When Purchasers Default - Assessment Of Vendor's Damages In Land Contracts

Standard Land Contracts

1. The standard Law Society of South Australia Contract for the

Sale and Purchase of Land is representative of those used in most

jurisdictions in Australia1 in that a vendor who

terminates due to the purchaser's default either prior to or at

settlement may at their option:

1.1. Retain the land and sue the purchaser for damages for

breach of contract; or

1.2. Resell the land and claim from the purchaser any deficiency

in the resale price together with incidental expenses.

2. The former remedy is of course the common law remedy of

unliquidated damages, the latter being liquidated damages.

Common Law Unliquidated Damages

3. Common law unliquidated damages compensates the innocent

vendor for the loss they may have suffered. It is not

restitutionary in nature such as a claim of unjust enrichment. In

that event a vendor may be more appropriately advised to rely on

the common law remedy of money had and received, or in

equity claiming an account of profits.

4. The purpose of an award of damages is to compensate the

vendor for the loss which they have suffered as a result of the

purchaser's breach. It is intended to restore the vendor to the

same position which they would have been if there had not been a

breach of the contract, so far as money can do.2

5. However, the principle of compensation is limited by any

consideration of causation. The test of whether or not damages are

too remote is most famously expressed as the rule in Hadley v

Baxendale.3 Subsequently the rule has been widely

interpreted to have two limbs, namely that:

5.1. Damages ought naturally and usually to flow from the

breach; and

5.2. Damages should be those as may reasonably be supposed to be

in the contemplation of both parties at the time they made the

contract and the probable result of the breach.

Usual Or Natural Measure Of Loss

6. When asked to advise, the lawyers' qualification may be

uttered: "it depends on the facts". This will

particularly be the case when the usual or natural measure

of loss is not dissimilar to the liquidated damages provision in

the contract. An election will need to be made. Often this will

arise when considering the difference between the date of breach

and the contract price on the one hand, and the market value of the

property at the intended completion date. To confuse matters

(perhaps because of factual differences) the approach to the

assessment has been applied inconsistently by the Courts when asked

to assess damages between the contract price and the market

price.

7. For example, in the Supreme Court of New South

Wales,4 a vendor reselling after default by the

purchaser pursuant to a contract which provided for both

unliquidated and liquidated damages, (but on construction of the

Statement of Claim had elected unliquidated damages) held that the

vendor had a duty to mitigate against loss only. It did not have a

fiduciary duty akin to that of a mortgagee.

8. It followed from that assessment that the resale contract

price (and damages) would be assessed as the reduction in the

resale contract price plus estate agent's commission payable on

the original sale, and rates, taxes and interest. Legal costs for

addressing the initial breach and negotiations were not

allowed.

9. The approach in Jampco would appear to be at odds

with the second limb of Hadley v Baxendale; that is, a

vendor should be put back in the position they would have been had

the contract been performed.

10. It could be argued that if settlement had proceeded, a

typical agent's agreement would provide for commission to be

payable only in the event of a settlement and not otherwise.

However, legal costs could be considered a legitimate expense in

pursuing those damages and a vendor would have been unlikely to be

able to avoid those costs. Accordingly, on these particular, and

not uncommon facts, the full resale contract price, less original

sale price, plus legal costs and other legitimate expenses would

seem to be the usual or natural measure of loss.

11. Jampco does highlight that quite apart from losses

to be assessed between the contract price and any reduction in the

resale contract price, an innocent vendor is likely to have

incurred other consequential losses as a result of a

purchaser's breach.

Agent's Commissions And Conveyancing Costs

12. The second limb of Hadley v Baxendale would suggest

that these are not recoverable as the vendor agent's commission

and conveyancing costs would have been payable in any event if

settlement had proceeded and the contract had not been terminated

for the purchaser's breach. Compensation of this type, in

addition to damages for differentials in either contract or market

price, could be considered a windfall to the vendor.

Notwithstanding, expenses of resale and abortive sale was allowed

in Jampco.

Legal Costs

13. Costs of this type were disallowed in Jampco,

incurred by the vendor in trying to unsuccessfully renegotiate the

contract. It seems legal costs would have been allowed in

Carpenter v McGrath,5 if they and other general

damages, had exceeded the amount of the forfeited deposit.

14. However, from time to time, possession is given up to a

purchaser prior to settlement through a licence to...