WHEN EQUITY AND THE COMMON LAW CONFLICT, EQUITY DOES NOT ALWAYS PREVAIL

• Published date: 01 December 1995
• Author: JOAN SETHUPATHY
• Date: 01 December 1995
• Citation: (1995) 7 SAcLJ 212

Lim Kim Som v Sherriffa Talbah Bte Abdul Rahman 1

INTRODUCTION

The present case highlights yet again the question whether the doctrine of frustration applies to contracts for the sale of land. However, the interest in this case lies in the fact that equitable principles did not prevail over the common law. This short article attempts to examine the equitable principles applicable to situations between the time of contract and completion where there has been a sale and purchase agreement for a piece of property and the rights and interests of both the vendor and the purchaser. It is not the aim of the writer to argue that the doctrine of frustration does not and cannot apply to contracts of the sale of land. Whether or not it does apply, has already been dealt elsewhere.2 It is the writer’s view that frustration was not appropriate in the present case because of the interplay of equitable principles.

FACTS

The respondent-vendor and the appellant-purchaser entered into a sale and purchase agreement (the agreement) for a piece of property. Completion did not take place on the specified date and five days later, on 13 July 1983 the respondent sent the appellant a 21-day notice to complete. On the very same day, a declaration was made under s 5 of the Land Acquisition Act (Cap. 272, 1970 Ed.) (‘the Act’) stating that the property was required for a public purpose. On 19 July 1983 a notification was published in the government gazette. On 1 August 1983 the appellant wrote to the respondent stating, inter alia, that in view of the declaration in the gazette the appellant did not intend to carry on with the purchase and requested the refund of the 10% deposit. In response, the respondent, by a telex dated 5 August 1983, stated that the 21-day notice had expired and as the appellant did not intend to complete, the deposit had been forfeited. On 7 August the respondent commenced the present action against the appellant claiming the balance for the purchase price plus interest or alternatively damages for breach of contract. The Collector of Land Revenue had, in the meantime, awarded a sum of compensation for the acquisition which was paid into court and later paid out to the respondent. The amount of compensation was approximately a fifth of the purchase price.

The appellant raised, inter alia, two defences which may be summarized as follows:

1. (a) the performance of the agreement without any fault on his part was frustrated by the compulsory acquisition of the property under the Act which was initiated by the declaration under s 5 of the Act and the appellant was thereby discharged from the performance of the agreement.

2. (b) the respondent was precluded by the declaration from giving to the purchaser a good title to the property. The appellant counterclaimed the refund of the deposit of 10% of the purchase price.

At trial,3 Michael Hwang JC held, inter alia, that the declaration under s 5 did not deprive the vendor (respondent) of her interest in the subject land so as to preclude her from completing the sale. Nor did the declaration destroy the subject matter of the agreement. On the question of good title to the property, the learned judicial commissioner held that the declaration under s 5 was not an encumbrance on the property and the fact that the property would shortly after completion, have to be ‘surrendered’ to the state should not affect the validity of the vendor’s title at completion. The effect of the declaration under s 5 might be to diminish the value of the property but that did not impeach the vendor’s title.

Before the Court of Appeal three main issues were raised: first, whether the doctrine of frustration was capable of being applied to a contract for the sale of land; secondly, if the answer to the first question is in the affirmative, whether in this case the agreement was frustrated by the compulsory acquisition of the property under the Act, and thirdly, whether by reason of the compulsory acquisition, which had already commenced, the vendor could on completion convey to the purchaser a good title to the property.

The court held, that on the authorities which it had considered, frustration is capable of being applied to contracts for the sale of land. It held further that the occurrence of the unexpected event i.e. the commencement of the process of compulsory acquisition, had altered fundamentally the ‘face of things’ and there was such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. Finally the court held that the process of compulsory land acquisition which de facto had begun with the s 5 declaration had changed the nature of duration of the title. The title had become no longer one as provided in the agreement but a defeasible one which within a short period of time would vest in the state.

COMMENTARY

The first question one must address is what is the position in equity between a vendor of land and a purchaser at the time of contract for the sale of the land but before completion takes place? The principal conflict has been whether it is correct to say that the trust arises immediately a contract for sale is entered into, or whether it arises at some later date.

It has been said that the effect of a binding contract is that the vendor remains the owner of the legal estate until this passes to the purchaser as a result of the conveyance. Nevertheless the purchaser does have an equitable interest by virtue of the contract, and the vendor is in a position similar to that of a trustee.4 Immediately a binding contract for the sale for the sale of land is made the purchaser becomes the owner of the property in the eyes of Equity.5 The vendor retains the legal estate in a position similar to that of a trustee holding the property for the purchaser, who is the beneficial owner. It is true that this trusteeship is not absolute,6 for the vendor has a personal and substantial interest in the property, which he is entitled to protect.7 His beneficial interest in the property, however, converted to the purchase money, or he may always fall back on the lien on the land that equity gives him until he is actually paid.8

In Hillingdon Estates v Stonefield Estates Ltd,9 Vaisey J stated that the position of a vendor in such a situation is that from the moment the contract is entered into he holds the legal estate as trustee for the purchaser. In that case, the vendors contracted in 1938 to sell their property in two portions. The purchase for the first portion was completed without any mishap. The completion of the second portion was delayed by, among other things, the outbreak of war. In 1948 the local authority made a compulsory purchase order affecting the second portion and the purchase was never completed. The events that subsequently occured led to the purchasers bringing an action claiming a declaration that they were discharged from liability under the contract and the return of the interest that they had paid. The vendors counterclaimed for specific performance.

Vaisey J held that the vendor’s interest when he has entered into a contract for sale is not an interest in land but an interest in personal estate, in a sum of money. The purchasers, subject to the payment of that purchase-money, are to be regarded as owners of the land. The effect of the compulsory purchase order process is merely to place an obligation on those who are already owners of the land in question i.e. the purchasers. The compulsory purchase order does not affect the vendors who have no interest in the matter save in respect of the purchase-money which they are entitled to be paid.10

In Lim Kim Som, Michael Hwang JC, although he found the case of Hillingdon as being of assistance, did not rely on the passing of the beneficial ownership as the basis for finding that the agreement had not been frustrated.11 In the Court of Appeal, LP Thean JA said that the passing of beneficial ownership to the purchaser is not a sufficient answer to the question why frustration cannot apply to a contract for the sale of land. It is submitted that the issue of whether the common law doctrine of frustration applies to a contract for the sale of land is a separate issue from deciding the rights and position of the parties in equity from the time the contract is entered into to the time of completion.

As stated earlier, there are authorities to suggest that the true owners of the land from the time the comtract is entered into are the purchasers. On the sale of land the risk passes at the time of contract rather than on completion.12 This stems from the principle that, from that date, the purchaser is regarded in equity as the owner of the property. From the middle of the seventeenth century the effect of a contract for the sale of land has been said to be to pass the equitable title to the purchaser.13 The reason for this is probably that, unlike most contracts of sale, specific performance is routinely awarded of a contract for the sale of land. This is on the basis that damages are never considered...