Rescission Notices and Damages

Transcription

1 Greens List CPD Breakfast Briefings Rescission Notices and Damages Thursday, 4 October 2012 Presenter: Mr Peter Little Barrister The Victorian Bar 1

2 Rescission Notices and Damages Peter Little 1 1. What are the losses that flow from a breach of a sale of land contract that was terminated pursuant to a correct rescission notice? 2. The injured party will look to general conditions 25 to 28 of a standard sale of land contract to determine his/her losses. 3. The first thing to do is to check the special conditions of the contract. There may be special conditions that affect the injured party s rights and quantification of his/her damages. For example, in recent times I have seen numerous special conditions that increase the interest rate payable higher than the rate of 2% above penalty interest rate as stated in general condition It is necessary to start at clause 25 of the general conditions which states, Breach A party who breaches this Contract must pay to the other party on demand: (a) compensation for any reasonably foreseeable loss to the other party resulting from the breach; and (b) any interest due under this Contract as a result of the breach. (emphasis added) 5. The first point is that the loss is compensatory and it has to be reasonably foreseeable. It also is worth noting that the interest is the penalty interest rate as per general condition 27. The interest component is more for the vendor than the purchaser. 1 Peter is a member of the Victorian Bar. If you have any questions concerning his paper you can contact him on (03) or peterlittle@vicbar.com.au 2

3 6. When are losses reasonably foreseeable? This is normally determined at the time of entering into the contract. However, what about consequential losses rather than direct losses? When do these losses become foreseeable? It is also at the time of entering into the contract. 7. The next question is what are the reasonably foreseeable losses? While from one perspective it is self evident, it may be prudent to record the results of some events (specified outcomes) that may occur if the purchaser defaulted. 8. Mason P referred to Alderson B in Hadley v Baxendale in Castle Constructions Pty Ltd v Fekala Pty Ltd 2, to determine the question of what is reasonably foreseeable 3. He said, Alderson B's statement is not to be read as a statute, and it is not always possible to draw a sharp line of demarcation between the two "limbs" in a particular case (see generally Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377 (HL)). Nor is it possible to construct a bright line test as to the specificity of the contracting parties' reasonably supposed contemplation as to the probable result of breach. The degree of likelihood of the contemplated event has been discussed in several cases conveniently summarised by McHugh JA in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at In Alexander v Cambridge Credit Corporation Ltd, McHugh JA pointed out that the High Court of Australia accepted Lord Reid's speech in Koufos v C Czarnikow Ltd 5 as correctly stating the law 6 when he said that the test is whether the loss claimed was " reasonably supposed to have been in the contemplation of both the parties as a not unlikely result of" the breach. 7 In recent times the modern understanding of this test does not require the 2 Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR Foreseeable loss is commonly referred as the "second limb" of the rule in Hadley v Baxendale. 4 Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 at [35]. 5 Koufos v C Czarnikow Ltd [1969] 1 AC 350 (at 388). 6 This entailed a paraphrase of Alderson B. 7 Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at

4 innocent party to show a contractual undertaking to provide compensation if the special loss eventuates Accordingly, the central issue with damages is really one of the extent or scope of the injured party s losses. 11. To claim his/her losses, the injured party must have been ready, willing and able to complete his/her respective obligations pursuant to the contract at the time of the breach. 12. Also, note the same general limitations such as causation and remoteness apply. Causation 13. To succeed for damages at common law, the onus is on the party alleging the breach to establish a sufficient connection between the breach and the loss suffered. Causation can be established in one of two ways: (a) if it can be proved that, but for the other party s breach, the alleging party would not have suffered the loss or damage; or (b) the other party s breach is so connected with the alleging party s loss or damage that, as a matter of ordinary common sense and experience it should be regarded as the cause of it Even if a causal link is established, a loss resulting from the breach may not be compensable if it is too remote. The alleging party must be able to satisfy the test for remoteness as set out in Hadley v Baxendale 10. Remoteness 15. Hadley v Baxendale provides a two limb test that damage will not be too remote if it may be reasonably considered: 8 Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 655 at [39]. 9 March v E & M H Stramare Pty Ltd (1991) 171 CLR 506 at (1854) 9 Ex

5 (a) as arising naturally according to the usual course of things from the breach ( the first limb ); or (b) to have been reasonably in the contemplation of the parties at the time they made the contract as a probable result of it ( the second limb ). 16. While there has been much debate as to the loss that will be considered to flow from the usual course of things as required under the first limb, the test the courts apply under the first limb is, what loss is sufficiently likely to result? In determining whether the loss or damage was reasonably in the contemplation of the parties under the second limb, regard must be had to the actual knowledge possessed by the defaulting party 12. In addition to actual knowledge of the circumstances, it is also necessary for either: (a) the defendant to acquire this knowledge from the innocent party prior to entering into the contract; or (b) for the innocent party to know the defaulting party has this knowledge at the time of entering into the contract. Requirement to Serve a Notice 18. The injured party is required to serve a default on the other party. General condition 27 states, Default notice 27.1 A party is not entitled to exercise any rights arising from the other party's default, other than the right to receive interest and the right to sue for money owing, until the other party is served and fails to comply with a written default notice The default notice must: 11 Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 667 per Wilson, Dawson and Deane JJ citing Lord Reid in Koufous v C Czarnikow Ltd [1969] 1 AC Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB

6 (a) Specify the particulars of the default; and (b) State that it is the offended party's intention to exercise the rights arising from the default unless, within 14 days of service of notice- (i) The default is remedied; and (ii) The reasonable costs incurred as a result of the default and any interest payable is paid. (Emphasis added) 19. This general condition requires the injured party to serve a written default notice. The term default notice is not defined in the contract 13. Generally, all rescission notice are considered to be default notices but not all default notices are rescission notices. A default notice can simply be a notice that triggers a right that the injured party may have other than rescission of the contract. Any rights to an injured party that arise from the service of the default notice, such as penalty interest rate, can only arise on the failure of the defaulting party to comply. 20. It is implicit that the rights referred to in this general condition would be rights only applicable or arising from the standard contract. The common law rights still apply. 21. This precondition to serve a notice, however, does not apply to interest and the right to sue for money owing. 22. While, fails to comply is also not strictly defined, there is general condition 29 which states, Default not remedied 29.1 All unpaid money under the Contract becomes immediately payable to the Vendor if the default has been made by the Purchaser and is not remedied and the costs and interest are not paid The Contract immediately ends if: 13 It is also not defined in the Butterworths Australian Legal Dictionary, Melbourne Butterworths

7 (a) (b) the default notice also states that unless the default is remedied and the costs and interest are paid, the Contract will be ended in accordance with this General Condition; and the default is not remedied and the reasonable costs and interest are not paid by the end of the period of the default notice Where the Contract ends by a default notice given by the Purchaser: (a) the Purchaser must be repaid any money paid under the Contract and be paid any interest and reasonable costs payable under the Contract; and (b) all those amounts are a charge on the Land until payment; and (c) the Purchaser may also recover any loss otherwise recoverable If the Contract ends by a default notice given by the Vendor: (a) the Deposit up to 10% of the Price is forfeited to the Vendor as the Vendor's absolute property, whether the Deposit has been paid or note; and (b) the Vendor is entitled to possession of the property; and (c) in addition to any other remedy, the Vendor may within one year of the Contract ending either : (i) retain the property and sue for damages for breach of contract; or (ii) resell the property in any manner and recover any deficiency in the Price on the resale and any resulting expenses by way of liquidated damages; and (d) the Vendor may retain any part of the Price paid until the Vendor's damages have been determined and may apply that money towards those damages; and (e) any determination of the Vendor s damages must take into account the amount forfeited to the Vendor The ending of the Contract does not affect the rights of the offended party as a consequence of the default. 7

8 23. General condition 29.1 covers only all unpaid money. All unpaid money becomes immediately payable once the "default" has not been remedy and the costs and interests are not paid. This general condition suggests that the "default" is separate and different to the costs and interest. Does that mean that all unpaid money does not become immediately payable if at least the costs are paid? This, however, is not how a rescission notice is structured. The default in a rescission notice includes costs and interest to the default that needs to be remedied otherwise the contract is automatically terminated. Further, is there a difference between "money owing" pursuant to general condition 26 and 27 and "all unpaid money" in general condition 29.1? 24. General condition 29.3 is a situation where the purchaser issues the default notice. It requires the vendor to pay the purchaser the money paid under the contract (ie the deposit) together with interest and reasonable costs. This clause is triggered when money is owed then it general condition 16 (interest) is applied to that amount. Interestingly, it does not require immediate repayment of money paid under the contract. 25. Then when a vendor terminates the contract, the vendor can keep the deposit which is "up to" 10% of the price. This is different to any part payment of settlement amount. Arguably, if the deposit is not 10% but the amount that is specified as the deposit in the Particulars of Sale of the contract then the vendor may not be able to obtain the difference. Notwithstanding and in addition, the vendor may, within one year of the termination of the contract, either return the property and sue for the damages for breach of contract or resell and recover any deficiency in the price of the resale. This requires an election to be made. Please note that the election is within one year of the contract ending. Also note the deposited forfeited is to be taken into account when assessing the vendor s overall damages. Vendor s loss 8

9 26. In a situation when the purchaser did not settle (i.e. failure to pay the amount due under the contract at settlement), and the vendor issued a correct rescission notice, 14 days later the contract is automatically terminated. 27. In such a situation when a vendor duly elects to terminate a contract because of the breach, the purchaser is discharged from the duty to complete the contract. There is nothing more the purchaser can do. The vendor seeks his/her damages from the purchaser s breach. The general principle governing the award of damages for breach of contract is that stated by Parke B in Robinson v Harman,... where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed The prime facie measure in an action by the vendor against the purchaser is that stated by Parke B in Laird v Pim 15, The normal measure of damages is the injury sustained by the claimant by reason of the defendants not having performed their contract. The question is how much worse is the plaintiff by the diminution in the value of the land or the loss of the purchase money in consequence of the non-performance of the contract? In a situation where the vendor resell is the property, the vendor s loss was said to be assessed by reference to the difference in the value (if any) of the subject property at the date of the breach compared to the contract price that the vendor would have received on that date. 30. In Palasty v Parlby 17, the vendor terminated at the contract to sell his house at Hunters Hill on 23 May The vendor then sold the property again on 27 December The primary judge found that the value of the property on 27 December 2000 approximated the 14 Robinson v Harman (1848) 1 Ex 850 at 855 and 154 ER 363 at 365 which was cited with approval in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at and Laird v Pim (1841) 7 M&W 474 and 151 ER Laird v Pim (1841) 7 M&W 474 at 478 and 151 ER 852 at Palasty v Parlby [2007] NSWCA 345. Mason P, Tobias JA and Handley AJA 9

10 market value of the property at the date of the breach 18. On appeal, the Court (Mason P, Tobias JA and Handley AJA) found no error in the primary judge s findings. However, these matters are always fact specific. 31. Also in this case, on 10 March 2000, the vendor sold his house at Hunters Hill and on 27 April 2000 he purchased another home at Killara. Due to the purchaser's failure to settle on the Hunters Hill s contract, the vendor terminated his contract for the purchase of the Killara property. This resulted in a loss of a deposit of $165,000 to the vendor. Accordingly to the primary judge, this was a foreseeable loss, and the Court of Appeal agreed. It was said it was reasonably foreseeable of the purchaser of the Hunters Hill property to foresee that the vendor would purchase another property and if the purchaser could not continue then it is reasonable to conclude that the vendor may also not be able to continue. The relevant evidence included that the Hunters Hill property was the vendor s family home, the vendor had disclosed to the purchaser that he was looking at another house, the vendor had two mortgages on the Hunters Hill property and the purchaser knew the vendor was strapped for money. 19 Interest, Penalty Interest and Interest that is a Penalty 32. Let s look at standard interest first. Clause 26 of the general conditions states, Interest Interest at a rate of 2% per annum plus the rate for the time being fixed by section 2 of the Penalty Interest Rates Act 1983 is payable on any money owing under the Contract during the period of default, without affecting any other rights of the offended party. (Emphasis added) 18 This was not a case where the resale took place long after the relevant date or after what Young J in Jampco Pty Ltd v Cameron (No 2) (1986) NSW Conv R at p 56,581 (passage not reproduced in report of case at (1985) 3 NSWLR 391) referred to as a "demonstrable change in the market". See generally Holland v Hardy (1882) 3 LR(NSW) 450; Delbridge v Low [1990] 2 Qd R 317 at 333; Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648 at 656[42]-[44]. 19 Palasty v Parlby [2007] NSWCA 345 at [13] [28]. 10

11 33. The injured party can claim interest at 2% higher than the penalty interest rate for money owing during the period of default. This should not be confused with the other interest awards such as statutory interest. 34. In a situation where the vendor resells the property, the interest is calculated from the time when the contract is terminated to when the contract for resale is completed. The interest component also requires the vendor to show that he/she acted diligently in his/her effort to resell. The principal sum on which the interest is calculated is the sale price according to contract sale of land less the deposit paid less the agent s fee and less any legal expenses. Equity may require a set off in relation to interest for the benefit of the vendor has from being in possession of the property until it is resold but only where it is fair and equitable to do so. 35. Also note that this interest calculation is different to interest damage which could be the actual loss incurred by the vendors in consequence of his/her inability to discharge mortgages he had placed over the property. This could be a mortgage that existed on the property at the time of entering into the contract for the sale land or entered later as a result of the purchaser s default. 36. It is not a general rule that the vendor s loss includes the interest payable on the vendor s mortgage. If, however, the purchaser was aware of a particular situation in which the vendor would be placed and that such a breach would be likely to cause special damage, then the vendor would be entitled to recover such interest payments. Accordingly, interest damages are recoverable in a certain situations The common law's artificial restraint was by Hungerfords v Walker (1988) 171 CLR 125 at 142 and 146 per Mason CJ at Wilson J and 152 per Brennan and Deane JJ; Commonwealth v SCI Operations Pty Ltd (1998) 192 CLR 285 at 316[73]; Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, [2007] 3 WLR 354 at [16], [84], [87], [89], [93], [165] and [216]. 11

12 37. Such an approach was approved by Young J in Jampco Pty Ltd v Cameron (No 2) 21, when he said 22, In equity, where damages or compensation was claimed, it was customary to allow interest on the purchase money from the date fixed for completion, but to allow a setoff if appropriate, for the vendor's occupation or the benefits which it derived from remaining in possession of the property, see Leggott v Metropolitan Railway Co (1870) LR 5 Ch App 716, at p 719. The set-off was not permitted where the circumstances were that the vendor was against his wishes forced to remain in possession of the property on a precarious basis, never knowing exactly when his occupation would come to an end.. Normally, the interest would be calculated on the balance of the net proceeds of sale up until the resale, and on the balance of the damages to which the plaintiff is entitled from the date of resale at the Court rate. However, where there is evidence before the Court that the plaintiff has had to pay out interest at a greater rate than the Court rate, then, in accordance with the Court of Appeal's decision in Leighton Contractors Pty Ltd v Queensland Insurance Co Ltd (4 October 1978, unreported) the Court should allow that higher rate. Similarly, if the successful party is borrowing money at a lower rate, only the lower rate will be allowed. 23 Increasing Interest Rate 38. The vendor is entitled to interest pursuant to the contract. However, the vendor can, and often does, increase the penalty interest rate. When does a term that increases an interest rate become a penalty and unenforceable? 39. It is well established that if the increase in the rate represents a genuine pre-estimate of the amount needed to compensate the innocent party for a loss of funds he would otherwise have available to him, it will be treated as "a liquidated satisfaction fixed and agreed upon by the parties", but if not, it will be void as a penalty Jampco Pty Ltd v Cameron (No 2) (1986) NSW Conv R at p 56, It was also supported in Senavale Pty Ltd v Nolan (2000) NSW Con R ; [2000] NSWSC 619 at [46] [48]. 23 Jampco Pty Ltd v Cameron (No 2) (1986) NSW Conv R at p 56, Ronstan International Pty Ltd v Thomson [2002] VSCA 75 at [25]. 12

13 40. The mere fact that a contractual term operates to impose upon a party an obligation to pay a sum greater than can be recovered at law does not entail the result that the term is a penalty. 25 The degree of disproportion between the stipulated amount and the loss likely to be suffered by the promisee must show that the term is oppressive or unconscionable The question is whether the increase in the interest rate makes the payment a penalty. There is a good deal of authority for the proposition that an increase in the rate of interest upon default may constitute a penalty 27 although where the increase is prospective rather than retrospective in effect the vendor may be able to support it "as a liquidated satisfaction fixed and agreed on by the parties as compensation for the vendor being kept from his money." In Beil v Pacific View (Qld) Pty Ltd 29, Holmes J found that the additional interest might, indeed, represent a genuine pre-estimate of the amount needed to compensate the plaintiffs. In this case the interest rate pursuant to the contract was 16 percent at the time the agreement was made and this was considered to be an appropriate payment for the use of the plaintiffs' capital. However, the court found that it also suggested that an increase interest rate to 25 percent was intended as " a punishment for non-observance of a contractual stipulation" 30. However, note that this case was a summary judgment application and the defendant only had to ascertain that was a reasonable question to be tried. It was a lower threshold. His Honour found in this case the court needed to determine the question whether the relevant term was a penalty. Something happened as the matter did not go to a hearing. 25 PC Developments Pty Ltd v Revell (1991) 22 NSWLR 615 at per Mahoney JA. 26 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at per Mason and Wilson JJ. 27 See the cases set out at p29 of Davids Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1; Ronstan International Pty Ltd v Thomson [2002] VSCA 75 at [23] [25]. 28 Davids Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 30; Lordsvale Finance v Bank of Zambia [1996] 3 All ER Beil v Pacific View (Qld) Pty Ltd [2003] QSC 043, Holmes J. 30 Legione v Hateley (1983) 152 CLR 406 at

14 43. Accordingly, the increase in the interest rate needs to be very excessive (extreme) before the relevant term becomes a penalty. As their Honours (Buchanan, Chernov and Easmes JJA) said in Ronstan International Pty Ltd v Thomson, Burton v Slattery 31 was described by Lockhart, Beaumont and Gummow JJ in David Securities Pty Ltd v Commonwealth Bank of Australia 32 as a case in: "a long line of authority which indicates that additional interest will not be considered as a penalty, but rather as a liquidated satisfaction fixed and agreed upon by the parties as compensation for the lender being kept from his money." 33 Purchaser's claim for loss 44. Similar to the vendor s situation, the purchaser is entitled to foreseeable losses and interest pursuant to general condition 26. However, it is very difficult for the purchaser to obtain his/her losses. It is also rare the purchaser has a genuine loss. It is possible the purchaser may incur losses pursuant to an inability to reinvest certain funds that were required for settlement, and thereby required to pay interest (loss of net income); reasonable costs for accommodation and storage costs. However, to date, the court rejects such claims. 45. Also similar to the vendor s situation, the purchaser is under a duty to mitigate any losses. If the purchaser could not reinvest the funds at the same rate as the interest payable, it is still required to invest in the best rate possible. Conclusion 46. The terms in the standard contracts require more of a contractual interpretation that previously. Good analogy damages cases can be found in mortgages cases and guarantee cases. 31 The headnote in Burton v Slattery refers to "the additional interest not being considered in that case as a penalty, but as a liquidated satisfaction fixed and agreed on by the parties." 32 Davids Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at Ronstan International Pty Ltd v Thomson [2002] VSCA 75 at [24]. 14

15 47. The cost of delaying the election and reselling the property means greater costs as the vendor will be required to ascertain the market value at the time of the breach from an expert and this is most difficult especially when the property is resold 12 months later. 48. If there is a breach by the purchaser (for example: nonpayment of the deposit) then consider issuing a notice of default first before considering a notice of rescission. 49. When drafting special conditions, you should consider the effect on the general conditions before making such changes. It can get complex if the injured party s rights to damages in the general consideration are changed by additional terms in the special conditions. On present trends this is going to lead to problems in the interpretation of the general conditions and the special conditions. 50. No one really knows where the line is when an increase in the penalty interest rate makes the term becomes a penalty, and not therefore enforceable. 15