In this case, the New South Wales Court of Appeal considered whether a party was entitled to recover an advance payment made in anticipation of a contract which was never concluded and, if so, when their claim in restitution arose.

Key learnings

The right to bring a claim in restitution to recover an advance payment made in anticipation of a contract which is never concluded arises when the contemplated state of affairs “fails to materialise”. This is when both parties realise that negotiations have failed and the contract cannot proceed. At that point it becomes inequitable for the receiving party to retain the advance payments.

A party who proposes to make an advance payment in relation to a transaction which is still being negotiated should expressly reserve the right to obtain repayment if the transaction does not proceed. This should include when the right to obtain repayment will arise, because mere silence or inaction may not be enough to indicate that the proposed transaction has failed so as to trigger a claim in restitution.

Case note

A husband and wife (“Respondents”) wished to sell a parcel of land to Nu Line Construction Group Pty Ltd (“Nu Line”). Nu Line made several payments (approximately one third of the proposed purchase price) over the course of the negotiations. In May 2002, negotiations stalled when Nu Line failed to respond to repeated requests from the Respondents over a period of 4 months. Approximately 3 years later, the parties revisited negotiations, with a proposed increase in purchase price. However, the contract of sale was never executed. In 2008, Nu Line claimed it was entitled to recover the payments it had made during the initial negotiations. In the context of the limitation of action defence raised by the Respondents, it was necessary for the Court to determine when the claim for restitution arose.

All three judges of the Court of Appeal agreed that Nu Line’s claim in restitution arose not at the time when the payments were made, but rather when the contemplated state of affairs (namely a concluded contract for the purchase of the relevant land) failed to materialise. However the judges disagreed on the application of this test to the facts.

The majority, Basten JA and Young AJA, held that by resuming negotiations after a 3 year hiatus the parties demonstrated an ongoing willingness to enter into the contract originally anticipated in 2002. This cancelled out the previous silence and inaction by Nu Line. During the lull, the parties had demonstrated an intention to proceed with the contract in a number of ways, including Nu Line not requesting their money back and the Respondents not offering the land to another purchaser. These factors indicated that the negotiations were only suspended and could be resumed. In particular, Young AJA said that the parties were both “people of commerce” and would not reasonably pay a large amount of money without expecting commercial return. Accordingly, the fact that Nu Line had not demanded repayment of the advanced money until 2008 indicated that the proposed transaction had not failed at an earlier stage.

Barratt JA (the minority) disagreed with this analysis and said that the months of silence and Nu Line’s failure to respond to requests from the Respondents to enter into a contract constituted a failure of the proposed transaction. From this perspective, the only reasonable conclusion to draw from Nu Line’s lack of response was that Nu Line did not intend to proceed with the transaction. As this occurred in 2002, Barratt JA said that any claim in restitution had arisen at that stage. On this approach, by the time that Nu Line actually brought the claim it was statute barred.

The decision illustrates the potential difficulty in establishing a claim for restitution of payments made in anticipation of a contract which never eventuates. Where the failure of the contract to materialise is said to be evidenced by the inactivity of one party, it can be difficult to determine exactly when the claim arose (and hence when it becomes statute barred). Parties would be well advised to clarify the circumstances in which advance payments will become refundable. In the absence of express agreement a party which has made an advance payment may find that its right to recover it has been lost despite their own belief that the deal is not dead yet.

To see the full judgment in this case, please click here.