This decision of the NSW Court of Appeal regarding an election to rescind a contract for the sale of land highlights substantial differences in approach between the recent Court of Appeals of Victoria and NSW in respect of the interpretation of notices to rescind. In Koutsopoulos, the NSWCA found in favour of the purchaser because the letter had to be construed in the context of its factual matrix.
On the other hand, the Victorian Court of Appeal in Umbers was far more strict when they interpreted the sentence:
In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract.’
as equivocal and giving the vendor a right to make an election.
(For a more detailed discussion of the decision in Umbers, I recommend Russel Cocks’ blog post: Umbers v Kelson: A Silly Decision as a very good starting point)
Both cases concerned contracts (in Koutsopoulos a real-estate development contract; in Umbers a sale of a business) with ‘subject to finance clauses. But while Umbers was decided in favour of the vendor, Koutsopoulos was decided in favour of the purchaser.
Rescinding in Koutsopoulos: Putting Words in the Purchaser’s Mouth
The main issue arising in this case is whether the purchaser waived her right to rescind the contract. The letter in question, or the purchaser, relevantly, said:
‘We refer to your fax of even date and confirm that our client has elected not to exercise her right to rescind the Contract herein in consideration of the amendments to special condition 42 as set out in that fax. Our client also agrees to the terms of (revised) special condition 44.2 in relation to liquidated damages. For the purposes of certainty, we return herewith copies of the agreed special conditions 42 and 44.2 signed by the writer.’
Special Conditions 42 was a right to rescind if the Council refused development approval. Special Condition 43 on the other hand, was a right to rescind if finance was not obtained (like Umbers). What was significant is that the vendors tried to argue that the purchaser’s solicitors’ letter of 31 July, quoted above, was an election against rescission including (even though it wasn’t even mentioned) rescission due to inability to obtain finance (cl 43) at [31].
The basis of this argument is that as at 31 July, the only right of rescission that had arisen was under cl 43. Even if cl 42 had remained unamended, any right to rescind based on non receipt of development approval would only have come into being at a later date. The appellants say that the statement in the letter of 31 July was clear and unambiguous and must just be applied in accordance with its natural meaning.
The Court disagreed:
One must always be wary of statements like these. As Viscount Simonds said in Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at 463 (albeit in connection with statutes, but the same is true of contracts):
… it must often be difficult to say that any terms are clear and unambiguous until they have been studied in their context … the elementary rule must be observed that no one should profess to understand any part of a statute or any other document until he had read the whole of it. Until he has done so he is not entitled to say that it or any part of it is clear and unambiguous.
The Court continued:
‘From what Viscount Simonds said at 461, his use of the word “context” in the case of contracts would embrace the actual matrix.’
(This is very much in contrast to the approach of the Victorian Court in Umbers.)
The Court of Appeal in Koutsopoulos agreed with the trial judge, who said that the letter was part of a series of letters exchanged during July. The Court of Appeal then approved of the trial judge’s analysis of the letter quoted above:
On any rational understanding of this letter, in the context of the terms of the contract unaltered and as proposed to be altered, and in particular of the terms of Special Condition 42, the reference to an election not to exercise a right to rescind could mean and could mean only the right to rescind with which Special Condition 42 deals, which was the right that was to arise, and was to be exercised in seven days, if Council failed to make a determination by 31 July 2008. The relevant correspondence opened by the
purchaser’s solicitors on 30 June 2008 dealt only with Special Conditions 42 and 44.2, did not refer to Special Condition 43, and did not refer to the subjects with which Special Condition 43 dealt. The letter could not rationally have been understood by the person to whom it was directed to refer to anything other than the exercise of the right to rescind in Special Condition 42. A strongly confirming circumstance is the fact that no alteration to Special Condition 43 was discussed or considered, there was no reference in the correspondence to Special Condition 43 at all, although the right of rescission in it had already existed since 30 June and was a right of each party. If anyone thought that Special Condition 43 was involved, it is difficult to suppose that there would not have been some expression reserving or foregoing rights under it. Until late developments in October there were no expressions in communications between the parties’ solicitors of the concept that Special Condition 43 and its right of rescission might have been involved in the arrangements made in July. I am satisfied that it was nobody’s thought that they were, but if anybody did think that, they did not have a rational basis for so thinking.
The Court of Appeal, evidently having regard to the dicta of Viscount Simonds, explained the necessity to:
‘construe a document in its factual matrix. That exercise sometimes shows that what might be thought to
be “plain English words” were in fact terms used by the parties in their own special sense: they had their own dictionary. That sort of principle was rightly applied by the primary judge in this case. The correspondence between the parties’ solicitors in the month of July clearly shows that the solicitors had in mind the right to rescind under Special Condition 42 and only that right.’
This appears to be clearly correct; to infer that the purchaser was referring to Special Condition 43 would be akin to putting words into the mouth of the purchaser, something the Court in Umbers seemed willing to do.
‘Affirmation’ v Election not to Rescind
This argument failing, the vendor submitted that other conduct of the purchaser affirmed the contract. The Court disagreed, referring to the case of Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27 ; 182 CLR 26, 41:
‘The true nature of election is brought out in this sentence from the seminal work of Spencer Bower and Turner, The Law Relating to Estoppel by Representation (3 rd ed (1977) p 313): “It is of the essence of election that the party electing shall be ‘confronted’ with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice.’
To put it another way:
‘In all cases to which the doctrine of election applies the electing party has the choice of two rights, either of which he is at liberty to exercise, but not both. The rights between which he has a choice must be mutually exclusive.’
The Court found for the purchaser because, as the Court asked rhetorically at [50-54]:
‘Where in the instant case, it must be asked, was the purchaser electing between two mutually inconsistent rights?
‘…The case is analogous in some respects to Finagrain SA Geneva v Kruse [1976] 2 LL Rep 508 (CA) . In that case,
the buyer accepted sub-standard goods for the instalment delivered in June, but that did not amount to a waiver of its right to have goods of the required standard for the remainder of the instalments. The buyer had a number of distinct rights and waiver re one did not affect the others.‘
Marc Testart, Barrister
MyLearnedFriends 
Posted on June 12, 2011
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