Manda v Yatala Ltd [2009] PGSC 10; SC974 (30 April 2009)

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CONTRACT – Sale of property – Agreed Purchase Price was K155,000.00 – Appellant purchaser unable to settle due to shortfall of K7,750.00 – Parties agreed to vary lease back clause in Contract of Sale to accommodate shortfall – Settlement completed after variation – Appellant subsequently claimed rental arrears on the basis of original clause – Appellant denied shortfall and contested variation agreement – Respondent raised and relied on agreement to vary – Whether there was a shortfall – Whether agreement to vary enforceable – Whether sufficient consideration.

Brinks Incorporated and Brinks Air Courier Australia Pty Ltd v Brinks Pty Ltd (1997) N1567
In the matter of an application Timothy Mathew O’Dwyer v Arnold Theodorus Derks (2007) N3226
New Ireland Development Corporation Ltd v Arrow Trading Ltd (2007) N3240
Pinpar Developer Pty Ltd v TL Timber Development Pty Ltd (2006) N3075 PNG Ready Mixed Concrete Pty Ltd v The Independent State of Papua New Guinea [1981] PNGLR 396
Steamships Trading Co Ltd v Garamut Enterprises Ltd (2000) N1959

D. & C. Builders Limited v Rees [1966] QBD 617 and Williams v. Roffey Bros. & Nicholls (Contractors) Ltd [1991] C.A. 1.

1. BY THE COURT: This is an appeal against the decision of Salika J. delivered on 14th February 2003 in the National Court at Waigani which dismissed the Appellant’s claim for, among other things, rental arrears and an order for eviction.

2. The appeal relates largely to calculations of payments for sale of property. In our consideration of the appeal, therefore, it is appropriate to, in addition to other evidence, pay particular attention to the relevant primary documentary evidence which comprises of the Contract of Sale, the various correspondence between the parties and their respective banks, the Settlement Statements and copies of settlement cheques.

3. The claim in the court below was for rental arrears of K21, 000.00 pursuant to a lease back clause in a contract of sale of property the parties had entered into earlier in relation to the same property. The Respondents contested the claim on the basis that the lease back clause in the Contract of Sale had been varied to accommodate the Appellant’s shortfall at the time of settlement of sale of the property, and; consequently, the Appellant could not maintain a claim pursuant to the original clause. The Appellant counter argued that he did not incur any shortfall, and; further that, the shortfall in question was for the discharge of the mortgage which payment was the Respondents’ responsibility.

4. The initial issue, therefore, is whether there was a shortfall. This is a question of fact. If there was indeed a shortfall, the next issue would be whether there was a valid and enforceable variation of the lease back clause in the Contract of Sale. This is a question of mixed fact and law. The nature of the alleged variation would have to be determined and considered in accordance with the appropriate principles of contract law.

5. It is convenient to consider the appeal in this manner rather than labour on each ground of appeal. The grounds of appeal are individually and collectively interconnected to the identified questions. Answers to these questions would determine ultimately whether the trial Judge’s decision should be overturned.

6. Towards the end of 1999, the Appellant became interested in acquiring the Respondents’ property, a block of units, described as Allotment 9 Section 4 Matirogo National Capital District, which had been placed on the property market by sales agent Puritau Real Estate. Negotiations between the parties through the agent eventually resulted in the agreed sale price of K155, 000.00.

7. The Appellant made a 10 per cent deposit of K15, 500.00 into the trust account of Puritau Real Estate on 4th November 1999 and secured the sale. The Appellant then organized for a bank loan of K131, 750.00 from Papua New Guinea Banking Corporation (PNGBC). In the meantime, on 20th December 1999, the Respondents’ lawyer, Blake Dawson Waldron, forwarded the Contract of Sale to the Appellant for execution and requested for a stamp duty cheque of K7,752.00 and a lodgment fee cheque of K50.00 in favour of Department of Lands and Physical Planning. The Contract of Sale was duly executed and returned with the lodgment fee and an application for exemption from payment of stamp duties.

8. The Appellant was advised on 28th January 2000 that his loan application for K131, 750.00 had been approved. On 1st March 2000, the Appellant was advised that transfer of interest in the subject property had been approved by Department of Lands and Physical Planning and settlement was to take place on 14th March 2000. Unfortunately, the anticipated settlement did not take place and was deferred to 17th March 2000. In any event, the Settlement Statement of 14th March 2000 had the following settlement details:

Purchase Price	K155,000.00
Less Deposit Paid	(K15,500.00)
Total Payable	K139,500.00

Adjustments plus land rent @ K1, 375.00 per annum. Purchaser allows 289/366 days	K1,085.72
Plus land rate @ K60.00 per annum. Purchaser allows 289/366 days (Arrears: K1,158.13)	K47.38
Plus Water Rate @ K22.50 per quarter. Purchaser allows 28/91 days (Arrears K780.73)	(K6.92)
Amount payable	K140,640.02

Bank cheques required at settlement
Department of Lands	K1,375.00
National Capital District Commission	K1,158.13
Eda Ranu	K780.73
Blake Dawson Waldron	K1,592.36
Bank of South Pacific	K139,500

9. The Settlement Statement, which had been prepared by Blake Dawson Waldron, was in order. We note that, consistent with conveyancing practices, the statement reflected the Appellant’s 10 per cent deposit of K15, 500.00 and K139, 500.00 payable by the Appellant to Bank of South Pacific (BSP) being the Respondents’ bank. These figures add up to K155, 000.00.

10. We note, secondly, that a vendor could cover incidental costs from the sale proceeds. In this case, for instance, the sales commission was deducted by Puritau Real Estate from the Appellant’s 10 per cent deposit. On the other hand, incidental costs incurred by a purchaser are additional payments he is required to make. These additional payments are not part of the purchase price. In this case, for instance, the Settlement Statement shows that adjustments, rates and arrears are separate additional payments for the Appellant to settle on settlement date.

11. On that connection, we further note that the Appellant was also required to pay legal costs. Each party should have been paying for his own legal costs. We will not interfere, however, because what was in the statement could be the Appellant’s agreed share of legal costs. More importantly, we are not prepared to interfere and, thereby, alter the terms of the parties’ agreement.

12. We note, moreover, that the amount of K139,500.00, as shown in the statement actually comprises of the approved loan of K131,750.00 and the Appellant’s required contribution of K7,750.00 additional to the 10 per cent deposit of K15,500.00. They all add up to K155, 500.00. Unfortunately, the Appellant’s letter of 16th March 2000 suggests that he did not have K7, 750.00 to complete the purchase. He did not want his bank to raise the settlement cheque of K139, 500.00. He wanted to separately raise K7, 750.00 although he claimed he had sufficient funds.

13. It was obvious by 24th March 2000, that the Appellant did not have K7, 750.00 in his bank account or anywhere else for that matter. The Appellant’s shortcoming posed a serious threat to settlement and the entire contract. In a worse case scenario, the sale could have been aborted by the Respondents who had a keen purchaser with a higher offer.

14. The shortcoming was acknowledged in his letter of 24th March 2000 where the Appellant sought the Respondents’ assistance "to support my intended application for an additional loan of K7, 750.00 to meet the shortfall...." Even then, in the same letter, the Appellant appeared to have mistaken the real nature of the said K7, 750.00. He regarded the said K7, 750.00 as if it was for the discharge of the mortgage and attempted to get the Respondents to provide it. The Respondents quite rightly ignored him.

15. The Respondents were not mistaken. They wrote to the Appellant on 31st March 2000 and made an offer for a lease back arrangement. It was a prudent course to take because the sale had been substantially completed. It was necessary for the parties to agree on an alternative arrangement or call off the sale. The Respondents’ letter had a proposal to vary the lease back clause to accommodate the shortfall. The Appellant considered the proposal and accepted the variation at 10:30 am on 3rd April 2000.

16. Accordingly, the settlement proceeded without fail on 10th April 2000. The relevant Settlement Statement of 10th April 2000 shows the following details:

Purchase Price	K155,000.00
Less Deposit Paid	(K15,500.00)
Total Payable	K139,500.00

Adjustments plus land rent @ K1, 375.00 per annum. Purchaser allows 289/366 days	K1,085.72
Plus land rate @ K60.00 per annum. Purchaser allows 289/366 days (Arrears: K1,158.13)	K47.38
Plus Water Rate @ K22.50 per quarter. Purchaser allows 28/91 days (Arrears K780.73)	(K6.92)
Amount payable	K140,640.02

Bank cheques required at settlement
Department of Lands	K1,375.00
National Capital District Commission	K1,158.13
Eda Ranu	K780.73
Blake Dawson Waldron	K1,592.36
Bank of South Pacific	K135,733.80

17. However, not all the settlement cheques corresponded with the Settlement Statement. The actual cheques raised by PNGBC on behalf of the Appellant were as follows:

18. It is clear to us that, owing to insufficient funds in the Appellant’s bank accounts, PNGBC was not able to raise a bank cheque of K139, 500.00 to complete the purchase. The bank was only able to raise a cheque of K135, 652.81 which was slightly less than the figure of K135, 733.80 in the statement. The difference between K139, 500.00, as the outstanding purchase price, and the actual settlement cheque of K135, 652.81 would ultimately be the Appellant’s shortfall. At the time of settlement, therefore, the Appellant’s actual shortfall was not K7, 750.00. It had been reduced to just K3, 847.19.

19. If we have not been clear enough, it is probably simpler to present the changing figures in a comparative table.

Purchase Price Break downs	First Statement (14.03.00)	Second Statement (10.04.00)	Actual Payment (10.04.00)
Purchase Price	155,000.00	155,000.00	155,000.00
10% deposit	15,500.00	15,500.00	15,000.00
BSP Cheque	131,750.00	135,733.80	135,652.81
Shortfall	7,750.00	3,766.20	3,847.19

20. On the basis of actual payment made at the time of settlement on 10th April 2000, therefore, the Appellant had a shortfall of K3, 847.19. It was the Appellant’s contractual obligation to settle the shortfall to complete the agreed purchase but he failed.

21. As alluded to, the claim in the court below was for rental arrears pursuant to the lease back clause in the Contract of Sale. The Respondents argued that the clause in question was varied on 3rd April 2000 when the Appellant, himself a lawyer, accepted the revised lease back arrangement. Accordingly, they were not in arrears as claimed.

"If the agreement is completed, the Vendor guarantees rent at K3, 000.00 to K3, 500.00 for 6 months whether or not it continues to lease Unit 3 and Unit 4."

b) The total payable by Yatala monthly be K2, 150.00 plus VAT, net K3, 500.00 as previously discussed.

c) You accept Yatala occupies the units for a period of 3 ½ months in lieu of the K7, 750.00 being the shortfall in the settlement figure.

d) You accept Yatala rents back the 3 flats at K2, 150.00 plus VAT on a month to month basis."

24. The Respondents wanted three units for a reduced total monthly rent of K2, 150.00. The Respondents were to occupy the units for the first 3 ½ months in lieu of the shortfall. After 3 ½ months, the Respondents were to occupy the units on a month to month basis.

25. The appellant perused the proposal and accepted the variation at 10:30 am on 3rd April 2000 with the following inscription on the letter:

"I accept the arrangement to speed up the settlement. Please advise your lawyer of same"

26. The Appellant argued that it was not his intention to vary the lease back clause. He signed only because he wanted settlement to progress. He did not incur a shortfall and was always in a position to settle in March 2000.

27. As a matter of law, relevant to the facts of this case, a variation agreement is valid and enforceable if it has the elements of a valid contract. There should be offer and acceptance supported by valid consideration.

28. The case of D. & C. Builders Limited v Rees [1966] QBD 617 illustrates the point where a subsequent or variation agreement is not supported by consideration. The plaintiffs claimed a certain sum from the defendant as the balance due for work done and goods and materials supplied in respect of alterations and repairs to the defendant’s shop. The amount claimed was owing to the plaintiff but the defendant had not paid. Sometimes later when the plaintiffs were in dire financial straits, the defendant offered to pay a lesser amount adding that the plaintiff would get nothing if he did not accept it. The plaintiff got the lesser payment and later sued for the balance. The trial Judge found that there was no consideration to support the subsequent agreement and found for the plaintiff.

"It is an essential element of a valid accord and satisfaction that the agreement which constitutes the accord should itself be binding in law and no such agreement can be so binding unless it is either made under seal or supported by consideration."

30. On the other hand, a subsequent agreement which secures a benefit or avoided a detriment to a contracting party is capable of constituting consideration and the agreement is enforceable. In Williams v. Roffey Bros. & Nicholls (Contractors) Ltd [1991] C.A. 1, the plaintiff entered into a subcontract with the defendants to carry out carpentry work. The plaintiff got into financial difficulties because the agreed contract price was too low for him to operate satisfactorily and at a profit. The main contract had a time clause and the defendant, lest the plaintiff failed to complete the job on time, offered additional payments. The plaintiff sued for the additional payments when same was not paid. The trial Judge found for the plaintiff and the defendants appealed.

31. The Court of Appeal, in dismissing the appeal, again, as per the head note, held:

"(1) that where a party to a contract promised to make additional payment in return for the other party’s promise to perform his existing contractual obligations and as a result secured a benefit or avoided a detriment, the advantage secured by the promise to make additional payment was capable of constituting consideration therefore, provided that it was not secured by economic duress or fraud; that the defendant’s promise to pay the plaintiff the additional sum in return for the plaintiff’s promise to perform his existing contractual obligation on time, resulted in a commercial advantage to the defendants; that the benefit accruing to the defendants provided sufficient consideration to support the defendants’ promise to pay the additional sum; and that, accordingly, the agreement for payment of additional sum was enforceable."

32. These English cases are relevant to the facts of this case. They are not new principles. They simply reinforce the basic principles of contract law as adopted in this jurisdiction.

33. For cases on illegality, unconscionable conduct and equitable fraud, which may affect enforceability of a contract, see the cases of New Ireland Development Corporation Ltd v Arrow Trading Ltd (2007) N3240, Brinks Incorporated and Brinks Air Courier Australia Pty Ltd v Brinks Pty Ltd (1997) N1567, PNG Ready Mixed Concrete Pty Ltd v The Independent State of Papua New Guinea [1981] PNGLR 396, Steamships Trading Co Ltd v Garamut Enterprises Ltd (2000) N1959, Pinpar Developer Pty Ltd v TL Timber Development Pty Ltd (2006) N3075, and In the matter of an application Timothy Mathew O’Dwyer v Arnold Theodorus Derks (2007) N3226.

34. Nonetheless, in this case, illegality, unconscionable conduct and equitable fraud do not apply. Economic duress does not apply either in particular when the Appellant maintained consistently, though erroneously, that he did not incur a shortfall. The Appellant was himself a lawyer and legal officer with Post PNG at the relevant time. He was not a lay person. He knew or must have known his contractual obligations.

35. The Respondents’ letter of 31st March 2000 constituted offer. The Appellant’s endorsement on 3rd April 2000 constituted acceptance. The Respondents’ consideration was their surrender of interest in the property to the Appellant despite the shortfall at the time of settlement. The shortfall was a detriment to the Respondents. On the other hand, the acquisition of property ownership rights despite the shortfall was a benefit to the Appellant. Following settlement on 10th April 2000 he was obliged both in law and equity to keep his side of the bargain.

36. If it was not for the subsequent agreement, the sale could have been aborted and the Appellant’s desire to own a block of units would have been in vain. It is of little significance that the actual shortfall was less. If the Appellant had not gotten himself confused, the lease back arrangement could have been adjusted to accommodate the reduced shortfall. The variation of the lease back clause in the Contract of Sale, he must now accept, conferred substantial benefits to him and was, therefore, valid and enforceable.

37. The Appellant’s claim was for rental arrears pursuant to the lease back clause in the Contract of Sale. However, on the basis of actual payment made at the time of settlement on 10th April 2000, the Appellant had a shortfall of K3, 847.19. It was the Appellant’s contractual obligation to settle the shortfall to complete the agreed purchase, which he failed. This failure was cured by the variation agreement between the parties. If it was not for the variation, the sale would have been aborted. The variation of the lease back clause was, therefore, valid and enforceable.

38. Accordingly, the Appellant cannot sue for rental arrears on the basis of rental figures in lease back clause in the Contract of Sale. The trial Judge arrived at the same conclusion and we are satisfied that he did not fall into any error. The appeal is, therefore, dismissed with costs which, if not agreed, shall be taxed.

_____________________________________________
Greg Manda Lawyers: Lawyer for the Appellant
Henao Lawyers: Lawyer for the Respondents

Supreme Court of Papua New Guinea

Manda v Yatala Ltd [2009] PGSC 10; SC974 (30 April 2009)