Date for assessment of vendor’s damages and receivers and managers’ costs liability

The proper measure of a vendor’s damages under a contract for the sale of land

Ng & Anor v Filmlock Pty Ltd & Ors [2014] NSWCA 389

This decision by the New South Wales Court of Appeal discusses the proper measure of a vendor’s damages under a contract for the sale of land where the purchaser repudiates the contract and the vendor later re-sells the property. 

On 21 November 2005, the Appellants (purchaser) entered into an option deed with the Respondents (vendor), under which they were granted an option to purchase a property owned by the Respondents.  On 13 August 2007, the purchaser exercised the option, and the purchaser and the vendor entered into a contract with respect to the property for a purchase price of $7,210,000. 

On 14 April 2008, the vendor served a notice to complete on the purchaser, which required the purchaser to complete the contract by 2 May 2008.  The purchaser did not complete by 2 May 2008 and so, on 5 May 2008, the vendor terminated the contract on the basis of the purchaser’s repudiation.  Approximately 13 months later, the vendor re-sold the property for $3,100,000.  The vendor then commenced Court proceedings against the purchaser (and guarantors) claiming damages by reason of the purchaser’s failure to complete the contract. 

The contract provided that, in the event of termination, the vendor could sue for damages calculated by one of two methods:

1. if the property was resold within 12 months of the date of termination, the vendor could sue to recover the deficiency on resale and the reasonable costs and expenses arising out of the purchaser’s non-compliance with the contract; or
2. otherwise, the vendor could sue to recover damages for breach of contract.

At first instance, the Supreme Court of New South Wales found that the measure of the vendor’s loss was the difference between the purchase price payable under the contract ($7,210,000) and the net amount received when the property was resold ($3,100,000) plus interest until the date of judgment.

The purchaser appealed the decision at first instance and argued that the vendor was only entitled to damages calculated as the difference between the price payable under the contract ($7,210,000) and the true value of the property as at the date the contract was terminated (5 May 2008) and not when it was resold some 13 months later.

The New South Wales Court of Appeal held that the Supreme Court at first instance had erred by assessing damages by reference to the resale price.  The Court also held that, as the property was resold later than 12 months after the contract was terminated, the contract did not permit the vendor’s damages to be assessed in this manner. 

The Court of Appeal confirmed the general rule that damages for breach of a contract for sale of land are assessed as at the date of breach of the contract, which is usually addressed by comparing the contract price with the value of the land at the time of the purchaser’s breach.  It was also said that just because a sale of land might take longer than the sale of other types of assets, that does not of itself justify a departure from the general rule.  Accordingly, the critical date was the date when the bargain was lost, in this case, the date when the vendor exercised its right to terminate the contract for breach on 5 May 2008. 

Gleeson JA, in obiter, commented that the general rule “is not inflexible” and that the “the general rule will yield if ‘in particular circumstances, some other date is necessary to provide adequate compensation’”. 

The Court of Appeal allowed the appeal, set aside the orders at first instance and, as there was no evidence as to the value of the property as at the date of termination, remitted the matter to the Supreme Court of New South Wales for the purpose of the parties adducing evidence as to this and then recalculating the damages to which the vendor is entitled.  

Recently, the Queensland Court of Appeal cited this decision with approval in Baguley v Lifestyle Homes Mackay Pty Ltd [2015] QCA 75.

Vendors and agents should therefore be aware that, subject to the specific provisions of the contract, where a contract is terminated by reason of the purchaser’s repudiation, the usual amount of the vendor’s damages will be the difference between the contract price and the value of the property at the time of the breach, unless the particular circumstances of the case require that a departure from that rule is necessary to provide adequate compensation for the breach.  The onus will fall on the party claiming a departure from the general rule to prove that such a departure is necessary. 

The costs liability of receivers and managers who bring proceedings in the name of and on behalf of a company

Juniper Property Holdings No 15 Pty Ltd v Caltabiano [2015] QSC 95 per Jackson J

This decision discusses the form of costs orders that may potentially be obtained against receivers and managers that have commenced a proceeding in the name of and on behalf of a company. 

The background to the proceeding was as follows:

• The parties entered into a contract for the defendant to purchase a penthouse in the plaintiff’s “Soul” development at Surfers Paradise for $16,850,000.
• Settlement of the contract was due on 10 September 2012, but the defendant failed to settle.
• Pursuant to a notice to complete, the defendant was required to settle on 18 October 2012, but the defendant failed to settle.
• On 25 October 2012, receivers and managers were appointed to the rights, property and undertaking of the plaintiff by its secured creditor (National Australia Bank Ltd (NAB)).
• Pursuant to a further notice to complete, the defendant was required to settle on 19 March 2014, but the defendant failed to settle.
• On 19 March 2014, the plaintiff terminated the contract.
• On 5 June 2014, the receivers and managers commenced the proceeding in the name of and on behalf of the plaintiff, in which they claimed:
  • that the plaintiff validly terminated the contract;
  • that the deposit of $1,685,000 is forfeited;
  • pursuant to the contract, interest at the rate of 15% on the purchase price from the date for settlement of the contract (10 September 2012) until termination (19 March 2014);
  • damages for breach of contract, being the difference between the purchase price and the market value of the penthouse on 19 March 2014 plus holding costs and expenses; and
  • interest.
• The defendant defended the proceeding and alleged that the plaintiff made representations that were false or constituted misleading or deceptive conduct, and elected to rescind the contract and seek repayment of the deposit.

Given the significance of the debt owed to the plaintiff’s secured creditor, the Court inferred that there will be a significant deficiency in the plaintiff’s assets to meet the claims of its unsecured creditors. 

On 29 January 2015, the defendant sought an undertaking from the receivers personally to meet any costs order made in favour of the defendant in the proceeding.  However, no undertaking was provided.

The defendant did not file an application seeking security for costs.  Instead, the defendant filed an application seeking a declaration that the receivers and managers appointed to the plaintiff be made jointly and severally liable to the defendant in respect of:

• any costs order made in favour of the defendant in the proceeding; or alternatively
• any costs order made in favour of the defendant in the proceeding that was not satisfied by the plaintiff within 28 days of it being called upon to pay.

The defendant submitted that he did so because any order for costs that might be made against the plaintiff in the defendant’s favour would only amount to an unsecured debt in the plaintiff’s insolvent administration.  The defendant submitted that this gave rise to an inequity because:

• the receivers and managers had brought the proceeding in the name of and on behalf of the plaintiff for the benefit of NAB;
• the receivers and managers were likely to be indemnified by NAB but refused to provide the requested undertaking; and
• this resulted in a situation where the secured creditor is free from the risk of an adverse costs order, yet will benefit from the litigation instituted by its appointed receivers and managers.

However, Justice Jackson dismissed the defendant’s application.  In doing so, His Honour found that:

• In some respects, the defendant overstated the position as Knight & Anor v FP Special Assets confirmed that the Court’s statutory power to award costs included the power to make an order for costs against a receiver as a non-party to the litigation in certain circumstances.
• The liability for costs that the defendant sought to establish was conditional, that is, it would only be applicable if an order for costs was actually made in the future against the plaintiff and in favour of the defendant.That costs liability may or may not eventuate.
• However, having regard to previous authority, a declaration about such matters cannot be made in advance of the Court’s exercise of the discretionary power to make an order for costs.
• The defendant could or should have brought an application for security for costs before making the application.
• The question posed by the defendant in the application was not a real question, or was a hypothetical question.Indeed, the Court cannot know in advance all of the facts that might affect whether future costs should be paid by the receivers and managers as non-parties.

This case highlights that receivers and managers are not free from risk of an adverse costs order; and that defendants to such litigations should pursue, if appropriate, an application seeking security for costs instead of any form of pre-emptive order as to possible future costs. 

For more information or discussion, please contact HopgoodGanim Lawyers' Dispute Resolution team.