Paul Richard Tarling and Shirley Anne Tarling v Mogdon Investments Pty Limited [1986] ACTSC 82 (11 September 1986)

SUPREME COURT OF THE ACT

PAUL RICHARD TARLING and SHIRLEY ANNE TARLING v. MOGDON INVESTMENTS PTY.
LIMITED S.C. No. 1004 of 1986
Sale of Land

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Miles C.J.(1)

CATCHWORDS

Sale of Land - agreement to sell land and construct dwelling house - whether seller entitled to give notice to complete when building not constructed in accordance with agreement - whether buyer entitled to rescind or terminate.

R v. Hudson & Ors. (1985) 63 ALR 257

Neeta (Epping) Pty. Ltd. v. Phillips (1974) 131 CLR 287

Turner v. Labafox International Pty. Ltd. [1974] HCA 41; (1974) 131 CLR 660

McNally & Ors. v. Waitzer (1981) 1 NSWLR 294

HEARING

CANBERRA
11:9:1986

DECISION

The plaintiffs proceed by way of originating summons seeking certain declarations relating to their rights arising from an agreement for the purchase and sale of a Commonwealth lease. Amongst other things the plaintiffs seek a declaration that the plaintiffs are entitled to terminate the agreement and thereupon to recover the deposit paid by them and damages, or alternatively a declaration that the plaintiffs are entitled to rescind the agreement and thereupon to recover the deposit paid by them. The plaintiffs seek also a declaration that a notice to complete given by the defendant to the plaintiffs is invalid.

2. The agreement is dated 22 November 1985. The plaintiffs are named as the buyers and the defendant as the seller of the unexpired residue of the lease from the Commonwealth of land being Block 26 Section 16 situated in Rose Scott Circuit, Chisholm in the Australian Capital Territory and registered in Register Book Volume 994 Folio 77.

3. The agreement is in the common printed form in use in the Australian Capital Territory and special conditions are attached. The relevant standard clauses are:

"15. NEW PREMISES

Where the Crown Lease contains a building and
development covenant which has not been complied
with at the date this agreement is made the Seller
agrees that in order to procure the issue of the
Final Certificate and the Certificate of Lease
Compliance referred to in clause 14, he will at
his own expense prior to completion of this
agreement and as soon as practicable-
(1) complete the construction of the
Improvements
in a good and workmanlike manner
substantially
in accordance with the plans and
specifications now approved by the Building
Controller under the Building Ordinance and
(2) do perform and complete all such other
acts, matters and things as may be
necessary to satisfy the Minister that the
building and development covenant has been
complied with.

18. ERROR OR MISDESCRIPTION

No error of any kind or misdescription of the
property shall annul the sale but compensation if
demanded in writing before completion but not
otherwise shall be made or given as the case
requires. Clause 8 shall not apply to any such
claim for compensation.

19. NOTICE TO COMPLETE AND DEFAULT NOTICE

(1) Where -
(a) a date for completion is set out in or
becomes ascertained under Schedule
Item 14 and
(b) completion is not effected in
accordance
with sub-clause 2(3)
either party may at any time after such
date for completion give to the other party
a notice in writing to complete this
agreement ("notice to complete").
(2) A notice to complete shall -
(a) appoint a time during business hours
and a date being not less than 14 days
after the service of the notice
(excluding the date of service) within
which a place in the Territory at
which to complete this agreement and
(b) state that it is given pursuant to
this clause.

(3) Notwithstanding any rule of law or equity
to the contrary a party is entitled to give
a notice to complete if
(a) at the time the notice is given he is
not in default under this agreement
and
(b) at the time completion is due he is
ready willing and able to complete or
could do so but for some default or
omission of the other party.

(4) Upon service of a notice to complete the
period of time therein limited for
completion shall be an essential term of
this agreement.

(5) Where one party is in default in the
observance or performance of any obligation
on him under or by virtue of this agreement
(other than failure to complete) the other
party may at any time thereafter give to
the party in default a notice in writing to
rectify the default ("default notice").

(6) A default notice shall -
(a) specify the default and call upon the
party to rectify the default within a
period being not less than 7 days
after the service of the notice
(excluding the date of service) and
(b) state that it is given pursuant to
this clause.

(7) Notwithstanding any rule of law or equity
to the contrary a party is entitled to give
a default notice if at the time the notice
is given he is not in default under this
agreement.

(8) Upon service of a default notice the period
of time therein limited to rectify the
specified default shall be an essential
term of this agreement.

(9) Where one party does not comply with the
terms of an effective default notice or
notice to complete served by the other
under this clause then the provisions of
clause 20 shall apply.

(10) The party serving a notice under this
clause may at the request or with the consent
of the other party extend the term of
the notice for one or more specifically
stated period of time and thereupon the
term of the notice shall be deemed to
expire on the last day of such extended
period or periods and the notice shall
operate as though this clause stipulated
such extended period of notice in lieu of
that stated above and time shall be
essential accordingly.

20. TERMINATION OF AGREEMENT

Buyer in default

(1) Subject to the provisions of clause 19, if
the Buyer defaults in the observance or
performance of any obligation imposed on
him under or by virtue of this agreement
the Seller may forfeit the deposit paid by
the Buyer, except so much of it as exceeds
10% of the Total Purchase Price, the Seller
may terminate this agreement and
thereafter may either -
(a) sue the Buyer for breach of contract,
or
(b) resell the Crown Lease and Goods (if
any) as owner.
(2) In the event that the Seller elects to
resell pursuant to paragraph (1)(b) the
deficiency (if any) arising on such resale
and all expenses of and incidental to such
resale or attempted resale and the Buyer's
default shall be recoverable by the Seller
from the Buyer as liquidated damages
provided that proceedings for the recovery
thereof be commenced within 12 months of
the termination of this agreement.

(3) The Seller may retain any money paid by the
Buyer on account of the sale other than the
deposit forfeited under this clause, as
security for any damages liquidated or
otherwise awarded to him for the Buyer's
default provided that proceedings for
recovery of such damages are commenced
within 12 months of the termination of this
agreement.

(4) If the Seller terminates the agreement
under this clause the Seller or his
solicitor may notify the Stakeholder in
writing accordingly and the Stakeholder
shall thereupon be authorised to pay the
deposit forfeited under this clause to the
Seller or his solicitor as stated in that
notice.

Seller in default

(5) Subject to the provisions of clause 19, if
the Seller defaults in the observance or
performance of any obligation imposed on
him under or by virtue of this agreement
the Buyer may elect either -
(a) to enforce against the Seller without
any further or other notice under this
agreement such rights and remedies as
may be available to the Buyer or
(b) to terminate this agreement and
without prejudice to any right of the
Buyer to damages, to give notice in
writing to the Seller and the Stakeholder
forthwith to repay to the Buyer
any deposit and any money paid on
account of the Total Purchase Price
but on compliance with that notice the
Buyer shall no longer be entitled to
any right to specific performance of
this agreement and shall return
forthwith all papers in his possession
belonging to the Seller."

4. The special conditions attached to the agreement insofar as they are relevant are as follows:

"23. Further to Item 14 hereof completion of
this Agreement shall be effected within
fourteen (14) days of either the date of
the approval of loans referred to in
Item 13 hereof or the date of the issue of
the Certificate referred to in Clause
14(1)(a) hereof whichever is the later.
24. Pursuant to Clause 15 the Seller shall
complete the improvements and
(a) construct same in accordance with the
plan annexed hereto; . . . . ."

5. The remaining provisions of clause 24 relate to the provision by the seller of certain "inclusions and basic features" set out in a detailed list annexed to the agreement. This annexure is in the nature of a list of specifications such as is frequently annexed to a building contract and includes a list of what are often known as prime cost items. Clause 24 also makes provision for the consequences of the seller being unable to provide "the exact feature or inclusion listed", for an allowance to be made where the cost of an item selected by the buyer exceeds any estimate set out in the annexure, and for the consequences which flow from defects or faults in the construction appearing within ninety days from completion of the agreement or the date of possession.

6. It is to be observed that the standard form agreement which the parties have used is not simply an agreement intended to pass an interest in real property. It is also an agreement whereby the seller undertakes to construct for the buyer a building in accordance with certain plans annexed. In other words it is a building contract as well as a contract for the sale of an interest in land.

7. The plans annexed to the agreement between the parties are of a proposed dwelling-house consisting of a residence shown to be 133.6 square metres in area with a verandah shown to be 16.686 square metres in area. Three bedrooms are shown on the plan. Two of them are marked "Bed 2" and "Bed 3" respectively. The dimensions of each of those two bedrooms are shown on the plans to be 2800 x 3000 metres.

8. It is common ground that at the time the agreement was entered into the lease from the Commonwealth to the seller had not yet been granted to the seller, nor had a certificate of title issued. The lease was granted subsequently on 23 December 1985 and the certificate of title issued on 22 January 1986.

9. By 1 April 1986 the building had reached a certain stage of construction which enabled the plaintiffs to establish that bedrooms 2 and 3 were smaller than those shown on the plan. The plaintiffs allege and it is unchallenged that according to the plans each of those bedrooms should have an area of 7.38 square metres but that the house was constructed so that each of those bedrooms is only 6.48 square metres. I was told by counsel for the defendant and it is undisputed by the plaintiff that each of the rooms is about 300 cm. narrower than shown on the plans.

10. The plaintiffs discovered the discrepancy some time prior to 13 January 1986. Upon that date their solicitors wrote to the defendant's solicitors threatening to terminate the agreement unless a "certificate of compliance" issued by 17 January 1986. The letter purported to reserve the plaintiffs' rights if the building was not constructed in accordance with Clause 24(a) of the Agreement. There followed a series of communications between the solicitors to which it is not necessary to refer in detail. On 23 January 1986 the plaintiffs purported to serve a default notice under Clause 19 of the Agreement relying upon the discrepancy between the size of the bedrooms on the plans and the size of the bedrooms as constructed. On 6 February 1986 the plaintiffs purported to terminate the agreement in accordance with Clause 19, without prejudice to their rights to damages, and demanding the repayment of the deposit.

11. On 25 February 1986 the defendant, through its solicitor, offered "to complete the dwelling with the bedrooms numbered 2 and 3 to be of the correct proportions". The letter was marked "without prejudice" but its admission into evidence was not objected to. On 1 April 1986 the plaintiffs' solicitors purported to serve a further default notice and it is upon that notice that they rely in these proceedings. That notice drew attention to the discrepancy in the size of the bedrooms, called upon the defendant "to rectify the said defaults within twenty-eight (28) days after the service of this notice", and otherwise purported to reserve the plaintiffs' rights under the agreement. In a letter dated 4 April 1986 the defendant's solicitor denied the plaintiffs' right to issue the notice of 1 April 1986 and asserted that the effect of Clause 18 of the Agreement was that the alleged default on the part of the defendant "amounted to an error or misdescription as provided in Clause 18 of the Agreement . . . . ." so that ". . . . . the termination is not the remedy and the matter would be one for compensation."

12. On 16 May 1986 the defendant served a notice requiring the plaintiffs to complete the purchase on 4 June 1986. The plaintiffs did not comply with that notice. The defendant then served upon the plaintiffs a notice of termination of the agreement pursuant to Clause 20 of the Agreement. It may be noted that the plaintiffs have not served any notice of termination subsequent to the notice of default dated 1 April 1986. The building remains as originally constructed.

13. The case for the plaintiffs is essentially that the defendant has failed to comply with the obligation imposed by Clause 24 of the Agreement to complete the improvements and construct them in accordance with the plan annexed. The plaintiffs say that they have served a default notice in accordance with Clause 19, that the defendant has failed to comply with the default notice and that the provisions of Clause 20 apply. Clause 20(5) gives the buyer, in the event of default on the part of the seller, a right to elect between, on the one hand, enforcing against the seller without further notice such rights and remedies as may be available to the buyer and, on the other hand, terminating the agreement as provided, that is to say, by giving notice in writing to the seller to repay the deposit without prejudice to any right of the buyer to damages. Insofar as Clause 21 provides for rescission, the effect of Clause 20(5) is shortly to give the buyer a right to elect between rescission and termination as provided for. Whether the seller has in the present case elected as to what remedy is to be pursued is not clear, but in the event that matter does not have to be decided.

14. The defendant says that although it is conceded that the bedrooms have been constructed so that they are smaller than the bedrooms shown on the plans, the buyer has completed the construction of the improvements in a good and workmanlike manner substantially in accordance with the plans, as provided for in Clause 15. It may be noted that that clause makes provision for completion of construction in accordance with plans and specifications "now approved by the building controller under the Building Ordinance" whereas in fact it appears that at the time of the agreement no plans and specifications had been approved by the building controller at all, or at least there is no evidence that the plans had been so approved. The defendant relies upon a certificate which is in evidence from the delegate of the Minister stating that he is satisfied pursuant to s.28 of the City Area Leases Ordinance 1936 that the building and development covenants contained in the Crown lease have been complied with. This certificate is dated 4 March 1986. The defendant also relies upon a certificate of occupancy or use issued pursuant to Part V of the Building Ordinance 1972 by the Deputy Building Controller on 26 February 1986. However, in my view, neither the certificate of the Delegate of the Minister nor of the Deputy Building Controller is evidence that the defendant has complied with Clause 15 of the Agreement, or, if it is evidence, I am not satisfied that it proves that the defendant has discharged its obligation under that clause of the Agreement.

15. Before deciding the question whether on the remainder of the evidence the plaintiffs as the moving party have shown that the defendant has not completed the construction of the dwelling "substantially in accordance with the plans and specifications", I should say that it was submitted on behalf of the plaintiffs that the obligation went further than to comply substantially with the plans and specifications because of the precise provisions of Clause 24 that the seller is to complete the improvements and construct the same in accordance with the plan annexed. It was submitted that the word "substantially" has been omitted from Clause 24 deliberately and so the obligation of the defendant taking the contract as a whole was to do more than comply substantially with the plans and specifications and involved an obligation to comply with the plans and specifications in all respects. Construction of the agreement as a whole as to the duty of the seller in relation to the erection and completion of the dwelling is not an easy question and the difficulty is not lessened by the non-existence at the time of the agreement of plans and specifications approved by the building controller under the Building Ordinance. However neither party made reference in argument or otherwise to the absence of such approval at the time of the agreement. The plaintiffs seek to contrast the duty of substantial compliance provided for in Clause 15 with the duty of exact compliance provided for in Clause 24. In my view, the agreement is not to be construed in that way. Clause 24 is expressed to be "pursuant to Clause 15". I do not think that the duty otherwise provided for in Clause 15 of the standard contract is ousted and replaced by another and stricter duty imposed by Clause 24. I think that the duty imposed by Clause 24 has to be read subject to the duty imposed by Clause 15 which is a duty of substantial compliance only.

16. The question then falls to be determined as to whether on the evidence the plaintiffs have shown that the defendant failed to complete the construction of the improvements in a good and workmanlike manner substantially in accordance with the plans and specifications. The evidence shows that each of the two bedrooms has been constructed so that it is in area 0.9 square metres smaller, or alternatively, about 300 cm. narrower, than the bedroom shown on the plan. There is evidence that the internal walls can be moved in such a way as to increase the dimensions of each bedroom to the dimension shown on the plan. Whilst I find it difficult to understand how that can be done without a corresponding reduction in the size of one or other of the remaining rooms in the dwelling, that evidence is uncontradicted. The plaintiffs have sworn that the size of the bedrooms as constructed is less than that permitted by the ACT Building Manual, and again whilst that evidence is uncontradicted, I find it difficult to accept in the face of the certificates issued by the Delegate of the Minister and the Deputy Building Controller. There is no evidence that there are any practical difficulties with the use and function of the bedrooms as constructed, such as difficulties encountered with the opening of doors or the placing of appropriate bedroom furniture. The word "substantial" is a word of no fixed meaning in the law and its particular meaning in any case will depend upon the context: R v. Hudson & Ors. (1985) 63 ALR 257. I think that in the agreement under consideration the word connotes something more than minimal, something which has a practical effect. I am not convinced that the building as constructed involves a departure from the plans and specifications which can be described as "substantial". I therefore find that the plaintiffs were not entitled to give a notice of default pursuant to Clause 19 of the contract.

17. The further question arises as to whether the notice to complete dated 16 May 1986 given by the defendant to the plaintiffs is a valid notice to complete. The plaintiffs relied on a number of authorities to the effect that the defendant as seller was not entitled to give a notice to complete the contract of sale whilst it remained in breach of that agreement. Such authorities included Neeta (Epping) Pty. Ltd. v. Phillips (1974) 131 CLR 287, Turner v. Labafox International Pty. Ltd. [1974] HCA 41; (1974) 131 CLR 660 and McNally & Ors. v. Waitzer (1981) 1 NSWLR 294. In my view those cases are not to the point as they involved questions whether time was of the essence or which related to the giving of title. In the present case no such questions arise and furthermore I have already decided that the defendant was not in breach of Clause 15 of the Agreement in any event.

18. As I have already pointed out, the agreement between the parties is not simply a contract for the sale and purchase of land. It is also a building contract. The finding that there has been no substantial breach within Clause 15 of the defendant's obligations under the contract, is not a finding that there has been a complete absence of such a failure on the part of the defendant. Indeed, it is conceded on the part of the defendant that the bedrooms are smaller than those shown on the plan. The breach by the defendant is not of sufficient magnitude to enable the plaintiffs, according to the terms of the agreement, to rescind or terminate the agreement as an agreement for the purchase and sale of an interest in land, but that is not to say that the plaintiffs are not entitled to damages for the failure of the defendant to discharge its duties under the agreement insofar as the agreement may be regarded as a building contract. It was submitted on behalf of the defendant that the plaintiffs' entitlement, if any, was under Clause 18 of the Agreement which provides for compensation in the event of error or misdescription of the property. In my view, Clause 18 does not apply in the present circumstances. There has not been an error or misdescription of the property. There has, however, been a breach by the defendant of its obligations to complete the construction of the building in accordance with the plan, although that breach is not of a substantial nature. In my view the plaintiffs are entitled to damages for the breach, although whether such damages are to be assessed by the diminution in value of the property as it exists and compared with the property had it been constructed in complete accordance with the plans, or whether damages are to be assessed by reference to the cost of rectifying the error, is a matter upon which I express no view at this stage.

19. In the light of the above findings the plaintiffs are not entitled to terminate or rescind the agreement, nor to the declaration sought that the notice to complete dated 16 May 1986 is invalid. I propose to make declarations that the plaintiffs are entitled to damages and that the plaintiffs are obliged to comply with the notice to complete subject to the amount of damages being agreed or assessed and an appropriate deduction made from the balance of the purchase price. There is a further order sought that the matter be referred to the Registrar for an enquiry as to damages, but I remain to be convinced that that is an appropriate way of ordering the continuation of the proceedings. In the light of the above, I make no formal orders at this stage but give liberty to the parties to bring in short minutes to give effect to my rulings, or to present further argument on the effect of the findings I have made.