Contract – Nominee's rights

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A contract of sale of land essentially involves two parties – the vendor and the purchaser. The common law undoubtedly recognises the right of the named purchaser to nominate an alternative purchaser. Additionally, most standard form contracts (including General Condition 18 of the 2008 prescribed contract of sale) include a contractual right to nominate although sometimes conditionally, such as by requiring the inclusion of the words ‘and/or nominee’ or compliance with time limitations. Nomination often occurs in an environment where the named purchaser is ‘related’ to the nominated purchaser and little formality is associated with the nomination process. A non-prescribed form of nomination, simply reciting the essential terms of the contract and the fact of nomination, is completed and provided to the vendor, almost by way information only. In fact, the form of nomination is important to the vendor as it is the vendor’s authority to hand over a transfer of land to a person other than the contracting party. However, in all other respects, the vendor is essentially superfluous to the nomination process; almost a disinterested bystander. This is essentially because the legal consequences of the contract are not affected by the purchaser’s nomination. The vendor retains all contractual rights against the named purchaser and, correspondingly, gains no rights against the nominated purchaser. This situation may be contrasted with the alternatives of assignment, or novation. The consequences of an assignment are that the assignee becomes a party to what is now a tripartite contract and a novation involves the original parties agreeing to replace their contract with a new contract between the vendor and a replacement purchaser. By contrast, a nomination does not bring the vendor and nominated purchaser into a contractual relationship and they remain separated by the wall established by the doctrine of privity of contract. A vendor is therefore not overly concerned with the terms of the nomination as the vendor’s rights are not diminished. However, a nominee needs to consider how the nominee is going to enforce any rights against the vendor in the situation where the contract ‘runs off the rails’. In circumstances where the nomination is in a ‘commercial’ environment, the named purchaser (the party with the contractual and other rights arising from the contract) may be unwilling to ‘buy back’ into a contract that the purchaser had nominated itself ‘out’ of. Even in a situation where the named purchaser and nominee are ‘related’ and the named purchaser may therefore be willing to take up the cudgels on behalf of the nominee, the named purchaser may have no standing as it will generally be the nominee who is likely to suffer adverse consequences or damages, rather than the named purchaser. The case of 428 Little Bourke Street P/L v Lonsdale Street Café P/L illustrates the problem. The named purchaser nominated the plaintiff, a company associated with interests related to the purchaser. During the course of the contract the purchaser and nominee became aware of various alleged misrepresentations. A decision was made by the representatives of the named purchaser/nominee not to pursue those issues during the course of the contract (and thereby perhaps face rescission and/or proceedings that would delay settlement). Settlement was conducted and then proceedings issued for breach of contract and breach of the Trade Practices Act and Fair Trading Act in respect of alleged misrepresentations in relation to the net lettable area of the premises. The party who would suffer loss if these claims were successful was the transferee as subsequent owner of the property and therefore proceedings were issued by the nominee as plaintiff. These proceedings were summarily struck out as failing to disclose a cause of action. Relying on the doctrine of privity, the Court held that the nominee lacked the ability to enforce a contract that it was not a party to, thereby defeating the contractual claims. In relation to the claims based on breach of statute, the Court held that by the time the plaintiff nominee resolved to settle the contract it knew of the alleged deficiencies in the property and it chose to settle, notwithstanding the fact that as a non-party to the contract it had no obligation to do so. Thus the cause of the plaintiff’s loss was its own decision, not the alleged misrepresentations. It could have, as a mere nominee, walked away from the contract but it chose to proceed, thereby inflicting damage upon itself. Vendors will never voluntarily agree to nominees ‘inheriting’ contractual or statutory rights, but can they be ‘conscripted’? Section 134 Property Law Act allows for the assignment of a ‘legal thing in action’ – legal rights. Could it be argued that a nomination amounts to an assignment of the purchaser’s contractual and statutory rights and that the nominee, whilst not a party to the contract, is nevertheless able to enforce it?