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KAREN ABIDICONTRACT B

Actions for debt

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Where are we?

1. Termination of contracts2. Remedies for breach of contract

• Damages• Liquidated damages and penalties• Specific performance and injunctions• Damages under Lord Cairns’ Act• Actions for debt

3. Frustration of contracts4. Vitiating factors

3Requirements for an action for debt

1. The contract must impose an obligation to pay a certain or ascertainable sum of money

2. The right to payment of that sum must have ‘accrued’

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When does a debt accrue?

A debt will accrue where consideration for that money has been given (ie one party’s side of the contract has been performed).

In determining whether a debt has accrued, consider whether those contractual obligations were entire or divisible.

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Entire or divisible obligation?

Did the parties intend that performance and price would be divided into corresponding parts, or did they intend the entire obligation to be performed before any entitlement to payment would arise?

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Cutter v Powell

“Ten days after the ship 'Governor Parry,' myself master, arrives at Liverpool, I promise to pay to Mr. T. Cutter the sum of thirty guineas, provided he proceeds, continues and does his duty as second mate in the said ship from hence to the port of Liverpool. Kingston, July 31st, 1793.”

Cutter died ¾ of way through voyage.

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Cutter v Powell

Held –Not entitled to any payment. It was an entire contract. He was entitled to 30 guineas, if he completed the voyage, or to nothing, if he didn’t complete the voyage. The risk of non-performance was on Cutter.

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Steele v Tardiani

Contract for 3 Italian internees to cut wood for Steele to about 6 feet long and 6 inches wide. No particular quantity was to be cut. To be paid at 8 shillings per ton.

Cut 1500 tons of wood but most it was not the required width.

Steele did not object, did not tell them to re-cut, and agreed to pay for work once wood sold to other buyers, but later objected and refused to pay anything.

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Steele v Tardiani

Not an entire contract. Contract was divisible (“infinitely divisible”). Entitled to payment for timber cut to about 6 inches in width.

In relation to timber not cut to the required width, there was a fresh contract implied to pay for this timber.

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Legislation may give a right to partial recovery

Supreme Court Act 1986 (Vic), section 54: “All rents, annuities, dividends and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) are to be considered as accruing from day to day and are apportionable in respect of time accordingly.”

Nemeth v Bayswater

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Nemeth v Bayswater1 FebContract to hire

plane$2200

per month

payable at end

of month

16 FebruaryPlan

e crashed!

28 Feb

Monthly hire fee

accrued

Under common law:No fee payable because it didn’t accrue until the endof February.

Under apportionment legislation:$1257.14 payableHire fee was an “other periodical payment in the nature of income”and accrued from day to day.

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Substantial performance

Where a party has substantially performed their obligations, they may be allowed to recover the contract price as a debt, minus an amount to compensate the other party for the fact the work is incomplete.

Compare Hoenig v Isaacs to Bolton v Mahadeva

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Hoenig v Isaacs

Contract to redecorate and refurnish flat for £750, (£300 already paid).

Interior decorator took action for debt for remaining £450.

Customer claimed there were omissions, faulty design and bad workmanship (remedying defects to cost about £55).

Customer argued entire contract and interior designer therefore not entitled to any payment.

Held: The contract was substantially performed, so the interior designer was entitled to payment of the contract price less the cost of rectifying defects.

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Bolton v Mahadeva

Contract to install central heating system for £560. Defects cost £175.

Issue – Had plaintiff substantially performed the contract?

Held – No substantial performance – defects far greater than in Hoenig v Isaacs.

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Bolton v Mahadeva

Cairns LJ:

“The contract was a contract to install a central heating system. If a central heating system when installed is such that it does not heat the house adequately and is such, further, that fumes are given out, so as to make living rooms uncomfortable, and if the putting right of those defects is not something which can be done by some quite small amendment of the system, then I think that the contract is not substantially performed.”

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Bolton v Mahadeva

Sachs LJ:

“When … one looks at the aggregate of the number of defects that he held to have been established, at the importance of some of those defects, and that the way in which some of them prevented the installation being one that did what was intended, I find myself … quite unable to agree that there was a substantial performance by the Plaintiff of this lump-sum contract. It is not merely that so very much of the work was shoddy, but it is the general ineffectiveness of it for its primary purpose that leads me to that conclusion”.

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Discuss:

A seaman is hired for voyage for £50 a

month.

He is paid for first 7 months.

He wrongfully abandons vessel in 9th

month.

Can he claim wages for 8th month?

see Taylor v Laird (1856) 1 H & N 266

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Discuss:

P agrees to paint D's premises for $1200.Work is defective because old paint is visible

on the woodwork and in parts peeling off.Furthermore, paint is left on the windows,

and the front exterior is splattered with paint.Cost of curing defects is $600.What can P claim? see Zamperoni Decorators Pty Ltd v Lo Presti

[1983] 1 VR 338

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Discuss:

Contract to ship coal from UK to Hamburg.

When ship arrives at Glückstadt, it is arrested and cannot proceed to Hamburg.

At the request of the recipient, the master of the ship delivers the coal in Glückstadt.

Can the shipowner claim part of the freight?

see Christy v Row (1808) 1 Taunt 300; 127 ER 849

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Payments independent of performance

Where you have contracted to pay a sum of money independent of performance by the other party, that sum will be owing as a debt when the time for payment arrives.

The recipient’s right to retain those payments is conditional on it completing the contract.

See McDonald v Dennys Lascelles; cf Bot v Ristevski

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Deposit and Instalments

Sale of land: contract may require a deposit, and payment of purchase price before conveyance (eg. in instalments).

If contract is terminated before conveyance:

purchaser can claim instalments back: McDonald v Dennys Lascelles Ltd

vendor can keep deposit if purchaser has breached: Bot v Ristevski

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McDonald v Dennys Lascelles Ltd

Plaintiffs Defendants

Vendor/Seller of land

Vendor’s interest was assigned to Dennys

Lascelles

Purchaser of land

Purchaser’s promise to perform was

guaranteed by Mr McDonald

Contract for sale of land:

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McDonald v Dennys Lascelles Ltd

Purchase price payable by: a deposit; installments; and the balance of the purchase price on settlement.

The contract was terminated by the purchaser (with an instalment unpaid and overdue).

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McDonald v Dennys Lascelles Ltd

Issue: When a contract of sale (involving payment of part of the purchase money by instalments before conveyance of the land) is terminated (and the land is not conveyed to the purchaser): Does a purchaser have to pay instalments due?; and Does a vendor have to repay instalments already paid?

Vendor “cannot have its land and its value too”, because of total failure of consideration.

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McDonald v Dennys Lascelles Ltd

Where contract is terminated and land is not conveyed:

Instalments due don’t need to be paid.Instalments paid are to be returned.Deposit due needs to be paid. Deposit paid can be retained.

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Deposits

A deposit is a part of the purchase price payable on entering into a contract of sale.

The consideration for the deposit is the vendor entering into the contract (the right to payment of a deposit is independent of performance of the contract). It is “a guarantee that the purchaser means business” / “an earnest to bind the bargain”.

General rules: If the contract is performed - the deposit becomes part of the purchase

price. If the purchaser terminates the contract for the vendor’s breach /

repudiation – purchaser can recover the deposit. If the vendor terminates the contract for the purchaser’s breach /

repudiation - vendor can retain / recover the deposit. An excessive deposit may be a penalty.

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Court discretion to order repayment of deposit under legislation re: property

Property Law Act 1958 (Vic) s 49(2):

“Where the Court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the Court may, if it thinks fit, order the repayment of any deposit.”

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Bot v Ristevski

Contract for the sale of a house – vendor terminated for the purchaser’s repudiation - deposit due but only partly paid by purchaser.

Issue: Can a vendor recover an unpaid deposit upon termination of the contract for the purchaser’s breach / repudiation?

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Bot v Ristevski

Held: A vendor’s right to retain or recover a deposit is not conditional in the same sense as their right to retain or recover purchase money. It will not be defeated or divested by the subsequent discharge of the contract. A “vendor who discharges the contract in consequence of a purchaser’s repudiation of it can recover a deposit that should have been paid before the contract was discharged”.

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Mitigation and action for debt

When you pursue an action for debt, rather than sue for damages in contract, there is no need to mitigate your loss. Whether or not your loss was ‘avoidable’ is not relevant.

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Mitigation and action for debt

Where party owing payment repudiates,

other party is not generally obliged to

accept but can still perform and claim

contract price

White and Carter v McGregor

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White and Carter v McGregor

Contract for advertising garage business on litter bins for 3 years for £196, 4s.

Advertiser repudiated the contract on the same day it was made (anticipatory breach) – said did not want the advertisements and would not pay for them.

Plaintiff did not accept repudiation, elected to affirm contract, went ahead with advertising and took an action for debt for the contract price.

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White and Carter v McGregor

Issue: Can an innocent party upon election to affirm a contract following repudiation, continue to perform its obligations under the contract and claim for payment of the debt?

Held: Yes, with 2 limitations - the party taking the action for debt must:1. be able to completely perform its obligations without

the co-operation of the other party. 2. have a legitimate interest in performing contract

rather than seeking damages.

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Lord Reid’s first limitation –where defendant’s co-operation required

“Of course, if it had been necessary for the defender to do or accept anything before the contract could be completed by the pursuers, the pursuers could not and the court would not have compelled the defender to act, the contract would not have been completed and the pursuers' only remedy would have been damages.”

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Lord Reid’s second limitation – where “no legitimate interest”

“It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself.”

eg The Alaskan Trader

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Consider Lord Reid’s comment:

“It might well be, but it never has been, the law that a person is only entitled to enforce his contractual obligations in a reasonable way, and that a court will not support an attempt to enforce them in an unreasonable way. One reason why that is not the law is, no doubt, because it was thought that it would create too much uncertainty to require the court to decide whether it is reasonable or equitable to allow a party to enforce his full rights under a contract”

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Legitimate Interest exception

Was there any “legitimate interest” in performing the contract rather than claiming damages in the Alaskan Trader case? (Clea Shipping Corp v Bulk Oil)

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Clea Shipping (The “Alaskan Trader”)

Charter for ship – owners kept the ship and crew available despite repudiation, claimed entitled to entire chartering costs.

Held: Ship owners had no legitimate interest in pursuing their claim for the full hire price rather than damages – were not entitled to the full contract price (only damages).

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Lloyd J

“there comes a point at which the court will cease, on general equitable principles, to allow the innocent party to enforce his contract according to its strict legal terms. How one defines that point is obviously a matter of some difficulty; for it involves drawing a line between conduct which is merely unreasonable (see per Lord Reid in White & Carter v McGregor …) and conduct which is wholly unreasonable … But however difficult it may be to define the point, .. there is such a point …”.

“[T]here is some fetter, if only in extreme cases” on an innocent party’s right to elect to affirm a contract, continue with performance, and claim the contract price (rather than damages). The safest way of describing the fetter is to use the language of Lord Reid in White & Carter v McGregor ie. the absence of a “legitimate interest” is a ground on which the court, on equitable grounds, refuses to allow an innocent party to enforce his full contractual rights and obtain the contract price in an action for debt (ie. the range of remedies is limited to damages).”

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What do you need to know?

1. The requirements that must be satisfied in order to bring an action for debt;

2. The difference between “entire” and “divisible” obligations, and how to tell them apart;

3. How to determine whether an action for debt can be brought for a contract that has been substantially rather than fully performed;

4. How to work out whether and why it would be better for your client to bring an action for debt rather than an action for damages in any given fact scenario.

5. Fate of deposit and other advance payments in the case of termination.

6. Are claims for a debt subject to mitigation?

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Discussion: 2009 exam Q1(c)

Owen owns three boats moored off Port Melbourne. Their names are Albatross, Boar and Caesar. He runs a business of renting the boats out for cruises on Port Phillip Bay. His customers are individuals who hire a boat for private events, and businesses which offer cruises to paying customers. Advise Owen as to his rights and obligations under the following contract that he has entered into:On 1 May 2009, Owen enters into a contract with Chuan Pty Ltd, which is represented by its managing director Sheila. Owen agrees to let the Caesar to Chuan Pty Ltd from 1 June 2009 to 30 September 2009, and Chuan Pty Ltd agrees to pay $40,000. On 2 May, Sheila tells Owen that she has changed her mind and that Chuan Pty Ltd is no longer interested in hiring a boat from Owen. Owen demands that Chuan Pty Ltd go ahead with the contract. On 1 June, Owen tells Sheila that the Caesar is ready for collection by her company. Sheila refuses to collect the boat. Owen keeps the Caesar moored at his pier until 30 September 2009 and declines an offer from Tom who wants to hire the Caesar from 15 June to 14 September for $30,000. In October, Owen demands payment of $40,000 from Chuan Pty Ltd.

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Acknowledgments and Copyright

Thanks to Sirko Harder, Mark Davison and Rebbeca Giblin for the use of their slides.

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