LANDCO ALBANY LIMITED V FU HAO CONSTRUCTION LIMITED CA CA179/04

LANDCO ALBANY LIMITED V FU HAO CONSTRUCTION LIMITED CA CA179/04 30 November 2005IN THE COURT OF APPEAL OF NEW ZEALAND CA179/04BETWEEN LANDCO ALBANY LIMITED Appellant AND FU HAO CONSTRUCTION LIMITED Respondent Hearing: 5 September 2005 Court: Anderson P, Hammond and William Young JJ Counsel: J E Hodder and A Kistler for Appellant A C Sorrell and M J Robinson for Respondent Judgment: 30 November 2005JUDGMENT OF THE COURT A The appeal is allowed. The order of the High Court that the caveat should not lapse is set aside. B Costs to the appellant of $6,000, together with usual disbursements. REASONS(Given by Anderson P) [1] This is an appeal against an order made by Baragwanath J in the High Court, pursuant to s 145 of the Land Transfer Act 1952, that a caveat lodged by the respondent in respect of certificates of title to land owned by the appellant should not lapse. The respondent caveator claimed an interest in the registered land by virtue of an agreement for sale and purchase which contained a covenant by the respondentthat it would not lodge a caveat until the deposit of a Land Transfer Plan of Subdivision. Baragwanath J held that agreements not to caveat are unenforceable on the basis that they are contrary to public policy. For the reasons appearing in this judgment we hold otherwise.The agreement[2] The High Court judgment is reported, [2005] 1 NZLR 535, in light of which we can deal reasonably succinctly with the facts. At all material times the appellant was the registered proprietor of land, in the vicinity of Schnapper Rock Road, North Shore City, approved by the Council for subdivision into 14 lots. On 6 December 2001 the appellant entered into an agreement in writing with the respondent to sell the land subdivided into 53 lots, the appellant having the obligation to complete the subdivision. [3] Clause 19.1 of the agreement provided:The vendor shall complete the subdivision of the property more or less in accordance with the attached scheme plan without delay. Any minor adjustments (+/-10%) to the area of the property required by the North Shore City Council or Land Information New Zealand shall be accepted by the purchaser without adjustment to the purchase price.[4] A "Requisitions" clause included the following subclauses:22.3 If it is necessary for the Vendor to obtain any consent or consents to the sale, and the Vendor is unable or unwilling to obtain the consent or consents to the sale, the Vendor may, regardless of any attempt by the Vendor to obtain the consent or consents, by written notice to the Purchaser, or the Purchaser's solicitor, cancel the contract. 22.4 Where the Vendor cancels the contract under sub-paragraph 3 above, the Purchaser will be entitled to the return of the deposit, without interest or costs. The purchaser will accept the return of the deposit in full satisfaction of all claims against the Vendor.[5] Although clause 22.3 refers to "consent or consents to the sale", Baragwanath J held that the agreement plainly contemplated the need for the subdivision to require resource consent under s 11(1)(a) of the Resource Management Act 1991 for a subdivision not expressly allowed by the District Plan.He held that the phrase "unable or unwilling to obtainconsent or consents to the sale" must embrace the consent required by s 11 of the Resource Management Act. We agree with his conclusions on that point. Counsel for the respondent did not submit otherwise on the appeal, although he did submit that if the clause properly refers to resource consents, the appellant may not cancel on the grounds that it is unable or unwilling to obtain them. [6] The covenant not to caveat is contained in clause 19.4 in the following terms:The Purchaser shall not lodge a caveat against the Vendor's title prior to deposit of the Vendor's Land Transfer Plan of Subdivision.Attempts to perform the agreement[7] In March 2002 the appellant applied to North Shore City Council ('the Council') for resource consent to the intended subdivision. The Council responded on 30 April 2002 with a request for further information. The appellant replied, on 17 December 2002, in terms which included amendments to the proposed subdivision plans. In the meantime, however, on 5 April 2002, the respondent lodged the caveat which is the subject of this proceeding. [8] On 3 February 2003 the application for consent was publicly notified and by 4 March 2003, the closing date for public submissions, 39 submissions had been received in opposition to the subdivision. Negotiations by the appellant with objectors led to certain agreements being reached. On 12 March 2003 the appellant responded to a request by the Council for further information and that response again included amendments to the subdivision plans. [9] On 15 April 2003 the Council's planner reported:Generally the engineering reports are supportive of the application subject to conditions, however the draft reports from the landscape architect and parks officer do not support the proposal. Their principal concerns relate to the proposed earthworks, especially the batters adjacent to the reserves.[10] As Baragwanath J's judgment observed, at [18], the reports of the landscape architect and parks officer strongly recommended that the application be declinedbecause of the perceived significant adverse effects on the adjacent reserve and the extent of the earth batter. The landscape architect considered that the proposed subdivision would have significant adverse landscape effects as well as adverse visual impact, noted that the proposed subdivision was contrary to the policies, objectives and rules relating to landscape and visual amenity protection within the District Plan, and recommended that the subdivision application be declined. The parks officer concluded that the Park and Environment Department considered the proposal untenable and recommended that consent be refused. [11] On 13 May 2003 Mr Donnelly, the appellant's resource management project manager, and his solicitor, had a meeting with the Council's reporting planner and landscape architect to discuss the application. The Council representatives expressed a number of concerns which Baragwanath J, at [19] of his judgment, outlined as follows:These were the significant non-compliance with the density provisions for the zone, which contemplated small lots on flat land and large lots on sloping land; the visual dominance of the large batter required; the adverse visual effects as a result of the volume and extent of earthworks; and questions about access to an amenity of the adjacent reserve. The Council officers said that the hurdles to be cleared for the subdivision were that since the application was for a non-complying activity it needed to have no more than minor adverse effects whereas the Council officers had concluded that the proposed [subdivision had] significant visual and amenity effects; and that it must not be contrary to the objectives and policies of the District Plan whereas the Council officers considered that the proposed subdivision was inconsistent with the objectives and policies for the zone; that all 39 submissions lodged opposed the application and that the Council officer had significant concerns about the proposal. By that time the defendant had spent at least $137,000 in trying to obtain consent.[12] Later that day Mr Donnelly sent an email to the Council expressing the view that it would be preferable for the proposal to be placed on hold and the scheduled hearing of the application to be deferred. He stated that, following deferral, he intended to instruct a redesign of the proposal and said that he would obviously like the Council's input prior to that instruction. [13] On 20 May Mr Donnelly and his legal adviser again met with a Council officer to discuss the application. The officer said that the Council would be seeking a reduced density and a reduction in the earthworks before looking favourably on anamended application. This led Mr Donnelly to the view that it was pointless to press the application and that to do so would simply prejudice the relationship which the appellant, a land developer, had with the Council, for no good purpose. [14] It seems that nothing of relevance happened until nine months later when, on 18 February 2004, the appellant's solicitors gave notice of cancellation of the agreement, relying on clause 22.3 (to which we have already referred). They said they would "authorise the refund of the deposit when Fu Hao confirms its acceptance of the cancellation and provides a withdrawal of the caveat protecting its interest under the agreement." [15] The respondent, by its solicitors, did not accept cancellation. One of the arguments on appeal is that the retention of the deposit amounted to an affirmation of the contract by the appellant. [16] On 16 March 2004 the respondent applied for an order that the caveat not lapse.The High Court's reasons for making the order[17] In the matter of the interpretation and application of clause 22.3, Baragwanath J held that inability and unwillingness are to be measured by an objective standard of what degree of inability or unwillingness could reasonably justify cancellation, having regard to the parties' mutual contemplation at the time they entered the contract, and to the events that had occurred by the time of the purported cancellation. He was of the view that the notional bystander would consider that the obligation undertaken by the appellant, construed in the actual context against a test of commercial reality, would entail the application of skill, energy, determination, funding, and persistence. [18] Baragwanath J referred to evidence given by a Mr Ison, on affidavit, in support of the respondent, describing concerns and reservations by Council officers in relation to some aspects of a subdivision as a relatively usual part of the process of obtaining subdivisional consents. Baragwanath J characterised Mr Ison as anexperienced surveyor, consulted as an expert by the respondent, who had "familiarised himself with the application". In fact, however, Mr Ison had not actually read the appellant's application. As counsel for the appellant submitted and we accept, Mr Ison's affidavit is in such general terms and uninformed by any actual reading by him of the appellant's application as to be of little or no assistance. [19] Baragwanath J acknowledged that the $137,000 which had been spent by the appellant in seeking consent was a substantial sum and that it was evident that a good deal of work had been put in. The problems with the Council were plainly significant. However, Baragwanath J concluded:I am not satisfied that the objective standard of unwillingness has been met. There is, for example, no opinion of an experienced resource management expert that the problems are insuperable or the cost of dealing with them inordinate.[20] Baragwanath J was satisfied that the respondent had shown an arguable case that the cancellation was invalid. That led him to the necessary correlative issue whether the appellant had shown that, even if the cancellation was ineffective, there was no real prospect of an order for specific performance. [21] Baragwanath J noted the submission on behalf of the appellant that the caveat should be removed because the respondent had no reasonable expectation of obtaining a benefit from continuance of the caveat in the form of specific performance, citing Pacific Homes Ltd v Consolidated Joineries Ltd [1996] 2 NZLR 652 at 656 (CA) as authority for that submission. The Judge also had regard to the speech of Lord Hoffman in Co-operative Insurance Society v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL). Referring to the proposition that the courts are disinclined to grant injunctions enjoining a person to carry on a business, Lord Hoffman referred to the requirement for constant supervision by the Court that such an injunction would entail. But a distinction could be drawn between requiring a defendant to carry on an activity or business over an extended period of time and an order that required a defendant to achieve a result. By recognising such a distinction the courts had, in appropriate circumstances, ordered specific performance of building contracts and repairing covenants; see Wolverhampton Corporation vEmmons [1901] 1 KB 515 (CA) (Building Contract) and Jeune & Ors v Queens Cross Properties Ltd [1974] Ch 97 (Repairing Covenant). [22] In cases where a defendant might be ordered to achieve a result, what the Court has to do, as Lord Wilberforce said in Shiloh Spinners Ltd v Harding [1973] AC 691 at 724 (HL):is to satisfy itself, ex post facto, that the covenanted work has been done, and it has ample machinery, through certificates, or by inquiry, to do precisely this.[23] Baragwanath J concluded at [44]:For present purposes it is unnecessary to determine whether at trial the defendant may succeed in resisting specific performance. The question here is whether the contrary contention is arguable; I have expressed the opinion that it is. The defendant is an expert in this field and, having successfully performed another subdivision in the area, undertook to try to do so here. It assumed the obligation to seek a result; not, as in Argyll, to carry on an activity. It is arguable that in terms of Shiloh Spinners the Court's task of deciding whether the contracted obligation has been performed will be of a kind that it is not uncommonly called upon to perform. While the work in this case is greatly more complex than the erection of the eight houses inWolverhampton Corporation v Emmons, I consider that there is sufficient in the plaintiff's argument on the point to warrant trial. I must therefore consider the no caveat point.[24] Baragwanath J then turned to the issue of the covenant not to caveat. [25] Counsel for the appellant had argued that the statutory permission to caveat conferred a private right, importing no public right and could therefore be waived. [26] A subsidiary argument on behalf of the respondent, which we turn to before its major submission, was that the appellant was disentitled from relying on the no caveat clause because it had repudiated the agreement. Not having accepted the repudiation and therefore not having agreed to cancellation the respondent, counsel submitted, was entitled to disregard the clause. [27] With respect, the proposition is logically untenable. A repudiating party cannot unilaterally discharge a contract by repudiation. Where the innocent party refuses to accept repudiation a contract is not discharged but remains extant in itsentirety. The innocent party cannot accept repudiation in respect of those parts it does not like and reject repudiation to preserve those parts which it does like. When this Court pointed out to counsel for the respondent that the contract must be totally extant or totally discharged he felt unable to rely on this ancillary argument. [28] As to the public policy issue, counsel for the respondent had submitted that the land registration system imported at least two matters of public interest. One is that the register is accurate and a prospective purchaser or lender can rely on the information that it contains. The second is the discouragement of fraud. The caveat provisions have two purposes also. One is to protect an equitable claimant and the other is to give warning to those who might wish to enter into dealings in respect of the caveated land. [29] Baragwanath J held that the interest which a caveat protects is not a mere right in personam but is a right in rem. On the appellant's argument, the parties had contracted to keep the respondent's right in rem away from the eyes of those who would otherwise have notice of it via a registered caveat. Without notice, third parties potentially interested in the land would be unaware of the respondent's equitable interest and might well be led to engage in transactions inconsistent with it. Thus, he held, a caveat provides not only for notice to the public of an adverse interest but also an orderly procedure for disposing of disputes concerning land. He held that there was a public interest in the integrity of the register with which a no caveat clause was inconsistent. [30] Baragwanath J observed that there had been little close analysis of the issue in previous New Zealand judgments. In Harwood v McKenzie HC CHCH M243/87 15 July 1987, Williamson J gave as his first reason for rejecting a caveator's claim to an arguable case the provision in an agreement that a caveat would not be registered. Barker J referred to that case in Sail City Motors North Shore Ltd v Redish & AnorHC AKL M1700/89 23 November 1989. Barker J found no case authority for holding that the Court is precluded from sustaining a caveat in the presence of a no caveat clause. He considered, however, that the existence of such a clause is a factor in deciding whether to uphold a caveat or not.[31] Elias J (as she then was) considered the legal position in Cash Handling Systems v Augustus Terrace Developments Ltd (1996) 3 NZ Conv C 192, 398 (HC). She considered it was not contrary to public policy for a tenant to contract not to exercise the protection available as a matter of general law and said there is no suggestion in the authorities that a no caveat clause is not a valid term of a contracted lease. [32] In Australian Property and Management Pty Ltd v Devefi Pty Ltd (1997) 7 BPR 15,255 (NSWSC), Young J held that a promise not to lodge a caveat would not prevent the promisor, as a matter of law, from lodging a caveat but said that is the sort of promise that the Court would, in appropriate circumstances, enforce at least by way of injunction. [33] There was support, however, for the respondent's position in the judgment of Nathan J in Lintel Pines Pty Ltd v Nixon [1991] 1 VR 287 (VSC). Without reliance on any case law, Nathan J expressed the view that a no caveat clause is not a blanket prohibition preventing the lodgement of caveats and if it were it would be void as being contrary to public policy. [34] Baragwanath J decided to follow Lintel Pines Pty Ltd v Nixon and held that in New Zealand a no caveat clause should be regarded as contrary to public policy and not given any effect.Discussion[35] It is plain to our mind that when the parties used the expression "unable or unwilling" in clause 22.3 they must be taken to have invoked the jurisprudence relating to such expressions. With regard to the usual requisitions clause, appearing, for example, in standard forms of agreement such as the Auckland District Law Society – Real Estate Institute of New Zealand form, the jurisprudence is quite settled. It is summarised in Dr McMorland's work Sale of Land (2nd Ed, 2000) at para 9.13.[36] Amongst the principles which appear from the authorities are the following:(a) The vendor may not escape by acting in bad faith; (b) The vendor must not have been reckless in entering into the contract, for example if it is shown that the vendor had no reasonable expectation of being able to deliver the title described in the contract. (c) The vendor is not permitted to take advantage of the clause if the vendor has done less than ordinarily prudent person is bound to do when dealing with another. (d) The vendor must not act arbitrarily, capriciously or unreasonably. (e) The right to cancel may not be used to escape from a contract in a pre- emptory manner for that would be making a nullity of the transaction. (f) In deciding whether the vendor is acting reasonably regard may be had, amongst other factors, to the expense involved in complying with the requisition seen in the context of the case. A vendor cannot be forced to comply with a requisition if it would involve unreasonable labour or expense, although what constitutes unreasonable labour or expense varies with the value of the property and other circumstances. (g) The onus of proof that the vendor is not acting property in these circumstances lies on the purchaser and the vendor is not obliged to give the reason for wishing to cancel.[37] In the light of such well established legal principles, Baragwanath J must be taken to have set too high a test, at least by implication, when he referred to the absence of expert evidence that the problems being encountered by the appellant were "insuperable or the cost of dealing with them inordinate." He was also obviously influenced by his perception of the affidavit evidence of Mr Ison, evidence which we have considered to be of little or no value. [38] That is not to say, however, that we are prepared to rule out any reasonable prospect of the respondent satisfying the Court in a substantive trial that the appellant has repudiated rather than validly cancelled. The way in which the appellant expressed itself in its notice of cancellation raises the argument on behalf of the respondent referred to earlier in [15]. [39] The evidence available for our consideration suggests, however, that the respondent's task may be quite difficult indeed. That perception, necessarily basedon what may prove to be limited evidence, is not however entirely irrelevant to the exercise of a discretion whether or not to order removal of the caveat. [40] We turn now to the issue of the respondent's prospect of obtaining an order for specific performance. In our view there is no realistic prospect of such relief. We come to that view for two reasons. [41] First, performance of the contract is not wholly in the control of the appellant. The performance which the appellant undertook was to sell the land as a completed subdivision more or less in accordance with the scheme plan attached to the agreement. The obligation related to 53 lots. The only flexibility in performance related to minor adjustments to the area of the land as noted in clause 19.1, to which we have referred in [3]. The Council, by at least by two of its significant officers, has made it plain that it will not approve a subdivision which accords with the subject matter and obligations of the contract. Obviously a Court would not order a person to do that which is beyond the power of the person to accomplish, or compel performance of a materially different contract from that agreed upon. [42] If the appellant were required to take reasonable steps to obtain consent, significant difficulties of supervision and examining for compliance would arise. Would the Court, for example, be properly able or inclined to examine what financial or other resources the appellant might apply to the task? Or whether, in the event of an adverse decision from the Council an appeal should be taken to the Environment Court and thereafter possibly the High Court? [43] In any event, the respondent's interest in the land is plainly commercial rather than private or sentimental. It must have entered into the transaction in order to make a profit and in those circumstances damages would be an adequate remedy. [44] The combination of the adequacy of damages and the inefficacy of an order for specific performance drives us to the view that there is no real prospect of the respondent obtaining that equitable relief in its proceeding.The no caveat clause[45] As we indicated at the outset of this judgment we do not consider no caveat clauses to be void or unenforceable for reasons of public policy. Courts are always reluctant to refuse to give effect to contracts on this ground. As Cooke P observed inCBI NZ Ltd v Badger Chiyoda [1989] 2 NZLR 669 (CA) at 676:The law reports contain ample warnings to Judges to be cautious before striking down contracts in the name of public policy. Some of the metaphors are so familiar as to be trite. After collecting some leading earlier judicial statements, Lord Atkin in Fender v St John-Mildmay [1938] AC 1, 12, said that the doctrine should only be invoked in clear cases in which the harm to the public is uncontestable and that the contract should be given the benefit of the doubt.[46] What, then, is the potential harm to the public in the instant case? The right that the impugned clause purports to waive is the right to lodge a caveat against dealings, a right authorised by s 137 of the Land Transfer Act. The effect of lodging a caveat is, as McMullin J put it in Holt v Anchorage Management Ltd [1987] 1 NZLR 108 at 113, that:Once lodged, a caveat is notice to all who search the title to the land against which it is registered and to the registered proprietor of the land (to whom notice of its receipt is given pursuant to s 142) that the caveator claims the estate or interest the subject of the caveat. It is both a warning to the persons mentioned that the caveator asserts rights against the land and a protection of those rights. (Section 143(1) uses the phrase "protected by the caveat".) Once the caveat is lodged the Registrar is prohibited from making any entry on the register which has the effect of charging or transferring or otherwise affecting the estate or interest protected by the caveat (s 141).[47] As to the limitations of this mechanism, the authors of Hinde, McMorland & Sim Land Law in New Zealand note that while:[l]odgment of a caveat is a simple and effective way of protecting an equitable interest and of giving notice of that interest to those who search or ought to search the title it is clear that the holder of an equitable interest is under no duty to caveat and also that the absence of a caveat does not imply that no equitable claim exists. (at 10.003, emphasis added)[48] Baragwanath J's views were significantly influenced by the public and private benefits of the Torrens System of land registration. Certainly there are private and public benefits if every registrable interest in land is in fact registered.The settling of priorities amongst interested parties and notice of those interests to non-parties is the exemplar of the system. But no one is obliged to register a registrable interest and there may be sensible commercial or personal reasons for requiring that interests or instruments be not registered, or not registered for a certain time or until a certain contingency, or for electing not to register. Sometimes mortgages are not registered, for family reasons. Sometimes, as is the case here, there may be a covenant against the registration of a caveat until a proposed scheme plan is deposited, so as not to jeopardise or impede progress towards approval and deposit of the scheme. [49] What has to be remembered is that the Torrens System protects registered interests, not unregistered interests, and that its twin guiding principles are indefeasibility of title for registered interests and the protection of those who deal with registered proprietors. [50] In our view the integrity of the system is not depreciated by declining to recognise a public policy invalidation of no caveat clauses and there are reasonable commercial and private reasons why such clauses may be stipulated and accepted. [51] While not present, on any analysis, in the present case, we acknowledge that there are concerns (such as those expressed by Dr McMorland in (1991) 6 BCB 36) that an inequality of bargaining power may result in injustice in some situations. We do not consider that this necessitates a blanket prohibition on no caveat clauses. As Campbell notes in "Contracting Around the Right to Caveat" in Grinlinton (ed)Torrens in the Twenty-first Century (2003) at 207, the purpose of the caveat scheme is the provide protection from the consequences of indefeasibility - not from perceived bargaining inequalities. In situations where these inequalities are deemed to be problematic enough to justify a blanket restriction, it is a subject for legislation – such as has occurred with regard to buy-back transactions (see Credit Contracts and Consumer Finance Act 2003, s 76). [52] Further, whether such a clause might or might not be enforced by a quia timetinjunction will involve the exercise of a judicial discretion in light of the circumstances of any particular case. Similarly, circumstances will inform a judicialdiscretion whether or not to order the removal of a caveat, or to make or decline an order preventing lapsing. And depending on the nature of competing interests, the discretion may be informed by an agreement by the parties against the lodging of a caveat. [53] As the last paragraph shows, we agree with the views expressed by Barker J, in Sail City Motors, Elias J in Cash Handling Systems, and Young J in Australian Property and Management. [54] The absence of any real prospect of specific performance together with the agreement not to caveat leaves us entirely satisfied that the caveat must lapse.Result[55] The appeal is accordingly allowed. The order of the High Court that the caveat should not lapse is set aside. Costs to the appellant of $6,000 together with usual disbursements.Solicitors: Chapman Tripp, Auckland for Appellant Turner Hopkins, Takapuna for Respondent