By Russell Cocks, Solicitor

First published in the Law Institute Journal

A caveator’s arguments in support of the contract upon which his caveat was based were not well received by the court in the recent case of Damco Nominees P/L v Moxham [2012] VSC 79, with the result that the contract was found to have been terminated. Consequently the caveatable interest based on the contract no longer existed and the court ordered the caveat to be removed. It could reasonably be anticipated that final orders, when formulated, would have included a costs order against the purchaser, so the exercise would have been an expensive one.

The arguments made by the caveator are reasonably common and are discussed in 1001 Conveyancing Answers – indeed, they may have sourced from that publication – so the case serves as a guide as to how the court may regard those arguments in the future.

The facts

The caveator had entered into a contract to purchase the property for $1.9m. The property was a potential residential development site and the contract gave the purchaser nearly one year to complete, with a view to allowing the purchaser to seek planning approval et cetera, a reasonably common scenario. The contract was not in the standard form commonly in use but rather was in a form specifically created by the solicitor for the vendor. Whilst not all of the terms of the contract are recited in the judgment, it is possible to conclude that the contract adopted many of the standard conditions, some with subtle changes, and added further conditions. Thus the contract included ‘general condition 40’ whereas the standard contract only has 28 general conditions.

This issue formed the first point of contention between the parties in that the caveator claimed to have signed an earlier contract in standard form and that the ‘second’ contract had only been signed one month later for the purpose of ‘cleaning up’ the ‘first’ contract. The second contract was vaguely attacked on the grounds of ‘unconscionability’ but the court gave short shrift to this argument, partly because to have accepted those arguments would have entirely undermined the caveator’s defence of the caveat as that defence was entirely based on the rights said to arise from the second contract. Thus the dispute was limited to the second, non-standard contract.

Nomination

The first indication that the purchaser might be in ‘trouble’ came two months prior to the date for settlement. The purchaser asked the vendor to give a second mortgage for 10% of the purchase price, but the vendor declined. One month prior to settlement the purchaser notified the vendor that he intended to nominate an associated company. The contract included a general condition setting out a nomination procedure involving submission of a deed and payment of a fee. The purchaser did not submit a deed in accordance with the general condition and objected to payment of the fee. Here the purchaser adopted two arguments set out in 1001 Conveyancing Answers.

The purchaser claimed not to be bound by the nomination provisions of the contract as the purchaser was nominating pursuant to its ‘common law right’. The vendor argued that no such right existed in this case as ‘the contract contained a complete code for nomination’. The point does not appear to have been argued in detail and no cases supporting the common law right are cited in the judgment, however Mukhtar AsJ was inclined to accept the vendor’s argument. However this is not authority to support the proposition that the standard form contract contains such a code. This contract was not in standard form and general condition 31 setting out the nomination procedure specifically stated ‘Nomination only under this condition’, whereas the standard contract merely provides that ‘the purchaser may nominate’.

The second attack on the nomination process in the contract related to the fee. Section 42(3) Property Law Act prohibits the imposition by a vendor on a purchaser of ‘any costs and expenses’ other than those arising from a default. The standard form contract does not provide for a fee for nomination and an attempt by a vendor to impose such a fee on the purchaser as a precondition to a nomination could be met with this s 42(3) prohibition. However this particular contract included as part of the specified nomination process an obligation by the nominee to pay the fee. By this method the vendor sidestepped the prohibition as the fee was not imposed on the purchaser. Such a fee could not be enforced by the vendor against the nominee, who is not a party to the contract, but failure by the nominee to pay the fee would give the vendor the right, as against the purchaser, to refuse the nomination.

Nomination is a common event in Victorian conveyancing. The approach of the drafters of the standard contract was to keep it as simple as possible. Therefore s 42(3) applies to the standard contract. That does not prevent individual vendors imposing a different nomination regime, as was done in this case.

Default notice

The purchaser failed to settle and the vendor issued a notice. It is fair to say that the notice was more detailed than the standard one page notice usually employed and revealed that considerable care had been taken in drafting. In addition to interest, it claimed costs on default, which were specified in the contract as $385, and costs on rescission of $1,100, including a courier fee for personal service. The notice was unsuccessfully attacked on a number of fronts:

1. that it had been served on the nominee as well as the purchaser;
2. that it contained an incorrect arithmetic addition resulting in an error of $310;
3. that the notice claimed ‘proper legal costs’ rather than ‘reasonable costs’ referred to in the contract;
4. that the $1,100 costs claimed in respect of the notice were excessive. Extensive evidence was called on this point and Mukhtar AsJ was satisfied that, in this case, that amount was a reasonable reflection of the costs arising from the purchaser’s failure to settle;
5. that the interest claimed was calculated on the balance of purchase price plus adjustments, GST and default interest agreed to be paid in return for an extension of time. This failed as the judge held that this was the amount, however constituted, that was owed by the purchaser to the vendor at the time the notice was issued and the vendor was entitled to interest on that amount;
6. that the termination condition in the contract incorrectly referred to the ‘buyer’s’ costs. This was rejected as an obvious error. It should have said ‘seller’s’.

The court concluded by proclaiming ‘the caveator’s claim as baseless’, having previously described the attacks on the notice as designed to ‘expose compositional errors’ and one of the letters from the solicitor for the purchaser to the solicitor for the vendor as ‘bumptious’. All in all – NOT WELL RECEIVED.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Receipt of a rescission notice is often a time of great stress in a conveyancing transaction. Such a notice is issued when a party defaults in performance of a contractual obligation (usually settlement) and gives the defaulting party 14 days to remedy the default. The party issuing the notice is entitled to claim costs (including legal costs) arising out of the default. What do you do if the legal costs claimed appear to be excessive?

Some practitioners appear to regard the opportunity to issue a rescission notice on behalf of their client as the legal equivalent to winning Tattslotto; however the right to claim costs in respect of rescission is subject to the normal rules governing costs generally, and so the defaulting party will only be liable to pay to the vendor a reasonable amount in respect of cost arising from the default and issue of the rescission notice.

The assessment of these costs commences at the point of default, when the solicitor for the non-defaulting party begins to take action that would not have been required if the matter had have proceeded in the normal manner. Costs must be calculated on an item remuneration basis (unless otherwise agreed), and thus there is an objective yardstick. These additional costs might be expected to include:

• attendance/letter upon/from defaulting party to be informed of default;
• attendance/letter upon/to client informing of default and seeking instructions;
• issue of rescission notice and service; and
• attendance/letter upon/to client to advise that default remedied.

The defaulting party is obliged to pay for the costs of the other party that result from the transaction ‘running off the rails’ and any costs associated with getting it back ‘on the rails’, but not for those matters that comprise the normal steps taken by the parties in a conveyancing transaction. Once the default is remedied the parties organise settlement in the normal way and these attendances are a normal part of the conveyancing transaction.

The above scenario envisages a quick ‘return to the rails’ and, on an item remuneration basis, it would be difficult to imagine the additional work required as a result of the default adding up to more than $200 or so. However, the process is rarely as smooth as this. Generally there are a number of additional attendances after issue of the rescission notice and before return to normality that cannot be strictly costed at the time the rescission notice is issued as they have not yet been incurred. For this reason there is a generally accepted allowance of $400 for costs on a rescission notice that allows for a reasonable level of consultation with the client before issue of the notice and a reasonable level of attendances after issue of the notice and before final settlement. There is not much science involved in this rule of thumb, but it does provide a good practical solution to a situation that often needs to be resolved in a stressful, time-poor environment.

No doubt there are particular cases where an amount in excess of $400 is justified. If the defaulting party vacillated before default, resulting in additional attendances by the nondefaulting party’s solicitor or if the
‘re-railing’ process involves many additional attendances, then the non-defaulting party might claim a higher amount. However the guiding principle must always be item remuneration, and it is not just a matter of plucking a figure from the sky. The client is entitled to be consulted and kept informed, but a client who rings every hour on the hour to inquire about progress cannot expect to have the costs arising from those attendances reimbursed. Likewise, a solicitor who rushes off to counsel for advice and draws documents that end up being superfluous may not be entitled to claim those costs.

If a claim for costs is made in a fairly typical scenario that the defaulting party believes to be excessive, it is recommended that the defaulting party offer to pay the generally accepted figure of $400 (or such other amount that may appear reasonable) without the need for more than a lump sum bill. However, if this offer is not accepted, the defaulting party cannot allow the issue of costs to further delay settlement and ought to settle by paying the amount claimed and, at the same time, request an itemised bill in accordance with Legal Profession Act s 3.4.36 and indicate that an application to review the bill will be made to the Taxing Master after settlement, in accordance with s 3.4.38.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A recent Magistrates’ Court case SDC (Vic) Pty Ltd v. Davies and others [2010] VMC 3 has considered an issue relating to the consequences of rescission of a contract of sale of land.

Whilst such decisions are not binding on other courts, the fact that they are now reported on AustLII means that they are more available for consideration and the fact that the doyen of Victorian property law barristers (P.N. Wikrama S.C.) appeared makes the case even more significant. Additionally, the case was described as dealing with an issue on which ‘there was no direct authority’ in Victoria.

The purchaser defaulted under the contract by failing to pay the balance of purchase price on the due date. The vendor had granted a number of extensions, but eventually the contract was terminated by a Rescission Notice served by the vendor. The deposit was forfeited and the property resold at a small loss. Whilst the judgment does not provide full details of the damages suffered by the vendor, it appeared clear that the forfeited deposit was well in excess of any actual loss suffered by the vendor.

The first issue concerned a payment, in addition to the deposit, that the purchaser paid to the vendor as part of an agreement to extend the date for settlement. Regrettably for the vendor this was described at the time of payment as ‘paid towards the purchase price’. As a consequence the Court ordered that the payment was to be refunded to the purchaser after the contract was rescinded by the vendor, as the vendor ‘cannot have the land and its value too’. Forfeiture of the ten percent deposit was authorised by the contract, but not this additional amount, beyond ten per cent, which was held to be an unjust enrichment on the part of the vendor.

The lesson to be learned from this part of the case was that a vendor who agrees to extend time for performance in return for a payment must ensure that the payment is expressed to be in consideration for the extension of time, and not part payment of the purchase price. An analogy can be drawn with key-money in a retail tenancy environment. Key-money is prohibited (and must be repaid) but expressing the payment as consideration for an additional term provided by the landlord means that the character of the payment changes from key-money to a payment in consideration for a valuable right – additional time. So too a payment in excess of the deposit that is made in consideration for an extension of time for settlement may be retained, even if the contract is ultimately rescinded by the vendor.

The main point of the case, and the one that was said to have no direct Victorian authority, was the characterisation of the vendor’s claim for penalty interest. Because of the extensive (agreed) delays, this amount exceeded (by coincidence) the amount the vendor was ultimately ordered to repay to the purchaser on the first issue, and so provided a convenient counterclaim for the vendor.

The vendor argued that the entitlement to interest arose out of a specific term, Condition 4 of Table A of the Seventh Schedule of the Transfer of Land Act that was incorporated into the contract, in the contract, that this entitlement survived the rescission of the contract and that it did not form part of the vendor’s damages arising from the rescission. This argument posited that such damages might be constituted by a loss on resale, payment of additional rates, payment of an additional estate agent’s commission etc. but that the contractual right to interest stood apart from these damages and constituted a distinct legal entitlement in addition to any other losses claimed by the vendor arising out of rescission.

The purchaser, represented by Wikrama S. C., argued that the right to interest was to be characterised as part of the vendor’s right to damages arising out of Condition 6 of Table A and that once the rescission procedure is invoked, interest is subsumed into the vendor’s general right to damages pursuant to that Condition. The significance of this argument is the well accepted principle that a vendor must give credit for the forfeited deposit and is only entitled to claim damages beyond the deposit if those damages exceed the forfeited deposit – Carpenter and Anor v McGrath and Anor [1996] NSWSC 411. Whilst the vendor had suffered a small loss on resale and other losses such as additional rates etc., those losses did not exceed the forfeited deposit and so the vendor had no claim for those losses. By holding that the contractual right to interest was to be characterised as part of the vendor’s general damages under Condition 6, the Court decided that the forfeited deposit also had to be allowed against that interest and that the vendor would only have an additional claim, beyond the deposit, if the damages (including interest) exceeded the forfeited deposit.

The vendor’s right to interest arises upon default and if settlement occurs the purchaser is obliged to pay this interest in addition to the purchase price. However, if the rescission procedure is invoked and the contract is ultimately rescinded, the vendor’s right to interest is not a separate and distinct legal right, but rather is part of the vendor’s general right to damages. This decision is likely to apply to Conditions 26 & 28 of the 2008 prescribed form of contract.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.