N3536

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NO. 148 OF 1999

BETWEEN:

MATHEW TOLANAS
Plaintiff

AND

COLLINS GIPE
First Defendant

AND

GOMI GIPE
Second Defendant

AND

SELA GIPE
Third Defendant

Lae: Gabi, J
2008: 6th, 8th, 23rd & 29th May
9th December

CONTRACT – letter of intent for sale signed between plaintiff and third defendant for sale of plaintiff’s property – third defendant makes improvements without approval from building board – plaintiff seeking to repossess property

CONTRACT - whether letter of intent constitute a valid contract - whether defendants acted unlawfully by occupying the property - whether defendants acted unlawfully by making structural alterations and additions to property without approval of Building Board
ESTOPPEL - whether principles of equitable estoppel is available to the defendants who have relied on the letter of intent - whether the plaintiff is unjustly enriched. 

Cases Cited:

Papua New Guinea cases
Fly River Provincial Government v Pioneer Health Services Ltd (2001) SC705
Jay Mingo v Steamships Trading Ltd trading as Steamships Property Division [1995] PNGLR 129
Paul Kumba v Motor Vehicle (PNG) Trust (2001) N2132
PNG v Keboki Business Group Inc. [1985] PNGLR 369
Putput Logging Ltd v Phillip Ambalis [1992] PNGLR 159
Ronald Douglas Ferns v Charles Henry Bird [1964] PNGLR 110
Shell Papua New Guinea Ltd v Speko Investment Ltd (2004) SC767
Waghi Security Services Ltd v John Tembon and Western Highlands Provincial Government [1994] PNGLR 138

Overseas Cases:
Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65
Cowan v Mibourn (1867) L.R. 2 Ex 230
Liverpool Borough Bank v Turner (1860) 2 D.F. & J 502
Mansfield in Moses v Macferlan in 1760
St John Shipping Corp. v Joseph Rank Ltd [1957] 1Q B 267 

Counsel
S Tedor, for the plaintiff
R Mugarenang, for the first defendant

DECISION

9 December, 2008

1.	GABI, J: Introduction: Mathew Tolanas, the plaintiff, and Sela Gipe, the third defendant, signed a letter of intent for the sale of the plaintiff’s property for K15, 000.00. As a result, the third defendant moved into the property and made improvements without the approval of the Building Board. The third defendant has so far paid K5, 000.00 and the plaintiff is seeking to repossess the property. 

2.	The issues before the Court are: (i) whether the letter of intent constitute a valid contract; (ii) whether the defendants acted unlawfully by occupying the property; (iii) whether the defendants acted unlawfully by making structural alterations and additions to the property without the approval of the Building Board; (iv) whether the principles of equitable estoppel is available to the defendants who have relied on the letter of intent; and (v) whether the plaintiff is unjustly enriched. 

Facts

3.	The plaintiff and the defendants were known to each other. The defendants became interested in the plaintiff’s property and the plaintiff agreed to sell it to them. One of the defendants drew up a document in which the parties agreed that the price for the property was K15, 000.00, that the first payment of K3, 000 was to be made on 16th December 1992 and final payment to be made by 31st December 1993, that the plaintiff would relinquish the title and the key to the defendants after payment of the first instalment and that the defendants would carry out repairs to the property. 

4.	Pursuant to the agreement the third defendant moved into the property in January 1993 after payment of K3, 000.00 for the months of January, February and March 1993 and the plaintiff handed over the title deed to the defendants. Upon discovery that the title was still in the name of New Guinea Containers Pty Ltd, the defendants returned the title deed to the plaintiff and stopped payments. After demands by the plaintiff, the defendants paid K1, 000.00 in August 1993 and the last payment of K1, 000.00 was made in June 1996. No further payments have been made since. 

5.	The third defendant has been in occupation of the property since January 1993 and has made structural alterations and additions to the property without the approval of the plaintiff and the Building Board. 

Did the letter of intent dated 15th December 1992 constitute a valid contract for the sale of the property?

6.	The letter of intent is in these terms:

"LETTER OF INTENT’

BETWEEN MATHEW TOLANAS AND SELA GIPE

1.	That the Seller/Owner of the said property at Allotment 7 Section 96 is Mathew Tolanas of P O Box 505 Lae.

2.	The buyer of the said property is Sela Gipe, of P O Box 1018, Lae.

3.	That the said property command an open Market value of K15,000.00 based on present market considerations.

4.	That the Buyer will carry out major repairs on the property, including re-connection of electricity, water and telephone.

5.	That the owner relinquish the original title and the keys to the buyer when the first instalment is made.

6.	That the first instalment be made on the 16/12/92 at the rate of K3,000.00 and monthly thereafter.

7.	The full payment shall be made by 31/12/03.

We both agree to transact the sale of the said property based on mutual understanding. Should there be any legal implications, relating to the said property, we agree to be under the Laws of the country and of the Word of God Almighty.

…………………………	…………………………	
 Seller	Buyer	

…………………………	…………………………	
 Witness	 Witness	

Date:15-12-92."

7.	Counsel for the defendants submits that the letter of intent constitutes a valid contract between the parties for the sale of the property. He argues that the parties had reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect and that the letter of intent contains all the agreed terms of the contract which were to be restated in a formal contract of sale in the future and referred me to Ronald Douglas Ferns v Charles Henry Bird [1964] PNGLR 110. In that case, the Court considered the 3 classes of cases defined in Masters v Cameron [1954-55] 91 CLR 353 and held that the contract fell into the first of the 3 classes. 

8.	Counsel for the plaintiff agrees that there was an agreement to sell, but argues that the contract was void and unenforceable for 2 reasons. First, prior to 1996, no transfer of land could be made without the approval of the Minister of Lands pursuant to section 69 of the Land Act, Chapter No. 185. However, the Land Act of 1996 provides that ministerial approval is not required in "permitted dealings." A "permitted dealings" is a sale of land between two citizens. There is no provision for retrospective application under the Land Act 1996. The letter of intent precedes the 1996 Act and is covered by section 69 of the Land Act, Chapter No. 185 where ministerial approval was required. As none was obtained he argues that the agreement is void and unenforceable. Second, under section 19 of the Stamp Duties Act the letter of intent is liable for stamp duty. Failure to stamp a document renders it inadmissible or unenforceable in a Court of law (see Putput Logging Ltd v Phillip Ambalis [1992] PNGLR 159 and Waghi Security Services Ltd v John Tembon and Western Highlands Provincial Government [1994] PNGLR 138). As the document was not stamped it was inadmissible and unenforceable in a Court of law.

9.	It has long been held that the Court is not prevented from directing specific performance of a contract despite the absence of ministerial approval (see McCosker & King v Kuster [1967-68] PNGLR 192, Re Luabar Logging Ltd [1988] PNGLR 124 and Arnold Ningiga v Peter Lare Koavea [1988-89] PNGLR 312); however, that depends on whether there is a contract. I will deal with that aspect later in my decision. With respect to the admission of unstamped document into evidence, I agree with the proposition that an unstamped document cannot be produced in evidence, but if there is sufficient collateral evidence given of the existence of an unstamped document and its terms, in equity a party can rely on that evidence (see Tian Chen Ltd v The Tower Ltd (2002) N2313 and New Ireland Development Corporation Ltd v Arrow Trading Ltd (2007) N3240).

10.	In this case, the parties were agreed that there should be a sale and purchase, and the parties, the property, the price and the method of payment were all settled between them. The essentials of a contract are there; but whether there is a contract depends on the intention of the parties. No formal contract was entered into. Notwithstanding the absence of a formal written agreement, it is possible for a binding contract to be entered into either in writing, or orally, or by conduct, or a mixture of those methods. The question is whether it can be said that a binding contract was entered into in the circumstances of this case. In determining this issue, the intention of the parties to enter into an enforceable contract is critical. That may be inferred from the language employed by the parties or the conduct of the parties. The test is an objective one.

11.	The common law principles applicable to this situation are those set out by the High Court in Masters v Cameron (supra). The Court at p.360 - 362 said:

"Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v Miller (1878) 3 App. Cas. 1124, when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does proceeded: ‘. . . as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed’((1878) 3 App., Cas. At p.1151): see also Sinclair, Scott & Co. Ltd. V Naughton (1929) 43 C.L.R. 310 at p.317. A case of the second class came before this Court in Niesmann v Collingridge (1921) 29 C.L.R. 177 where all the essential terms of a contract had been agreed upon, and the only reference to the execution of a further document was in the term as to price, which stipulated that payment should be made ‘on the signing of the contract.’ Rich and Starke JJ. observed ( (1921) 29 C.L.R. at pp.184, 185) that this did not make the signing of a contract a condition of agreement, but made it a condition of the obligation to pay, and carried a necessary implication that each party would sign a contract in accordance with the terms of agreement. Their Honours, agreeing with Knox C.J., held that there was no difficulty in decreeing specific performance of the agreement, ‘and so compelling the performance of a stipulation of the agreement necessary to its carrying out and due completion’ ((1921) 29 C.L.R. at p.185): see also O’Brien v Dawson (1942) 66 C.L.R. 18 at p.31.

Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: Governor & c. of the Poor of Kingston-upon-Hull v Petch (1854) 10 Exch. 610; 156 E.R. 583. The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v Parker (1950) 80 C.L.R. 304 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v Miller (supra). Lord O’Hagan said: ‘Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made’((1878) 3 App. Cas. at p.1149). And Lord Blackburn said: ‘parties often do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) singed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement’ ((1878) 3 App. Cas. at p.1152). So, as Parker J. said in Von Hatzfeldt-Wilden-burg v Alexander (1912) 1 Ch. 284 at p.289, in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract.

The question depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape: Farmer v Honan (1919) 26 C.L.R. 183."

12.	Mathew Tolanas and Sela Gipe filed affidavits and gave oral evidence at the trial. 

13.	In his affidavit dated 10th April 2008, Sela Gipe deposes that the understanding of the parties was that the letter of intent would be in place until a formal sale agreement was to be drawn up by their lawyers in the future (see paragraphs 2, 5, 8 and 14). He reiterated this understanding in his letter of 13th May 1999 to Mathew Tolanas (annexure "A") where he stated that "a legally binding contract of sale" would be signed after the title is handed over to his lawyers. He continued, "During that time we can mutually agree on a final sale amount …in the presence of our lawyers and a (sis) independent valuer." 

14.	In examination in chief, he said the following:

"Q. Why has it taken so long to have the property purchased?
 .A. We have been writing all these years for the plaintiff to hand over the original title as per our agreement and then a formal agreement to be done. Unfortunately, that has never been done." 

15.	I am of the view that the letter of intent was a statement of the parties’ intention, understanding or agreement to enter into an agreement in the future. This is clearly borne out by the evidence before the court. An agreement to enter into an agreement at some future date is not a contract: Masters v Cameron (supra) and Shell Papua New Guinea Ltd v Speko Investment Ltd (2004) SC 767. In the latter case, the defendant offered to assist the plaintiff to establish a service station on a piece of vacant land. On reliance of the offer, the plaintiff expended money and incurred costs to secure a registered title and carry out necessary groundwork for the project. The defendant later changed its mind and cancelled the deal. The National Court found that although there was no formal contract signed between the parties, a binding contract had been entered into and that the defendant had breached the contract. The defendant appealed. The Supreme Court allowed the appeal and held that the parties intended that no bargain would be concluded until a formal contract was signed and executed. 

16.	The letter of intent dated 15th December 1992 is not a contract. 

Have the defendants acted unlawfully by occupying the property? 

17.	Sela Gipe has been in occupation since January 1993. He moved in after payment of K3, 000.00 with the knowledge and acquiescence of the plaintiff pursuant to the letter of intent. However, in March and April 1999, the plaintiff changed his position and asked him to move out of the property; a position he maintains up until now. I am of the view that the defendants have been occupying the property without the approval of the plaintiff since 1999 and that no rent has been paid by the defendants to the plaintiff for the occupation of the property since 1999. 

Have the defendants acted unlawfully by making structural alterations and additions to the property without the approval of the plaintiff and the Building Board? 

18.	It is not contested that the property was in a run down condition when the defendants moved in. Counsel for the defendants submits that improvements to the property were made pursuant to clause 4 of the letter of intent. Clause 4 reads:

"That the buyer will carry out major repairs on the property including reconnection of electricity, water and telephone."

19.	The improvements include removing a bedroom of the house to make it a 2 bedroom house and the erection of a building at the back of the main house. The plaintiff says the agreement was that the defendants would move into the house and that he would hand over the title to the defendants, but denies that the defendants were to do maintenance and/or renovation. There is a certain degree of ambiguity about clause 4. It is not known when the buyer were to do major repairs; was it before the title or after the title was handed over? What do major repairs mean? The maintenance work on the property appears to have commenced in May 1993 and the construction of the new house/boy house commenced in May 1996. In view of the fact that the house was in a run down state at the time of the agreement, I am inclined to believe that the plaintiff agreed to the defendants making repairs on the property. Are the structural changes here repairs? I believe the construction of the new house/boy house and alterations to the bedrooms are structural changes of a substantial nature which require approval of the plaintiff and the Building Board. The erection or alteration of a building on the land requires the approval of the Building Board. 

20.	Sections 11 to 14 of the Building Act provide:

"11. Requirement of Approval.	

Where—

(a)	an owner or occupier of land; or

(b)	an architect, builder, contractor or engineer employed by an owner or occupier of land in any capacity; or

(c)	a person employed by an owner or occupier of land in an advisory or supervisory capacity, wilfully or negligently—

(d)	commences or continues to carry out, or to assist in the carrying out of; or

(e)	permits the carrying out of, the erection or alteration of a building on the land, unless—

(f)	the position; and

(g)	the plans and specifications, of the proposed building or alteration have been approved by the Board, he is guilty of an offence.

Penalty: A fine not exceeding K2,000.00.

Default penalty: A fine not exceeding K100.00 per day the offence continues.

12.	Application for approval.

(1)	An application for approval under Section 11 shall be made by the owner or the occupier or his agent to the Board or Building Authority that has jurisdiction over the area where the building the subject of the application is situated.

(2)	An application shall be in the prescribed form and accompanied by such copies of the plans and specifications of the proposed building or alteration, in the prescribed form and containing the prescribed particulars, as the Board requires.

 (3)	One copy of the plans and specifications referred in Subsection (2) shall be retained by and form part of the records of the Board.

13.	Approval.

A Board may grant an approval under this Act, subject to such conditions, not inconsistent with this Act, as the Board thinks proper.

14.	Conditions of approval.

(1)	A person to whom approval under this Act has been granted, or an architect, builder, contractor or engineer employed in any capacity, or any other person employed in an advisory or supervisory capacity, in connexion with the erection or alteration of a building to which approval under this Act has been given, who, wilfully or negligently—

(a)	fails to comply with the conditions (if any) to which the approval is subject; or

(b)	erects or alters, or permits a person to erect or alter, the building otherwise than in the position and in accordance with the plans and specifications approved, is guilty of an offence.

(2)	Where an approval specifies the purpose or purposes for which a building may be used, a person who uses the building, or permits it to be used, for a purpose other than the purpose or purposes specified is guilty of an offence.

Penalty: A fine not exceeding K2,000.00.

Default penalty: A fine not exceeding K100.00 per day the offence continues." 

21.	There is no evidence of approval of the plaintiff or the Building Board ever obtained in respect of the structural alterations and additions to the property. It is an offence to effect structural alterations and additions to a property without the approval of the Building Board. The defendants breached the Building Act. They acted illegally in making the structural changes.

Is the principle of equitable estoppel available to the defendants who have relied on the letter of intent? 

22.	Counsel for the defendants submits that the equitable principles of estoppel by representation and estoppel by acquiescence are available to the defendants (Jay Mingo v Steamships Trading Ltd trading as Steamships Property Division [1995] PNGLR 129) and the court should prevent the plaintiff from evicting them from the property and order specific performance of the contract for the following reasons: (i) the plaintiff breached the contract by not delivering the title to the defendants after the payment of the first instalment; (ii) the plaintiff had absented himself from Lae for 6 years, from 1993 to 1999, which made it difficult for the defendants to complete the sale; (iii) the plaintiff had taken a long time to prosecute the claim; and (iv) the defendants have altered their position considerably by expending money on improvement, maintenance and upkeep of the property over the last 15 years. 

23.	Counsel for the plaintiff submits that there is no provision in the letter of intent for the defendants to move in and possess the property. The continued occupation of the property and the expenditure of funds by the defendants to reconstruct and renovate the property without the approval of the plaintiff and the Building Board are unlawful. As a result, estoppel is not available to the defendants. Second, specific performance is not available due to the unlawful or illegal activities of the defendants. Specific performance would have been available if the contract were valid; not when the contract is void and unenforceable from the beginning. 

24.	It is trite law that an illegal contract is null and void and therefore unenforceable from the beginning. The authorities clearly show that the doctrine of estoppel by conduct is unavailable where the action is ultra vires or illegal (PNG v Keboki Business Group Inc. [1985] PNGLR 369, Pratt J. at 376 and Paul Kumba v Motor Vehicle (PNG) Trust (2001) N2132). 

25.	In Fly River Provincial Government v Pioneer Health Services Ltd (2001) SC 705, the Supreme Court dealt with the consequences that flow from an illegal contract. The Court said:

"[I]t is trite law that an illegal contract cannot be enforced. Clearly, a guilty party to an illegal contract cannot enforce it (Cowan v Mibourn (1867) L.R. 2 Ex 230). A person would be a guilty party to a contract for the purposes of not enforcing an illegal contract, where it fails to take steps it should have taken to protect its interest. This consequence follows even as against an innocent party. There is therefore, no such a thing as estoppel by conduct as against the need to put an end to an illegal contract. The judgment in Barclay Bros (supra) case, after having regard to a number of authorities made that clear in this way at page 16:

‘But as for pleading illegality, it clearly is the law that the State or any party can repudiate a contract on grounds of its own illegality. This is simply because Courts must always ensure there is no impediment to the cessation of unlawful action and restoration of legality.’"

26.	In this case, there is no contract, but if I were to find that there is a contract, it would be illegal in that the approval of the Building Board was not obtained.

Is the plaintiff enriched unjustly?

27.	The plaintiff has received a payment of K5, 000.00 pursuant to the letter of intent. In addition, the value of improvements on the property appears to be substantial. A party cannot be allowed to have the benefit of a contract and then hide behind the unenforceability of a contract to unjustly enrich himself: Putput Logging Ltd v Phillip Ambalis [1992] PNGLR 159. His Honour Sheehan J. said:

 "The law as to the consequences of illegal contracts has long been clear. Void contracts or unenforceable contracts are governed by the maxim ex turpi causa non oritur actio. That simply means, no rights can arise out of an illegal contract. But the courts have long recognised two situations. The first is that very often one or other party may be less at fault than another; the second is that situations arise where it would be unjust for the courts to allow a party to take advantage of illegality by hiding behind the unenforceability of a contract and, thereby, unjustly enrich himself…As for unjust enrichment, it is hardly surprising that the courts will not give any support to the enforcement of contracts plainly prohibited by law. But in situations where it is just and equitable to do so, the courts will make an award by way of restitution, rather than leave a party to hide behind a prohibited contract and retain monies paid under it. It is important to note that liability to make restitution of monies or economic advantage on property wrongfully received is not based on any action prohibited in contract, the law of contract generally, or implied contract. It is, in fact, largely based on the principle that no one should be unjustly enriched. Lord Mansfield in Moses v Macferlan in 1760 says in a passage which has stood the test of time: 

‘This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies (only) for money which, ex aiquo et bono, the defendant ought to refund; it does not lie for money paid by the plaintiff, which ... by positive law he was debarred from recovering. But it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through (duress) or an undue advantage taken of the plaintiff's situation, contrary to the laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is that the defendant upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money.’

To afford relief in such situations, the court will supply a remedy provided that the plaintiff seeking relief is not forced to found his claim for that relief on the illegal contract or plead the illegal contract in order to support his claim. (See Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65.) In other words, if a plaintiff can establish a claim which does not rely on the contract prohibited by statute, or result in a remedy which is, in effect, the enforcement of that illegal contract, then the court will afford a remedy.

All that need be added to this is to emphasise that, while the path to restitution under prohibited or illegal contracts is strictly confined, where restitution may be obtained, no limit should be implied that would restrict the courts administering natural justice as required by the Constitution."

28.	The plaintiff would be unjustly enriched if there is no restitution. In the circumstances of the case, I make the following orders:

1.	The letter of intent dated 15th December 1992 is not a contract;

2.	The plaintiff is the owner of the land described as Allotment 7, Section 96, Volume 38, Folio 197, Lae;

3.	The defendants are to vacate the property within 3 months from the date of judgment;

4.	The plaintiff shall pay the defendants K5, 000.00 and the costs of improvements to the property since January 1993; 

5.	The defendants shall engage a competent builder to assist calculate the costs of improvements for endorsement by the court;

6.	The defendants shall pay monthly rent to the plaintiff commencing 1st January 1993;

7.	The plaintiff and the defendant shall engage the services of a real estate agent to work out the monthly rent. 

Sialis Tedor & Associates, Lawyers:	Lawyers for the plaintiff
Muromu Lawyers:	Lawyers for the defendants