The Kitto Lecture: Sir Fredrick Jordan's Footnote
The Hon. Justice Meagher
Judge, NSW Supreme Court
The Kitto Lecture
University of New England
Armidale, NSW, Australia
27 May 1999
Sir Frank Kitto is venerated amongst lawyers for many qualities: intelligence, learning, judgment and clarity amongst them. Today I wish to essay a topic which Sir Frank never, alas, dealt with at length; and to examine some of the unfortunate results of those who have dealt with it. The topic is what happens in equity when there is a contract for sale of property. Sir Frederick Jordan, whom we all revere, attempted the question. In his “Chapters on Equity in New South Wales” he formulated a number of propositions. One, which we shall call the First Proposition, is as follows:
“An agreement for valuable consideration for the present assignment of any form of property whatsoever, assuming it to be assignable, operates in equity to transfer the equitable title to the property from the promisor to the promisee; and the principle is effective only in so far as the Court of Equity would, in all the circumstances of the case, grant specific performance of the agreement.”
Another, which we shall call the Second Proposition, is as follows:
“Thus, when a contract is entered into for the Sale of Land although no proprietary interest passes at common law, the ownership of the estate sold is in equity transferred to the purchaser by the contract…;and the vendor becomes a constructive trustee for the purchaser.”
As a footnote to the first proposition, Sir Frederick said in a footnote, which has since become famous:
“Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of parties.”
Reading these extracts together, what Sir Frederick is saying is that a total equitable assignment takes place after a contract of sale if the purchaser is entitled to any equitable relief whatsoever. It is my thesis that this contention is nonsense. But, before I embark on any elaboration of this thesis, I should like to make some general observations on the first and second propositions. The first proposition is carefully framed to describe the present assignment of existing property, presumably equitable as well as legal. It is talking the language of total, not partial assignments. It is not dealing with “future property”, with which Sir Frederick has already dealt, some pages earlier in his book. It is not dealing with executed consideration (which is critical in the “future property” cases), but with executory consideration (which in the normal situation in cases of “present property”). The second proposition is, rightly, framed as a logical and necessary consequence of the first. In the case of legal property, a total assignment of the equitable estate must necessarily lead to the legal estate remaining in the assignor and the equitable estate being transferred to the assignee: i.e., a trust. It also follows that any lack of validity in either proposition must signal an equal invalidity in the other proposition.
I shall now proceed to examine the correctness of these propositions. The first, which almost in terms is derived from a statement of Lord Westbury L.C. in Holroyd v Marshall (1862) 10 HLC 191, (a case, incidentally, which dealt with the assignment of future property, not the assignment of present property) has often received general deference, but rarely detailed analysis. The first proposition, read in conjunction with the footnote appended to it, would require the conclusion that if one found an assignment of present property which, for some reason, did not attract the remedy of specific performance in its primary sense, there would be a complete equitable assignment of that property if any other form of equitable protection were available. This precise situation arose in New South Wales in the case of Butts v O’Dwyer (1952) 87 CLR 267. It concerned the sale by contract of realty in that state. In effect the purchaser sought specific performance of the contract. The High Court held he was not entitled to that remedy, because the Minister’s consent was required but had not been obtained. Instead he was given a declaration that the vendor was obliged to do all things necessary to enable the plaintiff purchaser to apply to the Minister for his consent. Fourteen years later, in Brown v Heffer (1966) 116 CLR 340, a case which relevantly, involved the same facts, Windeyer J spelt out the consequences of that decision. He said (at 351):
“Here consent was never finally refused. In fact it was given but not until after the testator’s death. Immediately before his death he still held the land. At no time before he died could he have been compelled by an order for specific performance to transfer the land to the purchaser, because up till then the Minister had not consented.
While the question whether the Minister would consent was still pending, the testator or his executor was not at liberty to enter into any transaction inconsistent with an obligation to perform his contract with the purchaser. The Purchaser’s rights to have the testator and his executor do nothing to his prejudice were enforceable in equity by injunction. But they did not create an equitable interest in the land.”
A majority of the Court, of whom Kitto J was one, came to the same result, but did not spell out so explicitly what was involved. It would therefore follow if Brown v Heffer were correct, that a contract of sale does not effect an assignment of the vendor’s beneficial interest when the purchaser is entitled to no more than an equitable remedy less than specific performance.
A further demonstration that the first proposition lacks universal validity arises from any attempt to apply it to the sale of a purely equitable interest. The first proposition would require the passage of all a vendor’s equitable interest at the moment of contract, and since the vendor is selling nothing but an equitable interest, the result would be that a vendor has no interest at all in the property thereafter, even if no payment has been made to him. That much emerges from Oughtred v IRC [1960] AC 206, when the house of Lords wrestled without conspicuous success with this concept.
The second proposition, that immediately on execution of a contract the Vendor becomes a trustee for the purchaser, has attracted more attention in the courts. It has been considered in the following, amongst other, cases: Chang v Registrar of Titles (1976) 137 CLR 177; Howard v Miller [1915] AC 318; Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266; McMahon v Sydney County Council (1940) 40 SR (NSW) 427; Austin v Sheldon [1974] 2 NSWLR 656; Haque v Haque (1965) 114 CLR 98; Legione v Hateley (1983) 152 CLR 406; Bahr v Nicolay (No 2) (1988) 164 CLR 604.
The result of that judicial activity has been summarized, correctly, in an Australian Textbook, as follows:
“The position of the assignee after contract, but before consideration is paid or executed, is rather more obscure. It has been said that he has, even then, an equitable interest in the property, and that the assignor holds the property as constructive trustee for the assignee. But statements of this kind must be immediately qualified…it is defeasible, because the contract may be voided or rescinded; it is conditional, at least upon performance by the assignee of his obligation to pay the price; and the trust is unusual, in that it is difficult if not impossible, to point to any duties of a fiduciary character which the assignor owes to the assignee.”
But the matter goes further than that: if the “trust” is of such a precarious nature the complete equitable assignment on which it rests must be equally delicate. If there were a complete equitable assignment the “trust” would be more robust. It is to be noted that in one of the cases I have cited, Haque v Haque (1965) 114 CLR 98 at 124-5 Kitto J expressed his view that on contract the beneficial ownership was transferred from vendor to purchaser “to an extent” and the vendor became “in progress towards” a trusteeship, both observations contradicting the more absolutist propositions of Sir Frederick Jordan.
From all the above it would seem that both the first and the second propositions need some narrowing in the interest of precision; instead; what the footnote seems to do is widen their ambit. It is worth looking at one authority from outside Australia. I refer to Howard v Miller [1915] AC 318 per Lord Parker of Waddington, who asserted in a famous speech that the interest of a purchaser was “an interest commensurate with the ruling which equity would give by way of specific performance.” In this context it is clear enough that his Lordship, in using the term “specific performance” was talking of specific performance in its primary sense. In other words, his Lordship was saying that if you have an immediate right to specific performance in the primary sense you have complete equitable ownership; if you do not, and whether or not you have other rights, you do not have complete equitable ownership. This cannot be reconciled with Sir Frederick Jordan’s propositions.
What, then, caused Sir Frederick to frame the footnote in the way he has? The reason can, I think, be perceived. He is endeavouring to telescope the equitable learning about the assignment of future property and insert it into his proposition about the assignment of present property, although he has already dealt with future property and passed on. This much is clear from his citation of authorities in support of his footnote: Tailby v Official Receiver (1888) 13 App Cases 523, and the cases following it. Tailby v Official Receiver was a case which clarified what was said by the House of Lords in Holroyd v Marshall. It was not a case dealing with the assignment of present property. It is authority for the following proposition: (a) when A for valuable consideration agrees to assign, or purports presently to assign, an expectancy, or future property, to B, and (b) the consideration has been paid or executed, and (c) A acquires property which falls within the description of that which was agreed to be assigned or purportedly was assigned, then that property vests in equity in B as soon as it is acquired by A. What Tailby v Official Receiver did was to correct a statement made by Lord Westbury in Holroyd v Marshall, when Lord Westbury was endeavouring to lay down the same principles. That eminent judge had added a proviso that “the contract is one of which a Court of Equity will decree specific performance.” This was the remark which led to the famous correction of Lord Westbury by Lord Watson, who said:
“It is possible that the learned Judges [scil in the Court of Appeal] were misled by the reference which [Lord Westbury] makes to specific performance, an illustration not selected with his usual felicity.”
And by Lord Macnaghten who said:
“It is difficult to suppose that Lord Westbury intended to lay down as a rule to guide or perplex the Court, that considerations applicable to cases of specific performance, properly so called, where the contract is executory, are to be applied to every case of equitable assignment dealing with future property.”
The House of Lords repudiated any notion of specific performance. Thus, the ratio of the case is that the assignment of future property has nothing to do with specific performance either in the primary sense of that term or in its secondary sense. An assignment takes place when an event occurs, when property comes into existence; no curial assistance is required. The speech of Lord Macnaghten does illustrate that a variety of equitable remedies are, according to circumstances, available to the assignee of future property both before and after the assignment has taken place; but that is hardly remarkable, and in any event has nothing to do with “specific performance” in any of its senses, and has nothing to do with the present assignment of existing property for an executory consideration.
The result therefore is that Sir Frederick Jordan has relied upon authorities dealing with future property and executed consideration to support a proposition dealing with present property and executory consideration, and being authorities which negatived the importance of any form of specific performance in “future property” assignments.
If matters rested there, one could consign the footnote to the dustbin of legal theory, as a curiosity which has never misled anyone. But matters have not rested there. The matter has surfaced as least four times in the High Court recently, in a context where approval has been accorded by some judges to this very footnote.
The first of the High Court cases in question is Hewett v Court (1983) 149 CLR 639. In that case a builder contracted to construct a house and transfer it to the purchaser on practical completion. The price was to be paid by instalments, the last of which being on the date of practical completion. The contract provided that the house was to be at the builder’s risk until practical completion, and property in the house was to remain with the builder until the price was paid in full. The builder became insolvent. Shortly before the commencement of the winding up the builder entered into an agreement with the purchaser, whereby the latter could take the house on payment for all work done to date in addition to all instalments already paid. The liquidator sought to set that agreement aside as a preference, the purchaser claiming an equitable lien to secure paid instalments. The purchaser won by a majority (Gibbs, Murphy and Deane JJ, Wilson and Dawson JJ dissenting). All members of the majority held that the purchaser was correct and the lien arose out of the general equities between the parties. Indeed Deane J put it clearly (at p.665) as follows:
“Nor, in my view, is there any valid reason in principle why the mere existence of any one of the recognized grounds for refusing specific performance of, for example, a contract for the sale of land should automatically preclude a lien arising over that land to secure the purchaser’s right to be paid instalments of the purchase price of that property. The basis of specific performance lies in the equitable doctrine that personal obligations under a contract should be enforced where damages would be an inadequate remedy. The basis of equitable lien between parties to a contract lies in an equitable doctrine that the circumstances are such that the subject property is bound by the contract so that a sale may be ordered not in performance of the contract but to secure the payment or repayment of money. In the ordinary case of a purchaser who desires the actual performance of his contract with a defaulting vendor, an equitable lien to secure payment of instalments of purchase price is only of real value if specific performance of the contract would not be decreed.”
But his Honour added:
“The suggested requirement that equity would grant specific performance of the contract is usually propounded as being derived from the principle that an agreement for valuable consideration for the present assignment of property operates to transfer the equitable estate in the property if equity would , in all the circumstances, grant specific performance of the agreement (see, eg., Howard v Miller [1915] AC 318 at 316; Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266 at pp 271-272). In the statement of that principle however, the reference to specific performance must be understood as meaning not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it but also the protection by injunction or otherwise of rights acquired under a contract (see Tailby v Official Receiver (1888) 13 App. Cas. 523 at pp 546-548; Redman v Permanent Trustee Co of New South Wales Ltd. (1916) 22 CLR 84 at p96; Jordan, Chapters on Equity, 6th ed. (Stephen) (1945), p.52 n.(e)). So understood, the test of availability of specific performance of the contract to determine whether an equitable estate has passed amounts to little more than an assertion that equitable rights are commensurate with the protection which equity will afford them (see Hoysted v Federal Commissioner of Taxation (1920) 27 CLR 400 at p423.) Currey v Federal Building Society (1929) 42 CLR 421 at pp. 448-449). That assertion, if applied to equitable lien, would involve not a requirement that specific performance be available of some associated contract but the uncontroversial - and unhelpful - proposition that an equitable lien will only exist to the extent that it will be enforceable in equity (see King v Greig [1931] VLR 413 at p.435; Palmer v Carey [1926] AC 703, at pp 7-6-707; but cf. Dean “Equitable Assignments of Chattels”, Australian Law Journal vol. 5 (1932), 289, at p.292).”
So that the only member of the Court who resorted to the Jordanian footnote did so for the purpose of pointing out that it, whilst of critical importance, was both irrelevant and inapplicable.
The second of those cases is Legione v Hateley (1982) 152 CLR 406, a case where a vendor had stipulated in the contract of sale for a provision making time of the essence, and where the vendor had exercised the right of recission when the purchaser did not comply with a notice to complete. In this case the High Court permitted the purchaser to reverse the forfeiture and obtain specific performance of the contract. The joint judgment of Mason and Deane JJ dealt with the Jordanian footnote; no other judge mentioned it. But Mason and Deane JJ said:
“In this Court it has been said that the purchaser’s equitable interest under a contract of sale is commensurate only with her ability to obtain specific performance of the contract (Brown v Heffer (1967) 116 CLR 344 at p.349). On this view the loss of the respondent’s equitable interest, from which she presently seeks to be relieved, was occasioned by her failure to comply with an essential condition of the contract, payment of the balance of the purchase price on 10 August 1979, the date fixed for completion by the appellant’s rescission notice, time being of the essence by virtue of condition 5. Upon the expiration of the time fixed by the notice the contract came to an end.
A competing view - one which has much to commend it - is that the purchaser’s equitable interest under a contract for sale is commensurate, not with her ability to obtain specific performance in the strict or primary sense, but with her ability to protect her interest under the contract by injunction or otherwise (Tailby v Official Receiver (supra); Redman v Permanent Trustee Co. of New South Wales Ltd. (1916) 22 CLR 84 at p.96; Hoysted v Federal Commissioner of Taxation (supra); Pakenham Upper Fruit Co Ltd. v Crosby (1924) 35 CLR 386; Jordan, Chapters in Equity, 6th ed. (1945), p.52, n. (e)). If this view were to be adopted and applied, the respondent’s inability to obtain specific performance in the primary sense would not entail the loss of her equitable interest. She would retain that interest so long as she was entitled to make out a case for relief against forfeiture.
However, for the purposes of this case we are prepared to accept the correctness of the statement in Brown v Heffer.”
In other words, their Honours say that Sir Frederick Jordan’s distinction exists, but does not matter, because specific performance (in its primary form) will be decreed whenever a vendor’s rescission in unconscionable.
The third case is Chan v Cresdon Pty Limited (1989) 168 CLR 242. It involved a lease of land under the Real Property Act (Qld) 1861, containing a provision by which a guarantor, who was a party to the lease, guaranteed the performance by the lessee of its obligations “under this lease”. The lease was not registered under the Act. The lessee entered into possession and paid rent. On default by the lessee the lessor sought to recover the amount of the rent from the guarantor. The High Court found against the lessor, because the rent arose under an agreement for lease, not under a lease. This is what is meant by preferring substance to form.
The lessor, naturally, kept arguing that an agreement for lease in equity was as good as a lease. He relied on Walsh v Lonsdale (1882) 21 Ch D 9, a view which is only valid if the agreement was specifically performable. The Court, having reviewed some of the authorities, said:
“For present purposes these authorities establish two propositions. First, the Court’s willingness to treat the agreement as a lease in equity, on the footing that equity regards as done that what ought to be done and equity looks to the intent rather than the form, rests upon the specific enforceability of the agreement. Secondly, an agreement for lease will be treated by a court administering equity as an equitable lease for the term agreed upon and, as between the parties, as the equivalent of a lease at law, though the lessee does not have a lease at law in the sense of having a legal interest in the term.
The first proposition requires some elaboration or qualification in order to accommodate what has been said in later cases. Although it has been stated sometimes that the equitable interest is commensurate with what a court of equity would decree to enforce the contract, whether by way of specific performance (Connolly v Ryan (1922) 30 CLR 498, at pp. 506-507; Brown v Heffer supra at p.349; Chang v Registrar of Titles supra at pp. 184-185, 189-190; injunction or otherwise (Tailby v Official Receiver supra; Redman v Permanent Trustee Co supra; Legione v Hateley supra), the references in the earlier cases to specific performance should be understood in the sense of Sir Frederick Jordan’s explanation adopted by Deane and Dawson JJ. in Stern v McArthur, supra.”
Many things might be said about this decision, for relevant purposes. But perhaps the principal one is that it has nothing to do with the equitable effect of a Contract of Sale, and thus nothing to do with the footnote we are discussing. One could also suggest that no case, in England or Australia, has extended the footnote’s meaning of “specific performance” into the realm of Walsh v Lonsdale, supra. One could even wonder why the agreement in Chan v Cresdon was not specifically enforceable by either (or both) the lessee and the guarantor.
The fourth of the cases is Stern v McArthur (1988) 165 CLR 489 where the High Court, by majority, again allowed a purchaser to be relieved against forfeiture and have specific performance. The basic reason was that the vendor’s behaviour was seen to be unconscionable. Sir William Deane returned to the hunt, this time in the company of Dawson J. This is Deane J’s longest pronouncement on the problem, and hence deserves most attention. Time does not permit me to set out the whole text of his Honour’s judgment on the point, but I shall quote three extracts. The first is:
“The extent of the purchaser’s interest is to be measured by the protection which equity will afford to the purchaser. That is really what is meant when it is said that the purchaser’s interest exists only so long as the contract is specifically enforceable by him. Specific performance in this context does not mean specific performance in the strict or technical sense of requiring the contract to be performed in accordance with its terms. Rather it encompasses all of those remedies available to the purchaser in equity to protect the interest which he has acquired under the contract. In appropriate cases it will include other remedies, such as relief by way of injunction as well as specific performance in the strict sense. As Sir Frederick Jordan put it: “Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties”: Jordan, “Chapters on Equity in New South Wales”, Select Legal Papers, 6th ed (1947), p.52 n.(e).
The second is:
“To put the matter in this way is to say little more than that the equitable interest of a purchaser under a contract for the sale of land is that which equity recognizes and protects: Hewett v Court (supra), per Deane J. The relationship of trustee and beneficial owner will certainly be in existence when the purchase money specified in the contract has been paid, title has been made or accepted and the purchaser is entitled to a conveyance or transfer. At that point the purchaser is entitled in equity to the land and the vendor is the bare trustee: McWilliam v McWilliam Wines Pty Limited (1964) 114 CLR 656 AT P.660, per McTiernan and Taylor JJ. Otherwise there is not unanimity upon when the relationship of trustee and beneficial owner arises: Chang v Registrar of Titles (1976) 137 CLR 177, per Mason J. But that does not mean that before that time has arrived the purchaser may not be entitled to a lesser equitable interest than ownership.”
The third is:
“Entitlement to specific performance in the strict sense was necessary before the purchaser could be regarded as the owner in equity for the purpose of ademption. But that did not mean that, even if that remedy was unavailable, the purchaser could not have an interest under either contract which equity would protect regardless of whether he could, in a manner of speaking, be called the equitable owner. In appropriate circumstances equity would have directed that proper steps be taken to obtain the Minister’s consent and, consent having been obtained, that the land be transferred to the purchaser.”
The upshot of these passages is this: if no real specific performance is available, equity could grant relief in favour of a purchaser to some extent; and this betokens some form of equitable interest in the purchaser, not full ownership indeed, but an equitable interest nonetheless. Three matters of significance deserve mention about these passages; the first is that they mark a return to Brown v Heffer; there is no equitable ownership in the purchaser, but no reason why contractual remedies should not exist as long as the contract does. The second is that they mark an abandonment of Sir Frederick Jordan’s footnote. The footnote says that a purchaser disentitled to specific performance in the primary sense of the term, has a complete equitable assignment if any equitable remedy is available to him. Deane J says there is no equitable ownership, but some “lesser equitable interest”, a very different proposition. Thus the false becomes true, and the true false.
The third matter of significance is that they imply a belief that if one were, actually or potentially, entitled in equity to any form of remedy in relation to an asset, one has, by virtue of that fact, an equitable interest in that asset. This cannot be correct. In Commissioners of Stamp Duty v Livingston [1965] AC 694 the Privy Council on appeal from the High Court held that a residuary beneficiary had no proprietary interest in the residue of the estate, despite being entitled to limited equitable rights with regard to that residue. In so doing it specifically upheld the judgment of Kitto J in the High Court. Similarly, a beneficiary in a discretionary trust has no interest in the trust assets, although possessing limited equitable rights against the trustee: Gartside v IAC [1968] AC 553, even if he be the only beneficiary: Re Weir’s Settlement Trusts [1971] Ch 145. In The Queen v Toohey & Anor; ex parte Meneling Station Pty Limited (1983) 158 CLR 327 at 342, Mason J said: “No one who has a merely personal right in relation to land can be said to have an “estate or interest” in that land.”
Sir Frank Kitto was famous for the lucidity of his thought and clarity of expression. One wonders what he would have thought of the turgidity of expression and apparent lack of meaning in some of the cases I have been discussing. It is no wonder that recently Wordsworth wrote: “Kitto! Thou shouldns’t be living at this hour”.
|
|
