Ltd. [26] . Another right to rescind may arise from a different source: it may be conferred by contract if the parties have stipulated for such a right on the occurrence of an event and the event occurs. In that case, the right to rescind arises by operation of the contract itself. Legione was a case in which the purchaser failed to observe a stipulation as to time which the parties had agreed to be an essential term of the contract. It was therefore a case where equity intervened in the exercise of a right arising under the general law, as Mason and Deane JJ. noted [27] . 1. (1983) 152 C.L.R. 406. 2. (1983) 153 C.L.R., at p. 454. 3. (1933) 48 C.L.R., at p. 477. 4. (1983) 152 C.L.R., at pp. 445-446.

[62]

" First, where it is possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs: Peachy v. Duke of Somerset [35] and cases there cited Secondly, there were the heads of fraud, accident, mistake or surprise, always a ground for equity's intervention, the inclusion of which entailed the exclusion of mere inadvertence and a fortiori of wilful defaults." Their Honours said that "it is difficult to see any reason why the power of courts of equity to relieve against forfeiture should not be available in a case such as the present [36] ". To an objection that equity will not grant relief where the purchaser's interest is lost consequent on discharge of the contract, their Honours responded [37] : A court of equity will grant specific performance notwithstanding a failure to make a payment within the time specified by the contract if there is nothing to render such an order inequitable. The fact that time for the performance of the stipulated obligation is of the essence of the contract generally makes the grant of specific performance inequitable in such a case. However, if it is just to relieve against the forfeiture which is incurred when the vendor retains payments already made under the contract, it is difficult to see why it should be unjust to relieve the purchaser against the forfeiture of the interest in the property that results in exactly the same circumstances. No doubt where the parties have chosen to make time of the essence of the contract the grant of relief against forfeiture as a preliminary to an order for specific performance will be exceptional. Nevertheless on principle we can see no reason why such an order should not be made if it will not cause injustice but will on the contrary prevent injustice. If relief against the forfeiture is granted, the objection to the grant of specific performance is removed. Their Honours did not seek to define the concepts of justice or injustice which are central to this passage. 1. (1983) 152 C.L.R., at p. 424. 2. [1973] A.C. 691, at p. 722. 3. (1721) 1 Stra. 447 [ 93 E.R. 626]. 4. (1983) 152 C.L.R., at p. 425. 5. (1983) 152 C.L.R., at p. 429.

[69]

The true ground of relief against penalties is from the original intent of the case, where the penalty is designed only to secure money, and the Court gives him all that he expected or desired. This principle relates to the jurisdiction which is exercised when a vendor relies not on his general law right of rescission but on a contractual right. We need not be detained to consider the scope of that principle in this case. It was not suggested in Legione that a clause which makes time of the essence is a clause which is inserted as security for the performance of the purchaser's obligations and which may attract relief on the ground stated by Lord Macclesfield. No doubt cl. 15 is such a stipulation and it is true that the notice of termination served on the purchasers echoed the terms of that clause. But the purchasers' breach, on which the vendors are constrained to rely, is not a mere late payment of an instalment or a late payment of the balance of the purchase price due under the contract. A late payment enlivens cl. 15 but that is not the breach to which the vendors are restricted in supporting their rescission of the contract. The material breach consists in the failure of the purchasers to pay the balance of the purchase price at any time prior to the service of the notice of termination on 27 February 1979 although the balance had become due in or about April 1977 and had been demanded by the vendors in May 1978, and although a notice to complete had been served on or shortly after 17 January 1979 requiring completion within twenty-one days. The rescission on which the purchasers are entitled to take their stand is not a termination under a contractual stipulation but a rescission under the general law for such a delay in payment of the balance of the purchase price as amounted to repudiation of the contract. Priestley J.A. thought that the present case fell readily into the head of jurisdiction which arises from Peachy v. Duke of Somerset but I respectfully disagree. That head may have been invoked if the vendors had been constrained to rely on cl. 15 but it has no application when the vendor exercises a general law right to rescind: it applies only to a contractual stipulation which is inserted in order to secure the payment of money. In a later passage in his judgment, his Honour treats a vendor's general law right to rescind as no more than a security for the payment of the purchase price, seemingly by analogy with a mortgagee's right to foreclose. Unless the analogy be valid - and, as will appear, it is not - it would be erroneous to treat a vendor's general law right to rescind as a mere security for the payment of the price: it is a right which arises by reason of the purchaser's repudiation of the contract under which the price is payable or his commission of a breach going to the root of the contract or his failure to observe an essential term. The purpose of the general law right to rescind is not to secure performance of a contract but to secure its termination. 1. [1973] A.C., at pp. 722-723. 2. (1721) 1 Stra., at p. 453 [ 93 E.R., at p. 630].

[76]

However, the analogy of a contract of sale with a mortgage is not complete and it is the distinction between them which is critical. The mortgagee must accept the mortgage debt at any time prior to foreclosure, or even later if the foreclosure is reopened, and he cannot acquire the beneficial estate of an owner unless an order for foreclosure is made: Campbell v. Holyland [53] . A mortgagee of old system land cannot foreclose the mortgagor's equity of redemption by his own act (In re Farnol Eades Irvine & Co. Ltd. [54] ) and the procedure for foreclosure of a mortgage of land under the Real Property Act 1900 N.S.W. also precludes the mortgagee from acquiring ownership of the land by his own act: see ss. 61 and 62. By contrast, a vendor who has a general law right to rescind may, by his own act and without any order of the court, take back the beneficial ownership of the property. It is the vendor's general law right to rescind which distinguishes his position from that of the mortgagee. Some may think it desirable to eliminate the distinction and to assimilate the position of an unpaid vendor to the position of an unpaid mortgagee. But that is not the present law, and the present law is what parties have relied on in entering into conveyancing transactions. If equity's enthusiasm for the protection of the defaulting purchaser were to eliminate the distinction between contracts of sale and mortgages, it would no longer be true to describe the circumstances in which relief might be given in accordance with Legione as "exceptional": relief would be given as readily to a defaulting purchaser as to a defaulting mortgagee. If the distinction were eliminated, any attempt by a vendor to rescind for breach of a condition would be nugatory and specific performance would be decreed at the suit of a defaulting purchaser moulded to reflect its correspondence with a redemption action. It would be otiose to look for conduct which enlivened equity's jurisdiction to relieve in cases of fraud, mistake, surprise or accident: the threatened loss of the purchaser's estate would be sufficient to attract equity's protection. A new maxim of equity would be born: "once a purchaser, always a purchaser" and against that maxim no stipulation that time should be of the essence would prevail.

[91]

It seems that when the purchaser under a contract for the sale of land which is executory on both sides is described as the equitable owner of the land, that expression is used with somewhat less precision than in other contexts. For example, in Brown v. Heffer [1] it was said that the purchaser under two contracts for the sale of land was not the equitable owner because he was unable to obtain specific performance of the contract. In that case the Court was required to determine whether a specific devise of land was adeemed by the contracts which were entered into by the testator with respect to the land after the date of the will. The transfer of the land in each case was dependent upon the consent of the Minister being obtained. At the time of the death of the testator no consent had been obtained. For ademption to have occurred it was necessary that the land should in the eyes of equity have been converted at the time of death into other property. It was held that there was no notional conversion of the land into money because immediately before the testator's death, a court of equity would not, by reason of the lack of the Minister's consent, have ordered specific performance by him of his obligation under the contracts to transfer the land [2] . Entitlement to specific performance in the strict sense was necessary before the purchaser could be regarded as the owner in equity for the purpose of ademption. But that did not mean that, even if that remedy was unavailable, the purchaser could not have an interest under either contract which equity would protect regardless of whether he could, in a manner of speaking, be called the equitable owner. In appropriate circumstances equity would have directed that proper steps be taken to obtain the Minister's consent and, consent having been obtained, that the land be transferred to the purchaser. If in those or comparable circumstances there are those who would describe the relationship between the vendor and purchaser as that of trustee and beneficial owner in some qualified sense, it does not alter the substance of the matter.

[106]

The circumstance in the present case which warrants relief being granted is not only that the forfeiture provision was by way of security for the payment of the purchase moneys, but also that the contract as it was carried into effect was essentially an arrangement whereby the appellants undertook to finance the respondents' purchase upon the security of the land. In other words, there was a close and obvious parallel between it and a purchase with the aid of a mortgage (cf. Harpum, Relief against Forfeiture and the Purchaser of Land, Cambridge Law Journal, vol. 43 (1984) 134, at pp. 145-146 ) and the parties acted upon that basis. The respondents were required to pay a commercial rate of interest on the balance of purchase money from time to time outstanding in much the same way as would have been the case if the outstanding purchase price had been advanced to them by the vendors by way of interest-bearing loan. The contract was not an "ordinary commercial contract unconnected with interests in land": cf. Sport International Bussum B.V. v. Inter-Footwear Ltd. [19] . It was a contract by an ordinary couple for the purchase of land in a subdivision upon which they proposed to build their home. In that regard, it is relevant to note that, in this country, the instalment contract for the purchase of land has long been one of the types of contracts used by subdividers for selling lower-priced blocks of land (cf., as to the apparently different position in England where instalment contracts have been used as a device to avoid the Rent Acts, Hoggett, Houses on the Never-Never: Some Legal Aspects of Rental Purchase, Conveyancer and Property Lawyer, vol. 36 (1972), p. 325). The respondents, with the consent of the appellants entered into possession of the land, erected a house on it and occupied the house as their home. The second respondent has continued to occupy the house as her home. The respondents commenced to pay rates on the land. Whether or not their entry into possession effected a variation of the contract by conduct matters little. The importance of the parties' conduct is that it demonstrates how they themselves regarded the transaction, and that is of relevance where matters of conscience are to be considered. It is at least of passing interest to observe that, although it is not established by the evidence, the contract may well have been an instalment contract within the meaning of Pt III of the Land Sales Act 1964 N.S.W.and, if so, the point would have been reached where the respondents were entitled under s. 13 of the Act to call for a transfer of the land upon executing a mortgage back to the appellants.

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Court

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Before

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Judgment (167 paragraphs)

Parties