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Taudevin v Theseira and Theseira; Theseira and Theseira v Taudevin [1995] PNGLR 56 (24 April 1995)

PNG Law Reports 1995

[1995] PNGLR 56 - Philip Howard Taudevin v Charles Theseira and Theresa Theseira; Charles Theseira and Theresa Theseira v Philip Howard Taudevin 

[1995] PNGLR 56

N1379

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

PHILIP HOWARD TAUDEVIN

V

CHARLES THESEIRA AND THERESA THESEIRA

CHARLES THESEIRA AND THERESA THESEIRA

(CROSS PLAINTIFFS)

V

PHILIP HOWARD TAUDEVIN

(CROSS DEFENDANT)

Waigani

Sheehan J

21 April 1995

24 April 1995

CONTRACT - Sale of land - Claim for specific performance - Defence of termination for fundamental breach - Definition of fundamental breach.

REAL PROPERTY - Enforceable agreement passes property - Covenant against sub-letting - Licence does not amount to breach of such covenant.

WORDS AND PHRASES - “Structural alterations” or additions to property - Meaning of.

EVIDENCE - Manufacture of evidence - Pleading by counsel.

Facts:

The plaintiff and defendant entered into a contract of purchase and sale of registered property. The parties carried out the contract in a substantial way, a deposit of 10% was paid by the plaintiff, and he took possession of the vacant portion. However, because the transaction was couched as a lease/purchase agreement and the plaintiff permitted a third party use of the premises in purported violation of a clause against subletting, the vendor purported to forfeit the interest and claimed the deposit as damages.

Held:

1.       The transaction was a sale of real property, and the vendor had no ground to resile from carrying it out.

2.       From the moment of the execution of the agreement pending ministerial approval, the property passed to the plaintiff, though completion by giving full possession and final payment of the purchase price was postponed.

3.       Not every breach of a contract gives a right of discharge from liability. Only a breach of a term fundamental to the contract will entitle an innocent party to treat the contract as terminated.

4.       A licence to occupy on a temporary basis is not subletting or parting with possession and is not breach of such a term.

Counsel

J Shepherd for plaintiff.

J Aisa for defendant.

24 April 1995

SHEEHAN J: The plaintiff seeks orders that the defendants specifically perform a contract of sale of land entered into by the parties on 6 April 1994.

It is the plaintiff’s case that the parties agreed that the defendants, as vendor, would sell and the plaintiff purchase “all that the leasehold estate of the Vendor in ... the State Lease of Portion 1620, Milinch, Granville, Four Mile, of Moresby NCD registered in State Business Lease, Vol. 102 Fol 171 ... together with all improvements erected thereon” for a purchase price of K142,000. Settlement was provided for 18 February 1995, or within 14 days of ministerial approval under s 69 of the Land Act, or on such a date as the parties otherwise agree. A deposit of 10% - K14,200 - was paid by the plaintiff and released to the defendants on the security of an interest-free second mortgage of the property executed by defendants.

The plaintiff says that the property was sold with vacant possession but, pending settlement, an occupation fee of K1,500 per month was agreed. In fact, that vacant possession was subject to the proviso that the plaintiff allow a tenant of the defendants (Port Moresby Timbers Pty Ltd) to see out its lease to expiry date, namely, 1 December 1994.

The plaintiff contends that, in pursuance of the contract, the executed contract documents and transfer of title were duly stamped and returned for presentation by the defendants to the Minister of Lands for s 69 approval. The second mortgage securing the deposit to the plaintiff was also duly executed by the defendants.

The plaintiff says the defendants have breached their contract, in that on 27 September 1994 they determined to unilaterally terminate the contract and have claimed to forfeit the deposit of K14,200.

In reply, the defendants acknowledge that they “agreed to accept the offer of the sale to the plaintiff for K142,000”, but assert that the agreement executed by them was a “lease/purchase” agreement. It was a condition of that lease, they say, that the plaintiff not sublease. Accordingly, when the plaintiff, in breach of that agreement, entered into a sub-lease with another party, that breach brought about the defendants’ decision to terminate the contract as they claim they were entitled to by virtue of the provisions of cl 10 of the agreement.

Further, the contract provides that upon termination for breach, the defendants were entitled to damages. Therefore, the defendants forfeited the deposit as part of the claim for damages sustained from the plaintiff’s failure to honour this contract.

The trial of this matter was preceded by interlocutory applications for injunctive relief, brought about by the defendants’ decision to terminate the contract in late September of last year. Those applications were declined. Sufficient to say, court orders were made to hold the status quo pending trial. Likewise, questions of damages and costs were reserved for trial.

The trial itself involved a lengthy examination of the plaintiff and Mr Theseira, one of the defendants, as well as the events, from time of negotiation of the contract through to the purported termination. That evidence sought to solve the essential question of whether the defendants were justified by virtue of the terms of contract they had executed to terminate that contract with the plaintiff.

The contract between the parties provides in cl 10 that upon execution of the contract the purchaser (the plaintiff) shall be entitled to “the benefit of possession of the property pending completion”. Until that completion, the same clause provides that the purchaser shall abide by terms that prohibit subletting, structural alterations, or additions and require the property be kept in good repair. An “occupation fee” of K1,500 per month till settlement is also provided for.

That clause is stipulated to be “subject to the provisions of Clause 20”, which provides:

“20 Possession

The property is sold with vacant possession the benefit of which shall be given to the Purchaser forthwith provided however the Purchaser hereby acknowledges that approximately one half of the property is currently leased by the Vendor to Port Moresby Timbers Pty Limited (and which portion is identified and marked in orange on the diagram annexed hereto) and that not withstanding the provisions of Clause 10 hereof a purchaser shall not be entitled to take possession of that portion of the Property so occupied by Port Moresby Timbers Limited until such time as the Vendor’s existing lease arrangements with Port Moresby Timbers Pty Limited in connection with such portion of the Property shall terminate [October] November 1994 Provided Further However that the vendor hereby covenants with the Purchaser that vacant possession of that portion of the Property currently leased by the vendor to Port Moresby Timbers Pty Limited shall be available for the benefit of the Purchaser no later than 1, [November] December 1994. ”

On the evidence before the Court, there is complete agreement that the contract was executed by the parties on 6 April 1994 and that both parties acted with the full legal advice of their respective solicitors. It can also be said that the particular provisions regarding occupancy pending settlement were also plainly examined by the parties and agreed to. This is shown by the fact that the parties amended and initialled cl 20 to provide that possession would be granted no later than 1 December 1994. Briefly, that clause provides for the defendants’ tenant, Port Moresby Timbers, to see out its term of lease and that, upon that term expiring (or no later than 1 November 1994), the defendants undertook that full possession would be given to the plaintiff.

The parties proceeded to carry out that contract of sale in a substantial way. The deposit was paid. The plaintiff did take possession of that part of the property shown in the contract. The temporary separation of the Port Moresby Timbers part of the property and the erecting of a temporary fence was carried out in an amicable fashion.

The events that led to the defendants terminating the contract began in May of 1994. This was occasioned by the misfortunes of Mr Alex Hamei, who had operated a nearby motor vehicle repairs business, Chebu Workshop. His business premises had been vandalised and burnt out. He was unable to find alternate premises till the plaintiff, Mr Taudevin, offered him temporary haven on the portion of the property occupied by him.

The defendants say that no consent was given to Chebu Workshop entering the premises, but it is quite clear from the evidence offered by Mr Theseira himself that he was approached by the plaintiff’s then manager, Lester Symon, and made aware that Mr Taudevin “had decided to put Mr Hamei in on a temporary basis”. Significantly, Mr Theseira acknowledged that he made no objections at that time. He said in his evidence in Court that though he was not too happy, “I didn’t say anything. I didn’t say yes. I didn’t say no. I said it’s up to you.” That is plainly not a refusal or an objection.

The defendants did write to the plaintiff on 26 May expressing concern about the plaintiff’s arrangement with Chebu Workshop. That letter reads as follows:

“Portion 1620 - Sub letting to apportioned areas???

Under the explicit terms of the agreed sale of the above property of K160,000.00, to you, it was decided in your favour that K18,000.00 would be paid by way of rental payments for the use of a portion of the land to avoid excessive stamp duty on the overall value of the property, which we agreed.

Further, it was understood that you would use it either for stock piling or backfilling in the interim until due date of settlement and pending ministerial approval by April 1995, as part of your expansion proposal.

You have instead sub let the said portion without consultation with us, thus breaching clause (10)(a) of the contract of sale which your lawyers prepared.

I seriously think an explanation is due for us to agree on the matter. This is because we feel uneasy in that it is against our mutual understanding of the arrangements already committed.

I look forward in settling this issue amicably as soon as possible.”

The response was an unsigned letter sent by the plaintiff’s manager:

“P.H. Taudevin

P O Box 1

Baimuru GP.

31 May 1994

Charles & Theresa Theseira

P O Box 2911

BOROKO. N C D

Dear Charles & Theresa

PORTION 1620

I refer to your letter of 26 May 1994 regarding the above property.

It is indeed my intention to backfill the property and will do so upon completion of the filling of front block, Portion 1617. I am dependent on the supplier of the fill.

Prior to my departure overseas I agreed to allow Chebu Workshop to use Portion 1620 on a temporary basis due to their desperate situation because of the burning of their premises of which you are aware. The area was let for an amount far less than the rental being paid to you so it is not a profit-making venture.

I was under the impression that you had been advised by Lester Symons and Alex of Chebu Workshop and that you had not voiced any objection. If you were not aware, then I have been wrongly advised by Mr Symons. That I had not approached you in writing was due to my imminent departure to U.S.A. at the time and for this I apologise.

I trust this explains the situation that arose and apologise again for any inconvenience caused.

Yours sincerely

Philip Taudevin.”

It is to be noted, as the defendant surely noted, that “the area was let for an amount far less than the rental being paid to you”.

That response brought a further letter of enquiry about the sub-lease from the defendant to Chebu Workshop. In a letter dated 17 June, the defendants stated, inter alia:

“Thank you for your response to the letter of the 31/05/94.

Irrelevant to the kind gesture of helping the proprietors of Chebu Workshop. The fact of the matter is that we are adhering to the terms and conditions of the contract which we formally received back on the 23/05/94. Well after Mr Symons had irresponsibly enter arrangements with the sublessees without our formal authority.

Mr Symons should have first obtained an opinion from your lawyers prior to making this mistake, which puts in a serious question of trust and good relationship.

Let me remind you that legally the land is still ours and expect dialogue in any undertakings concerning it that may adversely effect (sic) the commitments made legally by both parties.

Should you wish to continue our good relationship and the undertakings made, we strongly suggest that you provide a copy of the sub-lease agreement etc, with Chebu Workshop to us or your lawyer, in order to sort things out.”

When there was no further response from the plaintiff, the defendants gave notice of termination in the letter of 27 September and declined further occupation payments.

The documents of sale duly executed by the defendants had been forwarded by them to the plaintiff for stamping on 7 April 1994. On 19 May 1994, the plaintiff’s solicitors returned the contract of sale, transfer and mortgage duty stamped, together with necessary fees - (K70) to the defendants’ solicitors, for lodgment at the Lands Department to obtain the necessary ministerial approval.

On 21 September, they wrote again, requesting an urgent confirmation that the approval had been obtained. Instead, the defendants gave notice of termination of the contract by a letter dated 27 September 1994:

“Under the terms and conditions your Contract of Sale and Purchase of Land for our above Property, we have decided to withdraw and terminate the deal without prejudice under Clause 10 (1. a - e) (2. 11 and 21). Please proceed with the necessary requirement for your cash refund via our lawyer who has been informed of this.

As our decision is final, we advise you to take immediate steps now to vacate your tenant who is sub leasing from you and all other items not ours effective 31 September 1994 from the Property.”

DECISION

There is no doubt that in this action the plaintiff is bound to succeed. The attempted termination of the contract by the defendant simply cannot be sustained under the terms of the contract that was freely entered into. This was a simple and straightforward contract, and the defendants/vendors have absolutely no grounds to resile from carrying it out.

This was a simple contract for the sale and purchase of land. That is how the document describes itself. Indeed, that is also how the defendants describe it in the letter of 27 September 1994 which purported to terminate it. The contract states that the defendants enter into the contract as “vendor” and the plaintiff as “purchaser”. It is an agreement freely entered into by both parties, having negotiated the terms themselves, upon and with the advice of their solicitors.

All the agreements necessary for the carrying out of the agreement of sale were stipulated. There was full description of the property to be sold and the price to be paid. There was provision for immediate payment of the deposit, and there was provision for the payment of balance, together with interest on that sum, for the whole of the period the balance was to remain unpaid. Indeed, it may be said that there was more than a deposit paid, rather a part payment, a part performance, since the deposit was not held in escrow pending settlement but paid out directly to the defendants, at their request, to enable them to meet current account debts. That sum was secured to the plaintiff by a second mortgage of the property.

The first paragraph states that the vendors agree to sell and the purchaser agrees to buy all the vendors’ leasehold interest in the property described. It provides that the purchase price is K142,000, that a deposit shall be paid upon the signing of the agreement, and that the balance of the purchase price will be paid upon settlement. Further provision is made for possession to be granted under specific terms and that, pending settlement, the purchaser shall pay the sum of K1,500 per month for the portion that it occupies.

By cl 2 of sch 2, the contract agreement spells out that, quite apart from the payment for possession pending settlement, the balance of the unpaid purchase money, namely K127,800, will bear interest at bank rate and that interest shall form part of the balance of the settlement figure on completion.

There is no provision anywhere in the agreement for a lease. There is no mention that this is a “lease/purchase agreement”, as the defendants maintain. There is, in any event, no magic in the term “lease/purchase agreement”, and certainly this was never a lease of the property with an option to purchase if the lease terms were satisfactorily carried out.

From the moment of execution of the agreement, the property was, in fact, sold to the plaintiff and, indeed, the contract partly performed. Only the completion of the giving of full possession and final payment for the sale was postponed. The provision of partial occupancy and eventual full occupancy were necessary but secondary to the essence of the contract.

Clause 10 provides for possession pending completion, but that clause is specifically stated to be subject to the proviso of cl 20. Claims by the defendants of inconsistency between the clauses are totally without substance. Clause 10 provides for the granting of possession because, overall, the intention is that possession should be given in total. But that clause recognises that, because there is a tenant of the vendors still in occupation, rather than remove that tenant it is agreed that the tenant shall remain in possession till 1 November, when its lease expires. Then, as per the defendants’ request and upon the undertaking of that clause, full possession was to be given not later than 1 December.

It could be said that cl 20 is not entirely for the benefit of the vendors but, rather, for its tenants, Port Moresby Timbers. But, in fact, it was at the defendant vendors’ request this clause was provided, as, of course, the defendants continued to have the benefit of the rent from their tenant. It is significant, too, that there is no stipulation in the contract for the defendants to remain in occupation of the property themselves once they had executed the contract of sale. But in the affidavit of Charles Theseira of 1 November 1994 (para 2) he states:

“we agreed to allow the plaintiff to enter a lease purchase agreement for a period of 12 months for a vacant area of the land. The other area was currently being leased to Port Moresby Timbers. There was a third portion which was still being used by ourselves.”

The occupation of part of the property by the defendants that Mr Theseira described, was an occupation of that part of the land described in the contract of sale as being leased to Port Moresby Timbers. That affidavit supplies the first mention of any claim of rights of occupation by the defendants of the property sold. Certainly, it was news to the plaintiff, no provision having been made for it in the sale agreement. Such failure may itself be seen as a breach of the contract of sale by the defendants themselves. However, even if their being there was not advised to the plaintiffs, their occupation is nonetheless governed by cl 20 in their undertaking to give full possession on 1 December 1994. Similarly the defendants failed to give any adequate explanation of the failure to proceed, with the diligence required by the contract, to complete the formalities of obtaining ministerial consent under s 69 of the Land Act. The plaintiff’s assertion that this was also an indication of reneging on the contract is, I believe, well founded.

The parties to a contract determine the terms and conditions they agree to be bound by. When they commit their agreement to writing, they are bound by the terms of that contract. That is plain contract law. It is also simple contract law that, if a party to a contract discovers that the other has breached a term of their contract, that breach may (with emphasis on the word may) give rise to a right in law to treat the contract as discharged.

The defendants say that, because the plaintiff subleased without formal consent and erected structures on the property in breach of cl 10, they terminated the contract, as they were entitled by cl 11. That clause is a general default clause and provides:

“If the purchaser defaults in the observance or performance of any obligation imposed on him under or by virtue of this Agreement then the Deposit paid by him hereunder and any interest paid thereon shall be forfeited to the Vendor who shall be entitled to terminate this Agreement by notice in writing to the Purchaser and thereafter either sue the Purchaser for breach of contract and/or to resell the Property as owner and the deficiency (if any) arising on such resale or attempted resale and the Purchaser’s default shall be recoverable by the Vendor from the Purchaser as liquidated damages together with interest thereon at the rate of fifteen per cent (15%) ....”

But, in fact, not every breach of contract gives the right to treat the contract as terminated. In Chitty on Contracts (25th edn) (Law Book Co 1983) para 1591, it is said, “Any breach of contract gives rise to a cause of action; not every breach gives a discharge from liability”.

Only a breach of a term fundamental to the contract will entitle an innocent party to treat the contract as terminated. Therefore, an omission or refusal to comply with a particular provision in a contract will only give a right to termination of the contract if that omission or refusal amounts to a total refusal to perform the contract. Only a breach of the essential contract of sale of the title in the property would justify either party terminating this contract. Breaches, if any, of terms not interfering with the essential contract of sale only resound in damages.

At issue in these proceedings, therefore, is whether the breaches claimed by the defendant - if proved - amount to breaches justifying termination of the contract of sale.

The claim of structural alterations and additions is quickly disposed of. Despite the length of the evidence on this issue, the photos and evidence from both parties, the Court is totally convinced the only “structure” or “constructions” or “buildings” of any kind, apart from the small office/residence on the property from the outset, were temporary shelters, movable containers and/or motor vehicles of one description or another.

None of these could be said in any way to amount to “structural alterations or additions” under cl 10 or give rise to the need for consent of the vendor under that clause. None of the “structures”, either the property of the purchaser or Chebu Workshop, could in any way be said to be in breach of cl 10. Mr Theseira’s assertion in para 35 of his affidavit of 19 October 1994, for example, that whether Mr Hamei had a “dismantled shed” or an “office building on rollers”, they are still structures which should comply with s 10c(d), is simply wrong. It is noted too that the National Capital District’s demolition orders for “structures” on the property were brought about by complaints of the defendants after these proceedings had been commenced. Those orders were withdrawn by the NCDC once the true situation regarding the temporary structures was made known to it.

There remains the allegation that the plaintiff sublet the portion of the property occupied by him to Chebu Workshop. It was very clear that the real cause for the defendants’ concern was the suspicion that, having contracted to sell, having agreed to give possession on fixed occupancy fee, the plaintiff was attempting to recover some of that fee by subletting to Chebu Workshop. There was some reason to think so initially. The unsigned letter of 31 May for the plaintiff speaks of a rental being charged, but that was the only reference to it. I am satisfied, however, that that was not the case. I accept the evidence of the plaintiff and Mr Hamei that, in fact, there was no rental charged.

There never was a subletting, no parting with possession. There was only a licence to occupy part of the plaintiffs’ portion on a temporary basis at no rental. The defendants’ suspicion amounted to no more than that. The servicing of the plaintiff’s motor vehicles from time to time was not a form of rental in kind for premises let. I am satisfied that it was an ad hoc gesture reciprocating the plaintiff’s generosity of allowing Chebu Workshop to share the portion it occupied. The plaintiff had lawful contractual occupation. His sharing of it was not a subletting. It was not a parting with possession since the plaintiff remained in occupation throughout. It was an act of generosity by a party lawfully able to do so. It was, at its most formal, a licence to occupy without fee. The defendants’ purported termination was, therefore, relying on grounds without foundation in fact.

The defendants, of course, knew the circumstances and had accepted the arrival of Chebu Workshop into the plaintiff’s portion. They were certainly entitled to enquire whether there were terms of occupation unknown to them which might impinge on their contractual rights as to occupation fees for the term remaining till settlement. They were not entitled under their contract to unilaterally terminate it, as they did.

But even had there been, in fact, a subletting to Chebu Workshop without formal consent, that would still not have warranted unilateral termination of the contract. Such a subletting under this contract would be a breach only of the clause relating to the extent of occupancy given the purchaser prior to final payment on settlement of all contract terms. Simply stated, it would not be a breach of term fundamental to this contract. It would only attract damages consistent with breach of that provision - a proportion of the agreed monthly occupancy fee, taking into account that full possession was stipulated for 1 December 1994 at the latest. In fact, as I have found, there was no breach of this provision anyway.

But the defendant did more than simply terminate the contract by letter. In his evidence, Mr Theseira acknowledged that, after the plaintiff was issued his writ, he had requested the NCDC to issued a demolition notice in respect of temporary buildings on the portion occupied by the plaintiff. He also obtained from a former associate a valuation report of the property the subject of this trial - ostensibly for establishing a value to support an application to borrow on mortgage.

That valuation report purported to value the property (already sold by the defendants at a price negotiated by the defendant themselves as willing vendors to a willing purchaser for K142,000) at a figure twice that value, namely K286,000. On the brief evidence given in Court of sale prices and/or values of adjacent and like properties, the failure to even mention or account for the defendants’ own agreed sale price shows that valuation to be unfounded and ridiculous. The property having been sold under contract by parties at arms length, valuation was irrelevant, but in any case the legitimacy of that valuation is rejected as any indication of value of the property.

Mr Theseira says he caused his solicitor to send that valuation to the Stamp Office. That had the result that the Stamp Office queried whether consideration on the contract of sale was adequate and made enquiries as to whether the appropriate duty had been paid. It required a further valuation to be tendered.

In the amended defence and cross-claim, this gross breach of good faith, both with the plaintiff and with this Court, appears in the very first paragraph.

“1.      The defendants/cross claimants admit paragraph 1 of the statement of claim that the defendants agreed to accept the offer of K142,000 (under) a lease purchase agreement. The defendants/cross claimants add that this K142,000 had been rejected by Internal Revenue Commission as not having a proper value by a recognised valuer.”

While the defendant denied that he had set out to manufacture evidence, he was plainly very embarrassed under cross examination on this point, and I am quite satisfied that the whole of this action was motivated solely to do all that was possible to further prejudice the contract of sale and the plaintiff’s efforts to enforce it. These steps were taken after proceedings had been commenced by the plaintiff, yet counsel for the defendants not only pleaded this supposed fact as part of an amended defence, as if a cause of action flowed from it, but was plainly party to setting up the query of the Inland Revenue Department in the first place.

Manufacturing of evidence by a party and the pleading of it by counsel cannot be condoned. The defendants have the penalty of failing on both their defence and counter-claim. But their counsel too must bear at least part of the penalty, and I see that in his sharing in the burden of the plaintiff’s costs.

The defence, as pleaded, totally fails to meet the plaintiff’s claim. It relies on a supposed “lease/purchase” agreement, when that is plainly not what it was. The defendants sold the property at their own price. They got not just a deposit, but part payment at their request, to enable them to meet pressing debts. They entered into the covenants of a mortgage to the plaintiff to secure their bond to complete. They agreed to full possession before final payment on terms they themselves determined.

Having committed themselves that far, they then resiled, failing to seek ministerial approval of the contract pursuant to s 69 of the Land Act, blaming the purchaser for their refusal to complete, and engaging in manufacture of evidence to try and build up a defence. From the outset, the defendants were bound to fail, and have failed. There will be judgment for the plaintiff on both claim and counter-claim.

Lawyer for the plaintiff: J Shepherd Lawyers

Lawyer for the defendant: Aisa & Associate