SC 96/2006
[2007] NZSC 62
BETWEEN SOUTHBOURNE INVESTMENTS
LIMITED
Appellant
AND GREENMOUNT MANUFACTURING
LIMITED
Respondent
Hearing: 28 June 2007
Court: Blanchard, Tipping, McGrath and Anderson JJ
Counsel: J G Miles QC and S A Grant for Appellant
P W David and J Long for Respondent
Judgment: 2 August 2007
JUDGMENT OF THE COURT
A The appeal is allowed and the orders for summary judgment and
specific performance are set aside.
B The proceeding is remitted to the High Court.
C The appellant is awarded costs in this Court of $13,000 together
with reasonable disbursements to be fixed if necessary by the
Registrar.
D The costs order in the Court of Appeal is set aside. The appellant
is awarded costs in that Court of $3,000.
REASONS
(Given by Blanchard J)
Introduction
[1] The Court of Appeal concluded that the respondent, Greenmount
Manufacturing Ltd, had validly exercised an option to purchase that was
contained in its lease from the appellant, Southbourne Investments Ltd, of a
property at East Tamaki, Auckland. It was of the view that Associate Judge
Doogue had been wrong to refuse Greenmount summary judgment. The Court of
Appeal ordered Southbourne to specifically perform the purchase agreement
which it found arose from the exercise of the option.
[2] Southbourne has during the course of this litigation raised a number of
arguments why the option was not validly exercised. The only one in respect of
which this Court has granted leave to appeal concerns the tendering by
Greenmount of its personal cheque in payment of the deposit due when the option
was exercised. Was Greenmount entitled to do that, and, if not, is Southbourne
precluded by its subsequent conduct from asserting that Greenmount’s cheque did
not constitute payment of the deposit in terms of the option clause in the lease?
[3] The Court for this appeal was constituted with four members under s 30(1)
of the Supreme Court Act 2003.
Facts
[4] On 9 February 2004 Southbourne leased warehouse premises at 13 Polaris
Place to Greenmount. The lease contained this provision:
47.1 Option to Purchase
The Landlord hereby grants to the Tenant or its nominee an option to
purchase the property on the following terms:–
(a) The option can only be exercised at any time within the first
eighteen (18) months of the commencement date of the initial lease
term in this Lease (time being of the essence).
(b) To exercise the option the Tenant or its nominee shall present to
the Landlord within the aforesaid time limit, a signed and dated
unconditional Sale & Purchase Agreement (“Agreement”) with the
following terms:–
i. The form of the Agreement shall be the then current form
of Sale & Purchase Agreement published by the Auckland
District Law Society and the Real Estate Institute of New
Zealand.
ii. The purchase price shall be $3,500,000.00 plus GST if any.
iii. The deposit shall be $350,000.00 and shall accompany the
Agreement.
iv. The settlement date shall be twenty-eight (28) days after
the date of the Agreement.
v. The interest rate for late settlement shall be 11%.
vi. If the nominee of the tenant fails to complete the Sale &
Purchase Agreement the Tenant will remain liable for all the
obligations on the part of the purchaser under the said
Agreement.
vii. The Agreement shall be subject to this within Lease.
[5] The lease ran from 1 May 2004 and so the last day of the 18 months for
exercising the option (time being of the essence) was Monday 31 October 2005,
by which time the value of the property is said to have considerably exceeded the
purchase price.
[6] Several days earlier, on Wednesday 26 October, Greenmount’s solicitor,
Mr Doughty, spoke by telephone with Southbourne’s property manager,
Mr Douglas, and told him that Greenmount intended to exercise the option.
Mr Douglas asked Mr Doughty to send the agreement form and deposit cheque to
Southbourne’s solicitor, Mr Foley. That was done by courier the next morning.
What was sent was an agreement form approved by the Real Estate Institute of
New Zealand and the Auckland District Law Society (Seventh Edition (3) July
1999) completed and signed by Greenmount, together with Greenmount’s
personal cheque for $350,000. Alongside the heading on the front page of the
agreement, “Deposit: (refer clause 2)”, there had been typed in “$350,000.00 paid
to the vendor”. The printed general conditions included:
2.1 The purchaser shall pay the deposit to the vendor or the vendor’s
agent immediately upon execution of this agreement by both parties
and/or at such other time as is specified in this agreement time being
of the essence as to each such time.
2.2 The vendor shall not be entitled to cancel this agreement for nonpayment
of the deposit unless the vendor has first given to the
purchaser three working days’ notice of intention to cancel and the
purchaser has failed within that time to remedy the default. No
notice of cancellation shall be effective if the deposit has been paid
before the notice of cancellation is served.
[7] In a covering letter Mr Doughty asked Mr Foley to acknowledge receipt of
the agreement and the cheque. Later that day Mr Foley faxed Mr Doughty a copy
of the letter on which Mr Foley had written “RECEIVED 27/10/05” above his
signature.
[8] The affidavits, particularly those on behalf of Southbourne as vendor, give
only a limited account of what occurred thereafter. Mr Doughty telephoned
Mr Foley on the morning of Friday 28 October and was told that Mr Foley had not
yet looked through the agreement in detail but would do so shortly as he was to
meet the principal of Southbourne, Mr Dickie, that day. The solicitors spoke
again that afternoon. There are significant differences between their versions of
what was said which cannot be resolved on the basis of the affidavits and which
must therefore be disregarded for present purposes. It is uncontroversial that
Mr Doughty was told that Mr Foley had not yet had the meeting with Mr Dickie.
[9] The next conversation between the solicitors was not until about 2:00 pm
on Monday 31 October (the last day for exercising the option). Mr Foley told
Mr Doughty that Mr Dickie’s father had had heart surgery on the Friday and that
therefore Mr Dickie had not been able to meet with Mr Foley on that day.
(Mr Dickie’s affidavit confirms his father’s ill-health and says that he died some
five weeks later.) Mr Foley advised that he was meeting Mr Dickie that
afternoon, 31 October. That meeting did occur but the affidavits do not indicate at
what time. Neither Mr Foley nor Mr Dickie give any account of it save to say that
Mr Foley was instructed to request counsel’s opinion on the validity of the
exercise of the option.
[10] Mr Foley did not communicate with Mr Doughty on 31 October after
meeting Mr Dickie. It was not until Tuesday 1 November, when the option period
had expired, that Mr Doughty was informed by faxed letter from Mr Foley that
there were questions about the validity of the exercise of the option. On Friday
4 November he was told that according to counsel’s opinion the option had not
been validly exercised. Southbourne subsequently took the position that no
contract of sale existed. Greenmount then sought specific performance.
The Court of Appeal judgment
[11] Because of his view that summary judgment should be declined for other
reasons, the Associate Judge did not find it necessary to deal with the sufficiency
of the cheque.1 The issue was dealt with as something of a tailpiece to the Court
of Appeal judgment.2 That Court cited a passage from this Court’s reasons in
Otago Station Estates Ltd v Parker:3
A vendor who takes a personal cheque or knowingly allows his or her agent to do
so, without objecting specifically to the form of tender of payment as soon as he
or she is aware of it, must expect to be taken to have dispensed with the need for
payment through legal tender or its equivalent. The vendor would then be
estopped from asserting that the mode of payment did not comply with the
contractual requirement.
The Court said this statement was decisive against Southbourne. It considered
that when Mr Foley received the agreement and Greenmount’s cheque for the
deposit on 27 October he would have seen at a glance that the cheque was drawn
by Greenmount: that it was not a bank cheque or cleared funds. He had
acknowledged receipt of the agreement and deposit cheque, as requested. It was
not until 4 November that Southbourne objected specifically to the mode of
payment. That was eight days later. The Court said it had no doubt that
1 Greenmount Manufacturing Ltd v Southbourne Investments Ltd (High Court, Auckland,
CIV 2005-404-6675, 13 April 2006).
2 Greenmount Manufacturing Ltd v Southbourne Investments Ltd (Court of Appeal,
CA 90/06, 21 November 2006) at paras [55] – [57].
3 [2005] 2 NZLR 734 at para [27].
Southbourne’s actions estopped it from asserting on 4 November that the mode of
payment did not comply with the contractual requirement.
Discussion
[12] The first question for this Court is what the option clause required of
Greenmount in relation to the deposit. It was submitted by Greenmount’s
counsel, Mr David, that the option clause should be construed against
Southbourne, whose solicitors had drafted it, and that on a literal and, counsel
said, natural reading, all it required was tender of the appropriate signed
agreement form. The sale contract then came into being. If Greenmount had not
tendered the deposit at the same time, it was in default under the contract. But,
crucially, the contract was already formed. Either it would have been possible for
Southbourne to cancel immediately (because time is always of the essence for
payment of a deposit),4 which it has never done; or cl 2.2 applied and three
working days’ notice was needed and was, again, never given.5
[13] We are not persuaded by this argument. It is not a natural or commercial
reading of cl 47.1. Moreover, if all that needed to be done was to present an
agreement form, that which was tendered was non-compliant concerning the
deposit, for reasons we will shortly give, and therefore amounted to a counteroffer.
That would be so even if a more tolerant view were to be taken than in the
line of cases concerning exercise of options which begins with Reporoa Stores Ltd
v Treloar.6
[14] There would have been little point in the lessor/vendor stipulating for a
clause requiring that the deposit shall “accompany the Agreement” if the absence
of the deposit did not prevent formation of the sale contract, leaving the vendor to
4 Brien v Dwyer (1978) 141 CLR 378; New Zealand Tenancy Bonds Ltd v Mooney [1986]
1 NZLR 280.
5 Southbourne has denied the existence of any contract. It has never accepted that a
contract exists and given a notice canceling it. The two postures would be quite
inconsistent: Hirst v Vousden (2005) 6 NZCPR 135 (PC) at paras [15] and [16].
6 [1958] NZLR 177 (CA).
its remedy under the contract for breach. The natural reading of the clause, which
accords with normal practice concerning options, is that Greenmount was required
to present both the agreement and the deposit in order to complete the exercise of
its option.
[15] But, if that be wrong, and an agreement sans deposit payment was enough,
the standard form agreement presented by the purchaser needed to be modified to
contain a provision requiring that the deposit accompany the agreement. That was
not done. Clause 2.1 in fact prescribes that the deposit is to be paid immediately
upon execution by both parties, so it would not be due until Southbourne had
signed. That is a material variation concerning an important component of the
exercise. We do not consider that the words written in about the deposit on the
front page were sufficient to rectify the position. Clause 2.1 does contemplate the
specification elsewhere in the contract of a different time for payment of the
deposit but the words on the front page did not achieve this. They merely
purported to record that a payment had been made, which begged the question
whether that had actually occurred. The heading was unaltered and it referred the
reader to cl 2.
[16] Mr David’s next argument was that cl 47.1 permitted the tendering of a
personal cheque. He submitted that there is a general expectation among
commercial parties that personal cheques will be used in their transactions, as had,
he said, been recognised by the High Court of Australia in George v Cluning.7
Southbourne had always allowed Greenmount to pay its rent by personal cheque,
including payments totalling over $100,000 before any lease was signed. Counsel
drew attention to a right of first refusal clause in the lease (cl 47.2), which
stipulated for a bank cheque for the deposit, whereas cl 47.1 did not.
[17] The same argument, based on commercial practice and George v Cluning,
was rejected in relation to deposit cheques payable under the standard agreement
form in Otago Station Estates8 and for the same reasons we reject it again here in
7 (1979) 28 ALR 57.
8 At paras [24] – [27].
relation to this option agreement. The fact that in commerce, including the real
estate industry, people do customarily proffer personal cheques and have them
accepted does not mean that they can amount to more than a means of obtaining
payment by presentation and clearance in the normal course. Southbourne’s
acceptance of personal cheques for rent falling due under the lease cannot provide
any support for the view that it was thereby indicating a willingness to take a
personal cheque for the deposit. Indeed, the right of refusal clause indicates the
contrary. And we can see no significance in the fact that cl 47.1, unlike cl 47.2,
does not specifically mention a bank cheque. It required a deposit, that is, a
payment by way of earnest. It would take very clear words to establish any right
to make a payment of a deposit, under the standard form or otherwise, by a means
other than cash, a bank cheque or cleared funds.
[18] That brings us to the nub of this appeal, which is, in terms of the passage
from Otago Station Estates quoted by the Court of Appeal, whether
Southbourne’s principal, Mr Dickie, knowingly allowed Southbourne’s agent,
Mr Foley, to take Greenmount’s personal cheque without objecting specifically to
the form of tender of payment as soon as he, Mr Dickie, was aware of it and must
therefore be taken to have dispensed with the need for payment through legal
tender or its equivalent.
[19] Mr David submitted that Mr Foley had been clothed with authority to
decide whether to accept the personal cheque because solicitors frequently accept
personal cheques on behalf of their clients and Southbourne’s property manager
had requested that the agreement and deposit cheque be delivered to Mr Foley. In
our view, against the background of well-settled law that solicitors do not have an
implied authority to accept payments made pursuant to the terms of agreements of
sale and purchase of land other than in legal tender,9 it would take something
much more specific than the property manager’s request in order to confer the
authority for which Mr David contended. That request was no doubt made for
9 Blumberg v Life Interests and Reversionary Securities Corporation [1897] 1 Ch 171 at
p 173; 44(1) Halsbury’s Laws of England, Solicitors, para [128]; Bowstead and Reynolds
on Agency (18th ed), para [3-021] and following. In New Zealand a solicitor can be taken
to have authority to accept a bank cheque or cleared funds: Williams v Gibbons [1994]
1 NZLR 273, approved in Otago Station Estates.
convenience in anticipation that Mr Foley would be asked to look through the
agreement on Southbourne’s behalf. Mr Foley was authorised to be the recipient
of the deposit but it does not follow that Southbourne was authorising him or even
appearing to authorise him to accept a cheque that did not constitute payment of
the deposit. There is no evidence suggesting that the property manager
acquiesced in the use of a personal cheque or even that he knew this was what
Greenmount was intending to proffer. As a matter of commercial convenience
solicitors customarily receive personal cheques on behalf of their clients but it
does not follow that they have an implied authority to commit their clients to
receiving payment by this means. It is the same when real estate agents for
convenience take personal cheques from purchasers as a means of obtaining
payment of deposits through the clearance of the cheques.
[20] Once a vendor (in which term we include a person who will be bound by a
valid exercise of an option to purchase) knows that the purchaser has tendered a
personal cheque, the vendor must promptly decide whether to accept it or to allow
his or her agent to do so. If the vendor decides to reject the cheque and insist on a
bank cheque or cleared funds, that choice must be forthwith conveyed to the
purchaser. Any failure to take either of these steps will leave the vendor
vulnerable to being found to have tacitly represented to the purchaser that the
personal cheque has been accepted as a payment. Unless the agent has a
satisfactory explanation for delay, the vendor will be presumed to have acquired
knowledge of the personal cheque as soon as the agent should have conveyed that
information. Of course, if the agent has had an advance instruction from the
vendor that a personal cheque will be unacceptable, the agent is clothed with
authority to reject it and must do so immediately.
[21] If by the failure to act in a timely way the vendor is found to have
represented that the personal cheque is acceptable, and the purchaser has
disadvantageously relied upon that representation, then, as this Court stated in
Otago Station Estates, the vendor will be estopped from denying the validity of
the payment effected by the personal cheque. The rationale for the estoppel is that
it would be manifestly unjust, when the vendor has given the appearance of
accepting the personal cheque, to allow the vendor to resile from that stance after
it is too late for the purchaser to remedy the position.
[22] The central question in the present case is whether Southbourne failed to
object in a timely way to the use of the personal cheque and whether as a
consequence it is estopped from asserting that the mode of payment did not
comply with the requirements of the option. If Southbourne is so estopped it
cannot deny that the sale contract came into existence when the agreement and
personal cheque were tendered to Mr Foley.
[23] It is on this point that Southbourne’s appeal must succeed because there is
simply not enough evidence presently before the Court in order for the matter to
be determined either way. It would be surprising, even allowing for the serious
illness of Mr Dickie’s father, if Mr Dickie had not made inquiries of Mr Foley
about the deposit on Friday 28 October when he certainly knew that Greenmount
had purported to exercise the option. In fact, it would also be surprising if, even
in the absence of such an inquiry from Mr Dickie, Mr Foley had not been alert on
that day to the significance of Greenmount’s use of its personal cheque and, in a
context where it seems probable that he knew that his client wished to avoid a sale
arising from exercise of the option, had not mentioned it to Mr Dickie
immediately. If Mr Dickie did know about the cheque at that time, the conclusion
that it was far too late to object to the mode of payment on 4 November, or even
on 1 November, is inevitable. However, we agree with Mr Miles QC that the
Court cannot properly on the present state of the evidence draw the inference for
the purposes of a summary judgment application that Mr Dickie must certainly
have known about the cheque on the Friday. As Mr Miles has also pointed out,
the case for Greenmount was not put in this way until as late as oral argument in
this Court. It would therefore be unfair if the Court were at this stage of the
proceeding to conclude that Mr Dickie and Mr Foley said nothing further in their
affidavits because they were unable to say anything which would advance
Southbourne’s case.
[24] There is also the same difficulty in the way of resolving the issues of
acceptance of the cheque and estoppel on the basis of the present state of the
evidence about what occurred on the Monday afternoon. All that is revealed by
that evidence is that at some unspecified time late that afternoon or in the early
evening there was a meeting at which Mr Dickie and his solicitor discussed the
exercise of the option and decided to seek the advice of counsel. Mr Miles
accepted that Mr Foley and Mr Dickie must by that time have turned their minds
to the status of the cheque. But counsel drew attention to the absence of any
evidence about the exact time of the meeting, saying that it may well have
occurred after the end of banking hours and therefore too late for the continued
silence from Southbourne subsequently to have caused detriment to Greenmount
because the latter would by then have had no way of obtaining and delivering a
bank cheque to Southbourne before the time at which the option expired.
(Mr Miles suggested that, in accordance with cl 1.1(6) and (7) of the agreement
form, that time was 5:00 pm, but we do not think that can be right, since cl 47.1
allows exercise of the option within the first 18 months of the commencement
date of the lease term and contains no limitation restricting the exercise to the
defined period of a working day.)
[25] It is of course possible that the meeting occurred at an earlier time in the
afternoon and that an immediate notification to Greenmount of the unacceptability
of the cheque would have left Greenmount with time to obtain and deliver a bank
cheque. It is also possible that Greenmount may have had some way of obtaining
a means of payment out of banking hours. However, on the present state of the
evidence the Court cannot safely draw the conclusion that Southbourne’s conduct
in relation to the cheque must necessarily estop it from denying the sufficiency of
the cheque as payment of the deposit. It therefore cannot be said that, on this
ground, Southbourne has no arguable defence. For this reason, the Court of
Appeal was wrong to conclude that Greenmount was entitled to summary
judgment and to an order for specific performance. Southbourne is entitled to
have this matter determined at trial.
Result
[26] The appeal is allowed and the orders made by the Court of Appeal are set
aside.
[27] Southbourne is awarded costs in this Court of $13,000 together with its
reasonable disbursements, to be fixed if necessary by the Registrar. The order for
costs in the Court of Appeal is set aside and in its place there will be an order in
favour of Southbourne in the sum of $3,000. These costs awards have been
reduced to reflect the fact that much of the argument in the Court of Appeal and
on the leave application in this Court was on an issue in respect of which
Southbourne was unsuccessful. Greenmount has not had its appeal against the
costs awarded by the Associate Judge in favour of Southbourne determined. As
requested by its counsel, we give leave for memoranda to be filed in relation to
that question.
Solicitors:
Foley & Hughes, Auckland for Appellant
Lee Salmon Long, Auckland for Respondent
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