Implied term that vendor must act in a reasonable manner when selling land pursuant to liquidated damages clause

What duties does a vendor have in selling land pursuant to a liquidated damages clause in the sale contract following a default by the purchaser?

There are three possibilities:

(a)  if a vendor acts unreasonably in failing to minimise loss arising from a purchaser’s breach, any damages will be reduced to the extent that the vendor’s loss would have been reduced had the vendor acted reasonably;

(b)  the duty imposed on a vendor is similar to that imposed on a mortgagee exercising a power of sale granted under a security, the duty being to act in good faith;

(c)  there is an implied term in the contract for the sale of duty that a vendor will exercise the power of resale in a reasonable manner.

In Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 Garde J rejected the first two possibilities and held that there was an implied term in the contract that the vendor would act reasonably in the exercise of its power of resale and that this implied term extended to all aspects of the resale. The contractual provision considered by the court was general condition 28.4 of the general conditions which provides:

“If the contract ends by a default notice given by the vendor:

1. the deposit up to 10% of the price is forfeited to the vendor as the vendor’s absolute property, whether the deposit has been paid or not; and
2. the vendor is entitled to possession of the property; and
3. in addition to any other remedy, the vendor may within one year of the contract ending either:
4. retain the property and sue for damages for breach of contract; or
5. resell the property in any manner and recover any deficiency in the price on the resale and any         resulting expenses by way of liquidated damages; and
6. the vendor may retain any part of the price paid until the vendor’s damages have been determined and may apply that money towards those damages; and any determination of the vendor’s damages must take into account the amount forfeited to the vendor.”

His Honour held that the implied duty to act in a reasonable manner in exercising the power of resale did not mean that a vendor had to put the interests of the defaulting purchaser ahead of his own. At [175] His Honour said:

“Where the interests of a vendor and the purchaser in breach are in conflict, for example as to the urgency or method of the resale, the vendor is entitled to prefer his own interests to those of the purchaser in breach, provided that in so doing the vendor acts in a reasonable manner. The obligation on the vendor to act in a reasonable manner has been held to apply to price, time of resale and conduct in the form or method of resale. It would also extend to the terms of resale to be offered by the vendor.”

Author: Robert Hays Barrister subject to copyright under DMCA.

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