Court asked to consider whether time of the essence in respect of payments under deed of settlement

06 November 2009

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The NSW Court of Appeal recently in Meares Nominees Pty Ltd v Permanent Custodians Ltd [2009] NSWCA 235 decided that the due date by which payments were to be made under a deed of settlement were crucial in respect of the operation of the deed.

The facts

Meares Nominees Pty Ltd was the registered proprietor of rural property that had been severely affected by drought. The property had been mortgaged to Permanent Custodians Ltd (PCL). In August 2006, the mortgagor was in default under the mortgages.

PCL obtained vacant possession of the property in January 2009 and proceeded to market the property for a sale by auction to be held on 3 April 2009.

On 2 April 2009, the mortgagor’s accountant put forward a proposal to PCL which would enable the mortgagor to keep the property. PCL agreed to the proposal and a deed of settlement (Deed) was prepared by PCL’s solicitors.

The Deed contained the following relevant clauses:

7. The Mortgagor’s will make the following payments to Permanent Custodians:

(a) By 12pm on 3 April 2009 payment…of One Million Dollars…

(b) By 5pm on Friday 12 June 2009 payment…of Two Million Dollars.


8. Provided that the first payment is made, Permanent Custodians agrees to delay the auction sale of the property until after 12 June 2009.

9. Provided the second payment is made, Permanent Custodians will delay the auction indefinitely and accept the second payment in full satisfaction of all moneys secured by the mortgages and shall release the mortgagors and any guarantors from all and any obligations under the mortgages.

The Deed did not contain a clause that time was of the essence.

The Deed was signed on 3 April 2009, and upon receipt by PCL of $1 million the proposed auction was cancelled. However, the second payment of $2 million was not made by 12 June 2009.

On 26 June 2009, the mortgagor’s solicitors wrote to PCL advising that their client was in a position to pay $2 million to PCL. On 30 June 2009, PCL replied that it did not regard the Deed as binding on it and that it proposed to sell the property.

The mortgagor commenced proceedings for specific performance of PCL’s obligations under the Deed despite the fact that the second payment had not been made within the time specified in clause 7(b) of the Deed.

The decision

The NSW Court of Appeal unanimously held that clause 7(b) of the Deed was a condition precedent and concluded that time was of the essence. Since the mortgagor was in breach of the condition precedent it was not entitled to specific performance of the Deed.

Hodgson JA (with whom Allsop P and Beazley JA agreed) opined that there was potential ambiguity in the use of the word “will” in clause 7 of the Deed. Clause 9 and other clauses of the Deed used “will” in ways that were clearly promissory, yet other clauses of the Deed used “will” in a way that appeared to be merely predicatory.

However, for the purposes of interpreting clause 7, the fact that what was to happen under clause 7 was less than what the mortgagor was already contractually bound to do was an important consideration.

At the time of the Deed, the mortgagor was already contractually bound to pay over $6 million to PCL. Therefore, a promise to pay $1 million on 3 April 2009 and $2 million on 12 June 2009 would add nothing to the obligations of the mortgagor or the rights of PCL unless PCL was granted some additional right in the event that such a promise was broken. Therefore Hodgson JA concluded that the clause 7 stipulations were conditions precedent.

Significance

The case highlights the importance of ensuring that terms which are intended to be conditions precedent are expressly stated to be conditions precedent and that a document contains a clause that time is of the essence.

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