In Laidlaw v Parsonage ([2010] 1 NZLR 286) the New Zealand Court of Appeal held that by virtue of a property purchaser being described as 'X and/or nominee', the nominee (once named) became entitled to the benefit of the contract pursuant to Section 4 of the Contracts (Privity) Act 1982. The rationale for this decision was that the nominee was a person 'designated by description' in terms of Section 4. This decision was subsequently upheld by the Supreme Court.
It has previously been noted that the Court of Appeal decision and the earlier decisions on which it was based appeared to assume that the rights of the nominating party were transferred to the nominee so that those rights no longer resided in the nominating party (for further details please see "Nominees: case law distortions present problems in practice" and "What is a nominee? Considering the Court of Appeal's answer"). In other words, the effect of Section 4, according to Laidlaw, was to create a new kind of statutory assignment of rights.
The view was advanced that there was no basis in Section 4 for such a transfer of rights and that the effect of Section 4 was to create additional beneficiaries, not substituted beneficiaries. Otherwise, the statute would operate to deprive a party of rights and there was no evidence that this was Parliament's intention.
This point was taken up by the judge in Rivette v Atrax Group New Zealand Limited ([2011] 11 NZCPR 723) in the High Court at Auckland. Justice Venning referred to Laidlaw and noted that it authorised a nominee to sue by virtue of the operation of Section 4 of the Contracts (Privity) Act. However, he noted that the decision before the court in this instance had not been addressed in Laidlaw – namely, whether the plaintiff, as the original party to the contract, could enforce the contract even after nominating another to complete the purchase. The judge said that:
"The start point must be that the plaintiff, as the original purchaser and a party to the contract, has contractual rights. There does not seem to be any principled reason why the fact of nomination should lead to the loss of those rights. That is not the purpose or effect of the Contracts (Privity) Act. Rather, the purpose of that Act is remedial, to ensure that the nominee, in addition to the original contracting party, can enforce rights under the agreement… The effect of s 4 of the Contracts Privity Act is to create additional rights in the nominee, not to extinguish the plaintiff's rights."
The judge was correct in holding that the purpose or effect of the act was not to take away existing rights. However, this inexorably led the court to the finding that both the purchaser and the nominee could enforce the contract at the same time. This should not be the case, as it would mean that the vendor of a property, for example, would be obliged to convey the property to both the purchaser and nominee and could be sued for non-performance by the party that failed to obtain a conveyance of the property. However, on a true construction of Section 4 of the act, this appears to be the logical consequence of the decision in Laidlaw.
Under a nomination as traditionally understood, no such situation could arise. This is because a bare nomination is revocable and thus gives the nominee a right to a conveyance of the property only to the extent that the nominating party elects not to revoke the nomination. Revocation transfers the rights back to the nominating party. Similarly, an assignment involves a transfer of rights that is absolute, so once an assignment has taken place and notice of it has been given, there can be no question of both assignor and assignee contemporaneously having a right to the conveyance.
It is only under the law as established by Laidlaw and Rivette that the nominating party and the nominee can both enjoy the same rights, so that the other contracting party may find itself unable to receive a good discharge by performing its obligations for the benefit of only one of them.
It is perhaps an understatement to say that this situation is apt to create a great deal of uncertainty.
For further information on this topic please contact Chris Moore or Michael Goodger at Meredith Connell by telephone (+64 9 336 7500), fax (+64 9 336 7629) or email ([email protected] or [email protected]).