Australia: Vendor who elects to sue for specific performance of contract not precluded from later terminating and claiming damages

In brief - NSW Court of Appeal upholds earlier decision in Galafassi v Kelly

The NSW Court of Appeal has upheld the decision of the NSW Supreme Court concerning the payment of damages to a vendor by a purchaser who did not complete a contract for sale.

Vendor enters into contract for sale with purchasers but completion does not take place

Galafassi v Kelly [2014] NSWCA 190 concerned an appeal from the Supreme Court decision of Kelly v Galafassi [2013] NSWSC 680, which held that the purchasers, one of whom is the actor Toni Collette, were liable to pay damages of over $800,000 to the vendor for failing to settle a purchase of residential property.

Ms Kelly (the vendor) was the owner of 40-42 Stewart Street, Paddington and entered into a contract for sale with Mr and Mrs Galafassi (the purchasers). The contract was dated 30 September 2011 for a purchase price of $6,350,000 and the date fixed for completion was 30 December 2011. Completion did not take place as required under the contract, as the purchasers advised they did not have the necessary funds to complete.

Vendor seeks to recover loss on resale of property

The vendor commenced proceedings in the NSW Supreme Court for specific performance, but this claim was subsequently abandoned and the vendor purported to terminate the contract on the ground of repudiation by the purchasers. The vendor then resold the property and sought to recover the loss on resale and other expenses.

In the Supreme Court, Windeyer AJ held in favour of the vendor on the following grounds:

  • The purchasers repudiated the contract by notifying the vendor that they were unable to settle.
  • The vendor was not required to issue a notice to complete, as the purchasers had clearly indicated their inability and unwillingness to settle the contract.
  • The vendor had sufficiently mitigated her loss by engaging experienced real estate agents to market and resell the property, notwithstanding that the property later sold at a significantly lower price.

Purchasers appeal following unfavourable ruling by Supreme Court

The court ordered the purchasers to pay the vendor's costs of proceedings and over $800,000 in damages, which included amounts for losses incurred on resale, land tax and interest. (For more information please see our earlier article Actor Toni Collette ordered to pay $800,000 in damages in Sydney real estate dispute.)

The purchasers appealed to the NSW Court of Appeal. On appeal, the court considered the validity of the vendor's termination of the contract and in particular, the rights of a vendor against a purchaser who does not complete a contract for sale.

Purchasers argue that vendor was not entitled to terminate contract

The purchasers contended that the vendor had no right to terminate the contract as:

  • The vendor never made time of the essence by serving a notice to complete.
  • The vendor had elected to keep the contract on foot by commencing proceedings for specific performance and therefore, was not entitled to terminate in the absence of further repudiatory conduct on the part of the purchasers.

Is there a requirement to issue a notice to complete before termination?

The Court of Appeal held that a vendor has a right to terminate a contract without issuing a notice to complete where there has been repudiation by a party of its obligations under the contract and not merely a delay in performance.

In this case, the statements from the purchasers' solicitor that they were not financially capable of acquiring the property, coupled with Mrs Galafassi's representations that they did not have requisite finance to proceed and could not comply with a court order for specific performance, constituted clear statements of the purchasers' inability and unwillingness to perform the contract.

The court found that these forms of unretracted declarations from the purchasers were plain and amounted to repudiation and not a mere delay in performance or breach of the obligation to complete.

By reason of the purchasers' continuing repudiatory conduct, the court found that it was not necessary to determine whether time was of the essence for the purchasers to complete or whether it was necessary for the vendor to serve a notice to complete to make time essential in respect of this obligation.

Right to terminate after election to sue for specific performance

In assessing the validity of the vendor's termination of the contract, the Court of Appeal discussed the legal significance of commencing proceedings for specific performance. In summary, the court held that a vendor who elects to sue for specific performance is not precluded from later terminating and claiming damages in circumstances where the purchaser, after the institution of proceedings, either committed a further breach of an essential term of the contract, or otherwise evinced an intention no longer to be bound by the contract.

As a result, the institution of proceedings for specific performance is an election to affirm a contract, but does not waive the vendor's entitlement to terminate the contract subsequently in respect of any further breach of the contract.

In this case, the purchasers' unretracted declarations of inability and unwillingness to perform remained as a fact in the history of the matter, such as to convey to a reasonable person in the position of the vendor, renunciation of the contract as a whole.

Despite commencing proceedings for specific performance, the vendor was still entitled to terminate the contract, as the purchasers continued to evidence their intention no longer to be bound by the contract.

Remedies vendor can seek against purchaser who fails to complete contract for sale

This decision provides useful guidance as to the nature of remedies a vendor can seek against a purchaser who fails to complete a contract for sale. An election to seek specific performance of a contract does not preclude a party from later terminating the contract where the repudiating party engages in further repudiatory conduct or otherwise evinces an intention no longer to be bound by the contract.

However, it is important to note that if an innocent party elects to terminate a contract and seeks damages, he or she is not entitled to bring proceedings for specific performance of the contract later.

For more information:

Jackie Cheung Gary Newton
Property acquisition, development and sale
CBP Lawyers

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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