ORDERS

The application filed on 29 September, 2011 is dismissed.

The Response be adjourned to 25 October 2012 at 9.30 a.m. for directions in the Federal Magistrates Court of Australia sitting at Brisbane.

IT IS NOTED that publication of this judgment under the pseudonym Herold & Kay is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).

REASONS FOR JUDGMENT

Mr Herold seeks orders for the enforcement of a Part VIIIAB, Division 4 financial agreement, which is to say, a binding financial agreement made between two de facto spouses, entered into between he and Ms Kay on 22 June, 2011.

Mr Herold seeks orders as follows:

that paragraph 17 of the binding financial agreement dated 22 June, 2011 between Mr Herold and Ms Kay be enforced as if it were an order of this Honourable Court pursuant to s.90UN of the Family Law Act 1975;

that Ms Kay pay Mr Herold’s costs of and incidental to this application fixed in the sum of $6,009.00.

Ms Kay opposes the orders sought by Mr Herold. Although in her response she seeks that the binding financial agreement is set aside because it was entered into “under extreme duress” on 2 February, 2012 Ms Kay informed the Court that she withdrew her application to set aside the binding financial agreement on that ground. However, she presses the balance of her application, namely to have the financial agreement set aside:

pursuant to s.90UM(1)(e) of the Act – the agreement is void, voidable or unenforceable; and

pursuant to s.90UM(1)(f) of the Act – in the circumstances that have arisen since the agreement was made it is impracticable for the agreement or a part of the agreement to be carried out.

Further, she argues that Mr Herold has failed to comply with the terms of the binding financial agreement in that he has failed or neglected to make a genuine attempt to assist her with her obligations under the agreement and in fact has made it more difficult for her. For that reason also, she says that the agreement should not be enforced.

Although Ms Kay also sought an interim order in her response to the effect that Mr Herold’s application be adjourned for six months so that she could attend to some requirements of her by her bank, that time has now passed. The benefit that Ms Kay perceived that she would get from the six month adjournment has not come to pass.

Upon the agreement being set aside, Ms Kay seeks property adjustment orders pursuant to s.90SM of the Act.

The orders sought by Ms Kay are opposed by Mr Herold.

This application was conducted on the papers and by oral and written submission from each party. Neither party applied to cross-examine the other.

Some facts

The parties were in a de facto relationship. There is a dispute between them about when the relationship started, but it is unnecessary to resolve that dispute to decide this application. Mr Herold alleges that the de facto relationship commenced in January, 2008. Ms Kay alleges that it commenced in December, 2008. They both agree that it concluded on 13 July, 2010.

On 17 December, 2010 Ms Kay filed a claim in [omitted] Magistrates Court seeking $40,307.45 (including interest) from Mr Herold.

On 20 January, 2011 Mr Herold commenced these proceedings seeking property adjustment orders pursuant to s.90SM of the Family Law Act 1975 against Ms Kay.

The parties engaged in mediation and reached an agreement about the outcome of these proceedings and the proceedings in the Magistrates Court at [omitted]. Heads of agreement were signed and the heads of agreement were subsequently reflected in an agreement signed by each of the parties and which they intended to be a binding financial agreement pursuant to Part VIIIAB Division 4 of the Act. Neither party suggests that the document which purports to be a financial agreement is not a financial agreement for the purposes of Part VIIIAB of the Act. That is to say, neither party attacks the validity of the document for reasons associated with its formation.

Ms Kay contends that the financial agreement leaves out a significant term. She says that the heads of agreement signed by the parties at the mediation included a provision which was not included in the financial agreement. To understand the significance of the missing provision, reference needs to be had to her obligations under the financial agreement.

According to the financial agreement, Mr Herold was to transfer all his right, title and interest in a certain property at [U] to Ms Kay. In return she was to undertake a refinancing of some joint debt which was secured over the [U] property. In addition to the [U] property, Ms Kay had another parcel of real property at [T]. It too, was subject to debt and the debt over the [T] property was cross-securitised with the property at [U]. By the terms of the financial agreement, Ms Kay was to retain both parcels of real property and the debt secured over those properties, her superannuation and other personal property. Mr Herold was to retain his superannuation entitlements and other personal property, including a motor vehicle, that were then in his possession.

The obligation on Ms Kay to refinance the mortgage existing over the [U] property was, according to the terms of the financial agreement, unconditional. That is to say it was not subject to the agreement or approval of the relevant financier. Nor was it expressly subject to Ms Kay securing alternative sources of funding so as to be able to discharge Mr Herold’s obligations to the parties’ existing financier. Ms Kay alleges, however, that the heads of agreement made it clear that her obligation was indeed “subject to finance” and that through oversight, such a provision was not placed in the financial agreement.

For his part, Mr Herold denies that the financial agreement was intended to be “subject to finance” and he says that Ms Kay’s obligation to refinance the mortgage over the [U] property is absolute.

I do not intend to decide whether the financial agreement was intended by the parties to include an express “subject to finance” condition. Such a determination is in my view, and for the reasons which appear below, irrelevant.

There is no dispute that Ms Kay has made an application to refinance the mortgage over the [U] property with the parties’ present financier the Commonwealth Bank of Australia. There is also no dispute that the Commonwealth Bank has declined to permit her to refinance the relevant debt into her sole name. In any event, her sworn affidavit material demonstrates that she has made such an application and it has been declined.

Ms Kay attributes the Bank’s refusal to allow her to refinance to action on the part of Mr Herold, but the Bank’s reasons are irrelevant. The fact is the Bank has refused to provide the necessary finance to enable Ms Kay to discharge her obligation under the financial agreement. There is evidence from Ms Kay, which I accept (it was not challenged), that she has approached alternate financiers to assist her to refinance the mortgage over the [U] property. Those attempts have been unsuccessful.

At the time of the mediation, both parties assumed that Ms Kay would be able to refinance the mortgage over the [U] property. In the event that she needed assistance to do so, it seems that her parents were in a position to provide guarantees to assist her to secure the finance, but according to Ms Kay’s evidence, those guarantees were not acceptable to the Bank. She also suggests that her parents have changed their minds about providing the guarantees, but as Mr Brown pointed out, there is no evidence from her parents abut that.

Clause 17 of the financial agreement provides:

In relation to the property situated at and known as [address omitted] [U] in the State of Queensland being real property described as [details omitted] (“the [U] property”):

(a) Mr Herold shall do all acts and sign all necessary documents to transfer to Ms Kay all of Mr Herold’s right, title and interest in the [U] property as follows:

(i) Ms Kay shall provide to Mr Herold within seven (7) days of the date of this agreement a Transfer and Mortgage Discharge Authority to be signed by Mr Herold to transfer Mr Herold’s interest in the [U] property to Ms Kay;

(ii) Mr Herold shall sign such Transfer and Mortgage Discharge Authority and deliver same to Ms Kay’s lawyers with Ms Kay’s lawyers to hold such transfer for the purposes of stamping only pending Ms Kay refinancing the Commonwealth Bank mortgage into her sole name.

(b) Ms Kay shall do all acts, sign all necessary documents and pay all monies required to pay out and discharge the mortgage to the Commonwealth Bank of Australia secured upon the title to the [U] property and to refinance same into the sole name of Ms Kay such that Mr Herold has no liability in relation thereto.

(c) Ms Kay shall so payout and discharge the said Commonwealth Bank mortgage within sixty 60 days of the date of this agreement whereupon Ms Kay shall be at liberty to register the transfer of the [U] property into Ms Kay’s sole name.

(d) Mr Herold and Ms Kay shall continue to pay in equal shares the shortfall of the Commonwealth Bank mortgage upon the [U] property after receipt of the rentals in relation thereto, the council and water rates as such payments fall due and until such time as Ms Kay effects the transfer of the [U] property into her sole name or the date sixty 60 days from the date of this Agreement whichever date first occurs and upon such date there should be an adjustment between Mr Herold and Ms Kay in respect of the payment of the Council and water rates such that Ms Kay shall pay to Mr Herold within seven (7) days of a request in writing by Mr Herold of the proportionate adjustment of the Council and water rates paid by Mr Herold in advance in respect of the [U] property with Ms Kay to only be entitled to register the transfer in respect of the [U] property into Ms Kay’s sole name upon Ms Kay making such payment to Mr Herold.

The Statutory Provisions

Relevantly, s.90UM(1) of the Family Law Act provides:

90UM Circumstances in which court may set aside a financial agreement or termination agreement

(1) A court may make an order setting aside, for the purposes of this Act, a Part VIIIAB financial agreement or a Part VIIIAB termination agreement if, and only if, the court is satisfied that:

…

(e) the agreement is void, voidable or unenforceable; or

(f) in the circumstances that have arisen since the agreement was made it is impracticable for the agreement or a part of the agreement to be carried out; or

…

Section 90UN of the Act bears upon the considerations relevant to determining whether to set aside a binding financial agreement. It is in the following terms:

90UN Validity, enforceability and effect of financial agreements and termination agreements

The question whether a Part VIIIAB financial agreement or a Part VIIIAB termination agreement is valid, enforceable or effective is to be determined by the court according to the principles of law and equity that are applicable in determining the validity, enforceability and effect of contracts and purported contracts, and, in proceedings relating to such an agreement, the court:

(a) subject to paragraph (b), has the same powers, may grant the same remedies and must have the same regard to the rights of third parties as the High Court has, may grant and is required to have in proceedings in connection with contracts or purported contracts, being proceedings in which the High Court has original jurisdiction; and

(b) has power to make an order for the payment, by a party to the agreement to another party to the agreement, of interest on an amount payable under the agreement, from the time when the amount became or becomes due and payable, at a rate not exceeding the rate prescribed by the applicable Rules of Court; and

(c) in addition to, or instead of, making an order or orders under paragraph (a) or (b), may order that the agreement, or a specified part of the agreement, be enforced as if it were an order of the court.

Consideration

Ms Kay argues that the Agreement is incapable of “succeeding” as it is “conditional” and dependant on her ability to obtain the finance required to payout and discharge the mortgages for both the [U] property and the [T] property. She says that there has been a common mistake made by both parties in that neither party considered what would happen should finance not be approved. That is to say, Ms Kay argues that the financial agreement is not enforceable because it was entered into on the basis of a mutual mistake.

In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Mason J explained the difference between a mutual mistake of fact extant at the time of formation of the contract and the failure of the parties’ assumption or expectation about a future fact that has failed to come to pass. His Honour said (at p.360):

The doctrine of frustration is closely related to the concept of mutual mistake. However, in general, relief on the ground of mutual mistake is confined to mistakes of fact, not of law. If the common contractual assumption is of present fact it is a case of mutual mistake; if the assumption is of future fact it is a case of frustration (Bell (1932) AC at, pp 225-226 , per Lord Atkin), the distinction being that in one case the contract is void ab initio and in the other it is binding until the assumption is falsified.

(my emphasis)

Whether Ms Kay would secure finance so that she could meet her obligations under the financial agreement was a future fact which both parties took as a given. Certainly on Mr Herold’s case, no thought whatsoever was given to the proposition that finance would not be available. Ms Kay thought that, perhaps with her parents’ help, she would secure the necessary finance.

But the assumed state of facts failed to materialise. Ms Kay cannot secure the necessary funding, and Mr Herold has not demonstrated that alternative sources are available to her. It is not a situation where the parties expected that Ms Kay would discharge Mr Herold’s liability to the Commonwealth Bank from her own resources. Apart from her ability to apply for finance, it was not suggested that she had any other source of funding from which she might do so.

Stephen J’s discussion of the relevant authorities dealing with the doctrine of frustration as it applies to contracts in Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 is generally seen as the leading formulation of that doctrine for modern Australian purposes. His Honour’s summary was referred to with approval by Mason J, with whom Aickin, Stephen and Wilson JJ agreed, in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (above) at 356. In Brisbane City Council Stephen J said at 160:

In Port Line Ltd. v Ben Line Steamers Ltd. Diplock J. said:

“It would appear to be the fate of frustration cases when they reach the highest tribunals that either there should be agreement as to the principle but differences as to its application, or differences as to the principle but agreement as to its application.”

This was said despite, or perhaps in the light of, what is the leading modern authority in the field, the decision of their Lordships in the Davis Contractors Case, pronounced in 1956. Such divergency of principle as commentators have extracted from their Lordships’ speeches do not, I think, affect the present case. In the Davis Contractors Case Viscount Simonds and Lord Morton offer no guide to principle, although they do reflect the general disinclination to allow much scope to the operation of frustration. Lord Somervell agrees with Lord Reid’s conclusion upon “the proper basis of frustration”. It is in the speeches of Lord Reid and Lord Radcliffe that extensive discussion of principle occurs.

Lord Reid rejected the notion of the implied term as the basis of the doctrine. He says that the task for a court, confronted with the partie’ contract, is to determine, on the true construction of the terms of the contract, read in the light of the nature of the contract and of the relevant surrounding circumstances when the parties made it, “whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.” Frustration he describes as “the termination of the contract by operation of law on the emergence of a fundamentally different situation”. What I understand his Lordship’s approach to involve is, then, a comparison between the contemplated situation, as revealed by the terms of the contract on its true construction, and the situation in fact resulting from the frustrating event. If they be “fundamentally different” the contract is frustrated subject, of course, to the frustrating event not being the fault of the party seeking to rely upon the doctrine.

Lord Radcliffe considers those cases which treat frustration as involving an implied term, cases which involved diverse approaches, sometimes subjective and sometimes objective, in ascertaining the content of the term to be implied. His Lordship suggests that “frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.” This is close to the views of Lord Reid and together they represent the approach which I would apply in the present case. It should, however, be noted that Lord Radcliffe tends rather to concentrate on a change in obligation. Thus he says: “it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.” Lord Radcliffe also introduces the limitation that the frustrating event must not be one which the parties could “reasonably be thought to have foreseen”. As already mentioned, the “change in obligation” test proposed by Lord Radcliffe, no doubt apt enough in most frustration situations, seems to be inapplicable here, as it was in the so-called Coronation cases, of which Krell v Henry is the leading example. But I do not understand his Lordship to say that without change in obligation there can be no frustration: it is “the occurrence of any unexpected event that, as it were, changes the face of things” that give rise to frustration. His Lordship’s emphasis upon change in obligation is, I think, to be understood in the context of the factual situation under discussion in the Davis Contractors Case.

(emphasis in the original, citations omitted)

Mr Herold argues that having performed all of his obligations under the financial agreement, he is entitled to have Ms Kay carry out her obligations. There is a dispute between the parties about whether Mr Herold has in fact complied with all of his obligations under the agreement, but for the purposes of these reasons I am prepared to assume that he has.

Mr Herold argues that Ms Kay is in breach of the financial agreement in that Ms Kay has failed to do all acts, sign all necessary documents and pay all monies required to payout and discharge the mortgage to the Commonwealth Bank secured upon the title to the [U] property and to refinance same into her sole name within sixty (60) days of the date of the financial agreement.

His argument proceeds on the basis that the obligation created by cl.17(b) of the financial agreement is, in fact, several obligations, each of which is independent from the other. He argues that Ms Kay’s obligations to “do all acts” and “pay all monies required” to payout and discharge the mortgage obligates Ms Kay to pay to the Bank any monies necessary to enable the refinance to occur by the time limit under the financial agreement. So much is apparent from his written submissions: “The term of the Financial Agreement that Ms Kay do all acts, sign all necessary documents and pay all monies required to payout and discharge the Commonwealth Bank mortgage is not dependent upon any condition whatsoever. Such term is, in particular, not dependent upon any condition that Ms Kay obtain the monies required to payout and discharge the Commonwealth Bank mortgage from any source or sources whatsoever”.

In my view, however, such an approach to the construction of cl.17(b) is flawed. It is a single obligation to refinance the mortgage presently in favour of the Commonwealth Bank of Australia secured upon the title to the [U] property into the sole name of Ms Kay. The reference to “pay all monies required” is not, when read in the context of cl.17 as a whole, an absolute requirement to pay out and secure a release of the mortgage. Those words must refer, in my view, to the monies required to effect a refinance of the existing mortgage. Application fees and stamp duty would be an example of the monies that might be required to be paid. Clause 17(a)(ii) is consistent with the parties’ intention and expectation that Ms Kay would replace the mortgage currently secured over the [U] property with another for which she would be solely responsible: “…. and deliver same to Ms Kay’s lawyers with Ms Kay’s lawyers to hold such transfer for the purposes of stamping only pending Ms Kay refinancing the Commonwealth Bank mortgage into her sole name”. It was not suggested by Mr Herold that Ms Kay had the financial capacity to simply discharge the mortgage by repaying all that was owed to the mortgagee.

Moreover, to the extent that Mr Herold suggests that Ms Kay has not paid “all monies required” to effect a refinance (eg., by not paying application fees), there is no evidence whatsoever that she has failed to make any necessary payments. Indeed, her evidence is that she has made the relevant application, but the refinance has been refused. The reasons for the refusal are irrelevant, except to the extent that it might be said that Ms Kay has done, or not done, something which has led to the refusal. No such case is put by Mr Herold.

To paraphrase the words of Mason J in Codelfa Constructions (above) at 360 the critical issue therefore is whether the situation resulting from the failure by the Commonwealth Bank (or the other financiers approached by Ms Kay) to approve the refinancing is fundamentally different from the situation contemplated by the financial agreement on its true construction and in the light of the surrounding circumstances. The financial agreement did not require that Ms Kay pay out Mr Herold’s liability under the mortgage secured over the [U] property. It required her to refinance that liability, no doubt recognising that without the assistance of a financier, she could not have Mr Herold released from his obligations to the Commonwealth Bank. To construe the obligation created by cl.17(b) as one which requires Ms Kay to secure Mr Herold’s release from his obligations to the Commonwealth Bank under any circumstances, not just by way of a refinance is to give the subject clause a meaning that its terms do not bear.

In my view the financial agreement was clearly frustrated by the failure of the Commonwealth Bank to approve the necessary refinancing so that Ms Kay could discharge her obligations as required by cl.17(b) thereof. Having done all that she could to secure that funding (it was not suggested that she should have done anything more than she had, short of simply paying out the mortgage from her own funds) the result was out of both her and Mr Herold’s control. The failure by the financiers to approve the refinancing created a situation which was fundamentally different from the situation contemplated by the financial agreement on its true construction.

The legal effect of a finding that the contract has been frustrated is that the contract is binding until the frustrating event has occurred. Thereafter the contract is at an end. Pursuant to s.90UM(1)(e), I am satisfied that the binding financial agreement between the parties dated 22 June, 2011 is unenforceable because it has come to an end. Section 90UM(1)(e) gives the Court power to order that the agreement be set aside if it is unenforceable. I will so order.

Ms Kay argues that, alternatively, the agreement should be set aside because in the circumstances that have arisen since the agreement was made it is impracticable for the agreement, or at least a part of the agreement to be carried out.

Mr Herold, by his written submissions, has drawn my attention to a number of authorities that deal with the issue of impracticability for the purposes of s.79A(1)(b) of the Family Law Act 1975. In particular I was taken to In the Marriage of Cawthorn (1998) 23 Fam LR 86 at 93, where the Full Court of the Family Court generally approved of the approach of Kay J In the Marriage of La Rocca (1991) 14 Fam LR 715. In that case Kay J considered that s.79A(1)(b) (the equivalent section to s.90UM(1)(f) in respect of the setting aside of s.79 orders) should be “narrowly interpreted”. His Honour took the view that the test under that section is akin to the application of the doctrine of frustration in contractual matters. True it is that his Honour emphasised that the frustrating event needs to be something that would not have been in the contemplation of ordinary men when entering into the contract, but I do not read his Honour’s words as limiting the range of frustrating event to events of such a description. Certainly no such limitation appears in either Brisbane City Council v Group Projects Pty Ltd (above) or Codelfa Constructions (above).

I was also taken to Sanger & Sanger (2011) 46 Fam LR 275 where the Full Court had to consider whether it was “impracticable” for a binding financial agreement to be carried out. In that case the applicant sought that the agreement be set aside on the ground that it was “impracticable for the agreement to be carried out” because the agreement was predicated on the property of the parties being worth $802,000.00. In actual fact the property was worth $400,000.00 less than the parties expected it to be. The Full Court referred with approval to the reasoning of Kay J in La Rocca at [88] and to Cawthorn at [89]. The Full Court also approved the following passage from Rohde & Rohde (1984) FLC 91-592, where Gee J discussed “impracticability” in the context of s.79A(1)(b) and said (at 79,768):

(a) It is not enough that circumstances have arisen since the order was made which make it unjust for the order or part of the order to be carried out; the onus is upon Mr Herold to establish to the reasonable satisfaction of the Court, that in the circumstances that have arisen it is impracticable for the order or part of the order to be carried out.

(b) The word “impracticable” means gleaning a definition from the Shorter Oxford Dictionary, “not practicable”, “that cannot be carried out or done”; “practicably impossible”; “unmanageable”; “intractable”.

(c) “Impracticability” is a conception different from that of “impossibility”; the latter is absolute, the former introduces at all events some degree of reason and involves some regard for practice (per Veale J in Jayne v National Coal Board [196312 All ER 220).

La Rocca, Cawthorn, and Sanger were all case where one spouse had to pay to the other a sum or sums of money, and by reason of various matters, the payer spouse claimed that it was impracticable to do so. In each case the Courts (both at first instance and on appeal) rejected the claims. That a bargain had turned out to be worse for the payer than it was expected to be when the relevant orders or agreement was made was beside the point.

The present case is different. It does not require Ms Kay to pay anything to Mr Herold. It requires her to do something other than pay money. Ultimately, whether the refinance comes to pass is a combination of two matters. The first is Ms Kay playing her part by “do[ing] all acts, sign[ing] all necessary documents and pay[ing] all monies required” to make a valid application for finance. The second is the approval of her application for refinance by the financier to which she has applied. There must come a point where Ms Kay can do no more and the matter is left for decision by the financier – a decision out of the hands of either party. On Ms Kay’s unchallenged evidence that is what has occurred.

On the facts set out above, cl.17(1)(b) of the financial agreement is incapable of performance within the time limited by the agreement for performance. As the Full Court points out in Sanger at [82]:

We agree with the submissions of counsel for the wife that there is a material distinction between an agreement which is unable to be put in practice, and is thus impracticable, and an agreement which, although producing a potentially different outcome to that for which a party hoped, is able to be implemented, or put into practice.

The difficulty with the financial agreement in this case is not just one of enforcement. It cannot be carried out. It cannot be put into effect. It is unable to be carried into execution. It is, in the circumstances set out above, impracticable for the purposes of s.90UM(1)(f) of the Act. For that reason also, it should be set aside.

Conclusion

Mr Herold’s application must be dismissed.

I will hear the parties as to the form of order and what further directions ought to be made on Ms Kay’s response given the findings herein.

I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment ofJarrett FM

Associate:

Date: 4 October 2012