connected talent
Special Conditions in a Contract for
the Sale of Land - Brennan V O'Meara
[2009] NSWSC 1374 (11 December
2009)
19 January 2010
On 11 December 2009, Davies J of the Supreme Court of NSW examined the meaning “become
mentally ill” in relation to the Special Conditions in a Contract for the sale of land.
Facts
The Plaintiff/Vendor entered into a Contract for the sale of a property; however, the Contract was
not completed by the Defendant/Purchaser on the due date and consequently the Vendor issued
a Notice to Complete on 30 January 2009. On the same day, the Purchaser issued a Notice of
Rescission on the basis of clause 33(a) of the Contract (mental illness). The Vendor then served
a Notice of Termination following the Purchaser’s failure to complete in accordance with the
Notice to Complete.
Issues
The primary issue in the case involved assessing the validity of the Vendor's Notice of
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Termination and further to that, the Purchaser’s Notice of Rescission. This involved consideration
of whether the Buyer had “become mentally ill”, within the meaning of clause 33 which provided:
‘without in any way limiting, negating or restricting any rights or remedies which would have
been available to either party at law or in equity …should either party…prior to completion:
a) die or become mentally ill then either party may rescind this Contract …’
In addition, the Court examined the Buyer’s claim that he was entitled to a refund of some of the
monies paid to the Seller as a result of his early occupation of the land, and whether clause 47
(payment for early occupation) amounted to a penalty.
“Become mentally ill”
a. Meaning:
The Court noted that there is no definition of “mentally ill” in the context of the Contract, nor is
there authority on what amounts to it for the purposes of the clause, though a similar clause was
considered in Karfoal Pty Ltd v Lorence [2002] NSWSC 204. Ultimately, the Court’s view was that
the clause is targeted at events which cause an impediment to the fulfilment of contractual
obligations. Therefore, the words “mentally ill” must entail a condition that causes a delay in
fulfilment of contractual obligations.
The Court noted that the definitions of “mentally ill’ in section 14 and of “mental illness’ in section 4
of the Mental Health Act 2007 are useful as a guide to the meaning of the words ‘mentally ill’ in
clause 33 of the Contract, however the requirements of those sections do not have to be met for
the purposes of clause 33. The mental illness must be of a magnitude that impedes the fulfilment
of contractual obligations brought about by entry into the Contract.
Present case Several medical expert opinions were tendered and the Buyer was characterised as possessing
an anxiety disorder; though still able to, “deal in a reasonably competent fashion with ordinary
affairs such as planning for the future, working out how to provide for himself, and his family,
working out how to earn income and how to look after capital.” The Purchaser did not lack mental
capacity to engage in commercial or legal transactions, and this was evidenced through his
instructions given to his mortgage fund and the real estate agent.
b. Timing of the mental illness:
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The Court considered it necessary that the mental condition arise prior to completion as the word
“become” in clause 33 impliedly reflected a transition between the date of the Contract and its
completion.
The Court reiterated that if a party was relying on becoming mentally ill prior to date of the
Contract, then the principle of dealing with a mentally ill person in good faith and for valuable
consideration, without knowledge of the condition, would apply – thus, making the contract valid
Molton v Camroux [1948] EngR 611.
Present case The Court noted, from the Purchaser’s own acknowledgement, that his illness had been present
from at least 1997 and consequently, it could not be said that he became mentally ill after the date
of and prior to completion of the Contract.
Penalty
a. Return of the deposit
Whilst not formally included in the pleadings, the Court considered the Purchaser’s argument as to
the partial return of the deposit to the Purchssr, under clause 19 (rescission of Contract).
The Purchaser submitted that clause 47 was a penalty because the Purchaser paid $1,000 per
week for occupation of and adjistment on the property, though a fair market figure would have
been $500; however, the latter figure was rejected on the basis that the Purchaser lacked
expertise on the market for agistment fees; the Puchaser's submission were not expert evidence
in accordance with Matika v Sprowles (2001) 52 NSWLR 705.
The Court held that there was no penalty involved as there was no evidence that $1,000 per week
was a penalty rate; the agreement was a legitimate bargain and the clause did not allow for a
lump sum or liquidated damages to be payable in the event completion did not occur.
Held
The Termination Notice issued by the Vendor was effective, and the Notice of Rescission issued
by the Purchaser was invalid and of no effect. The Purchaser was ordered to pay the costs of the
proceedings.
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Brian Ambler, Partner
Sydney
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