The Facts
Vendor and purchaser enter land development contract
On 12 November 1973, a vendor and purchaser signed a contract for sale of land near Sydney, described in the contract as “being Lots 1 to 9 inclusive in the Vendors Plan of Sub-division a copy of which is annexed hereto…”.
The purchaser paid a ten percent deposit upon signing the contract.
Special condition 4 requires registration of plan of subdivision
Special condition 4 of the contract provided that:
…the Plan of sub-division, a copy of which is annexed hereto, has been lodged with the… Council. The Vendor will… have the relevant plan of sub-division lodged for registration as a deposited plan, provided however that if the said plan has not been lodged for registration as a deposited plan within a period of 12 months from the date hereof… either the Purchaser or the Vendor may… rescind this contract whereupon all moneys paid to the Vendor hereunder shall be refunded to the Purchaser….”
Vendor applies for subdivision in two stages
There were thirty-five lots in the plan of subdivision annexed to the contract.
At the time the contract was signed, the vendor had not lodged that plan of subdivision.
The vendor instead sought to subdivide the land in two stages.
A month before the contract was signed, the vendor obtained council approval for the stage 1 subdivision of 11 lots, being the nine lots it later contracted to sell the purchaser, and two other lots comprising the balance of the land.
A couple of weeks before the contract date, the vendor applied for council approval for the stage 2 subdivision of the balance of the land.
Vendor seeks completion of contract after stage 1 plan registered
Under the contract, completion was to take place within fourteen days of written notification being sent to the vendor by council, that the plan for subdivision had been registered.
The stage 1 plan of subdivision was registered on 7 June 1974.
On 14 June, the vendor confirmed registration of the plan with the purchaser and sought payment of the balance of the purchase price and completion of the sale.
Purchaser and vendor each purport to cancel contract
Seeing that the registered plan was different from the plan annexed to the contract, the purchaser took this to mean that the vendor had repudiated the contract (ie indicated that it did not intend to perform its contractual obligations).
The purchaser, therefore, notified the vendor that it was rescinding (ie cancelling) the contract and sought damages for failure of the vendor to comply with its contractual obligations.
The vendor responded that the purchaser’s rescission was a wrongful repudiation of the contract, that it accepted this repudiation, and that it was itself now rescinding the contract, keeping the deposit, and reserving its right to claim damages.
Dispute goes all the way to High Court
The purchaser applied to the Supreme Court of New South Wales for a declaration that it had validly rescinded the contract.
The vendor, for its part, cross-claimed for a declaration that it had validly rescinded.
The primary judge ruled in favour of the vendor and the purchaser appealed.
The NSW Court of Appeal reversed the Supreme Court’s decision, ruling that the purchaser’s rescission was valid.
The vendor appealed to the High Court of Australia.
Expert commentary on the court's decision
Court rules neither party entitled to rescind
In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, the High Court of Australia concluded that neither the purchaser, Mona Homes, nor the vendor, DTR Nominees, was entitled to rescind the contract.
However, the court found that by the time the proceedings were commenced, both parties had abandoned the contract, and so it allowed to stand the Court of Appeal’s order requiring that DTR Nominees return Mona Homes’ deposit.
Vendor not entitled to subdivide in two stages
The court interpreted special condition 4 as requiring DTR Nominees to lodge for registration the contract plan of subdivision providing for subdivision into the thirty-five lots. Special condition 4 did not provide for DTR Nominees to subdivide the land in two stages.
Test for determining repudiation of contract
The test for whether a party has repudiated the contract is whether the party’s conduct would convey to a reasonable person, in the position of the other contracting party, that it does not further intend to be bound by the whole contract; or alternatively, that it only intends to undertake the contractual requirements in a manner different to certain terms and conditions.
Repudiation is clear when a party states expressly that it is unwilling to perform its contractual obligations. However, a party to a contract must also ensure that its actions do not imply an unwillingness to comply with contractual obligations.
While this case dates back to the 1970s, the principles of repudiation are just as applicable in modern times.
Purchaser not entitled to rescind contract
The question the court had to decide was whether it could infer from the events in evidence that DTR Nominees, by taking a two-stage approach, intended to repudiate or renounce the contract.
In addressing this question, the court said:
In the court’s view, DTR Nominees acted in accordance with a bona fide belief as to the correctness of its interpretation of the contract, without realising that Mona Homes had a different view, right up until such time as Mona Homes purported to rescind.
Further, Mona Homes made no attempt to persuade DTR Nominees of the error of its ways or to give it any opportunity to reconsider its position. It wasn’t a situation in which DTR Nominees was “persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement”.
The court concluded that it could not infer that DTR Nominees intended not to perform the contract according to its terms. Accordingly, DTR Nominees did not repudiate the contract and Mona Homes was not entitled to rescind it.
Vendor not entitled to rescind contract
Although Mona Homes was in error in regarding itself as entitled to rescind when it purported to do so, it was not in error in its interpretation of the contract.
Mona Homes’ purported rescission only evinced an intention not to proceed with the contract because of DTR’s incorrect interpretation. It did not evince an intention not to proceed with the contract correctly interpreted.
In the court’s view, this could not be regarded as a repudiation entitling DTR Nominees to rescind the contract when it was itself the party in error.
Further, according to the court, a party is only entitled to rescind after a repudiation, if at the time of the rescission, it is, itself, willing to perform the contract on its proper interpretation.
Otherwise, that party is “not an innocent party, the common description of a party entitled to rescind for anticipatory breach, and indeed could profit from his misinterpretation of the contract, as [DTR Nominees] seeks to do in this case when it claims forfeiture of the deposit and damages”.
Contract has been abandoned and deposit must be returned
As neither party was entitled to rescind, the contract was still on foot on and after 25 July 1974, the date DTR Nominees purported to rescind the contract.
However, the court concluded that by the date these proceedings commenced, there could be no doubt that neither party regarded the contract as still on foot. The parties had abandoned the contract.
In these circumstances, the court held that the deposit paid by Mona Homes to DTR Nominees should be returned.
Advisable to give other party chance to reconsider incorrect interpretation of contract
Generally, if one party to a contract believes that the other party to the contract has repudiated it, the options available are to either continue with the contract as it was formed, or to accept the repudiation and elect to rescind the contract, thereby dissolving all obligations.
However, as this case highlights, before electing to rescind a contract due to the other party’s incorrect view of the contract’s construction, it is advisable to point out the incorrect view and give the party an opportunity to reconsider their position.
If a party does rescind the contract, they should consider whether they have reasonable grounds to obtain damages against the repudiating party. This will require an in-depth review and analysis of the terms and “special conditions” of a contract.