3.1 The inadequacies of the common law relating to the passing of risk and insurance in conveyancing transactions have led to reforms in a number of jurisdictions. An examination of those reforms is useful in determining whether the law in New South Wales should be changed and, if so, the directions the change should take.

ENGLAND

3.2 English legislation enacted in 1925 purports to modify the common law position regarding rights to the proceeds of the vendor's insurance policy in the event of damage to the property. Section 47 of the English Law of Property Act 1925 is in the following terms:

“47. (1) Where after the date of any contract for sale or exchange of property, money becomes payable under any policy of insurance maintained by the vendor in respect of any damage to or destruction of property included in the contract the money shall on completion of the contract, be held or receivable by the vendor on behalf of the purchaser and paid by the vendor to the purchaser on completion of the sale or exchange, or so soon thereafter as the same shall be received by the vendor.

(2) This section applies only to contracts made after the commencement of this Act, and has effect subject to -

(a) any stipulation to the contrary contained in the contract

(b) any requisite consents of the insurers,

(c) the payment by the purchaser of the proportionate part of the premium from the date of the contract.” ¹

Prior to the passing of the 1925 Act, it was common practice to arrange, with the insurers consent for the purchaser to have the benefit of the vendor s, existing insurance and this was usually stipulated in the contract for sale. ² Section 47 removes the need to make the stipulation.

3.3 There are two major deficiencies in the protection offered to purchasers by this section The first is that it is subject to any requisite consent of the vendor s insurer (section 2(b)), and the section imposes no obligation upon the insurer to give that consent. While the requirement for consent may pose no practical problem in England - the English insurance industry’s voluntary extension of the benefit of the vendor’s policy to the purchaser, mentioned in Chapter 2, may be taken as consent - it may well do so under any similar provision in New South Wale. In addition the section is subject to any contrary agreement between the parties to the contract for sale.

3.4 The second deficiency is one which does not appear to have been tested in the English courts, but which follows from the decision of the High Court in Ziel Nominees Pty. Ltd. v. V.A.C.C. Insurance Co. Ltd. ³ It is this: the fact that the vendor has made, or is entitled to make, a claim upon his insurer in respect of damage to the property does not relieve the purchaser from the obligation to pay the full purchase price. Since a contract of insurance is a contract of indemnity only, a vendor who has received the full purchase price has suffered no loss from the damage to the property. Consequently, there is no money “payable” under the vendor s policy. This reasoning, if correct would substantially destroy the usefulness of the section and would restrict its operation to situations where the vendor was in fact paid by the insurer before completion of the sale. The counter- argument is that the purpose of the provision is to ensure that the purchaser, compelled to pay the full price for a damaged property, is compensated by the proceeds of the vendor’s policy, and that this purpose can be achieved only by interpreting the section as impliedly abrogating the indemnity principle. Under this construction money would remain “payable” under the vendor’s policy even though the vendor had received the purchase price. No doubt some judges would be sympathetic to the counter-argument, but it would require a willingness to interpret the language of the section liberally.

3.5 These deficiencies make the section at least in its present form an unsatisfactory attempt to provide protection to an uninsured purchaser. However, if the general approach taken by section 47 were considered appropriate the section could be drafted to overcome the deficiencies.

3.6 In England the purchaser also has a right to compel the vendor’s insurer to expend the proceeds of the insurance in rebuilding the property instead of paying the money to the vendor. This right stems from the Fires Prevention (Metropolis) Act 1774, an Imperial enactment which does not apply in New South Wales.⁴ No other legislation exists in New South Wales to enable the purchaser to insist that the proceeds of the vendor's insurance be applied towards repair of damage occurring to the property between contract and completion.

NORTHERN TERRITORY

3.7 The Northern Territory by the Real Property (Insurance Money Application) Ordinance 1975, adopted a provision similar to section 47 of the English Law of Property Act 1925. The Northern Territory provision is as follows:

“4. (1) Where after the date of a contract... for the sale or exchange of property money becomes payable under a policy of insurance maintained by the vendor in respect of damage to or destruction of property included in the contract, the money shall on completion of the contract, be held or receivable by the vendor on behalf of the purchaser and paid by the vendor to the purchaser on completion of the sale or exchange, or so soon thereafter as the money shall be received by the vendor.

(2) Sub-section (1) has effect subject to the payment by the purchaser of the proportionate part of the premium from the date of the contract.”

This provision differs from its English conterpart in that it is not subject to any requisite consent of the vendors insurer. But it suffers from the second deficiency of the English provision mentioned earlier, namely, that a vendor who has received the purchase price from the purchaser has suffered no loss, so that, in accordance with the indemnity principle, no money is “ payable” under the vendor’s policy.

QUEENSLAND

3.8 The Queensland legislature directed its attention to the matter of insurance in conveyancing transactions when enacting the Property Law Act 1974. This Act resulted from recommendations contained in a report of the Queensland Law Reform Commission.⁵ The report recommended substantial reform of Queensland property law and, inter alia, examined section 47 of the English Law of Property Act 1925 as a possible precedent in relation to the application of insurance money in the event of destruction or damage to property between the date of contract and completion. The Commission proposed the adoption of section 47 in Queensland, subject to specifically providing that the insurer would still be liable even though the risk had passed to the purchaser, and further, that the consent of the vendor s insurer would not be required.⁶ Two sections of the Property Law Act 1974 are relevant to the present discussion sections 63 and 64:

“63. Application of insurance money on completion of a sale or exchange.

(1) Where after the date of any contract for sale or exchange of property, money becomes payable under any policy of insurance maintained by the vendor in respect of any damage to or destruction of property included in the contract, the money shall on completion of the contract, be held or receivable by the vendor on behalf of, and, on completion of the sale or exchange or so soon thereafter as the same shall be received by the vendor, paid -

(a) to any person entitled thereto by virtue of an encumbrance over or in respect of the land; and

(b) as to any balance thereafter remaining, to the purchaser.

(2) For the purpose of this section cover provided by such a policy maintained by the vendor extends until the date of completion and money does not cease to become payable to the vendor merely because the risk has passed to the purchaser.

(3) This section ... shall have effect subject to -

(a) any stipulation to the contrary contained in the contract;

(b) the payment by the purchaser of the proportionate part of the premium from the date of the contract. ⁷

64. Right to rescind on destruction of or damage to dwelling-house.

(1) In any contract for the sale of a dwelling-house where, before the date of completion or possession whichever earlier occurs, the dwelling-house is so destroyed or damaged as to be unfit for occupation as a dwelling-house, the purchaser may, at his option rescind the contract by notice in writing given to the vendor or his solicitor not later than the date of completion or possession whichever the earlier occurs.

(2) Upon rescission of a contract pursuant to this section any moneys paid by the purchaser shall be refunded to him and any documents of title or transfer returned to the vendor who alone shall be entitled to the benefit of any insurance policy relating to such destruction or damage subject to the rights of any person entitled thereto by virtue of an encumbrance over or in respect of the land.

(3) In this section the term “sale of a dwelling-house” means the sale of improved land the improvements whereon consist wholly or substantially of a dwelling-house or the sale of a unit within the meaning of the Building Units Titles Act 1965-1972.

(4) This section... shall have effect notwithstanding any stipulation to the contrary.”

3.9 As noted earlier, section 63 is similar in purpose to section 47 of the English Law of Property Act 1925 but there are some important differences in drafting.

• The consent of the vendors insurer is not required.
• Encumbraricees are entitled to be paid out in priority to the purchaser. It is not clear why this provision was considered necessary since the rights of the encumbrances would not appear to be prejudiced by the statutory application of the insurance moneys.⁸
• Money does not cease to be payable to the vendor under the insurance policy “merely because the risk has passed to the purchase”. The Queensland Law Reform Commission was concerned that the insurer might escape liability under the policy by showing that the risk had passed to the purchaser.⁹ However, the provision does not seem to be necessary since the mere passing of the risk to the purchaser is not a justification for the vendor's insurer refusing to pay a claim under the vendor's policy (paragraphs 2.11-2.12).
• The vendor’s insurance cover “extends until the date of completion”. Although the wording is not entirely clear, presumably it is intended that, even though the vendors policy in fact lapses between contract and completion it is notionally’ continued for the purposes of the section until completion actually takes place. In a typical transaction this provision would require the deemed continuance of the cover for a matter of weeks, or possibly months only, but it would seem also to prolong the cover where the contract is a term or instalment contract with a period of years between contract and completion. The extension may of course impose a substantial additional burden on insurers.

3.10 As with the English and Northern Territory provisions mentioned earlier, section 63 also is open to the interpretation that a vendor who has been paid the purchase price has suffered no loss, so that there is no money “payable” under the vendor s policy of insurance. It could be argued that the effect of section 63(2) is to overcome the problem of interpretation evident in the decision of the High Court in Ziel Nominees (paragraph 3.4). The difficulty here is that if the insurer is able to escape liability under the policy it may not be “merely because the risk has passed to the purchases”. It may be, in addition, because the vendor has received or is entitled to receive the full purchase price pursuant to the contractor sale and has therefore suffered no loss against which he or she needs to be indemnified. If this reasoning is correct, section 63 may be interpreted in a manner which destroys much of its value.

3.11 Section 64, while not altering the common law rule regarding the passing of risk, gives the purchaser an important right of rescission not conferred by the common law. It is subject to a number of important qualifications, the desirability of which would need to be considered in any discussion of the suitability of a similar right in New South Wales.

• It applies only to the sale of dwelling houses. In contracts for the sale of properties which do not fit the description of “dwelling-house” the general law principles, discussed in Chapter 2, would continue to apply. Further, the section does not define “dwelling-house” in detail although subsection (3) makes it clear that residential units are included.
• The right to rescind arises only where the dwelling-house is so damaged or destroyed as to be unfit for occupation as a dwelling-house.
• The damage or destruction must occur between contract and the taking of possession or completion, whichever is the earlier. There are many instances where purchasers are let into possession prior to completion. Under the legislation a purchaser has no right of rescission if the damage or destruction occurs between the date of taking possession and completion. Further, where the damage occurs before the date of possession, the notice of rescission must be given not later than the date of possession.

3.12 The provision in subsection (2) that the vendor “ alone shall be entitled to the benefit of any insurance policy” relating to the damage or, destruction is somewhat puzzling. If interpreted literally, it would permit a vendor who had no insurance over the property to claim on any insurance which the purchaser may have taken out over the property. It seems unlikely that this result was intended, and that the provision was meant merely to confirm by way of more abundant caution that the purchaser, having rescinded, cannot take advantage of section 63. It might also be intended to confirm that a purchaser, in these circumstances, can have no claim against his or her insurer.

VICTORIA

3.13 The most substantial legislative reforms in this field have been enacted in Victoria in the Sale of Land (Amendment) Act 1982. This Act was introduced following two major reports dealing with the passing of risk and insurance in Conveyancing transactions, namely, the Chief Justice’s Law Reform Committee’s Report on Insurance of Real Property (1979) and the Dawson Committee of Inquiry into Conveyancing, Further and Final Report (1980). These reports differed in some respects as to the most appropriate path for reform to take. The Chief Justice’s Law Reform Committee recommended the adoption of a provision similar to section 63 of the Queensland Act, but with important amendments designed to protect the vendors insurer against high risk purchasers. That Committee did not recommend legislation granting purchasers a right to rescind along the lines of section 64 of the Queensland Act.

3.14 The Dawson Committee recommended that legislation similar to both sections 63 and 64 should be introduced. The Dawson Committee considered that a provision which merely gives the purchaser the benefit of the vendor s insurance policy is not sufficient where the vendor s insurance is inadequate or non-existent; and that, the purchase of a dwelling-house being more than a mere commercial transaction a purchaser should not be compelled to complete if the house were to be destroyed or damaged to the point where it was no longer habitable. ¹⁰ The Committee also took the view that it was appropriate to restrict the power of rescission to sales of dwelling-houses, as the purchase of other kinds of properties ordinarily takes place in a commercial setting where the purchaser can be expected to safeguard his or her own interests. ¹¹ The new Victorian legislation adopts the approach of the Dawson Committee’s Report although with some variations.

3.15 Before the introduction of the 1982 Victorian Act the law in that State was similar to that in England. Section 47 of the Victorian Property Law Act 1958 was almost identical to section 47 of the English Law of Property Act 1925, and section 67 of the Supreme Court Act 1958 (Vic.) was similar to section 83 of the Imperial Fires Prevention (Metropolis) Act 1774. Both provisions have now been repealed by the 1982 legislation.

3.16 The Act inserts into the Sale of Land Act 1962, the following sections relevant to the present discussion:

“Right to Rescind

34. (1) Where a contract for the sale of land upon which there is a dwelling-house has been entered into, and where the dwelling-house is so destroyed or damaged as to be unfit for occupation as a dwelling-house, before the purchaser becomes entitled to possession or to the receipt of rents and profits he may, at his option rescind the contract by notice in writing given to the vendor or his solicitor within fourteen days after the purchaser becomes aware of the destruction of or damage to the dwelling-house.

(2) Upon rescission of a contract for the sale of land pursuant to this section -

(a) any moneys paid by the purchaser shall be refunded to him;

(b) any documents of title or transfer shall be returned to the vendor; and

(c) the provisions of section 35 shall not apply and the vendor and any other person entitled to benefit from any insurance policy shall be entitled to do so to the same extent as they would have been if the land had not been subject to the contract.

(3) Any provision in any contract for the sale of land or other document whereby any provision of this section is excluded, modified or rescinded shall be void and of no effect.

Benefit of Vendor’s Insurance

35. (1) During the period between the making of a contract for the sale of land and the purchaser becoming entitled to possession or to the receipt of rents and profits pursuant to the terms of the contract, any policy of insurance maintained by the vendor in respect of any damage to or destruction of any part of the land agreed to be sold pursuant to the contract shall in respect of the said land, to the extent that the purchaser is not entitled to be indemnified under any other policy of insurance, ensure for the benefit of the purchaser as well as for the vendor and the purchaser shall be entitled to be indemnified by the insurer under any such insurance policy in the same manner and to the same extent as the vendor would have been if the land had not been subject to the contract.

(2) It shall not be a defence or answer to any claim by the purchaser against the insurer made under sub-section (1) hereof that the vendor otherwise would not be entitled to be indemnified by the insurer because the vendor has suffered no loss or has suffered diminished loss by reason of the fact that the vendor is entitled to be paid the purchase price or the balance thereof by the purchaser.

(3) A policy of insurance shall not enure for the benefit of a purchaser under sub-section (1) hereof if the insurer establishes that a prudent insurer would not have insured the purchaser against the risk covered by the policy.

(4) At any time prior to the happening of the risk insured against an insurer made liable to a purchaser under sub-section (1) may terminate that liability by giving notice of such termination to the purchaser in not less than three clear business days.

(5) ...

(6) The contract of insurance shall terminate at the expiration of the period specified in the notice.

(7) The service of a notice under sub-section (4) shall not affect the liability of the insurer to the vendor under the policy of insurance.

(8) Where money becomes payable under a policy of insurance in respect of any damage to or destruction of part of the land agreed to be sold the money shall on completion of the contract be held or receivable by the vendor on behalf of the purchaser and paid by the vendor to the purchaser on completion of the sale or as soon as the money is received by the vendor (whichever is the later).

(9) Notwithstanding sub- section (1) an insurer shall not be entitled to deny liability to the purchaser because of a fault on the part of the vendor by reason of which the vendor would not be entitled to make a claim under the policy.

(10) This section-

(a)...

(b) shall have effect notwithstanding any stipulation or term to the contrary contained in the contract of sale or any policy of insurance as referred to in sub-section (1).

Option of Restoring Premises

36. Where land has been destroyed or damaged, the vendor may restore that damage and where the vendor does so before the purchaser becomes entitled to possession or to the receipt of rents and profits, the purchaser shall not be entitled to rely on the provisions of section 34 or 35.”

Comments Upon the Victorian Legislation

Section 34: Right to Rescind

3.17 The purchasers statutory right to rescind is strictly limited. It may be exercised only where:

• the contract is for the sale of a dwelling-house; and
• the dwelling-house is so destroyed or damaged as to be unfit for occupation as a dwelling-house; and
• the purchaser rescinds within 14 days of becoming aware of the destruction or damage and before becoming entitled to possession or to the rents and profits.

Further, if the right to rescind is exercised, the provisions of section 35 allowing a purchaser to take advantage of the vendor s insurance, do not come into operation The rights conferred by section 34 cannot be excluded or modified.

Section 35: Benefit of Vendor’s Insurance

3.18 This section, like its Queensland counterpart is designed to give the purchaser the benefit of the vendor’s insurance policy However, the section has significant differences, some of which are intended to protect the interests of the vendor’s insurer.

• The vendors policy continues for the benefit of the purchaser for the period between the making of the contract and the date when the purchaser becomes entitled to possession or to the receipt of rents and profits. Accordingly, where the purchaser goes into possession prior to completion he or she loses the benefit of the vendors policy. The vendor s insurer is thus protected against any potential increased “risk” which might be thought to flow from the taking of possession by a purchaser whose character is unknown to the insurer.
• The insurer may avoid liability to the purchaser by establishing that a prudent insurer would not have insured the purchaser against the risk covered by the policy.
• The insurer has a discretion, at any time before the happening of the risk insured against, to avoid liability to a purchaser by giving three days notice of termination of liability to that purchaser. Although the rationale behind this provision is clear enough it is not altogether clear how effective the insurer’s right will be, since the insurer is unlikely to know that the property is subject to a contract for sale. Insurers could insert conditions in their policies requiring vendors to notify them when a contract is entered into, but such conditions might not be observed.

3.19 Four other aspects of section 35 call for comment.

• First, notwithstanding the reference in subsection (8) to money becoming “payable” under the policy, the provisions of subsection (2), together with the concluding words of subsection (1), appear effectively to overcome the problem posed by the decision in Ziel Nominees. It seems clear that the vendor’s insurer could not argue that payment to the vendor of the purchase price discharges the insurer from liability to pay under the Policy. ¹² The only qualification to this result will be where the purchaser has taken out a policy. In such a case, under subsection (1), the vendor’s insurer is not liable to the extent of the purchases s entitlement under his or her own policy.
• Secondly, subsection (9) precludes the vendor’s insurer from denying liability to the purchaser because of fault on the part of the vendor which would preclude the vendor from making a claim under the policy.
• Thirdly, contracting out of the section is not permitted.
• Fourthly (as with its Queensland counterpart), section 35 is not restricted in its operation to dwelling-houses.

3.20 The protection accorded by section 35 is dependent on the nature and extent of the insurance coverage taken out by the vendor (although even if the vendor is fully covered the purchaser will not necessarily be completely protected). Consequently, it may be important for the purchaser to as certain whether the vendor is insured for the full value of the improvements to the property. Section 32(2) (g) accordingly states that where the contract does not provide for the land to remain at the risk of the vendor pending completion the vendor shall give to the purchaser, before contracts are exchanged, a statement which includes particulars of any insurance policy maintained by the vendor in respect of damage to, or destruction of the property.

Section 36: Option of Restoring Premises

3.21 This section gives the vendor the option of restoring the damage before the purchaser becomes entitled to possession or to the receipt of rents and profits. There may be practical difficulties in the vendor taking advantage of the option conferred by the section, unless the purchaser agrees to this course of action. If the damage is anything other than minor, it is unlikely that the restoration could be completed before the purchaser becomes entitled to possession under the contract for sale. Should the restoration not be completed before this date, the purchaser will be entitled to exercise the right of rescission conferred by section 34, or the right to take the benefit of the vendor s insurance under section 35 provided of course that the requirements of each section have been met. If, however, the restoration is completed before the relevant date, the purchaser loses the right to rely on section 34 or 35.

3.22 Section 36 does not specify whether, if the vendor lays out the proceeds of insurance in repairing the damage, he or she can be called upon to refund the money to the insurer when the purchase price is paid. To avoid doubt it would be preferable for this matter to be covered expressly.

General

3.23 The Victorian legislation leaves open one point which should be clarified if similar legislation were thought advisable for New South Wales. Sections 34 and 35 appear to assume that the risk has passed to the purchaser upon exchange of contracts and that the purchaser needs protection against the consequences of the passing of the risk. If the risk remains with the vendor, it is likely that the purchaser is entitled, in the event of damage to the property, either to rescind or to insist that the purchase price be reduced. In such a case there would seem to be no valid reason for giving the purchaser a right to claim under the vendor’s policy and it would not be essential to create a statutory right to rescind. It is presumably open to the vendor and purchaser to agree that the risk shall not pass on exchange of contracts, and indeed this is contemplated by the language of section 32(2)(g), referred to in paragraph 3.20. Consequently, sections 34 and 35 should be expressly confined to the situation where the risk has passed to the purchaser upon entry into the contract.

AUSTRALIAN LAW REFORM COMMISSION

3.24 The Australian Law Reform Commission has recently considered the question of passing of risk and insurance in its Report on Insurance Contracts. ¹³ This is a matter on which the Commonwealth has constitutional power, since the Parliament may make laws with respect to “insurance other than State insurance.....” ¹⁴ The Commission’s terms of reference were limited to considering the law governing contracts of insurance. Accordingly, it did not consider whether the difficulties associated with the current law governing passing of the risk between vendor and purchaser could be overcome by some means other than allowing the uninsured purchaser access to the vendor’s insurance policy.

3.25 After considering actual or proposed reforms elsewhere, the Commission recommended legislation which would allow the purchaser to receive the benefit of the vendor’s insurance in respect of any loss occurring before completion or entry into occupation by the purchaser. In the Commission’s view the “only objection” which might be made to the proposal is that “it is contrary to principle to force an insurer to insure a risk which it is unable to assess”. However, the Commission considered that concerns of this kind would be minimised if the purchaser could have the benefit of the vendor’s insurance from exchange of contracts until completion or entry into possession whichever is earlier. During this period the Commission thought it unlikely that the purchaser would benefit from arson or add to the risk by careless maintenance. ¹⁵

3.26 The Commission’s report included a draft Bill giving effect to the recommendation in the text. The relevant clause is as follows:

“Sale of insured property

50. (1) Where -


(a) a person (in this section called “the purchaser”) agrees to purchase, or to take an assignment of, property and in consequence the purchaser has, or will have, a right to occupy or use a building;

(b) the building is the subject-matter of a contract of general insurance to which the vendor or assignor under the agreement is a party; and

(c) the risk in respect of loss of or damage to the building has passed to the purchaser;




the purchaser shall be deemed to be an insured under the contract of insurance, so far as the contract provides insurance cover in respect of loss of or damage to the building and such of the contents of the building as are being sold or assigned to the purchaser at the same time, during the period commencing on the date on which the risk so passed and ending at whichever of the following times is the earliest:


(d) the time when the sale or assignment is completed;

(e) the time when the purchaser enters into possession of the building;

(f) the time when insurance cover under a contract of insurance effected by the purchaser in respect of the building commences;

(g) the time when the sale or assignment is terminated.




(2) A reference in this section to a building includes a reference to a part of a building and also includes a reference to a structure.”

3.27 The following points should be made about clause 50.

• The legislation seems to avoid the problems presented by the decision in Ziel Nominees, by deeming the purchaser to be an insured under the contract of insurance.
• As occurs in Victoria, the purchaser s right to claim under the vendor s insurance continues only until the purchaser enters into possession or completes the sale. The Commonwealth Bill also specifically provides that the purchaser's rights under the vendor's policy cease when the purchasers own insurance commences.¹⁶
• The insurer has no statutory right to give notice to the purchaser terminating the insurance contract Nor can the insurer avoid liability on the ground (available in Victoria) that a prudent insurer would not have insured the purchaser against the risk covered by the policy.
• It is not clear whether the insurer can avoid liability to the purchaser on the ground that the policy could be avoided against the vendor, for example, because of misrepresentation or non-disclosure. This issue is not addressed specifically in the legislation or the Commission’s report. ¹⁷ The better view would seem to be that as the purchaser is deemed to be an insured under “the contract of insurance”, the insurer retains whatever defences might otherwise be available under that contract.
• It is also not clear, where the vendor s policy expires after exchange of contracts but before completion, whether the policy is deemed to continue in favour of the purchaser. The language of clause 50 is capable of being interpreted as requiring the policy to continue, even though the insurer receives no premiums in respect of the period of extension. ¹⁸
• The provisions of clause 50 apply only when “the risk in respect of loss of or damage to the building has passed to the purchases”.
• The rights of the purchaser under the clause cannot be modified or excluded by any provision in the contract of insurance. ¹⁹

WESTERN AUSTRALIA

3.28 The general conditions for the sale of land of both the Real Estate Institute of Western Australia and the Law Society of Western Australia are significantly different from the conditions contained in the standard form contract in use in New South Wales. The Western Australian provisions state that the property remains at the risk of the vendor until completion or earlier possession. Despite this important alteration to the general rule concerning the passing of risk, the provisions have not, to our knowledge, been the subject of any litigation.

3.29 The Law Society of Western Australia first adopted the provision that the property is at the risk of the vendor until completion or until the purchaser is entitled to or is given possession (whichever is the earliest) in its 1974 general conditions for the sale of land. We have been informed that the precedent for this was a similar provision in the New South Wales 1972 standard form contract for the sale of property under the Strata Titles Act, 1973. ²⁰ The 1974 general conditions were revised in late 1979 by the Conveyancing Committee of the Law Society of Western Australia and the 1980 edition of the standard form contract used by the Law Society for residential torrens or strata title property reverted to the common law position with the risk passing to the purchaser upon exchange of contracts. ²¹

3.30 However, following a further revision the 1982 Law Society general conditions for the sale of land contain a provision that the risk does not pass to the purchaser until completion or earlier possession. The condition is in the following terms:

“11. Risk

(1) Notwithstanding any rule of law or equity to the contrary the Property shall be at the risk of the Vendor until the whole of the Purchase Price is paid or the Purchaser is entitled to or is given Possession whichever is the earliest and thereupon the risk shall pass to the Purchaser.

(2) If the Property includes a building or other improvement any part of which is destroyed or damaged prior to the risk passing to the Purchaser the following shall apply:-

(a) If the building is a dwelling and it is made substantially uninhabitable, or in any other case, the building or other improvement is made substantially unusable for the use current at the date of the contract, then at the option of the Purchaser, the Contract may be rescinded by notice in writing to the Vendor given not later than 14 days after the date upon which the Vendor has given written notice to the Purchaser of such destruction or damage, and thereupon the Vendor shall repay to the Purchaser the deposit and all other moneys (if any) paid by the Purchaser to the Vendor under the Contract without deduction; and

(b) If the Contract is not rescinded pursuant to paragraph (2) (a) of this Condition, the Purchase Price shall be reduced by an amount equal to the reduction in value of the Property caused by the destruction or damage. Such amount shall be settled in cases of difference by an arbitrator appointed in the manner specified in Condition 10(2).”

3.31 It can be seen that not only does condition 11 provide for an important alteration to the general rule concerning the passing of risk, but the purchaser is given a right of rescission if a dwelling-house on the property is made substantially uninhabitable or any building or other improvement is made substantially unusable prior to the risk passing to the purchaser. Consequently, the right to rescind is not limited to damage occurring to dwelling-houses and in this respect is significantly different from section 64 of the Property Law Act 1974 (Qld) and section 34 of the Sale of Land Act 1962 (Vic). If the contract is not rescinded, there is an abatement of the purchase price equal to the reduction in the value of the property caused by the destruction or damage. There is provision for arbitration should there be any dispute as to the amount of the abatement.

3.32 The Real Estate Institute of Western Australia has a separate set of general conditions for the sale of land (1982 revision). We have been informed that at least 90 per cent of conveyancing transactions in Western Australia are completed using the Real Estate Institute general conditions. ²² Clause 9 of these conditions is in the following terms:

“9. Risk

Notwithstanding any rule of law or equity to the contrary the buildings and erections on the property shall be at the risk of the Vendor until the Purchaser is entitled to or is given possession of the property (whichever is the earlier) and thereafter the property shall be at the risk of the Purchaser and until completion the Purchaser shall at his own expense insure and keep insured against loss or damage by fire, storm, tempest and earthquake and such other risks as the Vendor may reasonably require in the joint names of the Vendor and Purchaser with an insurance company approved by the Vendor to their full insurable value all buildings and erections of an insurable nature upon the property and all moneys received in respect of such insurance shall at the option of the Purchaser be applied in repairing or reinstating the buildings or erections insured or shall be applied by the Purchaser in or towards payment or part-payment (as the case may be) of the unpaid balance of the purchase price and any interest thereon. If the Purchaser neglects or refuses to pay the annual premium or any part thereof necessary to obtain or renew such policy the Vendor may pay the amount of such premium and thereafter demand and recover by process of law from the Purchaser the amount so paid.”

This provision differs in several ways from the general conditions for the sale of land used by the Law Society of Western Australia.

• Clause 9 provides that the risk passes to the purchaser upon actual possession or entitlement to possession whichever is the earlier. There is no reference to the risk passing upon completion although generally speaking, the purchaser is entitled to possession from the day following completion of the sale unless the contract provides otherwise. ²³
• Clause 9 states that from the time the risk passes to the purchaser, the property is to be insured at the expense of the purchaser. The policy is to be in the joint names of the vendor and purchaser with an insurance company approved by the vendor. Clearly, the purchaser would only be required, pursuant to clause 9, to obtain insurance prior to completion when he or she has been given possession or is entitled to possession. However, we have been informed that there is a substantial amount of double insurance in Western Australia with purchasers taking out their own insurance upon exchange of contracts, principally because building societies insist that purchasers obtain insurance before a loan is granted. ²⁴

3.33 Finally it is to be noted that although both the general conditions of the Law Society of Western Australia and the Real Estate Institute can be altered by agreement between the parties, for example, to provide that the risk passes to the purchaser upon exchange of contracts, it appears that it is rare for the provisions concerning the passing of risk to be altered. ²⁵

NEW ZEALAND

3.34 In May 1983 the New Zealand Contracts and Commercial Law Reform Committee published a Report, Aspects of Insurance Law (2) in which the questions of passing of risk and insurance were considered. The Committee expressed the view that the present law in New Zealand, which is similar to that in New South Wales (with the exception that section 83 of the Imperial Fires Prevention (Metropolis) Act 1774 applies in New Zealand), was unsatisfactory and in need of reform The Committee considered that there were two main options for reform.

The first was the adoption of legislation along the lines of the United States Uniform Vendor and Purchaser Risk Act (paragraphs 3.41-3.42) which alters the common law rule concerning the passing of risk between vendor and purchaser. Although the Committee thought that such a reform possessed the advantage of simplicity, it was rejected as constituting too radical a change to the existing principle regarding the passing of risk. The Committee also felt that the Act was productive of possible uncertainty, in that it might be difficult to determine whether damage was “material” for the purposes of the Act, the answer to which determines whether the contract can be enforced by the vendor and, further, disputes could arise concerning the amount of abatement of the purchase price appropriate in the circumstances. ²⁶

3.35 The second possible option for reform was the statutory extension of the vendor s insurance cover to the purchaser. This path had been opposed by the New Zealand Insurance Council in its submission to the Committee as constituting too great an interference with insurer’s discretion to choose and measure risk. Notwithstanding this opposition the Committee was of the view that this was the appropriate reform to adopt. ²⁷

3.36 The Committee had before it the Victorian Chief Justice’s Law Reform Committee’s Report (paragraph 3.13), but apparently not the provisions of the 1982 Victorian Act The Committee agreed with the main thrust of the Victorian Committee’s proposals, subject to some qualification concerning aspects of that committee’s draft legislation which subsequently found their way into section 35 of the Victorian Act. In particular, the New Zealand Committee rejected the need for any provisions in the nature of subsections (3), (4) and (5) of section 3 5, on the ground that the insurer is reasonably protected by the provision that the policy continues for the purchasers benefit only until possession is given. ²⁸

3.37 The New Zealand Committee also addressed the problem that can arise at the same time that the purchaser is given the benefit of the vendor s policy, the purchaser also takes out his or her own insurance policy which includes a term avoiding liability if the purchaser is otherwise entitled to indemnity. In such cases, the enactment of a provision making the vendor’s policy enure for the benefit of the purchaser “could have the paradoxical effect of vitiating the insurance specifically arranged by the purchaser”. ²⁹ Accordingly, the Committee recommended a section stating that it should not be a defence to any claim by the purchaser against his or her insurer:

“that the purchasers entitlement under the policy to which the claim relates is affected or defeated by the existence or terms of any policy held by or on behalf of the vendor.” ³⁰

3.38 The draft provisions recommended by the New Zealand Committee are as follows:

“11. Purchaser of land entitled to benefits of insurance between dates of sale and possession

(1) During the period between -

(a) The making of a contract for the sale of land and all or any fixtures thereon;

(b) The purchaser taking possession of the land and fixtures pursuant to the contract or final settlement, whichever is the sooner -

any policy of insurance maintained by the vendor in respect of any damage to or destruction of any part of the land or fixtures shall in respect of the land and fixtures agreed to be sold and to the extent that the purchaser is not entitled to be indemnified under any other policy of insurance, enure for the benefit of the purchaser as well as for the vendor, and the purchaser shall be entitled to be indemnified by the insurer under the policy in the same manner and to the same extent as the vendor would have been if there had been no contract of sale:

Provided that nothing in this subsection shall oblige an insurer to pay more in total under a policy of insurance than it would have had to pay if there had been no contract of sale.

(2) It shall not be a defence or answer to -

(a) Any claim by a purchaser against an insurer under this section that the vendor otherwise would not be entitled to be indemnified by the insurer because the vendor has suffered no loss or has suffered diminished loss by reason of the fact that the vendor is or was entitled to be paid the purchase price, or the balance thereof, by the purchaser; or

(b) Any claim under this section by a purchaser against the vendor’s insurer in relation to the land or fixtures sold that the purchasers entitlement under the policy to which the claim relates is affected or defeated by the existence or terms of another policy; or

(c) Any claim by a purchaser against an insurer (other than the vendor’s insurer) that the purchasers entitlement under the policy to which the claim relates is affected or defeated by a claim under this section.

(3) In this section the word “vendor” includes a mortgagee of the vendor and any person claiming through the vendor.

(4) Where, in respect of a contract for the sale of land and all or any fixtures thereon, -

(a) There is damage to or destruction of any part of the land or fixtures during the period specified in subsection (1) of this section; and

(b) The whole or part of the amount payable in respect of the damage or destruction under the policy of insurance maintained by the vendor is payable to a mortgagee of, or any person claiming through, the vendor -

the purchase price payable under the contract of sale shall be reduced by the amount so payable to the mortgagee or person claiming through the vendor.

(5) This section shall not apply to the extent that the purchaser and vendor under a contract of sale expressly agree at any time.

(6) This section -

(a)...

(b) Subject to subsection (5) of this section, shall have effect notwithstanding any provision to the contrary in any enactment, rule of law, policy of insurance, deed, or contract.

(c)...

12. Double insurance relating to contracts for sale of land

Where there is a contract for the sale of land and all or any fixtures thereon, it shall not be a defence or answer to any claim by the purchaser against an insurer (other than the vendor s insurer) that the purchasers entitlement under the policy to which the claim relates is affected or defeated by the existence or terms of any policy held by or on behalf of the vendor.”

In December 1983 the Insurance Law Reform Bill was introduced into the New Zealand Parliament and was referred to a Select Committee. The Bill gives effect to the recommendations of the report of the Contracts and Commercial Law Reform Committee. Clauses 11 and 12 of the Insurance Law Reform Bill are in almost identical terms to the clauses in the draft Bill appended to the Committee’s report.

3.39 It will be noted that these provisions, while departing from aspects of the Victorian section 35, introduce some significant new matters. The following are noteworthy:

• the proviso to clause 11 (1), making it clear that the insurer is not obliged to pay more than would have been payable had there been no contract of sale;
• clauses 11 (2) (b), (c) and 12, removing the argument that the purchases s claim might be defeated if the purchaser has arranged his or her own insurance and the policy contains a clause avoiding liability if the purchaser is otherwise covered;
• clause 11 (3), extending the clause to a mortgagee of the vendor and any person claiming through the vendor;
• clause 11 (4), permitting an abatement of purchase price where the proceeds of the policy are payable to the vendor s mortgagee or a person claiming through the vendor;
• clause 11(5), permitting the vendor and purchaser to contract out of the operation of the legislation.

UNITED STATES OF AMERICA

3.40 Brief mention should be made of the position in the United States. ³¹ The courts in the majority of States have adopted the rule that the risk passes to the purchaser upon entry into a binding contract (although as mentioned in paragraph 2.7, in some States the risk remains with the vendor until completion or earlier possession by the purchaser ³² ). However, the purchaser usually is able to claim the benefit of the vendor’s insurance.

3.41 A number of States have adopted the Uniform Vendor and Purchaser Risk Act As adopted in New York (the provisions in brackets being New York additions to the original Uniform Act), the Act provides:

“1. Any contract hereafter made for the purchase and sale or exchange of realty shall be interpreted, unless the contract expressly provides otherwise, as including an agreement that the parties shall have the following rights and duties:

(a) When neither the legal title nor the possession of the subject matter of the contract has been transferred to the purchaser.

(1) If all or a material part thereof is destroyed without fault of the purchaser or is taken by eminent domain, the vendor cannot enforce the contract, and the purchaser is entitled to recover any portion of the price that he has paid, but nothing herein contained shall be deemed to deprive the vendor of any right to recover damages against the purchaser prior to the destruction or taking.

[(2) If an immaterial part thereof is destroyed without fault of the purchaser or is taken by eminent domain neither the vendor nor the purchaser is thereby deprived of the right to enforce the contract, but there shall be, to the extent of the destruction or taking, an abatement of the purchase price.]

(b) When either the legal title or the possession of the subject of the contract has been transferred to the purchaser, if all or any part thereof is destroyed without fault of the vendor or is taken by eminent domain, the purchaser is not thereby relieved from a duty to pay the price, nor is he thereby entitled to recover any portion thereof that he has paid; [but nothing herein contained shall be deemed to deprive the purchaser of any right to recover damages against the vendor for any breach of contract by the vendor prior to the destruction or taking.]”

3.42 It will be observed that under this Act liability for loss is governed by the passing of title or possession. So long as legal title and possession remain with the vendor, the vendor cannot enforce the contract if all or a material part of the property is destroyed or resumed; if only an immaterial part is destroyed or resumed, an appropriate abatement of purchase price is made. Once legal title or possession has been transferred to the purchaser, the purchaser must pay the full price, regardless of the extent of damage (provided that the damage has not been caused by any fault on the part of the vendor). In practical terms, the Act reverses the common law rule about the passing of the risk, although the presumption may be reversed by express agreement between the parties. The Act does not purport to interfere with or regulate the liability of insurers.

1. Section 47(3) further provides that s.47 applies to the sale of property resulting from a court order.

2. RE Megarry and HWR Wade, The Law of Real Property (4th ed., 1975), p.577.

3. (1975) 7 ALR 667.

4. Reid v. Fitzgerald (1926) 48 WN (NSW) 25, at p.26, approved in Hazelwood v. Webber (1934) 52 CLR 268; Imperial Acts Application Act, 1969, s.8.

5. Queensland Law Reform Commission, Report on a Bill to Consolidate, Amend, and Reform the Law Relating to Conveyancing, Property, and Contract and to Terminate the Application of Certain Imperial Statutes, QLRC 16 (1973).

6. Id., p.51.

7. As with the English legislation, s.63(4) provides that s.63 applies to the sale of property resulting from a court order.

8. The section raises the question of whether the insurer is subrogated to the rights of the encumbrances against the vendor. cf. Strata Titles Act, 197 3, s.86.

9. Note 5 above, p.5 1.

10. Committee of Inquiry into Conveyancing, Further and Final Report (1980), p.16.

11. Ibid.

12. Cf. PF Mitchell, “Closing the Insurance Gap Between Vendor and Purchaser” (1983) 57 Law Institute Journal 73, at p.75, where it is argued that the Act is not as clear as it might have been an over coming the effect of the decision in Ziel Nominees.

13. Australian Law Reform Commission, Insurance Contracts, Report No.20 (1982), paras.130-132.

14. Constitution, s.51(xiv).

15. Note 13 above, para.132. A consultant to the Australian Law Reform Commission, Mr GR Masel, observed that a purchaser may benefit from arson before settlement if he or she wishes not to proceed with the contract or if the purchaser wishes to finance the purchase by insurance proceeds.

16. Cf. Sale of Land Act 1962 (Vic), s.35(1).

17. Cf. id, s.35(9).

18. Cf. Property Law Act 1974 (Qld), s.63(2).

19. Insurance Contracts Bill 1983 (Cth), cl.52.

20. Personal communication with Mr RD Warren, Chairman of the Conveyancing Committee of the Law Society of Western Australia, 13 January 1984. The provision in the 1972 contract for the sale of land was cl8(f) which stated that in the case of property which is part of a Strata Scheme under the Strata Titles Act 1973 then:

“Notwithstanding any rule of law or equity to the contrary the risk of the property sold shall not pass to the Purchaser until completion.”

As noted elsewhere in this report (para.2.5) this provision has been included in condition 14A(e) (i) of the 1982 edition of the New South Wales standard form contract.

21. Clause 13 of the 1980 edition of the contract for sale of property stated that:

“The property is at the risk of the Purchaser after (but not including) the date upon which this Agreement or a duplicate or counterpart thereof executed by the Vendor is delivered to the Purchaser or the Purchaser’s solicitors.”

22. Personal communication with Mr N Roberts, Executive Director, Law Society of Western Australia, 13 January 1984.

23. Real Estate Institute of Western Australia, General Conditions for the Sale of Land (1982 Revision), cl.5.1.

24. Letter from Mr. CD Henri, Regional Manager (NSW), Insurance Council of Australia Ltd, 2 December 1983.

25. Ibid. This was confirmed by Mr RD Warren, Chairman of the Conveyancing Committee of the Law Society of Western Australia, note 20 above.

26. New Zealand Contracts and Commercial Law Reform Committee, Aspects of Insurance Law (2) (198 3), para.9.9.

27. Id., para.9.11.

28. Id., para.9.14.

29. Id., para.9.15.

30. Ibid., and Appendix A, cl.12.

31. See the helpful article by G. Walker, “Insurance and the Sale of Land” (1981) 9 Australian Business Law Review 148.

32. Ibid., pp. 151, 156-157, 158.