In Kazacos v Shuangling International Development Pty Ltd  NSWSC 1504 the Supreme Court found a term in a contract for the sale of land, in a lawsuit between a vendor and purchaser, described as being part of the deposit to in fact not be a deposit, and then went on to find it a penalty and in so doing made it void. The decision, if it stands, is a cautionary tale for lawyers (and their clients) who stagger the payment of a "deposit" so that the "balance" falls due on completion as such a clause may be a penalty.
- Kazacos as the vendor of a property at 311-317 Sussex Street sought to recover the balance of a "deposit" being $850 k in respect of a $17 m sale of a property to Shuangling;
- The contract provided that $850 k was to be paid on exchange, and the rest of the 10% "deposit" needed to be paid under special condition 52 on completion (as defined or actual whichever was earlier);
- The purchaser, despite a variation to the contract that permitted the vendor to retain the 5% already paid, extensions as to time for completion and a notice to complete being issued, ultimately failed to complete;
- The vendor terminated the contract, and later sold the property for $18 m and thus made a profit over what would have occurred if the original contract had been completed.
- The purchaser defended to lawsuit on the basis that the provision requiring payment of the balance of the deposit on completion was in fact a penalty.
After noting that the 5% already forfeited would not be a penalty (unless it was excessive or unconscionable in amount) the court indicated that the essential character of a deposit was that it was "an earnest of the bargain or its performance" i.e. an assurance pending completion. In that regard a deposit is paid to secure performance rather than paid if the purchaser defaulted. Given that here, the second installment of the so called deposit was due on completion it could not be regarded as an earnest of performance as it would really fall due on breach by the purchaser. In the circumstances the Court found that special condition 51.1 was a penalty, and consequently the vendors could not recover the deposit balance.
Arguably the essential difficulty with this decision appears to be that once the Court found that the relevant term could not be characterised as a deposit it determined it was a penalty without going into all the reasons as to why it was excessive and not a genuine pre-estimate of the loss. On another level, if the Court's reasoning is tested and later upheld, then the solicitors (or relevant drafts person) of the clause may potentially face a claim for professional negligence. Time will tell.
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