31 March 2010


Subjects: GST, Rectification

In this matter a property was sold at auction using 2005 edition of the Contract for Sale approved by the Law Society of New South Wales and the Real Estate Institute of New South Wales. The purchase price stated in the contract is $2,820,000. In the section headed “Tax information”, there is an indication that the sale is a “taxable supply” in full for the purposes of the legislation concerning goods and services tax (“GST”).  The dispute was over who was responsible for paying the GST.

The purchaser claimed that the contract price was fixed at $2,820,000 and that the vendor, was liable to pay GST to the ATO out of that sum. The vendor argued that the purchaser must pay $2,820,000 plus 10% being a total of $3,102,000.

Clause 13.2 of the contract reads:

Normally, if a party must pay the price or any other amount to the other party under this contract, GST is not to be added to the price or amount.”

The word “normally” is given the following meaning by clause 1:

normally subject to any other provision of this contract.”

As there was no other relevant clause the judge concluded that the purchaser was correct and the written contract provided $2,820,000 was a price inclusive of GST.

The vendor did not dispute this but claimed that written contract must be supplemented by a collateral oral contract, made at the auction, which causes the price to be the bid sum of $2,820,000 with GST on top. This claim was put as a suite for rectification or alternatively as a claim for specific performance.

The vendor’s specific performance claim was defeated by second leg of the “parol evidence rule” which was stated as applying to conveyancing transactions thusly:

a) When parties negotiate an agreement by parol and subsequently reduce it to writing, the writing constitutes the contract, or at any rate is conclusive evidence of its terms, subject, of course, to the right of either party to proceed for its rectification or rescission on sufficient grounds.

b) A distinct collateral agreement, whether oral or in writing, and whether prior to or contemporaneous with the main agreement, is valid and enforceable even though the main agreement be in writing, provided the two may consistently stand together so that the provisions of the main agreement remain in full force and effect notwithstanding the collateral agreement

The vendor’s rectification claim was that the true common intention of the parties was to provide for a price with GST on top. The court noted the law that applies to such a claim is as follows:

“In considering whether to grant rectification of a written contract, equity does not use any of its own principles to decide what the terms of the contract are, or how they are construed – those matters are decided solely by the common law. Rather, equity focuses on what it is unconscientious for a party to assert about the contract. The rationale is that it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered. In other words, when a plaintiff succeeds in a claim for rectification, the plaintiff is found to have been justified in in effect saying to the defendant ‘you and I both knew, when we entered this contract, what our intention was concerning it, and you cannot in conscience now try to enforce the contract in accordance with its terms in a way that is inconsistent with our common intention’

In considering the evidence that was put forward by the vendors to the effect that GST would be payable on top His Honour noted:

Here we have the uncertain testimony of slippery memory. I say that without intending the slightest criticism of or disrespect to any witness. I have no doubt whatsoever that every one of them made an honest and conscientious effort to recall the events of the day and did his or her best to give a true and faithful account. The problem is that human memory is fragile and prone to unconscious shifts, particularly when the mind has had a long time to dwell on important events. The fallibility of human recollection and the effect of imagination, emotion, prejudice and suggestion on the capacity to ‘remember’ is well documented.

The court concluded the vendors were unable to prove the purchaser had a common intention with them that was different from the written terms of the contract and so the purchaser succeeded and the vendor’s failed.

Click here to read the full judgment

Kate resize

Kate Cooper joined Bransgroves Lawyers in 2006 and has been a partner since 2009. Kate specialises in Supreme Court litigation in the fields of mortgage enforcement, professional negligence and originator/funder disputes. She has an extensive transactional practice including, origination deeds, aggregation deeds, commercial and construction lending and mortgage securitisation.

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