Ipsofactoj.com: International Cases [2000] Part 3 Case 6 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Issac Construction Co Ltd

- vs -

McDonald

HENRY J

GALLEN J

DOOGUE J

4 DECEMBER 1997


Judgment

Doogue J

THE ISSUE

  1. At issue in this appeal is whether a sub-purchaser of part of a block of land has an equitable interest capable of enforcement by specific performance against a subsequent purchaser of the whole of the land. The issue turns on whether the sub-purchase agreement formed a severable part of the head contract capable of performance and whether the subsequent purchaser took over the liabilities of the original purchaser.

    THE FACTS

  2. A Mr. and Mrs. Clarke owned two adjoining blocks of land. One comprised some 240 hectares. On 30 April 1992 they agreed to sell it to a Mr. and Mrs. Bartlett ("the head contract"). It was a term of the head contract that the Bartletts would take all necessary steps to deposit a subdivision plan in accordance with an existing scheme plan. The purchase price of $585,000 plus GST was to be "paid on title at the rate of $47,916.66 plus GST per lot as per attached scheme plan" with provision for a final settlement date in respect of the payment of the total purchase price. On 23 December 1992 the Bartletts and the Clarkes entered into a second agreement relating to the adjoining 192 hectare block.

  3. The sub-purchase agreement was made on 29 January 1993 between the Bartletts and the respondent ("McDonald"). McDonald agreed to buy from the Bartletts 20 hectares, described as Lot 5 of a subdivision on an attached scheme plan, for $75,000. The undated scheme plan attached showed a subdivision of 12 lots each of approximately 20 hectares. It was clear that areas and dimensions were approximate and subject to local authority approval and final survey. However, unbeknown to McDonald, the Bartletts actually intended a two-stage subdivision with Lot 5 part of the second stage.

  4. The Bartletts proceeded with the first stage of the subdivision only, which excluded Lot 5.

  5. McDonald believed that the scheme plan attached to his contract had been approved subject to certain local authority conditions as the Bartletts’ solicitors so advised on 25 March 1993. Final approval was confirmed to McDonald on 1 December 1993. As a result of that confirmation, McDonald believed title could be given as soon as the requisite survey plans had been completed and paid the deposit in respect of Lot 5.

  6. McDonald had been misinformed by the Bartletts’ solicitors as the plan approved by the local authority was the stage one plan which did not include Lot 5.

  7. The position at 16 December 1993 was that all conditions relating to the sub-purchase contract had been met subject to certain conditions relating to the supply of water and the provision of a sealed road, and, unbeknown to McDonald, no approval of the local authority had been given to the subdivision of Lot 5.

  8. It was not until late in April 1994 that McDonald became aware of the staged development of the subdivision. By then the Bartletts had entered into a number of agreements for sale and purchase of various lots involved in the subdivision of the land. Settlement in full of the head contract was due on 10 May 1994, when the amount required to settle was $650,915.92. Only preliminary survey work had been completed by July 1994. Some time about then the settlement date was extended to 28 February 1995 on certain conditions, but the Bartletts were unable to comply with those conditions and settlement did not take place.

  9. The first interest of the appellant ("Isaac") in the land arose in June 1994, when it became the possible roading contractor for the subdivision. Ultimately because of the Bartletts’ financial problems Isaac decided that it was interested in taking over the subdivision, provided it had complete control and ownership of the land and that it would not be exposed to claims arising from any of the contracts entered into by the Bartletts. There were negotiations with the Bartletts. As a result of these and other negotiations, Isaac on 22 December 1994 entered into a conditional agreement with the Clarkes to purchase the land the subject of the head contract and the adjoining block. Isaac had to receive from the Bartletts their written surrender of the head contract and the contract relating to the adjoining land with the Clarkes. Isaac had to be satisfied that the arrangements for the sale of the lots into which the property would be subdivided were satisfactory to it. The local authority approval to Stage I of the subdivision had to be assigned to Isaac.

  10. On 31 January 1995 the Bartletts entered into an agreement with Isaac. It contained conditions for the benefit of Isaac but waivable by it that

    1. Isaac receive from the Bartletts their written surrender of the head contract and that for the adjoining land

    2. The Bartletts cancelling the sub-purchase agreements for Lot 5 and other lots

    3. The assignment of the local authority consent to Stage I of the subdivision

    4. The contract of 22 December 1994 between Isaac and the Clarkes becoming unconditional

    5. The Bartletts’ confirmation of the cancellation of sub-purchase agreements for other lots

  11. Subject to Mr. Bartlett’s being authorised to do so the contract gave the Bartletts the exclusive right for 12 months to sell certain lots in Stage I and the balance of the land if local authority approval to its subdivision was obtained. It was noted Lot 5 was subject to a conditional contract. It was spelt out Mr. Bartlett would be an independent contractor entitled to a commission on sales. Provision was made for the Bartletts to retain deposits paid to date on certain lots and in the event of their being refundable for Isaac to do that. Provision was made for profits of the subdivision to be shared ,with the Bartletts being entitled to the first $100,000 after the payment of all costs and the balance being shared equally between Isaac and the Bartletts.

  12. The local authority consent for Stage I was assigned to Isaac.

  13. McDonald was offered the opportunity by the Bartletts of release from his contract if he wished, to allow him to proceed with the purchase of Lot 5 at a higher purchase price or to purchase one of the other unsold lots. McDonald at all times rejected proposals such as those and asserted the existence of a valid contract to buy Lot 5 in accordance with his original agreement.

  14. McDonald registered a caveat on 2 February 1995 against the 240 hectare block which included Lot 5.

  15. On 3 February 1995 the Bartletts and the Clarkes agreed to release each other from their obligations under the head contract and the contract relating to the adjoining land. No further steps had been taken by the Bartletts to complete the subdivision or deposit a plan relating to Lot 5 and they did not have the funds to do so. Although the Bartletts had not cancelled the sub-purchase agreement and Isaac knew of this, Isaac confirmed its contract with the Clarkes on 3 February 1995.

  16. On 2 March 1995 McDonald learned for the first time that the Bartletts’ solicitors’ advice in December 1993 that the subdivision was approved was wrong. McDonald agreed to the transfer from the Clarkes to Isaac subject to his caveat remaining in place. Isaac completed its contract with the Clarkes on 3 March 1995 and took title to the land.

  17. No approval has ever been given by the local authority to a subdivision enabling a separate title to be given for Lot 5 as described in the sub-purchase agreement. However, in May 1995 Isaac obtained consent from the local authority to a subdivision containing two lots generally corresponding with Lot 5 but 1.33 hectares larger which the local authority required to be in one title.

  18. Isaac and McDonald were at no time able to reach agreement and the litigation followed in November 1995, with Isaac seeking to remove McDonald’s caveat and McDonald counterclaiming for specific performance of the sub-purchase agreement. By that time Mr. Bartlett was bankrupt.

    THE LAW

  19. There is really no dispute about the law. The dispute is about the application of it to the facts. As was made clear by Lord Chelmsford in Shaw v Foster (1872) LR 5 HL 321, 333, when a contract for sale is signed, the vendor becomes a trustee of the estate for the purchaser and the purchaser a trustee of the purchase money for the vendor, with it being competent for the purchaser to assign the benefit of the contract to another, and upon notice being given to the vendor of such assignment the vendor would be bound to protect and give effect to it. Lord O’Hagan said in the same case (349-350) that a sub-purchaser may obtain specific performance of a head contract, at least insofar as the sub-purchaser "assumes the position of the vendee" under the head contract "and fulfils the duties and sustains the liabilities created by the [head] contract". An example of the application of these principles is Naismith v Smith [1954] ALR 965: [1954] VLR 567.

  20. It has also been clear law for an equally long time that "it may be possible to construe a contract which contains several parts as being in effect several separate and distinct contracts so that the enforcement of one is independent of the others" (Hanbury and Maudsley Modern Equity (13th edn, 1989), page 671, citing Wilkinson v Clements (1872) LR 8 Ch 96). There was no problem in Wilkinson v Clements in the sub-assignee obtaining performance of the head contract relating to the part because, in the words of Sir W.M. James LJ, 107, "The contract is made in its terms a divisible contract". That was a case of leases of severable properties. It was, however, essential to the relief granted to the sub-assignee that the relevant duties and liabilities of the sub-assignor under the head contract in respect of the severable part of the property had been fulfilled.

    THE PROCEEDINGS

  21. The proceedings first came before Tipping J on an interlocutory application that McDonald’s caveat not lapse (McDonald v Isaac Construction Ltd [1995] 3 NZLR 612). He made an interim order to that effect. He held that a sub-purchaser even as to part of a piece of land had an equitable interest and is entitled to caveat the land.

    After discussing the relevant law, particularly with reference to Spry on Equitable Remedies (3rd edn, 1984), page 80 (see now 4th edn, 1990, pp 84-85), he concluded (at 618):-

    .... it is arguable that they [Isaac] cannot deny Mr. McDonald the right as sub-purchaser to seek the independent enforcement of his divided part of the original contract.

    No final conclusion is possible until the facts and the law on this point have been explored in greater depth.

    The Judge was concerned only with whether McDonald had a sufficient equitable interest to justify a caveat and not whether there was an enforceable interest against Isaac.

  22. That issue came before a different Judge, who in the decision under appeal of 2 May 1997 said this (16-17):-

    The facts in the present case are stronger in favour of McDonald than those in Wilkinson v Clements. No doubt the requirement of mutuality in the general case of a sub-purchase is that the head vendor should not lose the benefits of his contract at the suit of a Plaintiff with whom he had no contractual arrangement. However, in this case, not only has the subdivision been carried out but Mr. and Mrs. Clarke have been paid the full purchase price.

    Had no subdivision taken place and had it been established that the consents of the local authorities could not be obtained, the contract would have ceased to have effect because of the failure of a condition. That is not the case and there is no reason why McDonald’s contract should not give him an equitable interest in the land. Isaac, having purchased with full notice of that equitable interest, should be bound by it.

    The Judge then went on to find that the equitable interest of McDonald had not been extinguished and said (18):-

    In this case Isaac is not the vendor but it acquired the land with full knowledge of McDonald’s contract. It could be described as a substitute vendor. The question is one of competing equities. McDonald’s equity was first in time. There was no necessity for Isaac’s subdivision to alter the description of lot 5. Obviously McDonald’s equity should prevail.

  23. The Judge then noted that it was not an absolute bar to an order for specific performance if the contract could be substantially performed, and held that the present Lot 5 with an additional 1.33 hectares was sufficiently similar to the land originally agreed to be conveyed to enable the contract to be specifically performed with provision for compensation if appropriate. He ordered an enquiry into the issue of compensation, if any, for any extra area of land beyond that described in the contract and into equitable damages, if any.

    REASONS FOR DECISION

  24. The first issue is whether the Bartletts (and thus McDonald) were at any stage in a position to call for partial settlement of the head contract by the Clarkes (and thus Isaac) in respect of Lot 5 when they had not obtained a subdivision approval in respect of it and had not obtained title in respect of it. It is understandable that because of the derivative nature of the sub-purchaser’s interest McDonald was treated in the Court below as being in the same position as the Bartletts. What was perhaps less understandable was that the Court treated Isaac’s actions in achieving an ultimate subdivision of the land and title to two lots which equated with the original Lot 5 as if that was performance on the part of the Bartletts or McDonald in respect of the contract with the Clarkes. The Clarkes were never under any duty to subdivide the land. That obligation was on the Bartletts. Isaac only took action to subdivide the area of Lot 5 out of the land when the contract between the Clarkes and the Bartletts had been cancelled. McDonald never had any rights in respect of the contract between the Clarkes and Isaac. His only rights arose in respect of the contract between the Bartletts and the Clarkes. As neither the Bartletts nor McDonald were ever in a position to perform the Bartletts’ obligations to obtain title in respect of Lot 5, the Clarkes at no time held the land subject to a trust in relation to Lot 5 binding upon Isaac. The requirement that Isaac, as the purchaser from the Clarkes, should hold the land the subject-matter of the original Lot 5 on trust for McDonald was necessarily dependent upon the Bartletts or McDonald fulfilling the Bartletts’ duties or obligations under the head contract to entitle them to title to Lot 5 as against the Clarkes and therefore against Isaac. Neither the Bartletts nor McDonald ever did or could put themselves in the position where the Clarkes were under any duty to provide title to Lot 5 independently of the whole of the land. Nor were the Bartletts or McDonald ever in a position where they could call upon the Clarkes to give title to the whole of the land in favour of the Bartletts and thus enable McDonald to obtain title to Lot 5. It does not matter in this case whether the position is dealt with in accordance with the Wilkinson v Clements principles or the general principles stated in Shaw v Foster. Whichever way round the facts of the case are looked at, there was never any performance of the Bartletts’ obligations under the head contract which required the Clarkes to hold Lot 5 in trust for McDonald. As no trust was imposed upon Lot 5 in favour of McDonald vis-à-vis the Clarkes, there can be no obligation upon Isaac in respect of it directly arising out of the purchase from the Clarkes.

  25. The second issue is whether Isaac is liable to McDonald as a result of taking over the Bartletts’ interest, as well as that of the Clarkes in the head contract and hence the sub-purchase contract. The argument is put in different ways. Essential to it is the submission that Isaac knew of McDonald’s interest in Lot 5 and took the land subject to that equity. It is submitted that Isaac took over the Bartletts’ interest by virtue of the agreement of 31 January 1995 and that it constituted a joint venture or partnership arrangement. It is acknowledged for McDonald that agreement did not assign the Bartletts’ interest in the head contract to Isaac. It is said nevertheless that the nature of the transactions between Isaac and the Clarkes and the Bartletts was such that Isaac must be bound by the sub-purchase agreement.

  26. Ultimately this submission stands not on the agreement between Isaac and the Bartletts but upon Isaac’s waiver of the condition of that agreement that the Bartletts would cancel the sub-purchase agreement with McDonald.

  27. The agreement between Isaac and the Bartletts, like the agreement between Isaac and the Clarkes, made clear that Isaac did not enter into any of the Bartletts’ obligations in respect of the head contract or the sub-purchase agreement. It is quite impossible to read into the agreement any opposite intention. It does not matter therefore how the agreement between Isaac and the Bartletts is categorised. Its terms negate any taking over of the Bartletts’ obligations under either the head contract or the sub-purchase agreement.

  28. The waiver of the condition that the Bartletts would cancel the sub-purchase agreement with McDonald cannot constitute an acceptance by Isaac of the Bartletts’ obligations under the head contract or indeed the sub-purchase agreement. It did mean that Isaac took a risk that McDonald may have enforceable rights against Isaac. It did not and could not mean that Isaac took over any obligations of the Bartletts.

  29. The problem for McDonald is that there was no approval of a subdivision containing Lot 5 at the time of the sale from the Clarkes to Isaac. Isaac was never liable to undertake the Bartletts’ obligations under the head contract. McDonald’s equitable interest was never enforceable as it was dependent on the Bartletts being entitled either to title for Lot 5 or to completion of the head contract and neither event occurred. The acquisition by Isaac did not alter that situation.

  30. The result is the appeal must succeed.

    JUDGMENT

  31. The order for specific performance is set aside and McDonald’s counterclaim is dismissed. There will be an order removing McDonald’s caveat registered against the land now owned by Isaac. Isaac is entitled to costs both in this Court and the Court below. In the High Court they are fixed in the sum of $3,000 together with court fees, witnesses’ expenses and reasonable disbursements to be fixed by the Registrar. In this Court McDonald is to pay Isaac $5,000 costs together with reasonable disbursements including the reasonable costs of a single counsel’s travel and accommodation and in the event of disagreement such disbursements are to be fixed by the Registrar.


Cases

McDonald v Isaac Construction Ltd [1995] 3 NZLR 612; Shaw v Foster (1872) LR 5 HL 321; Naismith v Smith [1954] ALR 965: [1954] VLR 567; Wilkinson v Clements (1872) LR 8 Ch 96

Authors and other references

Hanbury and Maudsley Modern Equity (13th edn, 1989)

Spry on Equitable Remedies (3rd edn, 1984)

Representations

S.R. Maling with M.J. Logan for appellant (instructed by Lane Neave Ronaldson, Christchurch)
C.B. Atkinson, Q.C., for respondent (instructed by Ralph Thompson Shaw & Thompson, Christchurch)


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