Timely Payment But No Settlement: A Necessary Requirement of Notification?

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1 Timely Payment But No Settlement: A Necessary Requirement of Notification? D W MCLAUCHLAN Professor of Law, Victoria University of Wellington; Honorary Professor, TC Beirne School of Law, The University of Queensland In Larsen v Rick Dees Ltd [2007] 3 NZLR 577 the Supreme Court upheld the vendor s cancellation of contracts for the sale of real estate in circumstances where, although the purchaser had paid the amount required to complete the purchases before the stipulated essential time for settlement, notification of the payment was not made until a few minutes later. This article analyses the Court s reasoning in support of this harsh result. It questions the basis for finding that the purchaser had breached an essential obligation to make the vendor aware of the payment and argues that the contrary conclusion could easily have been justified. 1 INTRODUCTION In the recent case of Larsen v Rick Dees Ltd 1 the Supreme Court ruled that the vendor of units in an apartment block was entitled to cancel the contracts in circumstances where the purchaser had paid the amount required to complete the purchases by electronic funds transfer before 5 pm on the date for settlement (time being of the essence) but had not notified the vendor of the payment until 5.07 pm. The Court held by a 4:1 majority that the contracts required the purchaser to both pay the amount due and make the vendor aware of the payment before the deadline passed. In her dissenting judgment Elias CJ refused to accept that the implication of a requirement of notification into the settlement obligation is necessary for reasons of commercial reality. 2 Indeed, her Honour thought that there is more commercial unreality in holding that a contract can be cancelled against a purchaser who has made full payment to the vendor or his agent in the manner directed by the vendor simply because the vendor is not notified of the payment before the time for settlement elapses. 3 However, Tipping J, who concurred with the main judgment given by Blanchard J (in which references to commercial reality are conspicuously absent), was of the opposite opinion. He thought that [i]n the present context, the concept of payment necessarily involves the payee being satisfied that the appropriate sum has actually been received and that [i]t would be commercially unrealistic to hold that the vendor had been paid by 5 pm when he was unaware that this was so at 5 pm. 4 1 [2007] 3 NZLR Ibid, at p 582, para 7. 3 Ibid. 4 Ibid, at p 589, para 38. March

2 MCLAUCHLAN Which of these views is to be preferred? Did the terms of the contracts in question, construed in their commercial context, really require the purchaser to notify the payment before the deadline so as to justify the vendor s cancellation? If the answer to the latter question is yes, perhaps the harsh result is best explained as yet another example of an appellate court applying the old adage hard cases make bad law, for, although there is little indication in the majority s judgments of any great sympathy for the purchaser, their Honours cannot have been unaware that many would regard the decision to reverse the Court of Appeal and uphold the cancellation as extremely harsh. In my view, however, the contrary conclusion, for the reasons I shall endeavour to explain, could easily have been justified without the Court being accused of making bad law. 2 THE FACTS The facts so far as material to the Supreme Court s disposition of the case can be stated relatively briefly. In November 2003 the appellant vendor entered into separate contracts for the sale of ten units in an apartment block to the respondent purchaser. Settlement was to take place on 10 February 2004 but was later rescheduled for 17 February. The parties used the REI/ADLS agreement form (7th edition) which provided in cl 3.7 that: On the settlement date: (1) The purchaser shall pay or satisfy the balance of the purchase price, interest and other moneys, if any, due as provided in this agreement ; and (2) The vendor shall concurrently hand to the purchaser: (a) the memorandum of transfer of the property provided by the purchaser under subclause 3.5, in registrable form; and (b) all other instruments in registrable form required for the purpose of registering the memorandum of transfer; and (c) all instruments of title the obligations in subclauses 3.7(1) and 3.7(2) being interdependent. On 17 February the vendor s solicitors sent settlement statements and a trust account deposit slip to the purchaser s solicitors. In the accompanying letter they undertook to forward the transfers and title documents upon receipt of a faxed undertaking that a bank cheque for the settlement figure had been credited to their trust account and faxed copies of the cheque and stamped deposit slip. The purchasers were unable to settle, whereupon the vendor s solicitors, as they were entitled to, served notices requiring settlement by 5 pm on 5 March 2004, time being of the essence. The mortgage funds required to complete the purchase were not received by the purchaser s solicitors until 4.38 pm on that day. They immediately set in train electronic transfers of the settlement amounts into the trust account of the vendor s solicitors. The transfers, which the evidence established were cleared funds, were completed by 4.54 pm. An attempt was then made to send a fax confirming the payment but the fax number of the vendor s solicitors was engaged. The fax was eventually received at 5.07 pm. However, in the meantime the vendor s solicitors had sent a fax purporting to cancel the contracts for failure to comply with the settlement notice. This fax was received by the purchaser s solicitors at 5.03 pm. The latter issued proceedings seeking specific performance. They claimed that, since payment had been made before expiry of the settlement notice, the cancellation was invalid. 38 NEW ZEALAND BUSINESS LAW QUARTERLY Volume 14

3 Timely Payment But No Settlement: A Necessary Requirement of Notification? 3 THE HIGH COURT AND COURT OF APPEAL DECISIONS In the High Court Winkelmann J found for the vendor 5 but her decision was reversed by the Court of Appeal. 6 The Court held that, although cl 3.7 contemplate[d] face-to-face settlement, 7 the letter of 17 February set out a procedure for remote or fax settlement which, since the purchaser did not object, it must be taken to have assented to. 8 This agreement did not, however, modify the purchaser s basic settlement obligation in cl 3.7(1). That obligation was to make payment 9 and it was fulfilled when the transfer of cleared funds was made before 5 pm on 5 March. Notification of payment was required under the agreement but it was not an essential element of the settlement obligations. 10 It sufficed that the notification occurred within a reasonable time of payment, a requirement that was plainly satisfied on the present facts. 4 THE SUPREME COURT DECISION As noted earlier, the Supreme Court allowed the vendor s appeal by a 4:1 majority. The principal judgment was given by Blanchard J (for himself, McGrath J and Gault J). Tipping J delivered a concurring judgment and Elias CJ dissented. 4.1 The Judgment of Blanchard J After setting out the facts and summarising the decisions of the courts below, Blanchard J began his analysis with four key points that, with respect, seem clearly correct. First, the letter of 17 February did not have contractual force. It did not say that no other method of settlement would suffice and, even if it had, the purchaser s silence could not fairly be taken to be an assent. 11 The only significance of the letter lay in its indication that a payment might be made to the solicitors trust account. 12 Secondly: 13 The only contractual provision governing the mode of settlement was that found in cl 3.7. At para (1) it required that the purchaser pay the balance of the purchase price. Paragraph (2) then made it clear that the purchaser was not under an obligation to do so unless concurrently the vendor was able and willing to hand over the memorandum of transfer and other instruments needed in order to register the transfer together with all instruments of title. Thirdly, while cl 3.7(2) did contemplate face-to-face settlement and entitled the purchaser to insist on that mode of settlement, it did not make that mode compulsory for the purchaser. If prepared to run the risk that may be involved, the purchaser could elect for a remote settlement under which it made payment of the settlement figure without concurrently receiving the title documents. The provision in cl 3.7(2) for concurrency of performance by the vendor recognises that the purchaser s obligation to pay is dependent upon the delivery of the documents and thus it protects the purchaser from vendor 5 Rick Dees Ltd v Larsen [2005] 3 NZLR Rick Dees Ltd v Larsen [2006] 2 NZLR Ibid, at p 775, para Ibid, at p 775, para Ibid, at p 778, para Ibid. 11 [2007] 3 NZLR 577, at p 587, para Ibid. 13 Ibid, at para 29. March

4 MCLAUCHLAN default in that respect. The vendor needs no such protection against a failure to pay the money as the vendor is not required to deliver the documents until payment is tendered. 14 Fourthly, the purchaser had satisfied its obligation to pay the settlement figure though the transfer of cleared funds. The evidence was that the electronic transfers were irrevocable and that the funds received could immediately have been drawn upon by the solicitors for the vendor. 15 To this point in the judgment everything was looking rosy for the purchaser. Thus, to recapitulate: the purchaser s obligation under cl 3.7 ( [t]he only contractual provision governing the mode of settlement ) was to pay the settlement figure; face-to-face settlement was not required; and the payment obligation had been met by the deposit of cleared funds into the trust account of the vendor s solicitors. Nevertheless, Blanchard J proceeded to hold that the purchaser had not done enough. There had been a breach of an essential obligation that justified the vendor s cancellation. The purchaser had failed to make the vendor aware of the payment by the 5 pm deadline. His Honour s reasoning is to be found in the following two key paragraphs: 16 But it is equally the position that under cl 3.7 the purchaser is not entitled to impose on the vendor a mode of remote settlement involving any risk or disadvantage not present in the envisaged face-toface settlement. When the parties or their representatives meet and payment is tendered by or on behalf of a purchaser, the vendor or representative naturally has knowledge that cleared funds are available and, if they are accepted, that they have been received and are able to be used immediately, for example, by placement on interest-earning deposit or for settlement of a back-to-back transaction. That advantage, which is an important element in what is contemplated in cl 3.7, is missing if the vendor is not made aware of the payment. Obviously the obligation to tender a payment cannot be fulfilled unless the vendor is made aware of the offer of the money and in this context we consider that, even though the purchaser may actually complete a payment of cleared funds, cl 3.7 is not complied with merely by taking that action without also taking steps to make the vendor aware that the funds are now available. The imparting of that knowledge to a vendor is an essential feature of a settlement in terms of cl 3.7, or indeed under any contract of this kind which is silent about the mode of settlement. In the present case the purchaser failed timeously to evidence to the vendor that payments of cleared funds had been made and therefore did not comply with the requirements of the settlement notices. It was not good enough for a purchaser to do so within some reasonable, but necessarily indefinite, time after the settlement notice deadline had passed. That would introduce a most undesirable element of uncertainty for vendors and provide room for much argument about how long after the deadline was acceptable as being close enough. Nor are we persuaded that the contract terms themselves provide for some flexibility because of the imposition of an additional day s interest if settlement is after 4 pm. That would not compensate a vendor into whose bank account cleared funds had been transferred before 4 pm without notice of the payment being given. We are unpersuaded also by the suggestion that because payment could be made at 5 pm some breathing space for subsequent advice to the vendor must be allowed for. In our view what the contract requires by 5 pm is a payment of cleared funds of which the vendor is aware. Purchasers who choose a remote settlement must pay in sufficient time to allow for providing the vendor with knowledge of the making of the payment in cleared funds before the deadline passes. 14 Ibid, at para Ibid, at para Ibid, at p 588, paras NEW ZEALAND BUSINESS LAW QUARTERLY Volume 14

5 Timely Payment But No Settlement: A Necessary Requirement of Notification? In my view, this reasoning is unconvincing. A number of questions can fairly be asked concerning the provenance of the obligation to notify and its essentiality. The difficulties begin with the opening sentence of the first paragraph, particularly bearing in mind his Honour s earlier conclusion that face-to-face settlement, although contemplated by cl 3.7, was not compulsory for the purchaser. We are now told that the purchaser cannot impose on the vendor a mode of settlement involving any disadvantage not present in the envisaged face-to-face settlement. But, if such settlement is truly envisaged or contemplated by cl 3.7, it surely gives rise to a contractual obligation on the part of the purchaser. This would mean that, contrary to the earlier conclusion, both the purchaser and the vendor could insist on that mode of settlement. It is difficult to see how the Judge can have it both ways: if a contract envisages face-to-face settlement and the purchaser is not entitled to impose on the vendor any risk or disadvantage not present in face-to-face settlement, it must be because that mode of settlement is a term of the contract. Incidentally, as I have discussed elsewhere, 17 the normal way of rationalising the latter conclusion where the words in question do not expressly state the obligation would be to find a necessary implication from those words. Such an implication differs from other implied terms, such as those that are designed to give business efficacy to a contract or to fill gaps in an agreement intended to be binding that would otherwise be void for incompleteness. Indeed, a necessary implication is more in the nature of an express term since it is derived from the true interpretation of the language of the contract. The implication is the meaning, or part of the meaning, of the words used. 18 Unfortunately, Blanchard J did not address this possible conceptual basis for justifying his conclusion. His reasoning would have been rather more persuasive if it had been argued that (a) the wording of cl 3.7 imported an obligation on both sides to settle face to face and that (b) where either an agreement is reached for remote settlement or permission is granted by the vendor for such settlement, that will not ordinarily be construed as a release by the vendor of its entitlement, inherent in face-to-face settlement, to know that the payment of cleared funds has been made. If the above observations have some validity, the difficulties with the conclusion in the final sentence of the first paragraph quoted above become readily apparent. Blanchard J said: The imparting of [knowledge of payment] to a vendor is an essential feature of a settlement in terms of cl 3.7, or indeed under any contract of this kind which is silent about the mode of settlement. This statement is especially puzzling. How can the imparting of knowledge be an essential feature of a settlement if the contract is silent about the mode of settlement? In fact, his Honour had earlier analysed the parties respective positions in relation to the mode of settlement under cl 3.7 and concluded, inter alia, that it did not make face-to-face settlement compulsory for the purchaser. More importantly, if some conduct is to be categorised as an essential feature of the contractual performance, surely one would expect that to be sourced in a clear term of the contract, a term that might be express or derived by necessary implication from express terms. His Honour went on to assert, contrary to the view of the Court of Appeal, that [i]t was not good enough for the purchaser to make the vendor aware of the payment within a reasonable time, but one might respond that it was not good enough for 17 D W McLauchlan, Interpretation and Necessary Implications (2004) 21 NZULR The leading New Zealand example is Vickery v Waitaki International Ltd [1992] 2 NZLR 58 (CA) where it was held to be clearly implicit in the terms of a written contract to provide a catering service for a freezing works that the employer undertook to operate the works and maintain a workforce to patronise the service for the duration of the contract. Several terms of the contract strongly suggested that this was a matter that was taken for granted (at p 64 per Cooke P). March

6 MCLAUCHLAN him to find the stricter obligation, and thus deprive the purchaser of its contract, without providing a clear foundation in the contract for that obligation. It can be surmised that Blanchard J wanted to avoid a conclusion that any attempt by the purchaser to settle remotely without the consent of the vendor is invalid. The purchaser should be able to choose to settle remotely. 19 But in his Honour s view, since the contract assumed a face-to-face settlement, the purchaser could not do so by a means which deprived the vendor of the advantage of that mode of settlement, namely knowledge that payment has been made. In my view, however, it is questionable whether, on its proper construction, cl 3.7 did necessarily imply face-to-face settlement. If it did not, the whole basis for a requirement of notification of payment as an essential feature of settlement falls to the ground and consequently the vendor s cancellation was invalid. If it did, there was an obligation binding on both sides to settle face to face and it would logically follow that a vendor, unless estopped from doing so, could reject a remote settlement, a conclusion that Blanchard J obviously regarded as unpalatable. Let us suppose that in the present case (a) there had been no communication between the solicitors of the sort contained in the letter of 17 February as to the mode of settlement, (b) the vendor had simply sent settlement statements on 5 March, and (c) the purchaser s solicitors did manage to deposit cleared funds for the required amount and advise the vendor s solicitors of the payment before 5 pm. Could the vendor, who was obviously anxious to do so, cancel the contract? The commonsense answer is, of course not. But how can that be right if the purchaser s obligation was to settle face to face? It might be argued that, because payment was made and notified, there is not a breach serious enough on these facts to allow cancellation. To this one might respond, how much more serious was the breach on the actual facts? And, in any event, does the seriousness of the breach matter where time is of the essence to settle in accordance with the terms of the contract? If it does not matter, in order to avert a valid cancellation we must find that there was no obligation to settle face to face, and of course the consequence of that finding, as suggested above, is to undermine the basis for upholding the cancellation on the actual facts. 4.2 The Judgment of Tipping J Tipping J expressed his entire agreement 20 with the reasoning of Blanchard J and added two main reasons of his own for concluding that the case involved breach of an essential stipulation 21 so that the vendor was entitled to cancel under s 7(4)(a) of the Contractual Remedies Act These additional reasons are, in my view, even less convincing than those of Blanchard J. First, his Honour was of the view that [i]n the present context, the concept of payment necessarily involves the payee being satisfied that the appropriate sum has actually been received. 22 Why? 19 Interestingly, remote settlement by electronic funds transfer has been restricted by the new 8th edition (2006) of the REI/ADLS form. Clause 3.7(1) now provides for payment of the purchase price by cleared funds and the latter term is defined in cl 1.1(5) as meaning cash, a bank cheque or an electronic transfer of funds that has been made pursuant to a protocol agreed between the parties. Thus, in the absence of an agreed protocol, a purported settlement by electronic funds transfer would be prima facie non-compliant. However, it is to be doubted whether a court would uphold a cancellation by the vendor where such a payment was made and notified prior to a settlement deadline. In any event, the Supreme Court s decision in Rick Dees is unaffected in other respects. For example, if the same facts arose again except that (a) the parties used the 8th edition of the form and (b) the payment into the trust account of the vendor s solicitors was made by cash or a bank cheque, the result would be the same. 20 [2007] 3 NZLR 577, at p 589, para Ibid, at para 37. His Honour was apparently unaware that the word stipulation has been replaced by term in s 7 of the Contractual Remedies Act Ibid, at para NEW ZEALAND BUSINESS LAW QUARTERLY Volume 14

7 Timely Payment But No Settlement: A Necessary Requirement of Notification? Because [i]t would be commercially unrealistic to hold that the vendor had been paid by 5 pm when he was unaware that this was so at 5 pm. 23 This is, with respect, pure assertion by the Judge. Nothing is said as to what is special about the present context. It was incumbent on him to do so given that in most everyday commercial contexts an obligation to pay a debt or other sum by a certain time lest certain penalties accrue would surely be held to be satisfied by a timely and irrevocable deposit of the amount owing to the creditor s bank account. Indeed, in some contexts, pay and even actually pay can mean liability incurred so that money need not have changed hands at all! 24 Obviously, there was no similar context in the present case, but there is prima facie nothing commercially unrealistic in holding that a person has been paid even though he or she is unaware of that fact. Furthermore, his Honour s argument to the contrary is not enhanced by the following observation immediately after the above quoted sentences: 25 The vendor was entitled at 5 pm to deploy the funds derived from the settlement to meet a contemporaneous obligation or in any other way he chose. He could not do this unless aware that he had received cleared funds from the purchaser, whose obligation it was to convey the necessary information. In my view, the first sentence begs the question whether, according to the terms of the contract, it sufficed for the purchaser to deposit the required funds by the stipulated time. The vendor no doubt expected to be able to deploy the settlement funds at 5 pm, but did he have a contractual entitlement to notification of payment by that time and, if so, was it an essential part of settlement so that any breach, however minor, gave rise to a right to cancel the contract? The second additional reason given by Tipping J is even more problematic. His Honour expressed his agreement with the view of Blanchard J that the vendor s solicitors letter of 17 February was not the source of an independent notification obligation and continued: 26 It did, however, convey the vendor s acceptance that payment could be made to his solicitors trust account. This acceptance was on terms that the purchaser would give notification of payment by means of faxed proof of the deposits. The vendor thereby preserved the requirement of notification of payment inherent in the terms of cl 3.7. Notwithstanding that the obligation to pay could now be satisfied by means of direct credit, the purchaser remained obliged to notify the vendor that payment had been made. The purchaser could not adopt the vendor s proposal for payment by direct credit without complying with its terms. The obligation to notify requires the purchaser to give the vendor sufficient information to enable the vendor to be satisfied that it has the certainty of actual receipt of the correct amount of money. In this case the vendor had signalled that receipt of the stipulated faxed documents would adequately serve that purpose. It is not possible to imply a term that notification could or would take place within a reasonable time after payment. The inevitable inference from what the parties had agreed was that payment was required in sufficient time before 5 pm to enable notification to take place by then. The sentences I have italicised read far more into the letter of 17 February than is warranted by its terms. The relevant part of the letter simply undertook to forward the transfers and title documents upon receipt of (a) a faxed undertaking that a bank cheque for the settlement figure had been credited to 23 Ibid. 24 See Charter Reinsurance Co Ltd v Fagan [1997] AC 313, at pp [2007] 3 NZLR 577, at p 589, para Ibid, at pp , paras (emphasis added). March

8 MCLAUCHLAN their trust account and (b) faxed copies of the cheque and stamped deposit slip. It said, in effect, you will get the title documents upon receipt of the faxed items or, more generally, we will perform our side when we have received confirmation that you have performed yours. It did not say you have not paid until we know you have paid or you have not performed your contractual obligations until we have proof that you have performed. 4.3 The Judgment of Elias CJ Elias CJ dissented on the ground that the purchaser had fulfilled its sole settlement obligation 27 to pay the required amount by 5 pm on 5 March. The vendor had indicated that the deposit of cleared funds to the trust account was acceptable payment and the purchaser had acted on this advice, thereby waiving its entitlement to concurrent receipt of the title documents in exchange for the undertaking of the vendor s solicitors to forward those documents on receiving notification of payment. It was drawing a rather long bow to suggest that, where payment is made at the direction of the vendor by deposit of cleared funds directly to the account of the vendor s solicitors on the vendor s solicitor s undertaking to forward the title documents on proof of deposit, the purchaser does not settle unless he notifies the vendor when such payment is made. 28 As mentioned at the beginning of this paper, her Honour also rejected the suggestion that the implication of a requirement of notification into the settlement obligation is necessary for reasons of commercial reality. 29 She could see no basis grounded in commercial efficacy for implying a notification requirement as, in the words of Blanchard J, an essential feature of a settlement. 30 Indeed, in her view: 31 there is more commercial unreality in holding that a contract can be cancelled against a purchaser who has made full payment to the vendor or his agent in the manner directed by the vendor simply because the vendor is not notified of the payment before the time for settlement elapses. A vendor may be hard to reach (as this vendor proved to be). 5 CONCLUSION The Supreme Court s decision in Larsen v Rick Dees Ltd has been welcomed as restoring to the process of settlement the very necessary element of certainty. 32 It is said that [a] very clear and necessary emphasis has been placed on the importance of certainty to confer commercial reality on the rules surrounding this area of law. 33 In my view, however, the conclusion and reasoning of Elias CJ is much to be preferred. The purchaser was denied its bargain on the basis of a highly questionable inference from the terms of the contract. This article was accepted for publication on 18 December Ibid, at p 581, para Ibid, at para Ibid, at p 582, para Ibid. 31 Ibid. 32 D McMorland, Settlement in the Electronic Age (2007) 12 BCB 165, Ibid. 44 NEW ZEALAND BUSINESS LAW QUARTERLY Volume 14