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Deposit monies won't easily be recovered following the termination of a contract

CaseFlash 29 August 2017

In Rushcutters Bay Developments Pty Ltd v Dragon Asset Investment Pty Ltd (No 2) [2017] NSWSC 866, Dragon Asset (the Purchaser) failed to meet deposit payment deadlines and the contract for the sale of land was subsequently terminated by Rushcutters Bay (the Vendor). The Purchaser sought the return of all deposit monies from the Vendor. The Court ruled in favour of the Vendor and ordered the Defendant to pay the owed $937,500 plus interest as per the contract.

Fact Summary

The Vendor and Purchaser entered into a contract for the sale of four lots in a strata plan on 27 August 2015. The sale of two of these lots was agreed to at a price of $12,625,000. The contract stipulated that instalments of the deposit must be paid by the deadlines specified, with time of the essence. This meant that time became an essential term and a breach of this deadline would give the Vendor a right to terminate.

Relevantly, Clause 9.1 of the contract stated that the maximum deposit that could be recovered of an unpaid deposit was 10% of the purchase price. However, the deeds of variation also included clauses which provided that the vendor would be entitled to retain the deposit even if it was in excess of 10% of the purchase price.

The Purchaser paid the first instalment of $325,000. However, after several negotiations, five deeds of variation and extensions of time granted to the Purchaser, the Vendor finally resorted to terminating the contract. The Vendor subsequently re-sold the properties at a higher price. A dispute then arose as to the quantum of the deposit, if any, the Vendor was entitled to recover and retain.

Contractual Construction Principles

The Court held that the applicable clause was 9.1 and that the maximum deposit funds that could be recovered was 10% of the purchase price. In making this finding, the Court noted that commercial contracts must be determined objectively from the perspective of what a reasonable businessperson would have understood the contractual terms to mean. This required a consideration of the surrounding circumstances and regard to the entire operation of the contract to, as much as possible, construct the contract in a way that did not contradict other terms.

Justice Darke reasoned that Clause 9.1. was a clause which directly dealt with recovery of deposit funds as opposed to retention. Thus, it was the application of this clause that was relevant in the enforcement of recovering the Purchaser’s owed deposit monies.

Repayment of Deposit – Statutory Discretion

Section 55(2A) of the Conveyancing Act 1919 (NSW) provides the court with a discretion to order the repayment of any deposit. The Purchaser argued that the Court should exercise this discretion in light of the fact the Vendors obtained a higher price for the properties when they were re-sold.

The Court did not look favourably upon this submission noting that a deposit plays an important role as an “earnest of performance”. The fact that the Vendors were able to obtain a considerably higher price was not sufficient reason to warrant the exercise of the discretion in favour of the Purchaser. It was emphasised that the discretion will not be applied lightly, especially when the deposit has been forfeited within the express terms of the contract. Thus, the Vendors were successful in their claim and the Purchaser was ordered to pay $937,500 plus interest and costs to the Vendor.

Lessons

  1. The wording of contractual terms and deeds of variation are incredibly important and must be reviewed carefully in order to give effect to the intentions of both parties.
  2. Deposit monies are difficult to recover once paid. The Court will not easily exercise its discretion for the return of such deposits, even if the Vendor has not necessarily suffered a large harm from the termination of the contract.

Gary Newton, Partner
Sydney

Khushaal Vyas, Law Clerk
Sydney

CaseFlash 29 August 2017
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