Dandaloo Pty Ltd v Iali

By Further Amended Notice of Motion filed on 30 November 2017 the plaintiff in these proceedings seeks summary judgment, and, in the alternative, default judgment, on its Further Amended Statement of Claim filed on the same day. By that Further Amended Statement of Claim the plaintiff seeks specific performance and ancillary relief in respect of a contract for the sale of land at Harrington Park (“the land”). The plaintiff claims that that contract was made between itself and the first defendant on 24 April 2017, or alternatively 27 October 2016.

The proceedings were commenced by Summons on 1 March 2017. The first defendant initially took part in the proceedings, filing an Appearance on 1 April 2017, and being represented at directions hearings. The first defendant became a bankrupt on 4 May 2017 and the third defendant (“the Trustee”) was appointed as the Trustee of his Bankrupt Estate on that day. The first defendant’s solicitors filed a Notice of Ceasing to Act on 31 July 2017.

The Trustee was served with the plaintiff’s Amended Statement of Claim on 9 August 2017. Since that time, the Trustee has taken no steps in the proceedings and has not opposed the relief sought. The Trustee has not responded to any of the communications from the plaintiff’s solicitors

The second defendant is the Commonwealth Bank of Australia (“the Bank”), which has a registered mortgage over the land. A consent position has been reached between the plaintiff and the Bank whereby the plaintiff will not seek to disturb the Bank’s priority and will not seek any costs order against it, provided the Bank does everything necessary to enable settlement of the contract for sale upon which the plaintiff is suing. Consent orders to that effect were entered on 14 September 2017, which excused the Bank from further appearance and provided for no costs order as between it and the plaintiff.

On 14 September 2017 the Court also granted leave to the plaintiff to file a Notice of Motion seeking default judgment against the third defendant. The matter was stood over to 13 October 2017. A Notice of Motion for default judgment was filed on 15 September 2017.

Directions were made on 13 October 2017 for the plaintiff to provide a Court Book in relation to its motion. It was noted that the Court intended to deal with the motion on the papers. The plaintiff was directed to notify the first and third defendants of the orders made. Included in the plaintiff’s Court Book was an Amended Notice of Motion dated 18 October 2017 which primarily sought summary judgment, and default judgment in the alternative. The Amended Notice of Motion was served on the Trustee on 18 October 2017.

The plaintiff’s submissions relied on both the contract allegedly formed on 24 April 2017 and the alleged 27 October 2016 contract. The Amended Notice of Motion and Amended of Statement of Claim, however, only sought relief in relation to the April 2017 contract. The Court notified the plaintiff of that fact, which led to the filing of the Further Amended Notice of Motion and Further Amended Statement of Claim on 30 November 2017. Those pleadings seek relief in respect of both the alleged 24 April 2017 contract and the alleged 27 October 2016 contract. The Trustee and the Bank were served with the Further Amended Notice of Motion and Further Amended Statement of Claim on 1 December 2017.

No submissions or evidence on the motion have been received from any of the defendants, and no party has suggested that an oral hearing is necessary. In those circumstances, the Court will proceed to determine the motion on the papers.

The plaintiff carries on a business of residential property development. The plaintiff has undertaken a number of developments in the area of Harrington Park in south-western Sydney. The land was part of a development called the “Lomandra Rise Precinct”, which was part of a larger development known as “Harrington Grove”. The development is part of a community scheme, which is intended to ensure that each purchaser of land in the scheme builds premises within certain guidelines.

The first defendant exchanged contracts for the purchase of the land from the plaintiff on 18 June 2012, for a price of $325,000. Completion occurred on 27 June 2012, at which time the Bank took a first registered mortgage over the land. On 17 June 2012 the plaintiff as Original Owner and the first defendant as Purchaser entered into a “Purchaser’s Deed of Covenant” (“the Deed”). The relevant clauses of the Deed were:

The Acquisition Date was 27 June 2012, the date when the first defendant completed his purchase of the land. The Construction Commencement Date was accordingly 27 December 2013, and the Dwelling House needed to be complete by 27 June 2014. I note that there appears to be an inconsistency between the definition of Construction Period, which provides that it commences on the date of the Deed (17 June 2012), and clause 3.1(2), which provides that construction is to be completed within 24 months from the Acquisition Date (being 27 June 2012), which suggests that the Construction Period commences on the latter date. That inconsistency concerns the commencement date of the Construction Period; on either construction the required date for completion of construction was 27 June 2014.

The first defendant failed to “substantially commence” construction by 27 December 2013, or complete construction by 27 June 2014. On 14 June 2016 the first defendant still had not commenced construction at all. The plaintiff posted a Completion Notice on the first defendant on that day which included the following:

By 22 July 2016 the first defendant still had not commenced any construction on the Land. On 27 October 2016 the plaintiff’s solicitors sent a Sale Notice (“the First Sale Notice”) to the first defendant by express post which included the following:

It appears that the price stated in this Sale Notice was incorrect, as expenses and taxes had not been deducted from the price before 80% of that price was calculated, as required by the definition of Discounted Purchase Price.

Clause 13.1(2)(b) of the Deed provides that a notice sent by pre-paid mail is treated as being given and received on the third business day after posting. Accordingly, the First Sale Notice was served on 1 November 2016. By service on that day the plaintiff exercised the option to purchase which the first defendant had granted by cl 7.3(1) of the Deed. The plaintiff alleges that this created one of two contracts to buy back the land from the first defendant (“the First Buy-Back Contract”) which it now seeks to have specifically performed. By cl 7.3(3)(a)(ii), the completion date under the First Buy-Back Contract became 29 November 2016.

On 9 December 2016 the plaintiff served a notice to complete under the First Buy-Back Contract which included the following:

On 20 April 2017 the plaintiff’s solicitors sent a second Sale Notice (“the Second Sale Notice”) to the first defendant by express post. That Sale Notice included the following:

The Second Sale Notice is said to be a further exercise of the option granted to the plaintiff under the Deed, creating a second contract (“the Second Buy-Back Contract”). The Second Sale Notice was posted to the first defendant on 20 April 2017. Pursuant to cl 13.1(2)(b) of the Deed, the Second Sale Notice was thereby served on 26 April 2017. No notice to complete has been issued under the Second Buy-Back Contract. The evidence establishes that neither the first defendant nor the Trustee has complied with the notice to complete issued under the First Buy-Back Contract, nor performed the Second Buy-Back Contract.

Uniform Civil Procedure Rules 2005 (NSW)(“UCPR”), r 13.1(1) provides:

I am satisfied that there is evidence of the facts on which the plaintiff’s claim for specific performance is based for the purposes of r 13.1(1)(a). There is no reason to doubt that the first defendant executed the Deed, and that the first defendant has not performed his obligations under the Deed, the First Buy-Back Contract or the Second Buy-Back Contract.

The plaintiff submitted that it may seek relief on both the First and Second Buy-Back Contracts, and relied primarily on the Second Buy-Back Contract pursuant to which contained a differently calculated Discounted Purchase Price. It accepted that if the Court was against it on that point, it would be limited to the First Buy-Back Contract.

In my opinion, the plaintiff may only seek specific performance of the First Buy-Back Contract. The first defendant granted an option to purchase the land by cl 7.3(1) of the Deed. By service of the First Sale Notice on 1 November 2016, the plaintiff exercised that option and a binding contract for sale came into existence. A notice to complete that contract was issued on 9 December 2016, which is yet to be complied with. I do not consider that it is open to the plaintiff to exercise the option a second time by serving a second Sale Notice. The option which was granted by the Deed was exhausted by service of the First Sale Notice. In my view, there was no extant option capable of being exercised after that date.

However it is also my view that the plaintiff is not bound to pay the Discounted Purchase Price stated in the First Sale Notice. Upon exercise of the option a contract is formed pursuant to which the plaintiff acquires the Property for the Discounted Purchase Price. The price must be calculated in accordance with the applicable definition. It is not determined by a calculation contained in the Sale Notice.

In relation to r 13.1(1)(b), I am satisfied that this requirement has been complied with. Ms Emma McFarlane, solicitor for the plaintiff, swore an affidavit on 23 October 2017 in which she deposed to her belief that the first defendant and the Trustee have no defence to the plaintiff’s claim. Ms McFarlane also deposes to her belief that the Bank does not oppose the relief sought based on the consent position that has been reached.

The principles in relation to summary judgment are well established. The power is to be “exercised with great care and should never be exercised unless it is clear that there is no real question to be tried” (see Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 at 99). It is not appropriate for a proceeding to be dealt with summarily where there is a “real question to be determined whether of fact or law” (see Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91).

In Origin Energy Ltd v Smart [2016] NSWSC 1858 Slattery J stated at [62]:

The plaintiff submitted that none of the usual defences to a claim for specific performance would be available to the first defendant or to the Trustee. It further submitted that it was ready, willing and able to perform its part of the bargain and had demonstrated no delay in prosecuting its claim. It contended that the Court would accordingly enter summary judgment and grant specific performance.

No Defence has been filed by either the first defendant or the Trustee. As a result, the Court does not know what responses those defendants might raise against the plaintiff’s claim. In any event, I do not think it can be said that the ultimate outcome of the proceeding is so certain that the entry of summary judgment would be appropriate.

At the very least I consider that it would be open to the first defendant and the Trustee to seek to challenge the enforceability the First Buy-Back Contract by contending that cl 7 of the Deed is an unenforceable penalty clause. By cl 7 of the Deed the first defendant granted to the plaintiff the right to repurchase the Land at the Discounted Purchase Price upon service of a valid Sale Notice. The enforceability of the First Buy-Back Contract is therefore dependent upon the enforceability of cl 7.

In the present case, the plaintiff claims that the first defendant breached cl 3.1 of the Deed by failing to undertake construction works on the Land within the required timeframe. Following service of a Completion Notice, and thereafter a Sale Notice, the plaintiff is able to cause the first defendant to sell the land back to it under a Buy-Back Contract created by the exercise of the option granted by cl 7.1. Pursuant to the definition of Discounted Purchase Price, the buy-back price is the lesser of the market value at the time of service of the Sale Notice, and 80% of the original purchase price once the Original Owner’s expenses and taxes are deducted.

In Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 the High Court stated (at [10]):

Upon failure of the purchaser to construct the Dwelling House within the Construction Period, and after service of a Completion Notice and a Sale Notice, the plaintiff is able to compel the reconveyance of the Land to it. In circumstances where the value of the land has significantly decreased since entry into the accompanying contract for sale, the plaintiff is likely to pay a price reflecting that value. However, where (as here) the value of the land has increased, the plaintiff is only required to pay 80% of the original contract price (less expenses and taxes). Depending on market conditions, that may be productive of a significant windfall gain to the plaintiff.

In my opinion, it would be open to the first defendant or the Trustee to contend that the prospect of repurchase at the Discounted Purchase Price pursuant to cl 7 should be characterised as a collateral stipulation in the nature of a security for and in terrorem of satisfaction of cl 3.1 of the Deed, and penal in nature by being “extravagant and unconscionable” and “out of all proportion” to the interests of the party which it is the purpose of the provision to protect (see Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; [2005] HCA 71 at [32]; Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 at [29], [57], [154], [156], [250], [319]-[320]). Although the contention that cl 7 of the Deed is a penalty may not be a strong one, I do not regard it as “so obviously untenable that it cannot possibly succeed” (see General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129-130).

A contractual scheme in which one party was granted an option to purchase real property, which could be exercised upon default by the other, was recently considered by the Court of Appeal in Australia Capital Financial Management Pty Ltd v Lindfield Developments Pty Ltd (2017) 18 BPR 36,683; [2017] NSWCA 99. Ward JA (as her Honour then was, and with whom McColl and Gleeson JJA agreed) concluded (at [371]) that the “Call Option was not penal in its operation”. More importantly for present purposes, her Honour noted (at [323]-[330]) an uncertainty as to whether a strictly prospective approach to the assessment of whether a clause is penal applies where an impugned collateral stipulation requires the transfer of real property pursuant to a call option, rather than the payment of money (see also Ringrow Pty Ltd v BP Australia Pty Ltd (supra) at [21]-[22]). This potential uncertainty further persuades me that summary judgment is not appropriate in the present case.

I therefore decline to grant summary judgment on the plaintiff’s claim.

The plaintiff seeks default judgment in the alternative to summary judgment. UCPR, r 16.3(1) provides:

UCPR, r 16.10 states:

Rule 16.10 empowers the Court to grant default judgment in proceedings where relief such as specific performance is sought, which is not covered by rr 16.4-16.8. Where such relief is sought, the Court retains a discretion whether to enter default judgment (see Termijtelen v Van Arkel [1974] 1 NSWLR 525 at 529-31, 534-5).

In my view, the evidence adduced by the plaintiff is sufficient to establish a basis for default judgment to be entered on its claim for specific performance. The First Buy-Back Contract concerns an interest in land and is therefore amenable to specific performance. There is evidence to support the existence of the Deed, service of the Completion Notice on 14 June 2016, and service of the First Sale Notice on 1 November 2016. Those matters support the existence of the First Buy-Back Contract. There is evidence that the first defendant and the Trustee have never commenced any construction on the Land, and have failed to perform the First Buy-Back Contract.

I accept the plaintiff’s submission that the Trustee was the relevant defendant following the first defendant’s bankruptcy on 4 May 2017 (see Bankruptcy Act 1966 (Cth), s 58(1)(a)). The Trustee was served with the Amended Statement of Claim on 9 August 2017 and the Further Amended Statement of Claim on 1 December 2017. He has not filed an Appearance or Defence since being served with the Amended Statement of Claim on 9 August 2017 and is therefore in default (see UCPR, r 16.2(1)(a)).

The first defendant’s bankruptcy is no bar to the plaintiff obtaining default judgment on its specific performance claim. The plaintiff’s claim is for the enforcement of a contractual right against the first defendant which does not concern any provable debt. There is accordingly no bar to the plaintif’s suit and no requirement for leave to proceed under s 58(3) of the Bankruptcy Act 1966 (Cth).

Finally, I accept the plaintiff’s submission that none of the discretionary defences to a claim for specific performance are raised on the evidence currently before the Court. In the absence of a Defence, the plaintiff is presumed to have been ready, willing and able to complete (see UCPR, r 14.11; Dalswinton Pastoral Company Pty Ltd v Cole [2006] NSWSC 570 at [11]).

The Court will proceed to enter default judgment against the Trustee on the plaintiff’s claim for specific performance of the First Buy-Back Contract.

The plaintiff seeks an order that the Trustee pay its costs of the proceedings, and that those costs be set off against the Discounted Purchase Price payable by the plaintiff under the First Buy-Back Contract. Ms McFarlane deposed that the plaintiff’s costs up to and including the submission of the Court Book to my Chambers are $56,965.40. It submits that that figure ought be set-off against the Discounted Purchase Price of $260,000, resulting in a net payment of $203,034.60 to the Trustee.

The plaintiff submits that the appropriateness of this course was confirmed by Young J (as his Honour then was) in Wentworth v Wentworth (Supreme Court (NSW), Young J, 12 December 1994, unrep)(affirmed on this point in Wentworth v Wentworth (Court of Appeal (NSW), Priestley and Clarke JJA, Grove AJA, 21 February 1996, unrep)) where his Honour stated:

This species of set-off is founded on the inherent jurisdiction of the Court. It is “an inherent discretionary power in the Court to order set-off of costs orders when it is equitable to do so” (see Miller v Director of Public Prosecutions (No 2) [2004] NSWCA 249 at [23]). Its basis is the “general jurisdiction of the Court over the suitors in it” (see Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd (2006) 230 ALR 184; [2006] NSWSC 560 at [70]; see also New South Wales v Hamod [2011] NSWCA 376 at [35]-[36]). It is distinct from what is referred to as true equitable set-off (see Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451; Re Just Juice Corporation Pty Ltd (1992) 37 FCR 445).

However, the Discounted Purchase Price (where the applicable price is not the market value of the land) is to be calculated by “deducting Expenses and Taxes from the price at which the Purchaser bought the Property” ($325,000), and then determining 80% of that sum. “Expenses” means all costs, expenses fees and charges payable by the plaintiff in connection with the buy-back of the Property in accordance with the terms of the Deed and includes “legal costs (on a full indemnity basis)” and “any court and enforcement costs incurred in enforcing the rights of the Original Owner under the terms of this deed”. In my view, the plaintiff’s costs of these proceedings would fall within “Expenses”, and therefore would be able to be included in the calculation of the Discounted Purchase Price which is payable under the First Buy-Back Contract. Given the express reference to “a full indemnity basis”, it would seem to me that the plaintiff is entitled to deduct the full amount of its costs of the proceedings ($56,965.40) as part of that calculation.

That being so, the costs of these proceedings do not need to be (and are incapable of being) set-off against the Discounted Purchase Price payable by the plaintiff.

The Court will enter default judgment in favour of the plaintiff against the third defendant pursuant to UCPR, r 16.10. The judgment will be in the nature of orders for specific performance of the First Buy-Back Contract which came into existence on 1 November 2016. The Discounted Purchase Price under that contract will be calculated on the basis that the plaintiff is entitled to include its costs of the proceedings in the amount of $56,965.40 as Expenses.

The Court will make the following orders: