Supreme Court confirms a nominee can enforce contractual obligations

In this article, solicitor Jenny Roest discusses a recent Supreme Court decision which confirms that the description of a purchaser in a sale and purchase agreement as "X and/or nominee" is sufficient identification for the nominee to take the benefit of the agreement and enforce it against the vendor under the Contracts (Privity) Act 1982.

Often, a sale and purchase agreement will state the purchaser as being "X and or nominee". This enables a different entity to complete the purchase and is particularly useful where, for example, at the time the parties enter into the agreement there is some doubt as to which company in the purchaser's group will be nominated as the purchaser. It is also common to make use of a nominee where a family trust is to be substituted for the purchaser at completion or where the company or trust is not in existence at the time of entering the sale and purchase agreement.

In such cases, the question arises as to whether the nominee (who is not a party to the agreement) is entitled to enforce the agreement. The law in New Zealand on this point has recently been settled with the Supreme Court¹ refusing to grant leave to appeal the Court of Appeal's decision in Laidlaw and Anor v Parsonage and Anor². This decision confirmed that a contract specifying "X and or nominee" as the purchaser is sufficient to bring the nominee within section 4 of the Contracts (Privity) Act 1982 (the Act), enabling the nominee to enforce the contract under section 8 of the Act.

The facts

The Laidlaws, as the vendors, had entered into a sale and purchase agreement with Mr Parsonage "and-or nominee" for the sale of a residential property. Mr Parsonage and Mr Goulding, as trustees of a family trust, became the nominee under the agreement. The Laidlaws' agent was told that a family trust would be purchasing the property, with solicitor to solicitor correspondence referring to the purchaser as either the trust or the trustees. It was suggested that the description of the purchaser in the sale and purchase agreement was used to avoid having to obtain Mr Goulding's signature on the offers and counter-offers leading to the final agreement.

Shortly after Mr Parsonage moved into the property, it was discovered that the property leaked. The trustees sued the Laidlaws with one of the claims based on a warranty contained in the sale and purchase agreement. Consequently, one of the issues before the courts was whether the trustees, as the nominee under the sale and purchase agreement, were entitled to enforce the agreement.

The decision

Under section 4 of the Act, where a promise contained in an agreement benefits a person who is not a party to the agreement, the person making the promise must still deliver on it. Section 4, however, requires the beneficiary to be designated by name, description, or reference to a class (whether or not the beneficiary exists at the time of contracting). The purpose of this requirement is to identify the promisee with certainty³. The Supreme Court commented that designation by description requires no more than a sufficient identification of the person who may take the benefit. Given that once nominated the nominee is identifiable with certainty, the nominee will be a person designated by description for the purposes of section 4. The Supreme Court noted that in its view:

"There is no good reason why that person should not be identified by the nomination of the purchaser. Identification by a third party or by the occurrence independently of an event or by some other particular means is not required by [section 4]."

As noted above, it also does not matter for the purposes of section 4 that the person is not in existence at the time that the sale and purchase agreement is executed.

The proviso to section 4 of the Act which states that the promise must be intended to create, in respect of the benefit, an obligation enforceable by the beneficiary is also met by the use of the term "X and or nominee" as the purchasing party. The Court of Appeal considered that the inclusion of the nominee, when defining the purchaser, was designed to provide the nominee with a right to enforce obligations under the agreement and, therefore, that the requirements of the proviso were met.

Enforcement of the contract by a nominee is covered by section 8 of the Act which provides for the beneficiary of a promise to enforce the contract "as if he were a party to the ... contract, and relief in respect of the promise, including relief by way of damages, specific performance, or injunction, [is not to be] refused on the ground that the beneficiary is not a party to the ... contract in which the promise is contained or that, as against the promisor, the beneficiary is a volunteer".

Comment

The result of the decision is that a nominee, designated by the definition of a purchaser as "X and or nominee", will be able to enforce the contract against the vendor under the provisions of the Contracts (Privity) Act. It should be noted however that this decision does not relieve the "named" purchaser from its obligations under the contract. The vendor has the protection of the continuing liability of the named purchaser if the nominee proves unwilling to complete.

¹ [2009] NZSC 98

² [2009] NZCA 291

³ Rattrays Wholesale Ltd v Meredyth-Young & a'Court Ltd [1997] 2 NZLR 363; Laidlaw and Anor v Parsonage and Anor [2009] NZCA 291

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.