Getting in on the deal: nominees and novation of contracts
In the context of contracts for the sale of land, it is quite common to see clauses permitting the purchaser to nominate a third party to which title is to be transferred. Less common (one would hope) are issues arising from this, such as whether a right to nominate has been validly exercised and whether the contract of sale ultimately has been novated. Such issues recently arose for the New South Wales Court of Appeal’s resolution in Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd.[1]
The dispute
In March 2016, Park Cho Pty Ltd as vendor and Mr Zhang as purchaser entered into a contract for the sale of commercial property. Mr Zhang paid a ten percent deposit.
In April 2016, the vendor’s solicitors emailed Mr Zhang’s solicitors to enquire whether Mr Zhang would agree to the release of the deposit. The email also reminded Mr Zhang of his ability to ‘change the purchasing entity’s details on the front page [of the sale contract]’. In a reply email, Mr Zhang’s solicitors did not consent to the release of the deposit but requested a change to the ‘purchaser’s name’ and requested confirmation from the vendor that this was acceptable. Mr Zhang sought to change the name of the purchaser to ‘Fu Tian Fortune Pty Ltd’ (‘Fortune’), a corporate trustee of which he was sole director.
By reply email, the vendor’s solicitors acknowledged Mr Zhang’s request. The change, however, was never formalised and there was no further communication regarding the change. Moreover, the contract did not describe the purchaser in the expected fashion, that is, as Mr Zhang ‘or nominee’.
The contract was due to be completed at the end of that month. The due date for completion came and went. The vendor served a notice to complete on Mr Zhang’s solicitors, addressed to Fortune (and not Mr Zhang). When there was no response the vendor served a notice of termination in the same fashion — that is, addressed to Fortune rather than Mr Zhang.
In May 2017, Fortune commenced a proceeding seeking a declaration that the sale contact was still on foot and seeking orders for specific performance. Mr Zhang was later added as a plaintiff to that proceeding. The nature of the case changed; Mr Zhang was alleged to be the true purchaser and alternative orders were sought for the recovery of his deposit.
At trial, the judge held that the sale contract had been novated and Fortune had been substituted as purchaser for Mr Zhang. The trial judge regarded the email correspondence between the parties’ solicitors and the parties’ subsequent conduct as evidence of their understanding that a legitimate novation had occurred. That being the case, the vendor’s actions in purporting to terminate the contract were valid and there was no basis on which Fortune could seek to enforce it.
On appeal
Barrett AJA, with whom Macfarlan and Gleeson JJA agreed, gave the Court of Appeal’s judgment.
The sole issue on appeal was whether the trial judge had erred in finding that the contract had been novated. Fortune argued that there was no novation in circumstances where there was no rescission, nor any consideration for any rescission, of the original contract. Fortune raised the fact that no subsequent contract between the vendor and the new purchaser had been drawn up. Fortune also argued that the correspondence between the parties’ solicitors merely reflected Mr Zhang’s exercise of a ‘right to nominate’ rather than a request to novate the contract in favour of Fortune per se.
The Court went on to dismiss the appeal, and addressed the key issues as follows.
Had there been a valid nomination?
The Court of Appeal accepted Fortune’s argument regarding Mr Zhang’s exercise of a right to nominate, if only as an ‘abstract proposition’; the Court noted the existence of a common law right of nomination in the absence of the typical ‘purchaser or nominee’ expression in a contract of sale.[2] The Court also noted that the sale contract in question contemplated Mr Zhang’s ability as purchaser to tender a form of transfer naming a transferee other than himself. The relevant clauses in the contract required Mr Zhang to sign that form and serve it on the vendor at least 14 days prior to the date of completion.
The impact of these clauses and their requirements, then, was to modify the common law right to nominate; the Court of Appeal held that ‘[t]he express terms of the contract stipulated a particular and exclusive method of exercising the right of nomination’.[3] On the facts, the clauses setting out the means by which a valid nomination was to occur had not been complied with; Fortune had not exercised the right properly.
In circumstances where Fortune had not validly exercised its right to nominate, the question remained whether the sale contract had in fact been novated. If it had been novated, the original sale contract — and the one for which Fortune sought specific performance in the proceeding — would be discharged.
Had the contract been novated?
The Court of Appeal articulated the issue as follows:
‘[I]f it is found that [the vendor] had, with Mr Zhang’s acquiescence, agreed to accept the promise of Fortune to perform in place of Mr Zhang, so that an obligation to [the vendor] inconsistent with Mr Zhang’s came into existence by agreement, that finding will be sufficient to ground a further finding that [the vendor] released Mr Zhang’.[4]
Barrett AJA considered that the evidence, particularly the correspondence between the parties’ solicitors in April 2016 — where Mr Zhang’s solicitors requested a change in the name of the purchaser in the contract and the vendor’s solicitors assured this would be done — gave rise to the first kind of Masters v Cameron agreement, that is, one where:
‘[T]he parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, while at the same time proposing to have the terms restated in a fuller and more precise way which is not different in effect. In such a case, the agreement is immediately binding’.[5]
The evidence also showed, in the Court’s view, the parties’ acquiescence to this state of affairs despite their failure to ever formalise things. Such evidence included:
further correspondence from Mr Zhang’s solicitors that consistently identified Fortune as the purchaser; and
the vendor’s notice to complete and notice to terminate having been addressed to Fortune rather than to Mr Zhang.
The Court’s consideration of evidence of the parties’ conduct is consistent with the view expounded by the Court in Pavlovic v Universal Music Australia,[6] namely:
‘[T]he question whether, in circumstances of this kind, an immediately binding contract has been formed is to be determined by reference to what each party by words and conduct would have led a reasonable person in the position of the other party to believe with regard to the commercial context and surrounding circumstances of the parties’ dealings. The court will pay attention to the parties’ subsequent actions in answering that question. The inference that an immediately binding contract has been formed will be drawn with particular confidence if the parties have conducted themselves in a way that, on balance, must be referable to the existence of a binding contract of the type alleged’.[7]
Also relevant to the decision on appeal was the way in which the proceeding had been brought; the Court noted:
‘It is significant that the proceedings were commenced by Fortune alone … [and] [t]he statement of claim adding Mr Zhang as plaintiff and propounding the thesis that he was in truth the purchaser was not filed until more than two months later’.[8]
The Court of Appeal concluded:
‘An obligation inconsistent with Mr Zhang’s came, by agreement, to supersede Mr Zhang’s. That, for reasons discussed, is sufficient to ground a finding that [the vendor] released Mr Zhang and that Fortune became bound (and entitled) as sole purchaser in his place’.[9]
Comment
The Court of Appeal’s decision in Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd illustrates a few key points in the context of a sale of land. First, it highlights the interface between common law and contractual rights to nominate and the importance of complying with the specific requirements of the latter where they supersede the former. Secondly, the Court’s decision shows that, in the context of an alleged novation of a contract, the parties’ words and conduct after the purported novation can evidence its true occurrence.
[1]: [2018] NSWCA 282.
[2]: Ibid [23]–[24].
[3]: Ibid [28].
[4]: Ibid [34].
[5]: Ibid [40].
[6]: (2015) 90 NSWLR 605.
[7]: Fu Tian Fortune Pty Ltd v Park Cho Pty Ltd [2018] NSWCA 282, [43] (emphasis added).
[8]: Ibid [37].
[9]: Ibid [44].