Idea Transcript
LAW OF CONTRACT LPAB – Summer 2016/2017 Week 10 Alex Kuklik
Lecture 10 •
Discharge –
Termination • Text: Radan & Gooley, Chapter 24 (paras 24.69-24.105)
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Requirement of an election • Tropical Traders Ltd v Goonan (1964) 111 CLR 41
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Estoppel as a restriction on the right to terminate • Foran v Wight (1989) 168 CLR 385
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Effect of termination • McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Discharge by Frustration Text: Radan & Gooley, Chapter 25 (paras 25.1-25.49 only) Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337 Taylor v Caldwell (1863) 122 ER 309 Krell v Henry (1903) 2 KB 740 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour [1943] AC 32 *Frustrated Contracts Act 1978 (NSW)
TERMINATION • Restrictions on termination •
A party with a right to terminate is still be precluded from doing so if: – That party is in breach of the contract or not ready and willing to perform it. – That party has elected not to terminate. – That party has not acted in good faith. – The equitable doctrine of relief from forfeiture prevents that party from terminating
TERMINATION • Requirement for election •
Termination for breach requires an election by the innocent party by some unequivocal words or conduct to terminate the contract. This is usually done by a notice of termination.
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If a right to terminate arises, the innocent party needs to decide whether to elect to:
– affirm the contract and claim damages for the particular breach. It may also be necessary to claim specific performance or injunctive relief to compel the other party to continue to perform (the availability of these remedies is beyond the scope of this article); or – terminate the contract and claim full loss of bargain damages.
TERMINATION • Requirement for election •
If a contract is affirmed, it cannot subsequently be terminated in respect of the same breach leading to the affirmation, although some breaches may be, by their nature, continuing breaches giving rise to a subsequent right to terminate.
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Termination requires unequivocal words or conduct evincing an intention to terminate.[Berger v Boyles [1971] VR 321 at 326]
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While the terminating party is required to justify termination on the basis that they have a legal right to terminate, they are subsequently entitled to rely on any valid ground existing at the time of election whether or not they were aware of it at the time. [Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 611]
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An election to affirm will be inferred from conduct which is consistent only with the continued existence of the contract, such as continued performance. [Carr v J A Berriman Pty Ltd (1953) 89 CLR 348]
TERMINATION • Requirement for election •
Having regard to the risk in purporting to terminate when there is no right to terminate and the possibility that if there is a right to terminate, it is lost by affirmation, in many cases parties will attempt to hedge their bets and reserve their rights. A party will not necessarily affirm a contract if they give the party in breach an opportunity to perform in suitably qualified and conditional terms or otherwise continue performance subject to an express right to terminate. [Tropical Traders Ltd v Goonan (1964) 111 CLR 41] An election cannot, however, be delayed unreasonably. [Government of Japan v Global Air Leasing Pty Ltd [2003] QSC 22]
TERMINATION • Requirement for election •
Tropical Traders Ltd v Goonan (1964) 111 CLR 41
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D agreed to purchase land in Perth in Jan 58. Price to be paid by deposit, four instalments due in 59, 60, 61 and 62 with final payment in 63. Cl 12 made time the essence of the contract in all respects. Cl 11 said that if D failed to make payments at the proper times, all the money paid by them would be absolutely forfeited. This clause also allowed them to "rescind" the contract without notice and to retake possession of the property. Title was to be transferred on payment of the full purchase price.
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D took possession and paid deposit. The first 3 instalments were each a few days late, and the 4th a few days early. Final payment due on 6 Jan 63. Interest was paid on the following day and an extension of time requested. On 8 Jan P informed of right to rescind for breach but said the right would not be exercised before 11 Jan. On 15 Jan P wrote to say money forfeit and agreement rescinded. 31 Jan P issued writ for declaration that rescission lawful and claiming possession.
TERMINATION • Requirement for election •
Tropical Traders Ltd v Goonan (1964) 111 CLR 41
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HELD: Kitto J
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Each acceptance of a late payment operated as an election not to rescind for non-payment by the due date.
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But to read into it anything of a promissory nature with regard to future payments and non-reliance on Cl 12 would be unwarranted. Repeated acquiescence in non-observance by the other of, say, a time provision may make it no longer 'of the essence', and it may not matter if it is described as a promissory estoppel, a waiver or a variation by mutual consent.
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The extension granted in relation to the final payment goes against the argument concerning a waiver. What the extension may do, is indicate that time is no longer of the essence.
TERMINATION • Requirement for election •
Tropical Traders Ltd v Goonan (1964) 111 CLR 41
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HELD: Kitto J
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Barclay (1874) the effect of the extension is only to substitute the new deadline for the old, and does not destroy the essential character of time.
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The extension is a qualified and conditional waiver of the original stipulation. The acceptance of the interest did not affect the right to rescind - it was money due and was not an election to affirm for the future. Contract validly rescinded, but remit to Supreme Ct to consider the question of relief against forfeiture.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
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Wight entered in to agreement for sale of land to Foran, including a 10% deposit and the requirement of registering a right of way prior to completion. Time was of the essence for completion. Some days prior to the completion date, the Wights represented that they would not be able to register the right of way and therefore complete on time. The Forans abandoned their efforts to secure finance and therefore at the completion date they did not have enough finance to purchase the house. Neither party acted on the completion date. Two days later the Forans purported to rescind the contract, and seek their deposit back.
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The Wights denied the validity of the termination notice on the ground that the Forans weren’t in a position to complete.
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The Wights then registered the right of way and tried to enforce completion, but were unsuccessful. They then terminated and sold the property to someone else.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
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The issue was whether the Forans validly terminated the agreement and could therefore get back their deposit from the Wights.
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The majority held that the Forans validly terminated the agreement and ordered restitution in the amount of the deposit.
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Did the purchasers need to show they were ready and willing to perform? (No) If so, at what time? Was an estoppel created by the vendor's representations? (Yes)
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
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When one party, A, purports to repudiate the contract, the other party, B, may either: – (i) accept the repudiation, and rescind the contract or – (ii) allow the contract to remain on foot.
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There is no third option. If the contract remains on foot, it does so for the benefit of both parties.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
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In this case, the Wright’s repudiation was not accepted (i.e. it was an action for actual breach), but (per Brennan, Deane, Dawson) the Wrights’ representation estopped them from arguing that the Forans needed to be ready and willing to complete on time.
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To rely on the estoppel, the Forans had to show that they were ready and willing to complete as at receipt of the repudiation (the representation). They discharged this onus. And because the vendor's consideration totally failed (no transfer of property), the purchasers were entitled to the return of the entirety of the deposit (Fibrosa).
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Where the respective obligations of parties to a contract are mutually dependent and concurrent, the primary rule is that neither party who fails to perform his obligation when time for performance arrives can rescind for the other party's failure at that time to his obligation.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
Brennan J • For one party to sue for the other's breach under contract they must show that, under ordinary contract principles, they were ready and willing to perform their obligations under the contract as at the time of the other's breach. •
Where A represents to B that B needn't perform B's obligations under an executory contract (i.e. one to be performed in the future), or that it would be pointless for B so to do, B is released from the performance of those obligations until such time as A gives notice that he is ready and willing to perform.
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If B wishes to sue under the contract for A's failure, B must be able to show that they were ready and willing to perform their obligations as at the receipt of A's representation. The onus of this is discharged if they can show they were "not incapacitated from [performing their obligations] and were not decided against doing so".
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
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Each party's obligation is conditional on performance by the other; neither can complain of non-performance by the other when the condition governing the other's obligation goes unfulfilled. But if one party intimates to the other that it is useless for the other to fulfil his obligation and the other acts on the intimation, the party to whom the intimation is given is dispensed from a nugatory tender of performance.
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A purchaser who is thus dispensed from his obligation to pay the price at the time stipulated for completion is not thereby discharged from his obligation to pay the price at some later time.
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But a party to an executory contract is entitled to rescind not only if the other party announces his intention not to perform his essential obligations but also if the other party is incapable of performing his essential obligations under the contract.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
Gaudron •
Not based on estoppel. The vendor's representation waived their benefits under the "essentiality of time" clause, thereby removed the need for the purchasers to complete on time.
Deane •
Readiness and willingness is only relevant where the plaintiff is attempting to recover damages for breach. It is not necessary to rescind a contract.
TERMINATION • Estoppel as a restriction on the right to terminate •
Foran v Wight (1989) 168 CLR 385
Mason CJ dissenting •
There was no relevant detriment to the purchaser on which to ground an estoppel. The purchaser was therefore required to show that they were ready and willing to perform as at the completion date. This onus had not been discharged.
TERMINATION • Effect of termination •
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Termination of instalment contract payments
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This case involved a contract for the sale of land to be paid for by deposit, 3 instalments and a final payment. The final instalment and balance were not paid on time and contract was terminated.
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Could the instalments other than the deposit be retained (or recovered if not paid), once the contract had been terminated?
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HELD Starke J:
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The termination of the contract did not extinguish it ab initio, but in futuro, so as to discharge obligations under it still unperformed.
TERMINATION • Effect of termination •
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Termination of instalment contract payments
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But a purchaser, not in default, is discharged from further performance, and entitled to recover any money paid or property transferred by him under it. A vendor, not in default, is discharged from further performance, and entitled to return of the land and bound to restore any money paid.
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A deposit paid as security for completion is an exception because the parties intended it to be retained by the vendor of the contract goes off.
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Dixon J
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Generally when contracts are terminated they no longer bind the parties, but are not rescinded as from the beginning. But rights are not divested or discharged which have been unconditionally acquired.
TERMINATION • Effect of termination •
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Termination of instalment contract payments
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However, the vendor’s title to the money is not absolute but conditional on completion of the contract. Even if the agreement says that the vendor may keep the money, equity will step in and treat this as a penalty clause and prevent the forfeiture.
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The underlying reason why the purchasers did not have to pay was that there had been a total failure of consideration. The purchasers received nothing - the failure was total - and this allows recovery of payment made.
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Strange in this case that the plaintiff did not ask for damages.
TERMINATION • Effect of termination •
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Termination of instalment contract payments
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The contract must contain an obligation to pay a certain or ascertainable sum of money and the performance to which this relates has occurred.
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But the plaintiff has to have ‘earned’ the right to recover by performance. That is why it usually does not apply to sale of land because the vendor will usually not have performed – transferred the land. In such cases, only if vendor has transferred will a debt arise.
TERMINATION • Effect of termination •
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
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Termination of instalment contract payments
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The vendor cannot have the land and its value too. A deposit is often an exception and intended to be retained if the contract goes off by default of the purchaser. Provisions for forfeiture of purchase money have been treated as penalties and relief given against those provisions [ie they will not be enforced]. After rescission, the vendors could not retain the land and sue for the balance of the purchase money - they could not have the land and money too. Assignors of the vendors should be in no better position.
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A guarantee or surety is not liable on the guarantee where the principal debt cannot be enforced. Here, the rescission means that the principal debt is no longer enforceable therefore the sureties are not liable under their guarantee.
DISCHARGE • Discharge by frustration •
If an event occurs between making the contract and its performance that makes performance of the contract substantially different from what the parties agreed, or that makes performance impossible – the contract may be frustrated.
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Sometimes these kind of events are built into the contracts in force majeur clauses. But if no such clause exists, the common law doctrine of frustration may apply.
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At common law the contract ends at the moment of that the frustrating event takes place. The parties are released from all future obligations. However, this may still have consequences at common law and under statute.
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Frustration is automatic.
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The common law rule can sometimes lead to harsh results so some injustices have been redressed by the Frustrated Contracts Act 1978 (NSW)
DISCHARGE • Discharge by frustration • Elements of frustration: – There must be a supervening event that significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights; – There must be no fault by either party; – The supervening event must not have been contemplated by the parties at the time of contract; and – It must be unjust to hold the parties to the original contract. •
National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
DISCHARGE • Discharge by frustration • Frustrating events: – Court order – Change of law – Destruction of subject matter
DISCHARGE • Discharge by frustration •
Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337
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Codelfa agreed to build a part of the Eastern Suburbs rail line. Anticipated work being done in a 3 shifts per day, 6 days per week.
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This was blocked by a nuisance injunction from the Court and Codelfa could only work 2 shifts per day (not at night). Codelfa thought that it shared the SRA’s immunity from prosecution for nuisance. It did not.
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Price was fixed irrespective of delays.
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One issue was whether the Court injunction frustrated the agreement.
DISCHARGE • Discharge by frustration •
Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337
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The High Court held that the injunctions fundamentally or radically changed the circumstances of the contract such that the contract had been frustrated.
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Aicken J approved of the description in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675
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Doctrine of frustration is closely related to concept of mutual mistake. If the assumption is about a present fact, it is mutual mistake. If it is an assumption about a future fact, it is frustration.
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The common assumption must be found in the contract itself.
DISCHARGE • Discharge by frustration •
Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337
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It is appropriate to look at the evidence of the surrounding circumstances to assist in the interpretation of the agreement, unless the language is plain.
DISCHARGE • Discharge by frustration •
Taylor v Caldwell (1863) 122 ER 309
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Caldwell contracted to rent the Surrey Gardens Hall to Taylor for five days for a series of concerts. Taylor was to advertise the event and was entitled to gate receipts. It was a term that a payment would be made of £100 for each day that the hall was used.
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Six days before the first concert the hall was destroyed by fire through no fault of either party. Taylor sued for damages.
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Did the destruction of the hall frustrate the contract?
DISCHARGE • Discharge by frustration •
Taylor v Caldwell (1863) 122 ER 309
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Yes. In contracts where performance depends upon the continued existence of a thing, a condition is implied that the impossibility of performance arising from the thing perishing shall excuse performance.
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What if the fire happened during negotiations but neither party was aware of it? - Common mistake.
DISCHARGE • Discharge by frustration •
Krell v Henry (1903) 2 KB 740
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Krell sued Henry for £50 being balance due on a contract for use of Krell’s apartment. The agreement required a £25 deposit and £50 two days before taking possession. Henry intended to use the flat to watch the coronation procession of Edward VII. Both parties understood this. Due to the King’s illness the coronation was postponed. Henry refused to pay the £50.
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Was the contract discharged? Did the principle in Taylor v Caldwell apply, as there was a failure of a non-contractual term that was in fact the purpose of the contract?
DISCHARGE • Discharge by frustration •
Krell v Henry (1903) 2 KB 740
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The cancellation of the procession discharged the parties as it was no longer possible to achieve the substantial purpose of the contract.
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Not limited to cases where the destroyed thing is the explicit subject of the contract. You must ascertain the substance of the contract, not necessarily from the terms of the contract, but also necessary inferences drawn from surrounding circumstances.
DISCHARGE • Discharge by frustration •
*Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
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Fairbairn contracted to deliver machines to Fibrosa in Poland. Fibrosa paid £1,000 in advance. WWII broke out and Germany occupied Gdynia in Poland. The contract was frustrated. Fibrosa sued to recover the deposit.
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Even though there was complete frustration of the agreement, and the agreement was therefore at an end, could Fibrosa recover the pre-frustration payment? Normally you cannot as previously completed parts of agreements stand.
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House of Lords held: as there was a total failure of consideration, Fibrosa was entitled to the return of the money.
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Where there is a total failure of consideration as the result of frustration, payments made before frustration can be recovered under the law of restitution.
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Chandler v Webster is wrong.
DISCHARGE • Discharge by frustration •
*Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
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Where a party obtains no benefit from a contract, and she has paid part of a sum before frustration, then that party can recover the money paid in advance because it can be said there has been total failure of consideration.
DISCHARGE • Discharge by frustration •
*Frustrated Contracts Act 1978 (NSW)
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The common law view that the ‘loss lies where it falls’ was considered harsh, so legislation was enacted to remedy this.
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Does not apply to all contracts: s 6 – (a) does not apply to a contract made before the commencement of this Act, – (b) does not apply to a charter-party, except a time charter-party and except a charter-party by way of demise, – (c) does not apply to a contract (other than a charter-party) for the carriage of goods by sea, – (d) does not apply to a contract of insurance, and – (e) does not apply to any other contract in so far as the parties thereto have agreed that this Act does not apply to the contract.
DISCHARGE • Discharge by frustration •
*Frustrated Contracts Act 1978 (NSW)
7 Promise not performed (1) Where a promise under a frustrated contract was due to be, but was not, performed before the time of frustration, the promise is discharged except to the extent necessary to support a claim for damages for breach of the promise before the time of frustration. (2) Subsection (1) does not affect a promise due for performance before frustration which would not have been discharged by the frustration if it had been due for performance after the time of frustration.
DISCHARGE • Discharge by frustration •
*Frustrated Contracts Act 1978 (NSW)
10 Adjustment where whole performance received Where a contract is frustrated and the whole of the performance to be given by a party under the contract has been received before the time of frustration, the performing party shall be paid by the other party to the contract an amount equal to the value of the agreed return for the performance.
DISCHARGE • Discharge by frustration •
*Frustrated Contracts Act 1978 (NSW)
11 Adjustment where part performance only received (2)
Where a contract is frustrated and part, but not the whole, of the performance to be given by a party under the contract has been received before the time of frustration, the performing party shall be paid by the other party to the contract: (a)
an amount equal to the attributable value of the performance, except where the attributable cost of the performance exceeds its attributable value, or
(b)
where the attributable cost of the performance exceeds its attributable value-an amount equal to the sum of: (i) the attributable value of the performance, and (ii) one-half of the amount by which the attributable cost of the performance exceeds its attributable value.