Cocks, Russel --- "Risk resolved" [1997] LawIJV 43; (1997) 71(2) The Law Institute Journal 35

• Risk resolved

Risk resolved

by RUSSELL COCKS

Andrew Brown, in an article in this Journal,' suggested that it was necessary to go "back to the drawing board" in relation to the provisions in the standard form contract of sale which related to risk, and indirectly to the insurance consequences of that risk. At that time the relevant provision was General Condition 1.2 and his comment arose from the interpretation of that condition by Brooking J in McTier v Haupt.'

It must be remembered that at common law the risk associated with a property which is the subject matter of a contract of sale falls on the purchaser from the moment that the contract is entered into: Fletcher v Manton.' Thus the purchaser in that case was obliged to complete the contract notwithstanding that a notice to demolish the improvements erected on the property was served during the con-tract period. However, Fletcher v Manton itself recognised that the contract entered into by the parties could seek to alter this situation and General Condition 1.2, which was introduced in 1983, was generally thought to have done so. That condition required the vendor to deliver the property in the "present state of repair", i.e. as it was on the day of sale.

On the basis of the only case which had considered that condition (James P O'Collins P/L v Esnouf'), I argued' that this condition had effectively reversed the burden of risk and that the vendor under such a contract carried the risk until settlement. In fact, Esnouf had not required a final determination of the issue as Ormiston J concluded that the deterioration in the premises had not been significant and that the vendor had in fact complied with his obligation of delivering the property in the "present state of repair". However, the judgment appeared to sup-port the proposition that, in appropriate circumstances, a purchaser could avoid a contract on the basis of deterioration or could alternatively seek specific performance of the contract and require the vendor to make good any such deterioration.

Esnouf had been concerned with what might be described as a defensive use of GC1.2: the purchaser had sought to rely on the condition to justify not settling. McTier v Haupt, however, concerned an attempt to use GC1.2 in a positive manner: the property had burned down during the contract period and while it was agreed that the purchasers were entitled to avoid, they in fact wanted the property and sought to enforce the contract. However, Brooking J interpreted GC1.2 as a "condition" rather than a "promise" and thus concluded that while there might be a right to avoid, GC1.2 could not support a claim in the nature of specific performance as the vendor had not "promised" to deliver the property in the condition sold. He also suggested that while Esnouf may have allowed the courts some flexibility in their approach to GC1.2, he was not certain that such flexibility could be justified. Thus Andrew Brown concluded that redrafting was necessary, particularly if the intention of the condition was indeed to reverse the risk.

The copyright contract of sale reflects the form of contract prescribed for use by estate agents by regulations made under slO Estate Agents Act. Those regulations sunsetted in 1993 and so the Law Institute was involved in a review of the form of contract in 1992. The opportunity to amend GC1.2 was taken and the replacement condition now reads:

GC2.1: The vendor carries the risk .. . GC2.2: The vendor must deliver the property and the chattels . . . in their present condition.

It would appear that this return to the drawing board has been successful. O'Bryan J in Black Creek Deer Farm P/L v ANZ6 was faced with a similar fact situation to that in McTier v Haupt. The property burned down during the contract and while it was clear that the purchaser could bring the contract to an end, the purchaser in fact wanted the contract to proceed, that is, the purchaser was seeking to impose a positive obligation on the vendor to present the property in the condition in which it had been sold including, if necessary, taking such steps as were necessary to put the property in that condition at settlement.

It is unusual that a purchaser would take such a view. Most purchasers when faced with a pile of ashes in place of their dream home will take the opportunity to escape from the contract, in relation to a dwelling-house under the specific provisions of s34 Sale of Land Act and in relation to other properties under GC1.2. However, the facts in this case were rather unusual and it is always the unusual case which tests legal theory. ANZ was selling as mortgagee. It is amazing how often a burn-down seems to befall such sales and this probably explains why the dispute was not simply resolved by insurance; presumably it simply could not be obtained or was not sufficient to cover the loss. And what a loss it was. The contract price was $200,000. On the land was erected a modern 75 square home with indoor swimming pool and evidence was given that it would cost $550,000 to replace.

The purchaser argued that it was ready, willing and able to complete the contract and was entitled to specific performance or damages for non-performance. The vendor, along with a number of other spurious arguments which were either eventually not proceeded with or were unsuccessful, argued that it was not obliged to reinstate. O'Bryan J noted that McTier v Haupt had concluded that as GC1.2 (as it was then) was a condition rather than a promise it carried no positive obligation. He went on to comment that this contract, however, was governed by GC2.1 and "General Condition 2 imposes an obligation on the vendor to deliver the property in its contractual condition at settlement" and "The risk of loss or damage to the property and the chattels is imposed upon the vendor until settlement (GC2.1)". He therefore found in favour of the purchaser and ordered that the contract be specifically performed by the purchaser paying $200,000 in return for a transfer and that the vendor pay damages of $500,000 to allow for reinstatement. After five days in the Supreme Court the total cost to the bank of this can of petrol would have been approaching seven figures.

The judgment is a resounding confirmation that the trip back to the drawing board has been successful. O'Bryan J has concluded that GC2.1 means what it says and does impose a positive obligation on vendors to maintain the property. That is not to say that the most trifling deterioration can be grasped by the purchaser to justify avoidance, nor to suggest that the purchaser may arbitrarily deduct from the purchase price some amount to compensate for some alleged deterioration, but it does mean that in appropriate circumstances the purchaser is entitled to insist on compliance with GC2.1. What circumstances short of burn-down will support that right is not clear, but some guidance may be found by returning to Esnouf, without being sidetracked by McTier v Haupt which has now surely been laid to rest. Applying Ormiston J's logic, it is almost possible to create a graduated table of "offences". A trivial deterioration will not justify rescission or damages, a more serious one may justify damages but not rescission and only the most serious deterioration, such as burn-down, will justify rescission or specific performance, with or without damages. There is no doubt that we will continue to suffer from practical difficulties in applying such a graduated scale, particularly in relation to those examples of deterioration which are revealed by the final inspection of the property conducted in the last seven days prior to settlement. Reality often means that a purchaser has to settle with something less than a perfect property, but such circumstances must be regarded as one of the hazards of modern life: we all take the risk of being run over by a bus.

It is clear that I personally am comfort-able with O'Bryan J's decision - as one of the drafters of GC2.1, why wouldn't I be? But others are not and there is a suggest-ion that vendors should now be taking steps to amend the standard form contract by deleting GC2.1. To simply delete GC2.1 is to return us to the Dark Ages where risk passes to the purchaser on contract, a mire we escaped from fifteen years ago. It also creates an obligation to disclose insurance pursuant to s32(2)(g) which, if not complied with, can justify avoidance. I can also imagine a purchaser running a fairly convincing misrepresentation argument if a contract is presented in what otherwise appears to be a common format but with such an important change effected by deletion. The ultimate criticism of this proposal, however, is the acknowledgment by its proponents that while vendors should be deleting GC2.1, purchasers should insist on its retention. We all act for both vendors and purchasers from time to time and a common form has been an achieved aspiration for decades now. GC2.1 simply requires vendors to ensure that they have their property adequately insured - not just until contract but through to settlement. On balance this is the safest course for all concerned. 

Notes

1. (1992) 66 LI1493.2. [1992[ 1VR 653.3. [1940] HCA 32; (1940) 64 CLR 37. 4. (1986) V ConvR 54-193. 5. (1991) 65 LIJ 727. 6. (1996) V ConvR 54-549.