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A Contract, Is a Contract, Is a Contract

I remember the first time I looked at a set of documents for a 'Blue Chip' transaction. Perhaps I was having a bad day, but I had to read them through about three times to work out how they were supposed to operate. There were, I think, three separate c

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I remember the first time I looked at a set of documents for a ‘Blue Chip’ transaction.  Perhaps I was having a bad day, but I had to read them through about three times to work out how they were supposed to operate.  There were, I think, three separate contracts that were all interlinked to some extent and there was money being shuffled all over the place.  Even without the benefit of hindsight, my immediate thought was – if you really want to buy a rental property why don’t you just ask a local real estate agent to show you a standard three bedroom house that is for sale in the local suburbs, and go from there?

I think only two Blue Chip transactions ever reached the office I was working in.  At the risk of sounding selfish, when we received them we were immensely relieved that the contracts had been signed up without the clients seeking our advice and that the clients’ own money was paid over long before the contracts reached us.  That meant no one could accuse us of professional negligence in letting our clients sign such things. We did try and point out our concerns to the clients but they looked at us with that feverish glint that true believers have in their eyes and told us that Blue Chip was the best thing since sliced bread, and we didn’t know what we were talking about.  No offence was taken as we were old enough to have had met clients who acted the same way back in the early 1980s.  Why listen to the conservative advice of your family solicitor if the nice salesman in white shoes is promising you the world?

Since Blue Chip and other schemes have collapsed the courts have been busy with some interesting contractual disputes.  One involved a couple, who left with a big loan to repay and no benefits from their transactions, argued that their financier should have realised that the loan was risky and oppressive, and should never have lent them the money.  This case went all the way to the Supreme Court and the loan contract in favour of the lender was upheld.  Another recent case in the Court of Appeal involved a group of litigants trying to get out of the unconditional contracts they had signed to buy apartments, because their finance arrangements had crashed along with Blue Chip.  This case also failed with the Court of Appeal basically saying that the contracts for the purchase of the apartments were quite separate to the litigants’ dealings with Blue Chip.

Despite the publicity, I do not believe the decisions are anything out of the ordinary or unusual. At the risk of grossly over-simplifying complex legal issues it seems to me that what the courts basically said, was this – if you are a ‘grownup’ and put your name to a legal contract you are bound to complete that contract, come hell or high water!  That is what the law has always been.  Yes, there are some exceptions for contracts induced by misrepresentation or fraud, and some very limited remedies where circumstances have changed making it impossible for both parties to complete a contract.  Regardless of what happened to the contracts entered into directly with Blue Chip, the third parties to the contracts that were actually before the court were sufficiently removed from the Blue Chip debacle for issues of misrepresentation or misconduct on the part of Blue Chip to be irrelevant. The contracts were separate and they stood alone.

The law has never assisted parties to a contract to extricate themselves from their bad decisions, even if enforcing the contract might ruin the party.  If you are an adult and not under a mental disability at the time you entered into the contract you are bound, regardless of how unfortunate your decision may have been, and regardless of the consequences that flow from your decision to sign.

Quite separate from the above two cases, I have noticed that a belief appears to have arisen out in the community in recent years that contracts are not really all that binding and you can usually wriggle out of them in some way. Not legally so.  I think this belief was a product of the rising property market that we enjoyed in New Zealand for so many years.  As a lawyer I saw many instances of people reneging from their obligations under property sale and purchase contracts.  Frequently lawyers, generally being realists, found it was easier to advise the client who was the victim of the default to just resell the property rather than spend thousands of dollars in legal costs, and the next twelve months battling through court.  If there was a modest deposit to seize, and the property could be easily resold at a good price, most clients were more than happy to take that approach.  At the height of the property boom some clients even resold their properties at a higher price and lost no sleep at all over the default under the earlier contract.

However, once the property market began to fall it became a new ball game. All of a sudden resales were hard to obtain and properties were fetching thousands of dollars less than before.  Claims against defaulters, often brought months later, to recover losses and resale expenses became very common. The law is very clear in these cases.  The vendor is entitled to the benefit of the original bargain struck and the fall in property values is just the defaulting party’s bad luck.

In one recent case where a property resold for about $100,000 less than the original sale price the defaulting purchaser tried to argue that the original agreed sale price was well above the real value of the land. The court simply told him that that was the price he had voluntarily agreed to pay and he was stuck with it.  A second argument that the vendor had not tried hard enough to get a better price on the resale also received short shrift. Legally the vendor was required to make reasonable efforts to resell and to act in good faith.  The court held the vendor, who had got an updated independent valuation before signing the resale agreement, had done enough.  He was not expected to take extreme or unusual steps to help mitigate the defaulter’s loss.  He was entitled to resell his property reasonably promptly and get on with his life.

Is there a moral in all this? Probably there are several: 1.When contemplating entering into any significant contract always think of the worst thing that could ever happen, and what your personal and financial position would be if it did happen. 2. Believe without any doubts that if the worst-case scenario happens that you would still be bound to carry out the contract. 3.Get legal advice from someone who is truly independent of the other parties to the contract, and also their advisers, financiers, agents or salespersons, and 4. Don’t sign up unconditional contracts relying on separate arrangements made with third parties, unless you can guarantee they are watertight and will never fail.

If after the considering the above points carefully, you think you might have a few sleepless nights if you go ahead – don’t.

Disclaimer: This article is of a general and summarised nature only and should not be relied upon to ascertain individual legal rights in any situation.

(c) T J Carson