Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd

1. [1]

   MACFARLAN JA: I agree with Barrett AJA.

2. [2]

   GLEESON JA: I agree with Barrett AJA.

3. [3]

   BARRETT AJA: In vendor and purchaser proceedings determined on 24 May 2018 [1] , a central issue was whether a contract for the sale of land formed by exchange of contracts in the conventional way had later been novated so that the rights and obligations originally created between the named vendor and the named purchaser became instead rights and obligations between that vendor and a substituted purchaser to the exclusion of the named purchaser. Slattery J held that there had been an effective novation. [2] On that basis and because the substituted purchaser defaulted in performance of the contract, it was ordered that the deposit be forfeited to the vendor and that the substituted purchaser pay damages of $100,000 to the vendor.

4. [4]

   In this Court, the sole issue raised by the grounds of appeal is the correctness of the decision that there had been an effective novation.

Facts in outline

1. [5]

   On 18 March 2016 the respondent, Park Cho Pty Ltd (“Park Cho”), as vendor and the second appellant, De Fung Zhang (“Mr Zhang”), as purchaser entered into a contract for the sale and purchase of commercial property at Belmont for a price of $3,088.000. [3] A deposit of $308,800 was paid by Mr Zhang. Solicitors acted for both parties on the exchange of contracts and the transaction as a whole. Joun Lawyers (“JL”) were the solicitors for Park Cho. Legal Point (“LP”) acted for Mr Zhang.

2. [6]

   On the day the contract was made, JL, acting for Park Cho, emailed Mr Zhang’s solicitors referring to the exchange of contracts and asking whether Mr Zhang would agree to release of the deposit to Park Cho. The email continued:

3. [7]

   On 5 April 2016, LP, on behalf of Mr Zhang, emailed JL saying that their client was “not going to agree to release of the deposit at this stage”. The email also said:

4. [8]

   By return email of 5 April 2016, JL said:

5. [9]

   There was no further communication between Park Cho and Mr Zhang (or their respective solicitors) regarding what the last email described as “the change of entity”.

6. [10]

   Fu Tian Fortune Pty Ltd (“Fortune”) came into existence on 1 April 2016. Mr Zhang was its sole director. The company was obviously unable to perform any function before that date. [4] No formal steps were ever taken to effect substitution of Fortune for Mr Zhang as purchaser under the contract of 18 March 2016.

7. [11]

   The contract was due to be completed on 29 April 2016. Completion did not take place on that day or at all. On 4 May 2016, Park Cho served a notice to complete. The notice was addressed to Fortune and served on LP. The notice required completion by 19 May 2016. On 31 May 2016, Park Cho served a notice of termination. That too was addressed to Fortune and served on LP.

The Equity Division proceedings

1. [12]

   Almost a year later, on 10 May 2017, Fortune commenced proceedings by which it sought a declaration that the contract for sale remained on foot between Park Cho and Fortune and an order for the specific performance of that contract. Fortune was, at that point, the sole plaintiff. Mr Zhang was later added as a plaintiff and the claims for relief were amended significantly. The principal claim became a claim for a declaration that the contract of 18 March 2016 between Park Cho and Mr Zhang was valid and binding and that Mr Zhang was entitled to have it specifically performed. There were then alternative claims as follows:

2. [13]

   The central issue before the primary judge was framed by him in these terms (at [43]):

The primary judge’s findings

1. [14]

   After examining the terms of the emails of 18 March 2016 and 5 April 2016 and noting that they constituted the only evidence of communications on the subject of novation, the primary judge said (at [51]):

2. [15]

   The inference that there had been some previous conversation between solicitors regarding substitution of purchaser (drawn from the emails themselves) was said to be supported by evidence given by Park Cho’s principal (Ms Park) about something that she had been told by Park Cho’s solicitor (Mr Lee of JL) on 4 April 2016, that is, the day before the exchange of emails referred to at [7] and [8] above. Ms Park testified that she was told by Mr Lee that he (Mr Lee) had received from Mr Zhang’s solicitors (LP) a formal request that the purchaser be replaced by a company. Ms Park replied, “OK, I’m fine with that”; and Mr Lee said, “I will replace the purchaser with the company so that the company takes the place of Zhang; this means that the purchaser will now be the company”. Ms Park’s response was: “OK, go ahead”.

3. [16]

   After referring to this evidence, the primary judge said (at [53]):

4. [17]

   The primary judge then referred to several further matters as follows:

   1. (1)

      The only part of the exchanged contract in evidence (being the part signed by the vendor and received by the purchaser on exchange) had been changed by deletion of the name of Mr Zhang as purchaser and insertion of Fortune’s name. His Honour inferred that someone acting on the purchaser’s behalf had made that alteration after exchange.

   2. (2)

      While correspondence between the solicitors before 5 April 2016 identified Mr Zhang as purchaser, the title on the purchaser’s solicitors’ correspondence changed around mid-April 2016. Letters from them dated 13 April 2016 and 22 April 2016 were headed “Fu Tian Fortune Pty Limited purchase from Park Cho Pty Limited”.

   3. (3)

      A form of transfer was served by LP on behalf of the purchaser on 22 April 2016. The form of transfer named Park Cho as transferor and Fortune as transferee.

   4. (4)

      On 29 April 2016, Fortune lodged a caveat on the title to the property claiming an interest as purchaser under the contract for sale dated 18 March 2016. In connection with the lodgement of the caveat, Mr Zhang made a statutory declaration describing himself as the sole director of Fortune and stating that Fortune had “good and valid claims to the estate or interest” claimed.

   5. (5)

      On 16 May 2016, LP wrote to JL about several matters that had arisen in relation to the matter. The letter was headed, “Fu Tian Fortune Pty Ltd purchase from Park Cho Pty Ltd”, as was a follow-up letter of 18 May 2016.

   6. (6)

      JL replied by letter dated 18 May 2016 using the same heading.

   7. (7)

      Park Cho served a notice to complete on 4 May 2016. The notice identified Park Cho as the vendor and was addressed:

   8. (8)

      Completion did not occur on the day fixed by Park Cho’s notice to complete. On 31 May 2016, Park Cho gave notice terminating the contract. The notice was addressed:

The primary judge’s decision

1. [18]

   The primary judge said (at [74]) that the effect of novation “is to discharge the original contract between two parties (the continuing party and the outgoing party) and to substitute it with a new contract between the continuing party and a new party (the incoming party)”. That incoming party must, his Honour said, “perform the contractual obligations, bear the contractual liabilities and is entitled to the contractual benefits (under the new contract) that were formerly the province of the outgoing party under the original contract”; and:

2. [19]

   Turning to the authorities, his Honour noted, referring to Vickery v Woods (1952) 85 CLR 336; [1952] HCA 7 (per Dixon J at CLR 345), that “the crux of novation is intention” in the form of consent by way of tripartite agreement; and that the intention may be express or, importantly for the case before him, may be implied from the circumstances. He referred, in that connection, to Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 the circumstances of which he saw as similar to those before him in that the purported novation had occurred with a degree of informality through a course of dealing. This Court there concluded that there was no basis for disturbing the trial judge’s conclusion that a novation had occurred – a conclusion reached by reference to, inter alia, the content of conversations between the parties and the “overwhelmingly consistent pattern of conduct” in which they had engaged. The primary judge also referred to McMahon v National Foods Milk Ltd (2009) 25 VR 251; [2009] VSCA 153 and to a statement (at [77]) that regard must be had to the totality of the parties’ dealings and the inferences that can be drawn from them.

3. [20]

   The primary judge then proceeded to apply the principles to the facts. He said (at [78]) that “the overwhelmingly consistent pattern of conduct between these parties from very shortly after 5 April 2016 supports the inference that a novation had occurred without further conditions and that all parties were content to treat Fortune and not Mr Zhang as the purchaser”. His Honour saw nothing in the parties’ mutual dealings from very shortly after 5 April 2016 to suggest that that “either side of the contract” had any doubt that Fortune had become the purchaser in place of Mr Zhang. Park Cho’s notice to complete and notice of termination had been given to the correct entity, being Fortune. There had been a novation. Park Cho’s actions by way of and in consequence of the giving of notice to complete to Fortune had therefore been effective.

Grounds of appeal

1. [21]

   None of the factual findings made by the primary judge is challenged on appeal. The sole ground of appeal is that his Honour erred in deciding that there had been a novation of the contract because:

The nomination argument

1. [22]

   Fortune argued in this Court, as it had below, that there had been no novation because the true characterisation of events was that Mr Zhang, as purchaser, merely exercised a right to nominate Fortune as the entity to which Park Cho was to convey the property in fulfilment of the contractual obligation it owed to Mr Zhang. There was no suggestion that the contract described the purchaser as Mr Zhang “or nominee”. But even in the absence of some such feature of the contract, it was submitted, the purchaser enjoyed such a right of nomination.

2. [23]

   This may be accepted as an abstract proposition. In Lord v Trippe (1977) 51 ALJR 574, Aickin J referred (at 582) to the common conveyancing practice of providing in the contract that the transfer is to be made to the purchaser or its nominee, so that the purchaser has power to substitute a different transferee (as distinct from a different contracting party) and the vendor becomes bound to transfer to the nominee upon payment of the balance of purchase moneys and compliance with other provisions of the contract. Aickin J continued:

3. [24]

   The right of nomination thus enjoyed by a purchaser under a contract not containing any express “or nominee” provision is often referred to as a “common law right”. [5] It was so described by the Queensland Court of Appeal in Trust Company of Australia Ltd v Commissioner of Stamp Duties [2001] QCA 278; (2001) 47 ATR 418 (at [22]). [6] The distinction between, on the one hand, exercise of the right of nomination and, on the other, both assignment and novation of the contract was explained by the Queensland court by means of the following extract from a case note by Peter Butt [7] :

4. [25]

   The essence of the matter was identified by Mason J in Meehan v Jones (1982) 149 CLR 571; [1982] HCA 52 when he said (at CLR 594) that “the purchaser's nominee does not become a contracting party; the vendor and the purchaser continue to be the sole contracting parties, the nominee being the person who takes title by the conveyance or transfer”.

5. [26]

   In the present case, the contract did not identify the purchaser as Mr Zhang “or nominee”. But it did expressly contemplate the possibility that Mr Zhang might direct transfer by Park Cho to a third party. Clause 4.1 required the purchaser to serve the form of transfer on the vendor at least 14 days before the completion date. Clause 4.3 then provided:

6. [27]

   It was thus made clear that the purchaser who had entered into the contract could, in conformity with clause 4.1, tender a form of transfer naming a transferee other than himself. But that right or ability of the purchaser was not exercisable unless the purchaser gave to the vendor a direction complying with clause 4.3, that is, a direction “signed by the purchaser personally for this form of transfer” (being the form of transfer naming the other transferee).

7. [28]

   Clause 4.3 recognised but, at the same time, regulated the exercise of the purchaser’s right to nominate a transferee. The “common law right” was qualified accordingly. In the absence of “a direction signed by the purchaser personally”, any attempt by the purchaser to compel the vendor to convey to another person would fail and the vendor would not be bound to transfer to a transferee other than the purchaser. The express terms of the contract stipulated a particular and exclusive method of exercising the right of nomination. [8]

8. [29]

   Because there was not, on any view, compliance with clause 4.3, Fortune’s argument that it had merely exercised a right to nominate a transferee by direction is untenable. It therefore becomes necessary to determine whether, as the primary judge found, the case was in truth one of novation.

Novation – principles

1. [30]

   A statement of the nature of novation and of the elements that constitute it is found in the judgment of French CJ, Crennan, Kiefel and Bell JJ in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338; [2012] HCA 6 at [12]:

2. [31]

   Where, as here, there are two parties to the original contract (vendor and purchaser), a novation by which a new purchaser is introduced in the place of the original purchaser will not be established unless it is found that a subsequent “tripartite agreement” (to adopt the expression used by all members of the High Court in Olsson v Dyson (1969) 120 CLR 365; [1969] HCA 3 [9] ) was made among the two original parties and the incoming party (that is, the substituted purchaser). Essential elements of the tripartite compact are: first, agreement by the substituted purchaser with the vendor that, upon the vendor’s releasing the original purchaser from his obligation to purchase, the substituted purchaser will accept and perform, as against the vendor, the obligation to purchase undertaken at inception by the original purchaser (including, of course, the obligation to pay the balance of the purchase moneys); second, agreement by the vendor with the substituted purchaser both to sell to the substituted purchaser and to accept the substituted purchaser’s promise to perform the purchase obligation in place of the original purchaser’s; and third, agreement between the vendor and the original purchaser with the concurrence of the substituted purchaser, that the purchase obligation undertaken by the original purchase at inception is discharged.

3. [32]

   Also essential is an intention of the vendor to discharge the original purchaser. In earlier times, scholars struggled with that aspect. Often, a party agreeing to accept a substituted obligor would not expressly release the original obligor, with the result that the true position may have been that each obligor was under the obligation. [10] That matter was addressed in some detail by Windeyer J in his dissenting judgment in Olsson v Dyson (above). After referring to the way that Roman law had dealt with the “difficulty” of finding extinguishment of the original obligation of the departing party, Windeyer J said (at CLR 390):

4. [33]

   This statement concerning inference was expressly approved by the plurality in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (above) at [31] where it was pointed out that the same approach had been sanctioned by Dixon J in Vickery v Woods (above) at CLR 345:

5. [34]

   In the present case, therefore, if it is found that Park Cho had, with Mr Zhang’s acquiescence, agreed to accept the promise of Fortune to perform in place of Mr Zhang, so that an obligation to Park Cho inconsistent with Mr Zhang’s came into existence by agreement, that finding will be sufficient to ground a further finding that Park Cho released Mr Zhang.

Novation – assessment

1. [35]

   The main factual matters that the primary judge took into account on the novation issue are mentioned at [6] to [8] and [14] to [17] above. To those may be added, perhaps merely by way of emphasis, some further details drawn from the evidence. First, on 24 March 2016 (six days after exchange of contracts), LP submitted requisitions on title under cover of a letter to JL headed “Zhang – Purchase from Park Cho Pty Ltd”. JL provided answers to requisitions by letter dated 27 April 2016 headed “Park Cho Pty Ltd Sale to Fu Tian Fortune Pty Ltd”. Second, the letters of 4 May 2016 and 31 May 2016 from JL to LP enclosing the notice to complete and the notice of termination respectively were headed “Park Cho Pty Ltd Sale to Fu Tian Fortune Pty Ltd”. Third, in an affidavit of 10 May 2017, the solicitor for the then sole plaintiff (Fortune) referred to the contract of 18 March 2016 between Park Cho and Mr Zhang and said:

2. [36]

   Mr Zhang was asked in cross examination about a passage in his own affidavit that was not read in the plaintiffs’ case and was in terms identical with those just quoted from the solicitor’s affidavit. The cross examination concentrated for some time on conversations between Mr Zhang and his solicitor and culminated in answers by Mr Zhang that he had seen a copy of the contract with Fortune’s name in it as purchaser and that he understood from the solicitor that the vendor had agreed to Fortune becoming the purchaser of the property.

3. [37]

   In addition, of course, it is significant that the proceedings were commenced by Fortune alone by means of the summons filed on 10 May 2016. The statement of claim adding Mr Zhang as a plaintiff and propounding the thesis that he was in truth the purchaser was not filed until more than two months later (on 28 July 2016).

4. [38]

   In the light of the evidence and for the reasons that follow, the primary judge correctly held that there had been an effective novation.

5. [39]

   The statement in JL's email of 18 March 2016, within hours after exchange of contracts, that "we will be more than happy to change the purchasing entity's details on the front page" indicates that the possibility of later substitution of a new purchaser had been discussed even before the contract was made. Although the reference was, in an uninformed and simplistic way, to changing the “purchasing entity's details on” the document, the intention can only have been that a new “purchasing entity" was to replace the “purchasing entity” who had been party to the then recent exchange of contracts. For someone sitting alone simply to take a pen to the document and cross out one name and write another in its place would achieve nothing. The solicitors, although using inapt language, obviously intended to refer to some legally meaningful result – a result, it must be emphasised, that is shown to have been approved by their clients. The evidence of Ms Park (at [15] above) and that of Mr Zhang (at [36] above) establishes that substitution of a new purchaser for Mr Zhang was agreed by Park Cho, by Mr Zhang and, through him, by Fortune. Because he was Fortune's sole director, it had no mind but his. It can only have been Mr Zhang who agreed to JL’s informing LP on 5 April 2016 that “the purchaser’s name” was to be “amended to” the “name” of Fortune.

6. [40]

   The solicitors’ emails of 5 April 2016 not only identified Fortune as the entity to be substituted as purchaser but also evidenced an agreement among all three persons that Fortune was to purchase instead of Mr Zhang. In response to the statement in LP’s email that “the purchaser’s name is to be amended to” that of Fortune, JL said that there were “no issues” regarding “the change of entity”. Consensus had been reached. The objection (faintly taken by counsel for the appellants) that solicitors cannot be assumed to have authority to contract for their clients is overcome by the evidence that JL and LP acted in accordance with the wishes of their respective clients in exchanging the 5 April 2016 emails. It is true that the emails referred to "formalities . . . in relation to effecting the change" and indicated that JL would identify these “formalities” at a future time. But all essential elements of the agreement (including, crucially, the identity of the substituted purchaser) were settled by the 5 April 2016 emails and JL confirmed on that day that there were “no issues” regarding the change. If one approaches the matter by reference to the categories of agreement considered in Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72 at CLR 360, it is seen to be within the first category, that is, where the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, while at the same time proposing to have the terms restated in a fuller and more precise way which is not different in effect. In such a case, the agreement is immediately binding.

7. [41]

   That the intention on the purchasing side (that is, the intention of Mr Zhang and Fortune) was to be immediately bound by the exchange of emails on 5 April 2016 was demonstrated by later events. Requisitions on title had been submitted by LP on 24 March 2016 under the heading "Zhang - Purchase from Park Cho Pty Ltd". But subsequent letters sent by JL (dated 13 April 2016, 22 April 2016, 16 May 2016 and 18 May 2016) all identified Fortune as the purchaser. In that way, Mr Zhang and, through him, Fortune, demonstrated their acceptance of an ongoing intention to be bound by the substitution of Fortune for Mr Zhang as purchaser. They did so, moreover, in a way that showed the intention to be of immediate effect even in the absence of the undefined "formalities" to which JL had referred. Mr Zhang and Fortune confirmed that stance when they caused Fortune alone not only to lodge the caveat claiming an interest as purchaser under the 18 March 2016 contract (which the caveat identified as a contract made between Park Cho as vendor and Fortune as purchaser) but also to commence proceedings by the summons filed on 10 May 2017. [11]

8. [42]

   On the selling side of the transaction, Park Cho too showed acceptance of an ongoing intention to be bound by the substitution of Fortune for Mr Zhang despite the absence of the "formalities". It did so not only in the way its solicitors framed correspondence but also (and in particular) by the terms of the notice to complete and the notice of termination. These, like the caveat lodged by Fortune, referred to the contract of 18 March 2016 as a contract between Park Cho as vendor and Fortune as purchaser.

9. [43]

   As this Court confirmed in Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605; [2015] NSWCA 313 at [65], the question whether, in circumstances of this kind, an immediately binding contract has been formed is to be determined by reference to what each party by words and conduct would have led a reasonable person in the position of the other party to believe with regard to the commercial context and surrounding circumstances of the parties’ dealings. The court will pay attention to the parties’ subsequent actions in answering that question. The inference that an immediately binding contract has been formed will be drawn with particular confidence if the parties have conducted themselves in a way that, on balance, must be referable to the existence of a binding contract of the type alleged. [12]

10. [44]

    Given that, as Dixon J said in Vickery v Woods (above), “the crux of novation is intention” and that, as is emphasised by the decisions in Fightvision Pty Ltd v Onisforou (above) and McMahon v National Foods Milk Ltd (above), regard is to be had to the totality of the relevant conduct and dealings and the inferences to be drawn from them, the answer in this case is clear. From at least mid-April 2016, all actions of Park Cho, Mr Zhang and Fortune were entirely consistent with Fortune’s having become subject to the purchase obligation and Park Cho having, with Mr Zhang’s acquiescence, agreed to accept the promise of performance by Fortune. An obligation inconsistent with Mr Zhang’s came, by agreement, to supersede Mr Zhang’s. That, for reasons discussed, is sufficient to ground a finding that Park Cho released Mr Zhang and that Fortune became bound (and entitled) as sole purchaser in his place. [13]

Disposition

1. [45]

   Orders should be made as follows:

   1. (1)

      Appeal dismissed.

   2. (2)

      The appellants pay the respondent’s costs of the appeal.