L00 LAW1212 Contract law 2 - StudentVIP

Week 1 – Discharge by Performance └ Frustration

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LAW1212 Contract Law 2

Notes


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Contents Week 1 – Discharge by Performance .............................................................................................. 8

Meaning of “Discharge” ..................................................................................................................... 8

Time for the Performance of Obligations ........................................................................................... 8

The Order for the Performance of contractual obligations .............................................................. 10

Cooperation & Good Faith ............................................................................................................... 11

Prevention of Performance .......................................................................................................... 11

The Level of Performance Required for the Discharge of a Contract ............................................... 12

Severable or Divisible Contracts ................................................................................................... 14

Obstruction of Performance ............................................................................................................ 15

The de minimus non curat lex rule ................................................................................................... 15

Free Acceptance .............................................................................................................................. 15

Unenforceable Contracts ................................................................................................................. 18

Substantial Performance .................................................................................................................. 19

Addendum ....................................................................................................................................... 21

Week 2 – Discharge by Agreement / Frustration ............................................................................. 24

Discharge by Agreement (Generally) ............................................................................................... 24

Discharge by Abandonment ........................................................................................................ 24

Discharge Pursuant to a Term of the Original Contract ............................................................... 26

Contractual Right to Termination upon Breach ....................................................................... 27

Conditions Precedent .............................................................................................................. 27

Conditions Subsequent ............................................................................................................ 32

Discharge by Subsequent Agreement .......................................................................................... 33

Discharge of Executory Contracts ............................................................................................ 34

Discharge of Executed Contracts ............................................................................................. 35

Waiver ......................................................................................................................................... 43

Frustration ....................................................................................................................................... 44

Frustrating Events ........................................................................................................................ 46

Effect of Frustration ..................................................................................................................... 48

Week 3 – Discharge of Contract by Breach .................................................................................... 50

General Concepts ............................................................................................................................ 50

Failure to Perform Contractual Obligations (term of contract) ....................................................... 51

Conditions .................................................................................................................................... 52

Warranties ................................................................................................................................... 53

Intermediate Terms ..................................................................................................................... 54

Termination for Breach of Time Stipulation ................................................................................ 56


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Time being of the essence by Implication ................................................................................... 58

Making Time of the Essence by Service of a Notice to Complete ................................................ 59

Contractual Right to Terminate ................................................................................................... 59

Repudiation ..................................................................................................................................... 60

Effecting Termination and the Effects of Termination .................................................................... 66

Restrictions on the Right to Terminate ............................................................................................ 69

Party Not ready, Willing and Able or itself in breach ................................................................... 69

Election not to Terminate ............................................................................................................ 70

Termination not in Good Faith .................................................................................................... 73

Relief Against Forfeiture .............................................................................................................. 74

Week 4A – Misrepresentation ....................................................................................................... 78

Elements of Misrepresentation ....................................................................................................... 80

Statement of Fact ........................................................................................................................ 80

The Representation must be False .............................................................................................. 84

The Representation must have been Intended to Induce (and did Induce) the Innocent Party to Enter into the Contract ................................................................................................................ 87

The Issue of Materiality ................................................................................................................... 89

Week 4B - Misleading and Deceptive Conduct ............................................................................... 91

The Meaning of “Engage in Conduct” .............................................................................................. 91

The Meaning of “In Trade and Commerce” ...................................................................................... 96

Financial Services ............................................................................................................................. 99

Week 5 – Mistake ....................................................................................................................... 101

Common Mistake .......................................................................................................................... 103

Mutual Mistake .............................................................................................................................. 108

Unilateral Mistake ......................................................................................................................... 109

Unilateral mistake as to Identity ................................................................................................ 109

Unilateral Mistake as to the Terms of the Contract .................................................................. 114

Mistake as to the Nature of the Document (Non Est Factum) ...................................................... 118

Week 6A – Duress ....................................................................................................................... 121

Duress of the Person ..................................................................................................................... 122

Duress of Goods ............................................................................................................................. 123

Economic Duress ........................................................................................................................... 123

Remedies in Relation to Duress ..................................................................................................... 125

Week 6B – Undue Influence ........................................................................................................ 127

General Concepts .......................................................................................................................... 127

Nature of Undue Influence ............................................................................................................ 128


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Categories of Undue Influence ...................................................................................................... 129

Actual Undue Influence ............................................................................................................. 129

Presumed Undue Influence ....................................................................................................... 130

Establishing the special relationship ...................................................................................... 131

Undue Influence and Third Parties ................................................................................................ 134

Rebuttal of Undue Influence ......................................................................................................... 134

General Equitable Defences .......................................................................................................... 136

Undue Influence and Third Party Guarantees ............................................................................... 138

The Yerkey v Jones Principle ...................................................................................................... 140

Remedies ....................................................................................................................................... 144

Week 7 – Unconscionability ........................................................................................................ 146

Generally ........................................................................................................................................ 146

Special Disadvantage or Disability ............................................................................................. 149

Knowledge about the Disadvantage .......................................................................................... 153

Unconscientious Exploitation of the Disadvantage ................................................................... 154

Defences ........................................................................................................................................ 155

Remedies ....................................................................................................................................... 156

Relationship with Undue Influence ............................................................................................... 156

Statutory Unconscionability (Australian Consumer Law) – an Overview ...................................... 157

S20 - Unconscionable conduct pursuant to the unwritten law ................................................. 159

S21 - Unconscionable conduct in connection with goods and services ..................................... 159

Financial Services ....................................................................................................................... 160

Remedies ................................................................................................................................... 161

Week 8 – Illegality ....................................................................................................................... 162

Statutory Illegality .......................................................................................................................... 162

Contracts Prohibited by Statute .................................................................................................... 163

Contracts expressly prohibited by statute ................................................................................. 164

Contacts impliedly prohibited by statue .................................................................................... 165

Common law Illegality ................................................................................................................... 171

Generally .................................................................................................................................... 171

Contracts made with the Intention of Acting Illegally ............................................................... 172

Contracts Prejudicial to the Administration of Justice .............................................................. 172

Contracts to oust the jurisdiction of the courts ......................................................................... 173

Contracts promoting or causing conflict between one’s public duty and private interests ...... 173

Contracts to promote sexual immorality ................................................................................... 173


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Contracts with Enemy Aliens ..................................................................................................... 174

Contracts in restraint of trade ................................................................................................... 174

General .................................................................................................................................. 174

Assessing the reasonableness of the restraints ..................................................................... 176

Sale of Business (Vendor-Purchaser Restraints) .................................................................... 180

Statutory Provisions ............................................................................................................... 189

Week 9A – Consequences of Illegality ......................................................................................... 190

Effect of Illegality ........................................................................................................................... 190

Independent Cause of Action .................................................................................................... 192

Independent Cause of Action - Restitutionary Claims ........................................................... 192

Independent Cause of Action - Tortious Claims ..................................................................... 193

Independent Cause of Action – Collateral Contract Claims ................................................... 195

Independent Cause of Action – Other ................................................................................... 195

Parties not equally at fault ......................................................................................................... 196

Severance .................................................................................................................................. 197

Week 9B – Rescission .................................................................................................................. 200

The meaning of Restitutio in Integrum .......................................................................................... 201

The Nature of the Remedy of Rescission ....................................................................................... 202

Limitations on the Right to Rescind ............................................................................................... 204

Affirmation ................................................................................................................................. 204

Third Party Rights ...................................................................................................................... 205

Laches/Delay .............................................................................................................................. 206

The rule in Seddon’s Case .......................................................................................................... 206

Sale of Goods ............................................................................................................................. 207

Exclusion Clauses ....................................................................................................................... 207

Week 9C – Rectification .............................................................................................................. 208

Rectification for Common Mistake ................................................................................................ 209

Rectification for Unilateral Mistake ............................................................................................... 213

Week 10 – Damages for Breach of Contract and Actions for Fixed Sum and Debt (and overview of statutory remedies) .................................................................................................................... 214

Nominal Damages .......................................................................................................................... 215

The Compensatory Nature of Damages ......................................................................................... 215

Disgorgement Damages ............................................................................................................. 216

Exemplary Damages .................................................................................................................. 216

Wrotham Park Damages ............................................................................................................ 217

The Once for all Lump Sum Rule ................................................................................................ 217


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Date of Assessment ................................................................................................................... 217

“Breach of Simple Contract” .................................................................................................. 218

Interests Reflected in a Damages Award ....................................................................................... 220

The (loss of) the Expectation Interest – Expectation damages .................................................. 221

Damages for Loss of a Chance ................................................................................................... 224

Damages for non-economic loss (eg loss of reputation; peace of mind) .................................. 226

The Rule in Bain v Fothergill ...................................................................................................... 227

The Reliance Interest ................................................................................................................. 227

The Restitution Interest ............................................................................................................. 230

The Indemnity Interest .............................................................................................................. 232

Betterment ................................................................................................................................ 232

Causation ....................................................................................................................................... 233

The ‘But for’ test .................................................................................................................... 233

Intervening Events ..................................................................................................................... 234

The plaintiff’s (Contributory) Negligence .................................................................................. 236

Remoteness of Damage ................................................................................................................. 239

Degree of Knowledge ................................................................................................................ 240

First Limb of Hadley – Presumed Knowledge ........................................................................ 240

The second limb of Hadley – Actual Knowledge .................................................................... 241

Likelihood of Loss Occurring ...................................................................................................... 244

The extent of Loss to be contemplated ..................................................................................... 244

The Contractual Assumption as to Scope of Liability ................................................................. 245

Remoteness and Concurrent Liability ........................................................................................ 246

Mitigation ...................................................................................................................................... 246

Avoidable Loss ........................................................................................................................... 247

Avoided Loss .............................................................................................................................. 250

Recovery of Expenses ................................................................................................................ 251

Cost of Mitigation and Increasing Loss ...................................................................................... 251

Mitigation and Damages for Anticipatory Breach ..................................................................... 252

Loss of Use of Money and Interest on Damages ........................................................................... 252

Week 10/11A – Equitable Damages ............................................................................................ 254

Week 10/11B - Actions for Fixed Sum and Debt .......................................................................... 256

Liquidated Damages/ Penalties ..................................................................................................... 256

Actions for a Fixed Sum and Debt .................................................................................................. 257

Requirements for an Action for a Debt ...................................................................................... 257


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Week 10/11C - Remedies for Misleading and Deceptive Conduct ................................................ 261

Week 12A – Specific performance ............................................................................................... 264

Nature of Specific Performance ..................................................................................................... 264

Jurisdictional Factors Precluding an Order for Specific Performance ............................................ 265

Necessity for the fact of a Contract ........................................................................................... 265

Inadequacy of Damages ............................................................................................................. 265

Contracts for the sale of personalty .......................................................................................... 266

Land Contracts ........................................................................................................................... 267

Contracts to pay or lend money ................................................................................................ 269

Contracts Conferring Benefits on a third party .......................................................................... 269

Discretionary Factors Precluding an Order for Specific Performance ........................................... 270

Personal services contracts ....................................................................................................... 271

Constant Court Supervision ....................................................................................................... 271

Hardship ..................................................................................................................................... 272

Unclean Hands ........................................................................................................................... 272

Laches ........................................................................................................................................ 272

Vitiating Factors ............................................................................................................................. 273

Lack of Mutuality ....................................................................................................................... 273

Breach/Readiness and willingness to perform .......................................................................... 274

The Effect of an order for specific performance ............................................................................ 275

Week 12B – Injunctions ............................................................................................................... 276

Negative Contractual Obligations .................................................................................................. 276

Restraint of Trade Clauses ......................................................................................................... 276

Interlocutory Injunctions ........................................................................................................... 279

Strength of Case and Balance of Convenience ...................................................................... 281

Undertaking as to Damages ................................................................................................... 283


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Week 1 – Discharge by Performance

Meaning of “Discharge”

“One party is discharged” means that party is excused from further performance of his obligations under that contract. There is nothing further that the law requires that party to do.

A party may be discharged from a contract by performance of the promise made.

OR either party may be discharged from further performance by:

• Discharge by Performance (This week’s topic) • Discharge by Agreement between the parties • Discharge by Breach committed by one or more parties • Discharge by Frustration

22.3 Time for the Performance of Obligations

22.5 The time at which obligations are to be performed is governed by the contract.

22.6 In order to have complied with the obligation to perform a contract, the performance of the contract has to have been complied with within the time for performance.

This is critically important: if performance has taken place within time, the contract is properly discharged within time; if performance (or purported performance) occurs too late, then the consequence is that there could be a breach of contract.

Such breach could entitle the innocent party to sue for damages or to terminate the contract depending on the extent of the breach or the classification of the time stipulation (ie its essentiality).

The time for the performance of a contract generally falls within two categories:

1. When time for performance is expressly stipulated.

2. Where, if time for performance is not expressly stipulated, then within a “reasonable time” – see paragraph 22.5 – 22.7 Text.

“An implication of performance within a reasonable time is in general to be made unless there are indications to the contrary” – Reid v Moreland


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What is a reasonable time?

Depends not by reference to the circumstances as at the date of the contract…but in the light of circumstances existing at the time when performance takes place or when the party demanding performance asserts that it should have taken place – Handley v Gunner

Example: say the parties make an agreement for the supply and delivery of a certain quantity of bananas forming part of a particular batch. No specific time for delivery is agreed. It is likely that a reasonable time for performance would be implied, by reference to the fact that bananas are perishable and that their price does fluctuate.

Could then a party make argument that a contract where no definite time can be implied or inferred for performance, then a party who does not perform will not be in breach (as there is no failure to perform within time)?

22.9 Argument made in Electronics Industries v David Jones… it failed:

a. There was a contract whereby the plaintiff was to give demonstrations of televisions in the defendant’s store.

b. Due to a serious coal strike affecting the number of likely customers visiting the store, the defendant decided it could not go ahead with the demonstrations at the time and requested the plaintiff to postpone the demonstration and advised the plaintiff that it would need 4 –6 weeks after the strike was over to make alternative arrangements.

c. The plaintiff agreed to do so but no substitute agreement was made and subsequently the parties just could not agree on an alternative time for the display after the strike had been settled.

d. The original time for the display came and went but the plaintiff in accordance with its arrangements with the defendant let the time slip by.

e. The defendant argued that it was not bound to perform at all because no time had been specified.

f. This argument was rejected (and, with respect, rightly so). The court held that all that had happened was that the plaintiff did no more than to accede to the defendant’s request for a postponement. This being so, the plaintiff was entitled to take reasonable measures to clarify with the defendant when he might enter the defendant’s store for the purposes of performing the display – this being (in accordance with authority) a “reasonable” time depending on the nature and purpose of the express stipulations in the contract.

This case is a good illustration of how a court might ascertain the time to perform a contract in a situation whereby:


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• Despite the effluxion of time for the original performance, the original contract remained on foot.

• The time for performance of the obligations under that contract would in those circumstances be a reasonable time (as is the usual case).

The kernel of this aspect is this: a court will ordinarily (indeed almost inevitably) attempt to infer that a contract needs to be performed within a reasonable time, and even where the parties haven’t agreed any time at all, the conventional approach is that the court will almost invariably “try” to find the basis for the implication of a reasonable time for the performance of the contract. This makes perfect sense.

Or taken another way; it will ordinarily be difficult for a party successfully to argue that no reasonable time can be inferred for the performance of a contract and that the contract does not have to be performed at all.

The Order for the Performance of contractual obligations

22.12 In order to ascertain whether a party is in breach or has in fact discharged its contractual obligations, it is sometimes necessary to ascertain the order for performance.

The order in which obligations are to be performed under the contract are normally determined by the terms of the contract.

However, if contract is silent on the matter, it becomes a question of construction of the contract to ascertain the intentions of the parties as to the order in which obligations are to be performed – Burton v Palmer.

22.13 Various categories for dealing with the order for the performance of contractual obligations set out below (mentioned briefly as will revisit when looking at “breach”):

a. Independent – in which the parties’ obligations do not depend on each other. What this means is that one party can call on the other to perform even if he himself has not performed. In this case the order of performance is not relevant. This is not very common – see paragraph 22.14 Text.

b. Dependent – where one party’s obligations are dependent on the other’s obligations. This is a far more significant category. A useful illustration – a contract of employment in which the obligation to pay wages depends on the employee performing his or her work – see paragraph 22.15 Text.

c. Concurrent – this is another significant and common category ie where the parties perform their obligations concurrently. Eg contracts for the sale of land in which the obligation to hand over the relevant certificate of title is concurrent with the obligation to hand over the purchase price. See the discussion at para 22.16 text.


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Cooperation & Good Faith

22.17 - Whenever considering the significance of the “order of performance”, the duty of cooperation and good faith also becomes relevant.

The significance of the duty of cooperation and good faith arises because arguments can arise whether a person is excused from performing his or her obligations under an agreement because the other person has by breaching an implied duty of cooperation or good faith, prevented performance (and, therefore whether that person’s obligations under the contract have been discharged even though he did not/could not perform).

There is always an implied duty of cooperation – this is particularly important because in cases of concurrent or dependent obligations (and these do form the majority of cases) one party who then essentially disables the other party from performing cannot then complain that the later party is in breach – and the corollary is that the party who is disentitled from performing may have a remedy based on a breach of that duty.

“It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of

the contract” – Griffith CJ in Butt v M’Donald (1896)

The following are various formulations of the duty of cooperation as set out in your text:

a. Such a duty may be one that is express – see paragraph 22.17 Text – this really should not cause any conceptual difficulties.

b. If not express, then it could be implied see eg:

(i) If in a written contract both parties have agreed that something shall be done, the construction of the contract is that each agrees to do all that is necessary for the carrying out of the thing – Secured Income Real Estate – see para 22.18 Text.

(ii) It is a “general rule” that each party agrees by implication to do such and all things as are necessary to enable the other party to have the benefit of the contract – Butts v O Donald and para 22.19 Text.

Prevention of Performance

22.20 - A party preventing the other party from performing his obligations will often discharge a contract.


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A contract may contain express term to the effect that a party will not prevent the performance of an obligation by the other party.

In appropriate cases the courts can find that there is an implied term to that effect – CSS Investments Pty Ltd v Lopiron Pty Ltd (1987)

The Level of Performance Required for the Discharge of a Contract

22.22 Where both parties have performed their respective contractual obligations the contract is discharged by performance.

A party to the contract is discharged by performance if he or she has performed his or her obligations.

For performance to lead to discharge, the party of parties must perform obligations exactly as required by the contract.

“It was contented that in all commercial contracts the question was whether there was a ‘substantial’ compliance with the contract: there always must be some margin. I cannot agree. If the written contract specifies conditions… those conditions must be complied with. A ton does not mean about a ton, or a yard about a yard. The conditions of contract must be strictly performed.” – Lord Atkin in Arcos Ltd v E A Ronaasen & Son [1933].

In Re Moore and Landauer the seller contracted to deliver fruit in cases of 30 tins per case. It was held that the seller had not performed the contract because the not all the fruit was delivered in lots of 30 tins per case. Your text remarks that the case illustrates the “strictness” of the rule – para 22.26.

The supply of more goods than were ordered means that the buyer may reject the whole consignment – see para22.25

Performance by payment of money must be by legal tender unless otherwise agreed – 22.23.

With payment by cheque, the promise is not discharged until the cheque is honoured.

The position is that a promisor is not discharged unless he has performed his obligation exactly and completely in accordance with the terms of the contract.

This is a rule of construction and not a rule of law – Hoenig v Isaacs.

22.25 - The rationale behind this rule is that the promisor’s obligations are seen as entire and indivisible: Cutter v Powell. (Famous Case)


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A promisor’s obligations are seen as entire and indivisible and subject to the de minimus rule or the rule relating to substantial performance, performance of part does not entitle the promisor to any part of the consideration – para 22.24. This is an important principle.

Notwithstanding, performance of less than what has been agreed may discharge the contract:

1. Subject to the de minimus non curat lex rule. Ken: In the absence of anything more persuasive it is suggested that the doctrine is indeed of limited practical utility – my own suggestion is that where the defect in performance is in truth ‘trivial’ then neither the perpetrator nor the innocent party will make any point of it.

2. Doctrine of substantial performance. (covered further below)

The requirement for exact performance has occasionally led to unjust results.

The leading illustration of this case is the famous case of Cutter v Powell discussed at para 22.27 Text. The plaintiff was contracted to provide services as a second mate for a journey but died early into the journey. His estate failed to recover a proportionate amount of his wages for seven weeks of the journey.

Court held that Cutter had promised to serve as second mate for the whole of the voyage but had not done so.

The reason Mrs Cutter failed in this case was that the contract in question was an entire contract.

“An entire contract, or entire obligation, is one in which the consideration for the payment of money or for the rendering of some counter-performance is entire and indivisible” – Mason CJ in Baltic Shipping Co v Dillion.

The performance of the entire obligation is a condition precedent to the right to recover payment – thus a party who partially performs (subject to considerations of substantial performance) cannot effectively recover his contract price for the partially completed work - see Appleby v Myers – which was a particularly unfortunate case in which the party who partly performed was prevented from completing a contract for the installation of certain machinery because the contract was frustrated by a fire which destroyed the premises in question – see para 22.29Text.

Appleby v Myers: Plaintiffs agreed to erect specific machinery at the defendant’s premises. It was a term of the contract that the plaintiff would not be paid until completion of the work. The work was partially completed when the premises and machinery was lost to fire. The court held the that the fire frustrated the contract and that the plaintiff could not recover for the value of work that was done.


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A party who partially performs cannot recover anything for work they have done. Importantly, the person cannot recover the whole contract price less damages which are attributable to their breach of contract. This is because that party’s performance is in essence a condition precedent to their right to demand payment – Appleby v Myers.

What this means is that if you have only partially performed an enforceable contract (in which case you may well be in breach anyway – this is obvious) and (subject to the very important “free acceptance benefit” exception discussed below) the other party would prima facie take the whole of the benefit of performance without payment.

Further, a party who partially performs cannot make a restitutionary claim based on quantum meruit because of the principle that where an enforceable contract remains on foot, such a restitutionary claim is not available – Pavey & Matthews Pty Ltd v Paul. The entitlement to payment and the recovery of benefits would have been entirely covered by the contract. Your entitlements to consideration and the obligations of performance are all governed by the contract, with no room for a restitutionary claim, and that was the ultimate point of the case.

Ken: all it really means is that the concept of restitution would not apply when the contract itself essentially subsumes all the rights of the parties (as was found in Perum itself). Your entitlements to consideration and the obligations of performance are all governed by the contract, with no room for a restitutionary claim, and that was the ultimate point of the case.

Ken: Additionally a person who partially performs pursuant to an enforceable contract ordinarily cannot recover a reasonable price (known as a quantum meruit in the case of services and a quantum valebant in the case of goods) for the provision of those goods or services. This is known as a restitutionary claim.

Quantum Meruit – A person who partially performs pursuant to an enforceable contract ordinarily cannot recover a reasonable price for provision of services (but they can make a restitutionary claim for Quantum Meruit)

Quantum Valebat - A person who partially performs pursuant to an enforceable contract ordinarily cannot recover a reasonable price for provision of goods. (but they can make a restitutionary claim for Quantum Valebat).

Severable or Divisible Contracts

If the contract is divided into parts, the performing party may be entitled to payment for that part of the contract that he has performed. (Common for building contracts).


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An entire contract/entire obligation, is one in which, the consideration for the payment of money or other counter performance is entire, indivisible and not separable (Baltic Shipping Co v Dillion, Steele v Tardiani etc).

If a contract/obligations is entire its complete performance is a condition precedent to payment or counter performance: (Phillips v Ellinson Brothers Pty Ltd, Hoenig v Isaacs etc.)

The question whether a contract/obligation is entire or is divisible is a question of construction.

Eg A building contract may provide for periodic payments with the result that performance of part of the contract may entitle the builder to payment.

Similarly with the sale of goods by instalments – but this would not always be the case. This could only apply to goods of the same generic type of course – the supply of a kit car for example would not fall within that category (so if you made a contract for the delivery of a kit car, and the parts were to be delivered in instalments, the seller (subject to the qualification mentioned in the para below) would prima facie not be able to recover anything for delivering the door or exhaust only. This would be different if the contract was say to be for the delivery of a quantity of wheat in identical instalments of 10 tonnes each.

Obstruction of Performance (How is this different to prevention of Performance?)

Ken does not discuss this.

A party who has partially performed his or her obligations but further performance is prevented by the other party may be able to bring a restitutionary claim against the party who obstructed performance.

The de minimus non curat lex rule

Means: “the law does not concern itself with trivialities”.

Where alleged breach of contract a court ‘will not regard or give effect to what are undoubtedly, in the view of the court, trivialities or of a trifling or negligible nature’. – Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London. See 22.36.

Free Acceptance

There is an important qualification to the principles of severability (divisibility) is where one party has “freely accepted” the benefit of the partly performed works or partly delivered goods under contract which has been breached.


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In cases where there has not been exact performance, the party who has not so performed may be able to bring a restitutionary claim for a reasonable sum for the work done and materials supplied if the other party has accepted the partial performance.

The critical aspect for such claims is that the other party has a real choice as to whether or not to accept the partial performance.

If there is no real choice but to accept the partial performance, a restitutionary claim is not available – Sumpter v Hedges, Steele v Tardiani

Sumpter v Hedges – Leading case on this point: is based on whether the circumstances are such that the party taking the benefit, must have “an option to take or not to take the benefit of the work done”.

Must be a “real choice to accept the partial performance” – 22.42.

Ken: For construction work, it is difficult to imagine a situation where there could ever be “free acceptance” – the owner would really have no “practical choice” other than to take the partly completed works as they are as was case in the leading example of Sumpter v Hedges – see paragraph 38.25 Text. (The alternative being to pull down the building and be put to even greater trouble and expense). In such a case, for partially completed work, ordinarily the builder would have no remedy.

Sumpter v Hedges – Building contracted to build, abandoned build before completion, owner completed at their expense, Builder could not sue on a quantum meruit for the value of the work carried out.

Sumpter v Hedges is useful as there was a second limb to it – apart from the construction work itself, the builder had left behind certain building materials (this is a separate aspect of the case). In the circumstances of that case the owner had a simple choice of rejecting the materials but did not do so and in that case, the owner was obliged to pay a “reasonable price”.

Another useful illustration of the “free acceptance” principle is contained in Steele v Tardiani. Related to the cutting of wood, which was not performed in accordance with the contract because the wood was not cut in accordance with the dimensions prescribed in the contract. The following are important observations from that case (para 38.26 text):

(i) Because the plaintiffs had not substantially performed their obligations under the contract, recovery on the contract was not possible. We will study substantial performance (a term of art) further below but for now, please appreciate that this part of the discussion concerns itself not with “substantial performance” but with the concept of restitution, which is based primarily on the establishment of “free acceptance” of the deficient or incomplete works (as the case may be).

(ii) In order to recover remuneration it had to be established that the defendant had obtained the benefit of the works and that it had “acquiesced in” the works with the result that the defendant then


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incurred an obligation to pay the value of the work done” (class – note that the obligation was to pay the “value of the work done: – not the contractual price – it has been already noted that not having performed under the contract, recovery on the contract was not possible). The methodology of the computation of the value of the work etc is nicely discussed in Sopov v Kane at para 38.27 of your text.

Lets take the example of the kit car mentioned above: the kit manufacturer probably would not have a good argument to recover a reasonable amount based on “free acceptance” merely if the recipient had disposed of it on the basis that it was too onerous and difficult to return it – the purchaser would have had to organise shipping and transport.

There are several subsidiary scenarios that could however arise:

i. Say there was a simple opportunity to reject it (say where he was in easy regular or daily contact with the supplier) but he didn't avail himself of the same then (like the case of the building materials in Sumpter) a good argument could arise that the purchaser would have been seen to have freely accepted the goods.

ii. Certainly if the supplier had requested its return then (subject to any claim in damages the purchaser may have for incomplete performance) he would have been bound to return it provided this could be achieved as a “practical choice” – which would depend on the degree of inconvenience that this may cause. If he did not do so, then he would have to pay a reasonable price based on a restitutionary claim.

iii. If neither party bothered to contact the other then on balance a rather provisional view is that the recipient would not be obliged to pay a reasonable (or any) price for to do so would be to place a burden on the innocent party – but this is a provisional view only.

Incidentally, much of the law at least with respect to goods has been subsumed by legislation and it is not intended to cover these in this unit.

Lumbers v W Cook Builders. Sub-contracted work to sister company Cook Builders.

The concept of “free acceptance” was complicated by the rather fact that the party that “did the work” and which made the claim, as not the party to the contract but a related party to the original party which had done the work. That, in a somewhat truncated nutshell, is a summary of the difficulties that are elaborated upon in some greater detail in paragraph 38.29. The reference to “contractual allocation of risk” mentioned at paragraph 38.30 of your text is ultimately I think a reference to the fact that contractually, the only party entitled to make a claim would have been the party that contractually was bound to do the work. In Lumbers the difficulty was that the party who was in fact contracted to do the work (“Cook and Sons”) did not actually do the work and thus could make no claim!


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The party that did do the work “Cook Builders” failed also not being under any original contract to do the works.

Unenforceable Contracts

Example of unenforceable contract is where the contract is unenforceable due to non-compliance with a statutory writing requirement. If work done under such contract, can a party accepting and receiving the benefit be forced to make restitution?

Referred to as claims for an award by way of quantum meruit.

Leading case Pavey and Matthews v Paul.

• P&M licenced building company, supplied materials and carried out work for Paul. • Oral contract only. Agreed P&M would do the work and be paid ‘A reasonable

remuneration for that work…”. • After work completed and Paul had accepted the benefit of it and taken up

occupation of the renovated cottage, P&M sued for claiming the balance owing for work.

• P&M’s claim was for money payable as on a quantum meruit. • Paul’s defence was the contract was not enforceable by the builder as s 45 of

Building Licencing Act requires contract not enforceable unless it is in writing signed by each party.

• Issue before High Court was whether the words of the section were to be construed as applying to preclude a plaintiff from suing to recover recompense for building work completed under an oral contract in circumstances where the work has been fully completed by the plaintiff and accepted by the building owner.

• Majority upheld P&M’s claim to be paid for the work done on the basis that Paul, having accepted the benefits accruing from the unenforceable contract, would have been unjustly enriched at P&M’s expense if payment was not made.

Whilst it was held that the plaintiff was unable to claim under the unenforceable contract the claim was ultimately allowed on the basis of restitution. The following was the basis of the decision:

a. The claim was not on the basis of the indirect enforcement of an unenforceable contract.

b. Rather the true basis of the claim was on the fact of having done the work and the defendant’s acceptance of the work without paying the agreed remuneration.

c. The end result was that the plaintiff recovered a quantum meruit or restitution based on “unjust enrichment arising from one party’s acceptance of benefits


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that accrued from the other party’s performance in circumstances where there was either no contract or an unenforceable one” – para 38.3 Text.

Substantial Performance

Where substantial performance, but not enough to activate the de minimus non curat lex rule, the defaulting party may still retain and enforce rights. 22.37.

Whether or not there is substantial performance is a matter of construction.

Doctrine approximately: unless the contract expressly makes exact performance of the obligation a condition precedent to the payment of the contractual price, if the plaintiff has substantially performed his obligation he is entitled to recover the contract price subject to a reduction in cost of any remedial work that has to be done.

Classic Case: Hoenig v Isaacs.

• Isaacs agreed to redecorate Hoenig’s flat for sum of 750GBP. He was to be paid ‘as the work proceeds and balance on completion’.

• Hoenig made some progress payments but refused to pay the balance because of poor workmanship.

• Isaacs sued for the outstanding amount. • Hoenig argued that the contract was an entire contract in which Isaacs had promised

to complete the job and that this was a prerequisite to full payment. • The cost of remedial work was 55GBP. • Court held that although works partially defective, the defects where easily

correctable. Further, held that plaintiff had substantially performed his obligations. • Isaacs entitled to contract price less the cost of remedial works.

The relevant aspect of that case as far as this topic is concerned is that where a contracting party has breached his contract by not completing the contract but has “substantially performed” his or her obligations, then he or she is entitled to recover the contract price less a reduction for the remedial work that has to be done.

The obvious and rhetorical question then becomes “what IS required to satisfy the requirements of “substantial performance”. Once again, the answer is easier illustrated than actually defined. The following are some collective observations on this point:

(1) Where the defects are “easily correctable” the court is more likely to find that substantial performance has been satisfied. In the circumstances of Hoenig v Isaacs the cost of the remedial work was just GBP55 (though that was worth more in those days!).

(2) If the extent of the defective performance is serious then the court will conclude that substantial performance has not occurred – see eg Bolton v Mahadeva and para 22.40 Text. Contract price for installing hot water system was $560, remedial work was $174 – substantial performance had not taken place.


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(3) The court in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd suggested that at least in a case of building contracts the courts might be reluctant to treat a failure to complete as disentitling the builder to his remuneration altogether but that the proprietor might have a set off or damages for the cost of completing the works – see the more complete discussion at paragraph 22.37.

“In the case of contracts which appear to be entire contracts, particularly lump sum building contracts, courts have been reluctant to construe complete performance of the works as an essential pre-condition for payment. Rather, in circumstances where there has been substantial performance, they have treated a failure to complete as a breach of a non-essential term of the contract not disentitling the builder to contractual payment for the work done but, rather, giving the proprietor a right of setoff or claim for damages for the cost of completing the work or rectifying the defect.” – Bathurst CJ

Highmist Pty Ltd v Tricare Ltd. Substantial performance did not apply because it was a condition of contract that performance be exact.

• Sale of land to be subdivided. • Contract permitted the size of land to be no more than 3% less than was shown on

plan. The subdivision of land resulted at 3.015% less than indicated on plan. • Issue arose as to whether the vendor had substantially performed its obligation in

relation to the plan of subdivision. • Court ruled that the question of substantial performance did not arise in this case

due to explicit requirements of special condition of the contract – “to excuse this failure because the amount by which the specifications of the plan deviated from those stipulated in the contract were ‘small’ would be to deprive the terms agreed upon by the parties of any real meaning”.

There is still very limited guidance as to just what level of performance is regarded as sufficiently “substantial” such as to entitled the promisee (of the promised consideration) at least to sue for his consideration, albeit subject to a set off or damages. In the case of a building, which is a large and time consuming undertaking, one can more easily see the logic behind the suggestion that a builder, who had completed, say, a significant amount of the works should be entitled to some remuneration.

The starting point in attempting to answer this question is that the issue of “what level of performance is required to be performed in order to discharge a contract” is a rule of construction and not law. And that the rationale behind this rule is that the promisor’s obligations are seen as entire and indivisible.

Based on this rationale, this explains the rationale behind the findings in each of Cutter v Powell, Sumpter v Hedges and Re Moore and Landauer (to the effect that in those cases, the contracts in question had not been discharged by performance).

On the contrary, the cases in which the substantial performance principle has been invoked successfully are not that numerous. Hoenig was such a case. The example of Cordon


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although obviously sensible, can perhaps be rationalised that it was a building contract, which as mentioned, involved lengthy and time consuming work and this might justify the “reluctance” of the court to disentitle the builder to remuneration altogether.

It can probably be said as a fair generalisation (but still a generalisation) that for a contract to be discharged by performance, then performance does indeed have to be precisely in accordance with the contract, subject to the rules relating to substantial performance, but that the doctrine of substantial performance is sparsely applied.

One important practical difference to a litigant is that where substantial performance of a contract has been effected, then the party seeking to enforce the payment would not have to rely on its restitutionary claim for the recovery of monies.

Substantial performance has difficulties of its own, whereas of course the practical difficulty with establishing a restitutionary claim is establishing the fact of “free acceptance”.

Addendum

Complete/Substantial Performance vs. Restitution.

Restitutionary Claim where there is a Valid Contract?

Text 22.29 - A party who partially performs cannot make a restitutionary claim based on quantum meruit because of the principle that where an enforceable contract remains on foot, such a restitutionary claim is not available – Pavey v Mathews.

The passage has potential for confusion… might seem to suggest that the very existence of an enforceable contract actually precludes a restitutionary claim.

In one sense, that is correct – if an enforceable contract exists then either it is performed or substantially performed and if neither, then there are neither contractual rights nor a restitutionary claim per se under that contract.

All that really means is that the existence of the contract would govern the rights of the parties under the contract ie as to the recovery of consideration, or restitution… If you cannot recover your contractual consideration, then neither could you recover a quantum meruit under that contract – Perum is a prime example.

What the passage doesn't explain is that if the requirement of free acceptance is otherwise satisfied, then in performing the contract (whether partially, incompletely or otherwise) the promisee (of the consideration) should be entitled to a quantum meruit (a reasonable amount). Such a claim however would not be under the contract but would be restitution- based – Pavey v Matthews.

It is not suggested in that passage or anywhere that the satisfaction of free acceptance would actually preclude the promisee from recovering a reasonable sum simply because a valid contract


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was in existence (the absurdity of the situation is clearly manifest by recognising that if that were so, the existence of a valid and enforceable contract would actually put the promisee in a worse position in terms of recovery than if NO contract existed).

In order to explore how this might work, let us take a situation in which the promisee has performed completely under the alleged contract and has discharged all his contractual obligations (at least, on the promisee’s own version of events). Let us also assume that the requirements of free acceptance have been satisfied (or so he would argue). The promisee however knows that the existence of the contract and its terms will be disputed. He therefore puts his claim on two alternative bases – UNDER the contract; and quantum meruit based.

Substantial Performance vs. Quantum Meruit/Valebat/Reasonable Sum

Discharge by Performance requires the satisfaction of discharge.

Discharge can happen in several ways:

• Full performance • De minimus rule satisfied (rare) • Where principles of substantial performance are satisfied • Where contract is divisible in which case the promisee is entitled to the pro rated

consideration for each divisible part of the contract that is full (or substantially) performed as the case may be (Steele was an example of the latter).

BUT in ALL cases of discharge by performance (and the entitlement to consideration as a result thereof) as mention above, by definition the right to the remedy does depend on the fact of discharge to the requisite level.

Restitution is an entirely different concept. The entitlement to restitutionary relief depends not on establishing the fact of discharge of the contract but rather on the fact of “free acceptance”.

Check these for correctness:

Enforceable Contract… Discharge of contract by way of Full Performance/De minimus rule/Substantial Performance/Contract is divisible (Full or substantial performance of part of contract) then… relief by????

Unenforceable contract (eg by non compliance with statutory requirement) … prove “free acceptance” occured… then claim of quantum meruit (fair price) based on unjust enrichment (to client receiving benefit) (Pavey & Mathew v Paul)

Making Claim ON the Contract:

Full Performance = Full claim of contract sum

Partial Performance = No Claim

Substantial Performance = Claim for contract sum, minus costs of rectification


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Di minimus rule = Performance so close to being exact the law will consider as full performance.

(Divisible contract – Full/Partial/Substantial/di minimus rules apply to single part of obligation).

Making Claim for Restitution (Not ON the Contract (nothing to do with the contract)):

If can prove “free acceptance” = claim for restitution/ quantum meruit or quantum valebat

Week 2 – Discharge by Agreement / Frustration └ Frustration

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Week 2 – Discharge by Agreement / Frustration

Discharge by Agreement (Generally) The parties to a contract may discharge by abandonment, subsequent agreement or pursuant to a term within the original contract.

Either way, the parties’ outstanding obligations under the original contract are discharge, no enforcement action can be brought against with respect to those obligations.

The parties’ future obligations and rights will be brought to an end. – 23.1

Discharge by agreement can be achieved by:

1. Abandonment 2. A contractual term within the original contract 3. A subsequent agreement

Furthermore a party to a contract may relinquish enforceable rights against the other party under the doctrine of waiver.- 23.1

Discharge by Abandonment

Both parties can agree to abandon a contract. The principle requirement is that it requires both parties to abandon a contract before a contract can be said to have been discharged by the abandonment by agreement of both. The problem would typically arise when both parties have conducted themselves in a particular way, then one party asserts that the contract is still “alive” and the other party that it has been abandoned.

Discharge by abandonment = inferred agreement to abandon contract. (no offer or acceptance needed for new agreement as is inferred by conduct of parties).

Contract can be discharged if abandoned. Abandonment of a contract cannot be effected by one party alone, both parties must abandon. – 23.2

In any contract it is possible for the parties to so conduct themselves as mutually to abandon or abrogate it. In other words did the parties by their ‘external manifestations’ evince an intention to abandon or abrogate the agreement. If they did the agreement will be discharged – Summers v Commonwealth.

23.3 Classic Statement relating to abandonment Fizgerald v Masters (1956):

“There can be no doubt that, where what has been called an ‘inordinate’ length of time has been allowed to elapse, during which neither party has attempted to perform, or called upon the other to perform, a contract made between them, it may be inferred that the contract has been abandoned…

What is really inferred in such a case is that the contract has been discharged by agreement”.


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Ken: The classic general statement of principle is contained in Fitzgerald v Masters – which invites the inference of abandonment from a long-continued ignoring of the contract, over an “inordinate” length of time which would lead the parties to infer that “the matter is off altogether”.

Another way of looking at it in J R Marine Systems Pte Ltd v Wavemaster International Pty Ltd:

“Contract may be said to be abandoned where the court infers that the parties, by their conduct, have discharged their contract by further agreement. The further agreement, being inferred from the parties conduct, does not depend upon the sequential offer and acceptance. Also, being an inferred agreement, it does not depend upon the subjective intention of the parties, but upon whether, objectively, their conduct manifests an intention to discharge the contract.”

Formalities of an agreement are relevant factors to determining discharge by abandonment. Length of term, etc. It may be more difficult to infer an agreement of abandonment where the parties have, in setting up their contractual relationship, expressed in detail the terms as to termination. – Fazio v Fazio.

“Where it is plain from the conduct of parties to a contract that neither intends that the contract should be further performed the parties will be regarded as having so conducted themselves as to abandon the contract…

Whether there is abandonment is a matter of fact to be inferred from an objective assessment of the conduct of the parties…

The underlying premise of the abandonment cases is that a period of time elapses during which neither party to the contract manifests any intention to perform the contract, leading to the inference that the contract has been abandoned.” – Ryder v Frohlich, McColl JA

Ken: More specifically, it is thus a matter of inference, from the objective analysis of the conduct of the parties (not what the party may or may not actually have been thinking) whether there is evidence of a mutual abandonment of a contract – see Summers v Commonwealth; Ryder v Frohlich; DTR Nominees v Mona Homes Pty. Ltd

The question whether an ‘inordinate length of time has been allowed to elapse’ is relative. In DTR Nominees Pty Limited v Mona Homes Pty Limited, HC was prepared to infer abandonment after a period of less than 5 months has elapsed during which neither party took any steps to perform the contract.

In Fitzgerald v Masters it was held that a contract for the sale of land had not been abandoned even though proceedings for it specific performance were not commenced until 26 years after its execution.


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It is not necessary for the court to examine whether the parties themselves actually had the intention of abandoning the agreement. The only question is whether the parties conduct, when viewed objectively, manifests such an intention – GCM Investements v Chilliah (2003).

Extrinsic evidence of the parties conduct is admissible to determine whether a contract is abandoned. – Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd.

“(Abandonment) can be more readily be discerned where one or more of the parties have ineffectively attempted to bring the agreement to an end and both parties behave as it if were ended.” – Wallera Pty Ltd v CGM Investments Pty Ltd, Kiefel J.

In case where contract has been held to be abandoned, any deposit that may have been paid pursuant to that contract is to be returned to the party that paid the deposit. – Summers v Commonwealth.

Ken: The following principles can generally be distilled from the abandonment cases in your Text:

a. The most obvious instance of abandonment is simply where after an inordinate period of time, neither party has acted on the contract.

b. What is an “inordinate period of time” isn't necessarily absolute – it all depends on the nature of the contract. In some cases, a few months may be enough and in one extreme case, 26 years would not be too late (see the discussion of Fitzgerald v Masters in Ryder v Frohlich discussed at para 23.5 Text).

c. Where one party actually takes steps to bring the contract to an end and the other party says nothing – see eg Wallera at para 23.7 (and there are obvious arguments that one can immediately see based on estoppel).

Discharge Pursuant to a Term of the Original Contract

A term of the contract may enable the contract to be terminated if a certain breach occurs. Alternatively, a term may discharge the contract if certain circumstances arise. -23.9

In such cases this is usually known as a ‘condition precedent’ or a ‘condition subsequent’.

Ken: There are three generic instances wherein a contract can be discharged pursuant to a contractual term (each giving rise to quite separate treatment):


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a. Where a contractual right to terminate arises upon breach.

b. Upon the non-satisfaction of a condition precedent.

c. Upon the occurrence of a condition subsequent.

Each dealt with in turn below.

Contractual Right to Termination upon Breach

A contract can contain a provision whereby, if a certain type of breach occurs, a party has the right to terminate the contract. (it is not a termination that arises from a repudiation of the agreement… see ch 24). – 23.10

If a contract is silent on what will discharge the parties’ obligations or on the consequence of termination, it may be that such a term can be implied into the contract. – 23.11

“The existence of the term is a matter of construction… question of construction does not depend only on textual examination… it also considers the subject matter of the agreement, the circumstances in which it was made and the provisions to which the parties have or have not agreed.” – Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd, McHugh JA.

If such a term is implied, the normal rules relating to implication of terms apply as set out in BP Refinery. -20.12

It may be possible to imply a term to terminate a contract where it has been abandoned after being partly performed – Fitzgerald v Masters. -20.12

Ken: Let’s test this by way of some examples:

a. Take the case for an ongoing contract for the supply of goods and services of no fixed duration. It is likely that an implied term would arise under that contract that it is terminable at will upon reasonable notice by either party (and what constitutes “reasonable notice” would depend on the nature of the actual contract including the nature of the goods/services supplied.)

b. On the contrary, it is less likely that a joint venture for a particular project would be terminable at will upon reasonable or any notice. Rather, the more natural inference is that parties would have intended that the contract would not be terminated until the completion of the project.

Ken: The study of the manner in which a contract is thus brought to an end by breach will be otherwise covered more completely when we discuss discharge by breach next week.

Conditions Precedent

A condition precedent is a provision which sets out one of two consequences in the event of a certain event not occurring.


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The first possible consequence is that a contract will not come into existence unless a certain event occurs.

OR

The second is that a party’s obligation to perform does not arise, unless a certain event occurs. -23.13

“There is an obvious difference between the condition which is precedent to the formation of a contract, and the condition which is precedent to the obligation of a party to perform his part and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment.

In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled.

In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of a party, or perhaps of both parties, to perform depends on fulfilment of the condition and non-fulfilment entitles him to terminate.” –Perri v Coolangatta Investments Pty Ltd, Mason J

When construing such provisions courts tend to favour a construction that the provision is a condition precedent to the performance of a contract and will only rule that it is a condition precedent to the existence of a contract where the contract compels such a conclusion. – Perri V Coolangatta Investments 23.14

Ken: authorities show a disposition to treat the non-fulfilment of such a condition as rendering the contract voidable rather than void (the former presupposes that the contract has indeed been brought into existence in the first place).

If the provision is condition precedent to the formation of a contract, then either party can withdraw from the transaction at any time before the occurrence of the event without being liable for damages for breach of contract. 23.14

If the provision is a condition precedent to the performance of an obligation by one of the parties, the non-occurrence of the event either automatically terminates the contract or confers a right to terminate the contract on one or both of the contracting parties – Suttor v Gundowda Pty Ltd.

In such cases the courts tend to prefer the latter if possible (confer a right to party or parties to terminate contract). – Perri v Coolangatta Investments.

Ken: The failure of that condition may then have the following possible consequences: the “innocent” party could bring the contract to an end or that it automatically terminates the contract; or that the non fulfilment of that condition may well amount to a breach that could give rise to remedies on the part of the innocent party includisubjecng damages in addition to the right to terminate.

23.15 – NSWCA held that nothing in Suttor precluded a court giving effect to a clear and explicit term in a contract which stipulated that the contract would be automatically terminated if a


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condition precedent was not satisfied. (Reinforces the principle of construction of contracts that courts give effect to ordinary and clear meaning of the words used.)

However, this approach was rejected by QLD CA in Quinn Villages Pty Ltd v Mulherin.

Perri v Coolangatta Investments – example of case involving a condition precedent to the performance of an obligation. 23.16

Perri’s contracted to purchase land in April 1978. A term of the contract stated that the contract was “entered into subject to the Perris completing a sale of their property No 9 Karokan Rd, Lilli Pilli.”

The contract did not fix a time for the completion of the sale of the property, nor did it contain any promise that the sale would occur.

The Perri’s made no arrangements to sell their property until March 1979. In August 1978, the vendor gave notice requiring completion of the contract and on expiry of this notice formally issued a notice of termination. The Perri’s challenged the validity of the termination and asked the court to order specific performance of the contract.

The HC held that the vendor had validly terminated the contract before the Perri’s began proceedings for specific performance.

The condition making the contract subject to the sale of the property was a condition precedent to the performance of the contract and not one going to its formation. The court held that a contract existed but the obligation to proceed to completion of the sale was contingent on fulfilment of the condition.

Neither party could withdraw and there were obligations on both sides. Furthermore, the court implied an obligation that the Perri’s would make all reasonable efforts to achieve the sale of the property. The HC held that failure to do this would lead to breach of contract and the liability for damages.

Non-fulfilment entitled the other party to terminate. If neither party elects to terminate, the contract remains on foot.

George v Roach – example of condition precedent to formation of a contract.

Agreement for the sale of a newsagency stipulated that the sale would be at a price to be determined by the named valuer. The valuer refused to value the newsagency.

HC held that the valuation by the named valuer was a condition precedent to the existence of a contract.

Ken: Further guidance as to how to characterise such a term (as to whether it is a condition precedent to formation rather than performance) can be distilled a bit further down in your Text at paras 23.17 – 20.22 of your Text. For convenience, the following principles have been distilled in a general sense:

a. The court (as noted above) is guided by the notion that it prefers the construction that a condition precedent is a condition precedent to performance because this construction would enable an innocent party to bring the contract to an end (as the contract would


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already have been in existence) as well as expose the wrong doer to an action for certain remedies for breach for the non fulfilment of that condition.

b. Where the condition precedent contains both a condition as well as a promise (including an implied promise) then the court will be likely be minded to treat the condition as a condition precedent to performance, giving the innocent party a right if he wished to terminate, sue for damages, or not perform – see the discussion at para 23.18 Text. This is entirely logical – for if the condition was one to formation, then by the non-fulfilment of that condition, there would be no contract that could be breached and this would be of little comfort to the innocent party.

c. Conversely, if the condition is of a type that does not attach to it any obligation on the part of either party (luck or chance, etc), then the court would be more minded, in that situation, to treat the condition as a condition precedent to formation rather than performance – there would be no wrong doer who could by his breach bring about the non fulfilment of a condition. An example of such was George v Roach at para 23.17 Text. This likewise makes perfect logical sense. For the sake of illustration only, I will here use a far fetched example – say there is a condition that A will sell certain land to B when the moon turns to blue cheese. Now, that is the “type” of condition that no notional wrong –doer could bring about the non fulfilment of, and thus the predisposition in favour of the finding that a term should be a condition precedent to performance, would not apply. Leaving aside the obvious absurdity of such a condition, the court will be minded to consider that such a term is likely to be a condition precedent to formation (though it might not make much difference – this is simply for the purposes of illustration).

Ken: The next logical question that could arise is: “how is an innocent party affected by a non-fulfilment of a condition precedent to performance?”:

This question was explicitly and comprehensively considered in a relatively recent decision of our Court of Appeal decision namely Killarney Investments Pty. Ltd. v Macedonian Community of WA (Inc) [2007] WASCA 180 in which (incidentally) I acted as counsel.

Ken: The following can fairly be said to be general principles that can be distilled from an examination of the authorities in cases in which there was the non fulfilment of a condition precedent to performance:

a. The contract would be subject to termination by either party if not in default (but the contract would not be automatically terminated) – see page 26 Killarney and Cheshire and Fifoot page 992; paragraph 23.16 Text.

b. If one party was in default, the obligation of the other party to perform would not arise and that party could choose to terminate the contract but that automatic termination would not take place - paragraph 23.13 Text and Killarney page 26.

Ken: Interestingly, many of the major cases in this category seemed to involve obligations concerning the sale and settlement of land eg:


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a. Killarney – where the condition in question concerned the obligation on the part of a vendor to take steps to subdivide the subject land, and one of the subsidiary issues under discussion was the consequence of the non-fulfilment of that condition ie whether the contract was automatically brought to an end or whether the innocent party (the purchaser) had the right if he wished to terminate the contract and/or to pursue further relief under the contract (it was found to be the latter).

b. Perri v Coolangatta - again a case involving the sale of land. The contract was conditional on the Perris (the purchaser) completing a sale of their property (a very common clause in real estate law). There was found to be an implied obligation on the part of the Perris to take reasonable steps to sell their property, failure of which entitled the vendor to terminate the contract and to seek damages from the purchaser.

Ken: The expression Subject to on its true and correct construction ordinarily indicates that there is an obligation on the person, whose benefit the clause has been inserted, to use certain endeavours to satisfy the clause in question.

This type of clause is particularly common in the case of real estate contracts, where the sale in question is variously often made “subject to finance”, or to the sale of the purchaser’s property – as in Perri itself. It is “for the benefit” of the purchaser because it means that if the clause is not satisfied, the purchaser then is entitled to bring the contract to an end.

Some general principles arise from an examination of the cases:

a. The expression subject to finance would imply an obligation on the part of the borrower to take certain steps to obtain finance - Meehan v Jones [1982] HCA 52 and it appears (on the authority of Meehan discussed below) that it would not matter greatly if the words “finance satisfactory to the purchaser” were or were not present – at paragraph 21 of that case. The same construction would apply to a clause such as Subject to sale.

b. In Perri v Coolangatta Investments (1982) 41 ALR 441 it seems to have been accepted without more that the obligation where such a clause was invoked, was to take reasonable steps to effect the fulfilment of the condition in question before the party seeking to do so was entitled to do so.

c. Such clauses are not void for uncertainty – Meehan.

d. Your text also appears to accept (on the basis of Perri) that the obligation under such a clause was indeed to take steps that were “reasonable”.

e. The question of whether one did require the taking of “reasonable” steps in order to obtain the benefit of such type of condition, is actually not that certain.


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f. Meehan is generally considered to be a leading authority on this point (it was a decision of our High Court) albeit the guidance is rather difficult to follow. The following points were therein made:

i. There is an obligation to act honestly but the court was rather divided as to whether there was also a duty to act reasonably.

ii. The cases went both ways – and these are described at paragraphs 26 – 28.

iii. Ultimately the court did not form an ultimate conclusion on this point.

g. I would have thought that the more likely reading of Meehan is that there is indeed an

obligation to act both honestly and reasonably. This view seems to be one that is supported implicitly by the observations in Perri and also seems to be accepted by the authors of your text.

h. Whilst that view is open (and I personally prefer it), it seems that the doubt expressed in Meehan (as to whether it was sufficient merely to act only honestly or if there was also an obligation to act reasonably as well) continues. Thus in Erley v Gunzburg [Lib No 980153] our Court of Appeal referred to the fact that in Meehan v Jones “in that particular case, it was not necessary to decide whether the purchaser in deciding whether finance is on satisfactory terms, is bound to act honestly or whether he is also bound to act reasonably”.

i. From a practical point of view, although the difference may in some cases be significant, it can also perhaps be suggested that there may not be that much of a practical difference in an everyday sense. This is because an act (or omission to act, as the case may be) that was so unreasonable (such as to refuse a perfectly “reasonable” – I use the word loosely – offer of finance) would likely to amount to acting other than honestly, as well as unreasonably. Nonetheless, the distinction is potentially a significant one and one which you must be conscious of, particularly as precise guidance on this point seems somewhat limited. We will test this in tutes.

Conditions Subsequent

This is the obverse of a Condition Precedent.

Recapping: a condition precedent was an event which had to be satisfied or take place for the contract to be brought into existence or which had to be satisfied for the obligation of the parties to perform to take place.

A condition subsequent is one which brings the performance of the contract to an end or which entitles one party to terminate the contract.

Condition subsequent, on occurrence of a particular event, further performance of the contract automatically comes to an end or the contract can be terminated by one or both of the parties.


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Courts tend to favour finding that one or both parties have the right to terminate the contract rather than it coming to an end automatically. (Same as with conditions precedent) – 23.20.

Ken: For students of contract, the far more important questions (rather than characterising the condition as a condition subsequent or precedent) are as follows:

a. Does the clause on its construction give one party the right to terminate or is the contract automatically treated as at an end by the non fulfilment of the condition in question.

b. In either case, what is the position of the innocent party?

Each of which has been dealt with under the discussion on conditions precedent.

Head v Tattersall, seller of a horse stated that the horse had hunted with Bicester hounds and further that the buyer could return the horse if it did not fit that description. The horse did not answer to the description and the buyer returned the horse, buyer entitled to refund of the purchase price.

Discharge by Subsequent Agreement

23.23 Parties to a contract may agree to enter into a subsequent agreement to vary or terminate the original agreement.

“When parties to an existing contract enter into a further contract, then they have made two contracts. It may then be material to determine whether the effect of the second contract is to bring to end the first and replace. Or, whether the effect is to leave the first standing subject to the alteration.” - Commissioner of Taxation v Sara Lee Household & Body Care

Ken: The following outcomes could result from an agreement to discharge the original agreement:

a. The agreement could merely be to discharge the original agreement and not substitute it for anything (known as a discharge simpliciter). 23.25

b. The original agreement remains on foot but the agreement could be to vary the original contract.

c. Finally, there could be an agreement to terminate the old contract and substitute it for a new contract. This could be as between the original parties, or where a new contracting party is substituted. This is known as a novation. Novation involves the extinguishment of the old obligation and the creation of a substituted obligation in its place. Both the old and new parties (as well as the continuing party) must be present to a novation.

“Novation is a transaction by which all parties to a contract agree that a new contract is substituted for one that has already been made…. The extinguishment of one obligation


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and the creation of a substituted obligation in its place. Intention is crucial to show a novation” – Fightvision Pty Ltd v Onisforou

Novation may result in a new contract between the parties, or a new contract between one of the parties and a new party – Scarf v Jardine.

In many cases it is a difficult question as to whether the parties intended the second or third of these outcomes. It can be noted that the degree to which the original contract has been modified will be a relevant factor in ascertaining the parties’ intention: Lahoud v Lahoud.

Ken: Finally (and briefly) there is a separate concept called merger. A typical case of merger is in an everyday contract for the sale of land. Initially the parties enter into a contract by offer and acceptance. Then on settlement the purchaser hands over the purchase price and the vendor hands over (“conveys”) the certificate of title. The effect of this (in legal terms) is that the parties rights are thereafter governed by the conveyance and the original contract is said to “merge” into the conveyance. The conveyance will thereafter govern the parties’ rights and obligations.

The major issue that arises in respect of discharge by variation, termination or novation as the case may be, is whether the agreement of discharge (whether it be by way of variation, termination simpliciter or novation as the case may be) needs to be in writing, and whether issues of consideration arise.

The treatment of this in your Text is to discuss discharge of executory and then executed contracts separately:

Discharge of Executory Contracts (Not yet performed)

The requirement of writing for executory contracts obviously only becomes material in respect of a contract which is required to be in writing in the first place (the most common of which is obviously a contract for the sale or disposition of an interest in land).

If the original contract is of a type that needs to be in writing, the following basic rules relating to writing for a contract to discharge that contract:

Requirement of Writing

a. A termination simpliciter (in other words, a simple termination with no surviving obligations) does not need to be in writing, even if the original contract was a type which is required to be in writing – Tallerman v Nathan’s Merchandise.

b. A variation of such a contract would need to be in writing eg (if the parties agree say to vary the purchase price of the house or the rent). – Agricultural & Rural Finance Pty Ltd v Gardiner.


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c. If parties want to terminate the original contract and replace it with a new agreement, the subsequent agreement needs to be in writing if the new agreement is one of a type that has to be evidenced in writing – 23.33.

Consideration

a. Such a contract as with any contract, would require consideration (unless in form of a deed) for the mutual promises (ie we promise each other to that we will treat the original contract as discharged and/or will vary the same) to be binding.

b. But consideration in this situation will not usually be a problem or issue because the consideration is not to sue on the unperformed obligations of either party (remember that where the contract is executory the parties have not yet performed their respective promises). 23.34.

Discharge of Executed Contracts (Performed)

Issue of whether the discharge of an executed contract by a subsequent agreement needs to be in writing, the same principles apply as with executory contracts above.

This is a significantly more complex area (consideration).

For a start, the party that has not yet performed its obligations must provide consideration for the plaintiff’s promise not to sue. 23.36

Ken: Remember in order to enforce the compromise the promisee had to provide consideration for the promise for payment, ie the promisee had to provide something of value. eg a bona fide belief that he had a valid cause of action in order to compel the promisor to pay the monies – see Wigan v Edward.

Ken: Here we are dealing with the issue of consideration from the point of view of the person who has (allegedly) incompletely performed its obligations and who is being sued by the “other party”. Thus, it is the person who has allegedly incompletely (or defectively) performed his obligation who needs to demonstrate that he has provided consideration in order to resist some action by the other party.

(This is the logical “flip side” of the situation that we covered in contract 1, where it is the alleged creditor/person suing under the contract, who needs to demonstrate consideration).

The promisee in the present context similarly is the one who is endeavouring to enforce some compromise/accord/agreement (and here you will see that the expressions are used somewhat interchangeably in the text) but here, it is the person who allegedly has incompletely or improperly performed his obligations and who needs to furnish consideration.

The leading case on the character of an accord in Western Australia is that of Nissho Iwai v Shrian Oscar (1983)


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In para 20 of the decision, expressly citing Miles v New Zealand Alford estate, that if there was a serious claim honestly made, the abandonment of the claim is good consideration for an accord (or for the promise to extinguish a cause of action).

Accord and satisfaction “requires acceptance of something in place of the full remedy to which the recipient is entitled” – Thompson v Australian Capital Television Pty Ltd, Gummow J.

Ken: We are already familiar with Miles having come across it in contract 1 but here we are applying precisely the same principles from the point of view of the promisee being the party who allegedly has not performed completely and who then wishes to enforce the promise comprising the accord.

“The party that has not completely performed (or has completely performed, but defectively) its obligations must provide consideration for the other party’s promise not to sue the first party on his unperformed obligations under the original contract. By providing such consideration, the party that has not completely performed its obligations under the original contract is released from its obligations under that contract. This is referred to as accord and satisfaction.” 22.36

Accord = The actual agreement to accept the satisfaction.

Satisfaction = the provision of the subject matter of the promise, which when provided will then effect a discharge of the original cause of action – thus, on provision of the satisfaction, there is then a discharge which then extinguishes the cause of action.

The role of an accord is to replace the former contract with a new one. The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. The accord is the agreement or consent to accept the satisfaction. On provision of the satisfaction, there is a discharge which extinguishes the cause of action – Federal Commissioner of Taxation v Orica Ltd.

The ultimate characterisation of the accord in Iwai was that it was in fact an accord and conditional satisfaction with the result that if the defendant did not perform, the plaintiff could at its option sue under the accord, or under the original cause of action but that the plaintiff was bound to accept performance if tendered.

“Where there is accord and conditional satisfaction, the plaintiff is bound to await performance and accept if tendered, but if there is no performance, then the plaintiff may proceed according to general principles called into play when any agreement is repudiated… ie treat the accord (agreement) as at an end and proceed on his original cause of action, or he may at his option sue on the compromise agreement in place of the original cause of action” – Osborn & Bernotti v McDermott

“The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement… but whatever it is until it is provided and accepted, the cause of action remains alive.


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The accord is agreement to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.

If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.” – McDermott v Black

If after that accord and satisfaction a party then attempts to revert to the original cause of action, the accord could be pleaded as having operated as a release. 23.39.

The question of whether there has been accord and satisfaction is one of fact – 23.40.

The accord may or may not be contractual. If contractual there may be different types of contracts involved:

“There are three possibilities:

First, there is the mere accord executory which does not constitute a contract and is unenforceable, giving rise to no new rights or obligations. Upon performance (but only if there is performance), the plaintiff’s existing cuase of action is discharged.

Second, at the other end of the scale is accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon. The parties agree that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution.

Third, somewhere between the two, there is accord and conditional satisfaction, which exists when the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause for action unless and until there has been performance.” –Osborn & Bernotti v McDermott.

Ken: An agreement involving an accord and satisfaction can take three forms, and recognising which is of crucial importance. Briefly by way of a somewhat incomplete introduction just so you can follow the discussion to follow:

a. An accord executory in which the promise to abandon a cause of action (and, as you can see from the discussion in Nissho Iwai, from a conceptual point of view it does not matter if it is the abandonment of a positive claim, or a defence of some sort), is given in exchange for the defendant actually doing something (eg the payment of monies). In this case, until the act is actually carried out, the plaintiff’s original cause of action remains on foot – see para 23.38 Text and McDermott v Black which discusses the point. Eg if you pay me $, I will not make an allegation of impropriety/will abandon my claim etc.). There is no exchange of mutual promises but there is a promise to abandon a cause of action (claim or defence) if the other party does that “something”.

b. An accord and satisfaction arising from an exchange of mutual promises: this takes place when the plaintiff agrees to extinguish his original cause of action in exchange for the promise on the part of the defendant to do something. The making of the promise


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itself and the exchange of mutual promises immediately discharges the original cause of action in this instance – supra.

c. An accord and conditional satisfaction in which the compromise in question amounts to an existing and enforceable agreement once the compromise is agreed upon (note the emphasis) and where the party abandons his or her cause of action so long as the defendant performs, but failing that the original rights can be revived – see Osborn v McDermott para 23.41 Text. You will see that this is a little bit different from an accord executory, in which latter case there is no agreement which comprises the compromise.

If there is accord and satisfaction and the promisor fails to perform the promise, the promisee’s only remedy is to sue for breach of the promise. There cannot be a return to the original obligation or claim – Koutsourais v Metledge & Associates [2004], 23.42

If a party to the accord and satisfaction seeks to revert to the original cause of action, the accord could be pleaded as having operated as a release.

Ken: The distinction between the various types of accord will now be discussed in some greater detail.

In the case of an accord and satisfaction: The promise to do the act discharges the original cause of action; the agreement is to accept the promise in satisfaction of the claim; the discharge is immediate – McDermott v Black; para 23.38. the promisee’s only remedy is to sue for breach of the promise and there cannot be a return to the original obligation – Koutsourais v Metledge – see para 23.42 text. If a party to the accord and satisfaction seeks to revert to the original cause of action, the accord could be pleaded as having operated as a release – para 23.42.

The key features of an accord and conditional satisfaction: the plaintiff is bound to await performance and accept it when tendered but if there is no performance, then the plaintiff may proceed either on the original cause of action or at his option sue on the compromise agreement – Osborn v McDermott and see paras 23.37 and para 23.41 text: and the compromise does not operate to discharge any existing cause of action unless and until there is performance. Significantly, and subtly different from an accord executory, as you will see from these explanations, there is, in the case of an accord and conditional satisfaction, even some form of “compromise” at all. Remember that in the case of an accord executory, there is no “compromise” as such inasmuch as in that case, the parties do not actually reach an agreement, but that upon the performance of the act in question, the cause of action is discharged.

One sees immediately the distinction between an accord and conditional satisfaction, and that of an accord and satisfaction.

We have already noted that in the situation of an accord and conditional satisfaction, the plaintiff is bound to await performance and accept it if tendered – see Osborn v McDermott para 23.37 text. At the stage of tendering performance, but not before, the original cause of action is then extinguished (and you can see that this sounds a little like an accord executory) – but on the other hand, pending


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the time for the performance of the act in question, the other party cannot sue on the original cause of action. Which then appears to have some characteristics associated with an accord executory inasmuch as one primary characteristic of an accord executory is that it is the performance of the act which discharges the original cause of action and not the making of the promise itself (this is an accord and satisfaction).

In the case of what is however as a “mere” accord executory, there is no contract and gives no new rights and obligations, and, pending performance, and where there is performance, and only then, the plaintiff’s cause of action is discharged – see para 23.41 text.

In the case of an accord and satisfaction, if the promisee does not carry out the act, then the promisor can only sue on the new agreement/compromise/accord but not the original cause of action but in the case of an accord and conditional satisfaction the promisor can sue under the original agreement or the compromise - see para 23.37 text.

I would thus suggest that the very characterisation of the accord itself is an extremely important exercise and one which needs to be performed carefully as the rights of the parties may well differ from case to case.

Example of operation of accord and satisfaction – McDermott v Black (23.43):

• A purchaser claimed to have been induced to enter into a contract of sale of shares by a number of fraudulent misrepresentations made by the vendor.

• Prior to date of completion of the contract, the purchaser complained of the misrepresentations. However, in a subsequent letter he withdrew all allegations imputing anything improper to the vendor conditionally on the basis that the vendor of the property grant him an extension of time to complete the contract.

• This extension of time was granted by the vendor. • The HC held that the withdrawal of the allegations in consideration of an extension of time

for completion was not too vague so as to constitute a contract of accord and satisfaction.

“The withdrawal of the allegations of improper conduct meant that he would make no claim based upon the misrepresentation but would accept the promise of further time instead… Consistent with the principle, the agreement to withdraw allegations in consideration of a grant of time can be regarded as an accord and satisfaction”.

Ken: The distinction between an accord and satisfaction (the acceptance of the promise being the thing that extinguishes the cause of action) and of an accord executory (where the doing of the promised thing extinguishes the cause of action) was further explained in McDermott.


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Dixon J there described “two types” of accord and satisfaction, one being where the making of the agreement discharges the cause of action and the other one in which the doing of the thing extinguishes the cause of action.

D&C Builders v Rees:

• Rees owed $482 to D&C Builders for work done. • ‘My husband will offer $300 in settlement. It is to be in satisfaction”. • D&C decided to accept the $300 and told her that we will accept this for now and give you a

year to find the balance. • $300 and receipt bore the words “in completion of account” • Subsequently the builders brought proceedings to recover balance of $182, the question

arose whether there had been accord and satisfaction so as to discharge the $482. • English CoA held there had not been according and satisfaction, and builders not barred

from recovering the balance. • Lord Denning: there was no true accord and satisfaction so as to found a defence of accord

and satisfaction. • Mrs Rees held the builder ransom by making a threat to break the contract by paying

nothing.

“It is an essential element of a valid accord and satisfaction that the agreement which constitutes the accord should itself be binding… unless it is either made under seal or supported by consideration.”

Ken: D & C Builder v Rees was a classic case in common law where the promisee owed monies to a builder. The promisee essentially held the builder to ransom by tendering a smaller sum and then paying it and then alleging the existence of an accord and satisfaction (incidentally, as there was actual performance, it would not have really mattered from a practical point of view if this was in reality a case of an accord and satisfaction or an accord executory or an accord and conditional satisfaction for that matter – the actual performance of the promised act would make the distinction academic). The more critical aspect of the case is that a valid accord was in the nature of an agreement, and the promise had to be supported by consideration. Here, none flowed from the promisee – this is an important case particularly for the analysis of the consideration-related aspects and the analysis at para 23.44 and 23.45 needs to be noted carefully.

A number of more recent cases illustrate similar principles:

Illawong village v State Bank of NSW:

• Illawong’s business operations involved construction and operation of a neighbourhood shopping centre.

• In order to carry out business Illawong borrowed money from the State bank of NSW. • Illawong claimed over two periods within 10 years Bank NSW charged more interest than it

was entitled to charge. • Illawong sought to recover the excess interest it claims to have paid. Also claimed lessened

ability to pay other loans due to wasted in interest to Bank NSW.


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• There was an agreement whereby interest would be paid at the rate of $70,000 per month until the repayment of finance.

• State Bank argued that this agreement gave rise to an accord and satisfaction of any claim which Illawong had to have overpaid interest in the earlier period.

• According to Cambell J, to succeed in establishing an accord and satisfaction, the bank needed to establish that Illawong agreed to give up its claim that it has been overcharged interest, in return for something which the bank gave it.

• The court was not satisfied the dealings between Illawong and the Bank could be so characterised. The defence of accord and satisfaction failed.

Ken: The case of Illawong Village is discussed at some length and is important for several points. Please read the facts carefully. For present purposes, I will selectively discuss the aspect that to succeed in establishing an accord and satisfaction, the bank needed to establish that Ilawong agreed to give up its claim that it had been overcharged interest in return for something which the bank gave to it.- at para 23.478. The latter, emphasised passage highlights that for a promise to form part of an enforceable accord (remember that the “accord” is the “agreement”) then the promise of the promisor needs to be supported by consideration on the part of the promisee and the passage really invokes the classic definitions of consideration that we studied in para 6.67 and following of the text, save that the promisee here is the person who had performed incompletely or in an allegedly deficient way. The quality of the type of “consideration” that would need to be furnished by the promisee is again well explained in Oscar as discussed above.

Flowers v Vescio [2006]: (see 23.48)

El-Mir v Risk [2005]:

• Dispute between builder and his client over residential building work performed pursuant to a building contract in 1994.

• Builder claimed he was owed money. • The clients complained about the quality of the works that the builder had performed. The

builder, relying on a provision in the building contract, sought to recover the moneys said to be owing to him by recourse to commercial arbitration.

• The clients cross-claimed alleging the builders work was defective. • After some evidence had been taken, the matter was, as the arbitrator was informed by the

builder solicitor, ‘settled’. • The terms of settlement were read onto the transcript as well as being reduced to writing in

a document signed by the parties’ solicitors “Terms of Settlement”: o Each party, without admission, withdraws their respective claims and cross claims

against the other party. o Each party is to bear its own costs of the arbitration. o Each party is to bear equally the costs of the arbitrator.

• The issue before the court was whether the Terms of Settlement document signed constituted accord and satisfaction.


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“In my view the clients have an arguable case that the 1997 Settlement amounted to accord and satisfaction. It is capable of being construed as mutual promises by the clients and the builder to forbear from pursing their respective rights under the building contract by not proceeding with arbitration. The requirement of consideration would be fulfilled by the parties mutual promises not to proceed, to bear their own costs and to contribute equally to the arbitrators costs.”

Ken: In El Mir v Risk, in the passage reproduced at para 23.49 and following in your text, the question was whether mutual promises not to proceed could satisfy the requirement of consideration (though for the purposes of contract-enforceability you only really need to consider the analysis from the point of view of a promisee). The facts there were that the parties were already in the middle of a hearing and in that situation, the fact situation would be supportive of an inference that the forebearance to pursue its rights could amount to consideration without more (though I would suggest this might not always be the case where, say, the promise not to pursue its rights (usually a defence of some sort) was without more totally without foundation – this of course being entirely consistent with the analysis in the type of compromise discussed at paras 6.67 and following of your text.

Ken: From the viewpoint of consideration, the quality of the consideration required to support a promise to grant an accord does not in any way contradict the rules of consideration already learnt and you will see from the following examples that they are entirely consistent with what we have learnt earlier:

a. A promise to accept a lesser sum on the day of satisfaction is not consideration that would support a promise to that would amount to an accord and satisfaction – D & C Builders v Rees and see para 23.44 Text (this is obviously the most commonplace situation where the issue could arise).

b. An agreement to withdraw allegations of impropriety can be regarded as supporting an accord and satisfaction – see McDermott v Black itself and para 23.43 Text. The question of whether the allegations of impropriety themselves were without foundation (to use the expression loosely) might at least potentially invoke an analysis of cases such as Wigan v Edward which you will recall from Contract 1 – see the discussion above. It should not be difficult to envisage, by parity of reasoning with the obverse situation of a compromise such as you learnt in contract 1, that if in fact the allegations were entirely without bona fides in the first place, then the promise to withdraw the allegations of impropriety could not amount to consideration to support a promise by the putative creditor to accept something less (and by parity of reasoning, this would apply to some analogous situation). It is noted that in the cases discussed in your text, this does not seem to have been in issue, although in an appropriate case, this might well be so.

c. A forbearance to pursue an arbitration could amount to an accord and satisfaction – see para 23.50 Text and El-Mir v Risk – and once again, it is suggested that the question of whether pursuing the arbitration in the first place was bona fides might be material but you will see from the facts of the case that the parties probably never got to the point of that even being in controversy – the alleged compromise took place in the


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middle of a hearing and it would have seemed axiomatic that there was mutual benefit that would have satisfied the requirement of consideration not to have pursued their respective rights.

Waiver In relation to discharge of contractual obligations, the doctrine of waiver arises where one party leads another party who is in breach of contract to reasonably believe that strict performance of his obligation is not required.

“The equitable defence of waiver applies where a party has made a conscious decision to relinquish a right to seek an available remedy” – The Bell Group Ltd v Westpac Banking Corp.

Thus, if a person has waived a right or remedy, he will be denied the right to subsequently pursue that right or remedy against another person.

Agricultural & Rural Finance v Gardiner defined waiver as ‘an intentional act, done with knowledge, whereby a person abandons a right by acting in a manner inconsistent with that right’.

“As a right is waived only when the time comes for its exercise and the party for whose sole benefit it has been introduced knowingly abstains from exercising it, a mere intention not to exercise a right is not immediately effective to divest or sterilise it”. - Commonwealth v Verwayen, 23.54

Tele2 International Card Co SA v Post Office, Aikens LJ:

• If a contract gives a party right to terminate upon the occurrence of defined actions or inactions, the innocent party is entitled to exercise that right. The innocent party has to decide whether or not to do so.

• It is a prerequisite to the exercise of the election that the party concerned is aware of the fact giving rise to its right and the right itself.

• The innocent party must make a decision otherwise a time may come when the law takes the decision out of its hands, either by holding it to have elected not to exercise the right, or sometimes by holding it to have elected to exercise it.

• Where the party who has right to terminate the contract acts in a manner which is consistent only with it having chosen one or other of two alternatives… then it will be held to have made its election accordingly.

• The election can be communicated to the other party by words or by conduct. However, if elected NOT to exercise a right, it will only be held to have elected not to exercise that right if the party ‘has so communicated its election to the other party in clear and unequivocal terms’.

Ken: Against the background of the difficulty of pining down a precise definition of “waiver”, it is noted that there is a particularly helpful decision of our own Supreme Court which may assist


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namely Esperance Market Garden v Cribb in which (incidentally) your unit coordinator was counsel. It really is directly on point and explicitly addresses the very difficulties articulated in your text.

The following useful propositions arise from that case:

a. Election (as to which, on one reading of your Text, waiver is said to be “synonymous”) was the sterilisation of a legal right and amounts to the choice of one of two independent and concurrent and mutually exclusive rights – at page 11.

b. Waiver was a “vague” term used in many different senses, one of which was to signify a legal ground on which one would be precluded from asserting one legal right when he is entitled to alternative rights inconsistent with each other. In this particular context, “waiver” would be “better categorised” as “election”.

Let us now illustrate examples of waiver/election - ie when and how can it be argued that contractual obligations can be said to be discharged by waiver/election?

Consider the following examples:

a. If the plaintiff determined a contract for breach then he could not, consistently with that course, subsequently insist on performance of the contract. This probably is the most common commonplace example of the operation of discharge of contractual obligations by waiver and is the example discussed on page 11 of Cribb. There, His Honour cites the example of “election” arising in the context of “determining a contract for breach” and “the alternative right to insist on the continuation of the performance of the contract”.

b. A plaintiff who acts as though a contract had been terminated and induces the other party to believe that a contract had been terminated, cannot then insist on rights under the contract (and this example immediately can be recognised as being very closely related to estoppel).

c. An insured person, after accepting the cancellation of an insurance policy cannot then insist on performance of the policy (ie by asserting that he was, after all, still insured).

Frustration “Frustration” is variously defined as:

a. An event that occurs between the making of a contract and its performance that makes performance of the contract substantially different from what the parties agreed or that makes performance impossible – 25.1

b. When, without default by either party a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken... it was not this that I promised to do. – Davis Contractors Ltd v Fareham Urban District Council.

Contrasting to above, it is possible that contracting parties provide for the termination of the contract if supervening events occur and which affect performance. In such case the contract will end upon happening of a specified event beyond their control. Eg construction contracts may


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include force majueure clauses which are designed to have the effect of terminating a contract if events occur which are beyond the control of the contracting parties, thus excused from future performance of obligations.

25.3 If parties do not include force majeure clauses in a contract, the common law doctrine of frustration may then apply, resulting in undesirable consequences.

Ken: Contracts quite commonly provide for the termination of a contract if supervening specified events beyond the control of the parties take place which affect performance – this is the typical “force majeure” clause. The termination of a contract pursuant to a typical force majeure clause is fundamentally different from the manner in which frustration discharges a contract.

25.5 – Not every supervening event which prevents performance of the contract will result in it being frustrated. It may be apparent from the general nature of the contract, its particular terms and the context in which it was made that it was intended to apply in the circumstances that have arisen.

“The question is whether the contract, on its true construction, is wide enough to apply to the new situation. If it is not, then it is at an end.” – Lord Reid, Davis Contractors v Fareham Urban District Council

Whether an event can be said to frustrate the contract is primarily to be considered in the light of whether the contract on its true construction is wide enough to apply to the new situation. If it is not, then it is at an end (frustrated) – see Davis Contractors v Fareham Urban District Council. This emphasises the need for a frustrating event to have been one that is not contemplated.

Ken: The following are some of the more pertinent formulations which have developed over the years as to what would constitute a frustrating event, selected as they cover a wide percentage (but not the entirety) of the field – but ultimately as you can see, the question often requires a careful balancing act of numerous competing considerations and with sometimes inconsistent outcomes.

a. The event that has the effect of fundamentally or radically changing the circumstances surrounding performance without fault by either party – paras 25.6 – 25.9, Text.

b. It would be “unjust” to hold the parties to the contract – para 25.12 Text; National Carriers v Panalpina.

c. The event in question must cause a fundamentally different circumstance to exist or to make future performance of an existing contract different in substance from what was originally contemplated - para 25.8 Text; and the cases referred to in that para.

i. In order for there to be a frustrating event, the event in question must cause a ‘fundamentally’ different circumstance to exist – British Movietonews Ltd v London & District Cinemas Ltd

Ken: A court will not readily conclude that a frustrating act has occurred. The common thread amongst all the definitions is that a frustrating act has to render the contract “fundamentally different”. Merely that an event wasn’t contemplated, isn't sufficient to render the contract frustrated. The concept of an uncontemplated event that does not frustrate a contract is easier illustrated than explained:


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a. Thus a wholly abnormal fall in prices, a sudden depreciation of currency, an unexpected hurdle to execution (this is one to take note of) – all do not lead to the frustration of a contract – see para 25.10 Text and British Movietones (a very important case). That para is very aptly headed finally it is important to note the limits to the doctrine of frustration.

b. In respect of a lease, it has been said that a lease “could be” but is “hardly ever” frustrated – National Carriers Ltd. v Panalpina and para 25.11 Text.

Tsakiroglou & Co Ltd v Noblee Thorl Gmbh:

• Appelant agreed to sell nuts to the respondent. • The cost of freight between the port of departure in Africa and the port of delivery in Europe

was to be borne by the sellers. The normal transit rought was via the Suez Canal. • The canel closed by government order, only other available route is via the cape of Good

Hope, much more lengthy and costly. • The sellers refused to complete & argued the closure of the canal had frustrated the

contract. • Court held there was no frustration. The journey was longer and costly but performance was

still possible.

Elements of Frustration

Lord Simon, in National Carriers Ltd v Panalpina:

• 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 in either party • The supervening event must not have been ‘reasonably contemplated by the parties’ at the

time of the contract, and • It must be unjust to hold the parties to the original contract.

Frustrating Events

Categories of events that the courts have considered to be frustrating events (however it should be understood that each of the cases discussed were decided on their own facts.):

Frustrating Events

• Court Order • Change of Law • Destruction of the Subject Matter • Contracts of Personal Service • Failure of a Condition


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• Government Intervention • Delay • War

(See section in text for each)

Non-Frustrating Events:

(FILL THIS IN FROM TEXT)?

Ken: This section really raises no fresh issues but reiterates the general principles but seen from the obverse side of the coin namely:

a. Fault and foreseeability will result in a contract not being frustrated (this is the obverse of the argument that for frustration to take place, the event in question needs to have been without fault, and unforeseeable) – see paragraph 25.33 Text. A self induced predicament (to use the expression loosely) will not necessarily lead to frustration eg in the case of a contract for the hire of trawlers, which were required to be licensed and where the hirers did not apply to obtain those licences - but would be regarded to be a breach of the agreement.

b. A self induced act which does not amount to a breach of contract may frustrate a contract. Thus in FC Shepherd v Jerrom (see para 25.36 Text) a contract was frustrated by the imprisonment of a party even though (self evidently) his imprisonment was the result of his own actions. That case actually presented some difficulties of analysis which are not apparent from the brief discussion in the text and rather than digress mid discussion, I have appended some thoughts below to deal with it.

c. The person who asserts that the frustrating event was self-induced rests with the party so asserting. By way of example in Taylor v Caldwell (para 25.37 text) (agreement for hire of hall frustrated by destruction of the hall in question) if the hirers wanted to argue that the hirees had induced the frustrating act by destroying the hall, they would have the onus of so proving that fact.

i. The hirer of the premises alleges that the owner was responsible for the fire, the hirer will have to prove that to be the case, rather than the owner having to prove that he or she was not responsible for the fire.

d. Foreseeability of event: The more commonly accepted position (even though there are contrary views) is that an event will not be held to have frustrated a contract if it was foreseeable – see paragraph 25.38 Text and Walton Harvey v Walker. Obviously if the contract itself specifically addresses the change in circumstances, then there will be no frustration. An issue arises as to whether the event itself is indeed specifically addressed in the contract. This issue arose in Metropolitan Water Board v Dick in which there was a clause in the contract providing for extensions of time in cases of delay “howsoever occasioned”. It was held not to have included in its ambit delays occasioned by government intervention and the contract was thereby held to have been frustrated. As your Text points out, the courts take a “fairly strict” approach to such clauses.


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Effect of Frustration

The Common Law principles relating to termination govern the consequences of frustration in Western Australia.

The contract ends at the moment that the frustrating event occurs. The parties are discharged from all future obligations that arose under the contract. There are some exceptions i.e. partial frustration. EG it may well be that the frustrating event operates only as a partial discharge of the main agreement with the balance still remaining on foot – Aurel Forras v Graham karp Developments.

The following are the effects of frustration:

a. Frustration automatically terminates the contract – this is different from breach or the non fulfilment of a condition (some of which we discussed above).

b. Termination occurs after the act of frustration but the act of frustration does not void the contract – this means that rights, duties and liabilities that occur before the frustrating event remain on foot. 25.43

i. Further, once frustration occurs the parties must enter into a new agreement should they wish to continue on – Bank Line v Arthur Capel & Co.

c. Partial performance prior to a frustrating event does not ordinarily ground a restitutionary claim ie a claim for a reasonable sum – see Appleby v Myers a case we encountered last week in the context of partial performance – para 25.44 text. This is consistent with the general proposition that we also learnt last week, namely that pursuant to an enforceable contract, you would not have a restitutionary claim because all your rights and obligations to consideration under that contract, are, axiomatically, governed by the contract itself.

d. You should try testing the parameters of the above proposition by exploring its application in Appleby v Myers itself, where the crucial point was that up until the frustrating event, as you might recall, the promisee of the consideration had not performed to the level required to entitle him to his consideration, in accordance with the general principles relating to the level of performance. As noted in para 25.44 of your text, the point is that “the contract provided for payment on completion of the work”. This being so, the plaintiff would not be entitled to his restitutionary claim either.

e. There is a short passage in your text quoted from the author of Carter to the effect that under the “modern law of restitution” it may be “possible” to bring a claim for restitution – para 25.44 text. That suggestion is not really explained fully nor explored to the point that of any real practical utility and a fuller appreciation of the argument would require an understanding of the modern law of restitution, something which is beyond the learning outcomes of this unit. Accordingly, for the purposes of this unit, it


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would suffice for you merely to be mindful of the more general proposition that “partial performance of a contract prior to a frustrating event will not ground a restitutionary claim at common law” – para 25.44 text.

f. The other side of the coin or obverse is if payment is actually already made, whether the monies paid prior to the frustrating event can be recovered. The present position is that monies can be recovered if and only if there has been a total failure of consideration. This aspect was considered in the two leading cases on this point:

(i) Fibroska Spolka v Fairbairn: Fairbairn contracted to supply to Fibroska some machines. Fibroska paid GBP1,000 in advance. War frustrated the contract. It was held that there was a total failure of consideration in those circumstances as Fairbairn was unable under those circumstances to deliver any of the machines it was contracted to supply and Fibroska could recover the deposit. For the purposes of recovery, consideration there was characterised as the performance of the defendant’s promise and in the circumstances of this case, the defendant did not “perform” as such. The unfairness in the result arises inasmuch as Fairbairn may well have and probably did incur loss, inconvenience and expense in preparing itself to perform the contract and may well have executed most of its obligations under the contract.

(ii) Baltic Shipping v Dillon (discussed at para 25.49 Text) was a case in which the plaintiff had paid the whole of the purchase price for a holiday in advance. The ship sank on the 8th day of a 14 day holiday and the contract was frustrated from the point. But the plaintiff could not recover any of the purchase price, on the basis that there was no “total failure of consideration” since she had already obtained the benefit of 8 days of a 14 day holiday. She did however have an action for breach of contract – and that is another aspect of the case to be considered separately.

Week 3 – Discharge of Contract by Breach └ Frustration

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Week 3 – Discharge of Contract by Breach

Topic of breach and the remedies is large and interconnected to other areas of study. This week is confined to the aspects of breach that are relevant to discharge only.

Lectures 10-13 look at other consequences of breach).

General Concepts 24.1 – 24.15

Contractual obligations may be discharged for several reasons. EG exact performance, agreement between the parties, frustration etc.

A contract can also be terminated for breach of certain contractual terms.

Two forms of conduct which that constitute a breach of contract and thus form the basis of a right to terminate (24.6):

• First, where the parties agree that the contact is to be performed by a certain time, any failure to completely perform the contract at the time agreed will constitute an actual breach of contract, and could form the basis of an application to terminate the contract by the innocent party. “A stipulation for completion on a fixed day creates both a substantive and a temporal obligation; an obligation to complete and an obligation to do so on the fixed day” – Brennan J in Foran v Wight (1989)

However, such a basis to terminate is not restricted to a failure to perform on time. A right to terminate may also exist where there has been a failure to perform in the manner contemplated by the contract, eg to a particular standard.

With respect to these types of breaches the emphasis is on objectively deciding whether performance, either in substance or on time, has occurred (breach of condition) or whether the breach is serious enough (breach of an intermediate term). In either case the innocent party may be able to terminate the contract.

• Second, where a party indicates an unwillingness or inability to perform their contractual obligations – Kraguljac v A & B Property Developments Pty Ltd. This is known as ‘repudiatory breach’ or ‘repudiation’ or ‘renunciation’. ‘Repudiation’ means ‘repudiation of obligation’ and describes a situation in which ha promisor’s absence of readiness or willingness to perform gives rise to a right to terminate. -24.8

Week 3 – Discharge of Contract by Breach └ Failure to Perform Contractual Obligations (term of contract)

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Where a party indicates an unwillingness or inability to perform their contractual obligations in advance of the time that the party was due to perform pursuant to the contract, this type of repudiatory breach is known as an ‘anticipatory breach of contract’. In contrast an actual breach of contract occurs where there has been a failure to perform contractual obligations at a time when those contractual obligations were due to be performed. – 24.12

Ken: The categories above majorly overlap – any one breach could conceivably (and indeed often will) amount simultaneously to an act of repudiation and a breach of an essential or fundamental term.

ANTICIPATORY BREACH = REPUDIATION, because inability to perform etc.

Failure to Perform Contractual Obligations (term of contract)

For the purpose of ascertaining whether a breach of a term of a contract gives rise to a right to terminate, traditionally the courts have categorised “terms” into three categories namely conditions, warranties or intermediate terms. – 24.16

Condition

A condition is sometimes referred to as an essential term. If the term breached is a condition, the innocent party may choose to proceed with the contract or to terminate it and/or claim damages.

The right to terminate arises for any breach of a term that is classified as a condition – Koompahtoo Local Aboriginal land Council v Sanpine.

Until the innocent party elects to terminate the contract still stands – Automatic Fire Sprinklers Pty Ltd v Watson (1946).

Alternatively, the innocent party ‘may treat the contract as continuing on foot, in which case it will remain in force for the benefit of both parties’ – Peter Turnbull & Co Pty Ltd v mundus Trading Co

In such case the innocent party may also be able to enforce the contract by an order for specific performance.

Ken: A breach of a term howsoever classified does not automatically bring a contract to an end – the innocent party may choose to proceed with the contract or to terminate it

Warranty

If the term is a warranty, there is no right to terminate the contract for breach of the term – Koompahtoo Local Aboriginal Lan Council v Sanpine.

The remedy of the innocent party lies in damages or specific performance.


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Intermediate Terms

Intermediate terms are relatively uncommon.

With intermediate terms, the issue of termination is not determined merely by the existence of breach. Rather, the court ascertains whether the extent of the breach is sufficiently serious to give rise to a right to terminate.

If it is not sufficiently serious, there is only a right to damages or specific performance.

Other

In addition to the rights of termination conferred by the common law, the parties to the contract itself may agree that a right to terminate arises in particular circumstances – Stocznia Gdynia SA v Gearbulk Holdings Ltd.

Condition, warranty or intermediate term?

A contract can expressly stipulate what type of term is involed.eg sale of goods legislation… explicitly stated to be either conditions or warranties.

Furthermore, it is open to the parties to expressly agree as to what type of term is involved. For example, ‘the use of the word ‘condition’ will usually be sufficient’ – Stocznia Gdynia SA v Gearbulk Holdings Ltd

In the absence of any express stipulation, the court with construe the term.

In construing a term the courts ‘are not too ready to construe a term as a condition and at least where other considerations are finely balanced, will hold that a term is of such a kind that a breach of it does not give rise to an automatic right to terminate’… this ‘is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations’. – Anker Pty Ltd & Arnick Holdings Ltd v National Westminster Finance

Conditions

Ken: The expression “condition” as a term of art in contract law has now taken on the meaning of “an essential promise” whereas a “warranty” has the character of a “non essential promise”.

Test for determining whether a term is a condition or warranty – Tramways advertising Pty Ltd v Luna Park (NSW):

“Whether a term in a contract is a condition or warranty depends on the intentions of the parties as appearing in or from the contract.

The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee


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that he would not have entered into the contract unless he had been assured of a strict, or a substantial, performance of the promise, and that this aught to have been apparent to the promisor.

If so… innocent party may treat himself as discharged upon any breach of the promise, however slight.”

Ken: The following are various formulations of the test of essentiality:

a. From the general nature of the contract considered as a whole or from some particular term or terms, that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise etc.

b. If the innocent party would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, and that this ought to have been apparent to the promisor – supra.

c. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise any substantial breach would ordinarily justify a discharge.

d. The quality of “essentiality” depends for its existence on a judgement which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances, taken objectively – essentially from the general nature of the contract considered as a whole, or from some particular term or terms. This test makes it clear that the analysis is based upon the words of the contract, and the importance placed on those words by the parties, having regard to the background of the making of the contract – see paragraph 24.23 – 24.24 text.

- See generally para 24.23 – 24.25 Text; Tramways Advertising v Luna Park (NSW) Ltd; DTR Nominees v Mona Homes Pty. Ltd; Ankar v National Westminster Finance (Australia) Ltd; Associated Newspapers v Bancks.

- Tramways in particular is a significant case and the expression “the Tramways test of essentiality” is sometimes used ie it has almost become a term of art itself.

Do not try to memorise these definitions verbatim. Conceptualise them in your own minds– know their sources. In very general terms, a “condition” by definition is a term of the contract that is regarded as so important that a breach of that condition would entitle the innocent party to terminate a contract.

Warranties

Ken: A warranty by definition is a type of term that does not give rise to the right to terminate.

A breach of warranty does not give rise to a right to terminate – Bettini v Gye (1876)


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Ken: The facts of Bettini v Gye are well known – there it was alleged that an opera singer had breached her contract by not arriving in London at least six days before the commencement of the engagement and that such breach entitled the employer to terminate. The Court decided that it was not such a breach ie it as a warranty as it did not go “to the root of the contract” – although the innocent party could recover damages for breach of such a term.

Further explanation is required to clarify the position ie how do you then identify a term as a warranty?

Often it is impossible to determine whether a term is a condition or warranty simply as a matter of construction because the term may be ambivalent in that a term may be important in one situation but unimportant in another context.

Intermediate Terms

Ken: The concept of an “intermediate” term arises because as a matter of construction, it is often impossible to determine if it is a condition (breach of which gives rise to the right to terminate) from a “mere” warranty (breach of which does not give rise to the right to terminate but merely to claim damages) – paragraph 24.27 Text. The case of Hongkong Fir cited there is usually accepted as the case which contains the genesis of the concept.

Hongkong Fir Shippng Co Ltd v Kawasaki Kisen Kaisha Ltd.

“A Third type of term, today referred to as an intermediate term, has been recognised by the common law. In Australia, The concept of an intermediate term was approved by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine.”

With an intermediate term, a right to terminate only arises if the consequences of the breach are sufficiently serious. – 24.27

The term in Hongkong Fir related to a vessel, that it was “in every way fit for ordinary cargo service”. It was breached and the precise issue that arose was whether a breach of that term gave rise to the right to terminate (this is precisely the type of dilemma that I referred to earlier when one needs to make a “call” and advise client accordingly). The difficulty as you would see is that one cannot immediately tell if it was contemplated if a breach of that term, howsoever slight, would be of the type that could satisfy the Tramways test of essentiality.

The court held that it did not. Diplock LJ regarded the term as an intermediate term.

“There are, however, many contractual undertakings of a more complex character which cannot be characterised as being ‘conditions’ or ‘warranties’… of such undertakings, all that can be predicated is that some breaches will, and others will not, give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend on the nature of the event


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to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a ‘warranty’.”

Ken: So, let us take a similar example – disregarding any statutory obligations, say there was a term of the sale of a car that it should be “in every way roadworthy” – what if the washer fluid was missing from the windscreen washer? One might argue that the car was not roadworthy (and some might argue to the contrary). There are many heads of damage for breach, but based on one head (which you will learn later) the car in that state might be worth marginally less than if the washer fluid was full.

This little example is just for the purposes of illustration and we often do so by using improbable examples eg in this instance there might be a duty to mitigate also (something you will learn later) which would be easily achieved by the purchaser’s buying a bottle of fluid and pouring it into the car. But it at least hopefully will bring you closer to an understanding of the rationale behind the creation of the category of intermediate terms ie where one cannot immediately ascertain from the term if its breach would satisfy the Tramways test of essentiality.

The leading judgment (and which gave rise to the classification “intermediate term”) was that of Diplock LJ who relevantly said as follows:

a. Contractual undertakings can be simple or complex but it wasn’t always possible to classify them into conditions or warranties. Put somewhat rhetorically, if one adopted the Tramways test, it can often be difficult to ascertain whether as a matter of “judgement” the term would satisfy the Tramways test of essentiality – which depends on examining the term in the light of the surrounding circumstances. Some terms are obviously essential whereas with some others, it is less obvious – at least as a matter of the nature of the contract and its provisions – that being the general essence of the Tramways test.

b. Whether termination was justified or not as a consequence of the breach of such term would depend on the gravity of the effect of the breach – bearing in mind of course that a term if breached might yet give rise to the right to damages but not the right to terminate, as one could even with a breach of warranty (but not a condition, based at least on this dichotomy).

c. Under the circumstances of the case itself, the breach did not give rise to the right to terminate.

Koompahtoo Local Aboriginal Land Council v Sanpine

• Koompahtoo – owner of large area of land. • Joint venture with Sandpine, property development company. • Agreement did not expressly set out the circumstances in which either party could

unilaterally terminate the agreement. • Considerable expense and delay. Koompahtoo requested financial positions and details

about joint venture loans.


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• Sandpine failed to provide. • Administrator for Koompahtoo terminated the joint venture agreement on the basis of the

alleged breaches. • Sandpine sought a declaration that the termination was invalid. • HC held that Sandpine’s actions amounted to serious breaches of an intermediate term of

the agreement, in that they deprived Koompahtoo’s representatives on the joint venture management committee of the capacity to make informed decisions about the project.

There is some controversy as to the rationalisation, and the basis for the classification in the first place, as discussed at paras 24.33 – 24.35 of your text.

(E.G. 24.34 – Carter suggests that the triparted classification of terms as either conditions, warranties or intermediate terms is unnecessary and that the warranty classification has now been rendered essentially redundant with what were formerly considered warranties, now to be considered intermediate terms. He suggests that ‘the concept of the intermediate term has had the effect of making it virtually impossible to conclude that a term was intended by the parties to be a mere warranty.”)

Ken: For practical purposes, at least in Australia, one can probably quite confidently say that the concept of an “intermediate term” has been recognised as such – see eg Kompahtoo v Sanpine.

Ken: Sanpine under the agreement was to coordinate the development and subdivision of certain land. It was held that this was an intermediate term which was breached by Sanpine by failing to provide information about the financial position of the joint venture with Kompahtoo with consequences that were so serious as to justify termination in that they deprived Kompahtoo’s representatives of the capacity to make informed decisions about the project that was the very subject of the agreement.

Termination for Breach of Time Stipulation

Ken: This topic introduces the argument that an innocent party may terminate a contract that is not performed within time.

First, let us deal with the situation in which time is actually made of the essence in the performance of a contract.

Your text deals with this on pages 476 - 477. Your Text says that “a time stipulation is clearly now to be seen as an intermediate term.. this is because a breach of a time stipulation may or may not give rise to a right to terminate” (my emphasis).

Due to the importance, I have decided to provide access to pages 1024 – 1030 from the 9th Edition of Cheshire and Fifoot in their entirety via our electronic reserve (which states that the parties will give effect to a time stipulation ie a breach of a clause that expressly makes time to be of the essence will give rise to the right of an innocent party to bring the contract to an end). Thus read, it would seem to be contrary to the proposition contained in your text (which is to the effect that a time stipulation is an intermediate term). Cheshire and Fifoot has gone into a new edition namely the tenth and as far as I can see the passages referred to earlier are substantially reproduced on pages 1070 – 1077.


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As a result of these diverging views, Zaccardi was closely examined. The primary point in Zaccardi seemed to be whether termination was validly effected pursuant to a notice to complete that was not complied with, rather than with the expiration of the time stipulation itself – and thus read, would seem to address a different point from the question of the effect of the expiration of the time stipulation itself.

The treatment in Carter and another text namely Contract Law by Willmott Christensen Butler and Dixon (Oxford University Press 2009) is consistent with that in Cheshire and Fifoot in that the writers appear to agree that a breach of an express time stipulation does give rise to the right to bring a contract to an end (without necessarily discussing whether it is an intermediate term or otherwise characterising it).

I am not totally confident as to the scope or meaning or basis for the statements in paragraph 24.38 of your Text and/or whether it is indeed consistent or inconsistent with the position apparently taken by the other texts that I have analysed but rather than dissect or analyse it any further, and with considerable reluctance, being aware of the difficulties and complications this may cause, I am inclined merely to adopt the position taken in Cheshire and Fifoot in lieu of the treatment in your Text. The various references to whether the contract is terminable in “equity” or “at common law” likewise are apt to lead to complications and confusion.

At common law, a time stipulation is seen as an essential term of the contract entitling the innocent party to terminate for a breach of the term. – 24.37

Accordingly, I have endeavoured to summarise the practical effect of these readings as best I can, in order to minimise the confusion and potential complications. The position as I see it is (summarising as best and usefully as I can the arguments in Cheshire and Fifoot and doing my best to reconcile any differences with the treatment in your text) would appear to be as follows:

a. A breach of an essential time provision will as with any other essential provision entitle the innocent party to bring a contract to an end (and this would seem prima facie at odds with the proposition in your text that a time provision by its nature is “clearly” an intermediate term).

b. It nonetheless is necessary, as always to determine if the term of the contract relating to time is indeed an “essential” provision.

c. If the parties expressly declare a time provision to be an express provision (ie “time is of the essence”) then that is the effect that the courts will ordinarily give to it but not always ie this is a prima facie rule and subject to the application of the Tramways test. (The corollary, addressed in Cheshire in the same passage, is that even where a precise time for performance has been stated, then it may not necessarily be an essential term (ie by an application of the Tramways test).

d. Separately, where time is NOT explicitly stated or declared to be “essential”, then the essentiality of the time stipulation “depends on the terms of the contract” – Cheshire and Fifoot page 1028, and note the cases at footnote 163 and 164. Thus (and this is a useful example though this is an example only!) in a contract for the continuing provision of services it is readily inferred that the payment of accounts by the due date is essential – 21st Century Promotions Australia Pty. Ltd. v Telstra Corp [2001] SASC 299. Similarly performance on time is usually regarded as of the essence in share sale


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agreements – Russo Resource Developments International Pty. Ltd. (no3) [2003] NSWSC 838. I would suggest that again, in such a situation the test of the essentiality of the time provision is still the Tramways test.

e. If time is not of the essence (which might be the case on an application of the tests described above) then failure to complete an obligation within the time stipulated or within a reasonable time, will not permit the innocent party to terminate the contract without issuing a valid notice to complete. From here, the treatment in paragraph 24.37 sub paragraph 3 of your text is more or less consistent with the treatment in Cheshire and Fifoot and at least in this particular context, there is no need for divergence in treatment here from the treatment in Cheshire and Fifoot.

Text 24.37 Sub Para 3: If time, not ebbing of the essence, was made of the essence by the service of a notice to complete on a party who breached the time stipulation – then will permit termination of the contract – G R Mailman & Associates Pty Ltd v Wormald International (Aust) Pty Ltd

f. On the other hand, even if time is not stipulated to be of the essence originally or by notice, failure to perform within time may nevertheless give rise to a right to terminate without prior notice if the delay is so long or of such a character as to amount to a repudiation of a contract – Cheshire and Fifoot page 1029. As to what does amount to a “repudiation” generally see below, but the following is a useful summing up of the position concerning a failure to comply with one’s obligations within time in this situation:

The only legitimate inference may be that he is saying ‘not only have I broken by contract by not doing the thing on the due date, but I am not going to do the thing at all’ or ‘I am not going to do the thing at all unless and until I find it convenient to do it” – supra.

g. Where notice is required to be given, the time allowed must be “reasonable” and what is reasonable is always a question of fact. The treatment of the content of a valid notice in paragraph 21.38 of your text seems not to be inconsistent with the position taken in Cheshire and Fifoot and can also here be adopted.

I will update you if and when I encounter something more authoritative but for now, I suggest that you adopt the propositions in Cheshire and Fifoot which I have summarised above.

Time being of the essence by Implication

24.39 It is the facts and circumstances of the case that lead to the conclusion that the parties intended time to be of the essence.

Thus, a finding that time is of the essence by implication can arise in circumstances where goods that are sold are perishable or where the property that is the subject of the contract is the subject is in a volatile market in so far as the price is concerned.

Also, a term stipulating for the payment of a deposit in a contract for the sale of land almost always gives rise to an implication that the time for payment of the deposit is of the essence.


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See Samerenko v Dawn Hill House Ltd at 24.39

Making Time of the Essence by Service of a Notice to Complete

24.40 In Netta (Epping) Pty Ltd v Phillips (1974):

“In cases where the contract contains a stipulation as to time, but that stipulation is not an essential term, then before a notice can be given fixing a time for performance, not only must one party be in breach or guilty of unreasonable delay, but also the party giving the notice must himself be free of default by way of breach. Only then may a notice be given fixing a day a reasonable time ahead for performance and making that time of the essence of the contract”.

24.42 in Carrapetta v Rado [2012] NSWCA 202, Barret JA, summarised the law on when a notice to complete could be served:

“The underlying concept is that a party who gives a notice to complete and thereby calls on the other party to adhere to the contract must be in a state of both present and prospective adherence to the contract... therefore in a ‘cash on completion’ case, the obligation of delivering a clear title in return for the money that the contract requires the purchaser to pay in cash on completion – and to have adopted up to the time of service of the notice a stance consistent with that future performance. If the vendor is in breach of contract when the notice is given, he is not in such a state of willingness and ability…”

24.43 For a Notice to Complete to be valid:

1. The recipient of the notice must be in default under the relevant contract 2. The person who gives the notice must themselves be ready, willing and able to perform their

own obligations under the agreement 3. The time fixed by the notice for completion of the contact must be a reasonable time 4. The notice must be valid in form and must clearly call on the recipient of the notice to perform

the contract. Once a notice to complete is served it operates to make time of the essence for both parties to the contract – Dainford Ltd v Yulora pty Ltd.

Contractual Right to Terminate

The situations so far discussed address the position of construing a term in accordance with its essentiality (condition versus warranty versus intermediate term – “the common law right to terminate”) but apart from all that, sometimes a specific contractual right to terminate is provided in the event of breach of any one of specified terms in a contract.

24.49 – Where a contract provides for a right to terminate on a breach it is presumed that such a clause operates concurrently with any other right given by law to terminate – Concut Pty ltd v Warrell (2000).

Week 3 – Discharge of Contract by Breach └ Repudiation

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Ken: What this means is simply that a breach of contract giving rise to the right to terminate at common law, may be the same act that is the subject to a contractual right to terminate. This makes perfect sense of course.

However, the common law right to terminate can be excluded, so that the right to terminate is governed solely by the terms for the contract.

In Commonwealth Aviation v Ammann, the contractual right to terminate was the only means by which the contract could be terminated, and the Commonwealth’s termination of it was wrongful because it did not abide by the termination procedures set out in the contract.

24.50 – It is usually the case that contractual rights to terminate also require notice of termination to be given. Any such notice requirement must be complied with, or the termination will be invalid – Burger King v Hungry jacks

Sargent v ASL Developments Ltd (1974):

• Three contracts for the sale of land were entered into between a purchaser and respective vendors of three different properties.

• Term of contract “should (these events) happen, either party shall be entitled to terminate this agreement by notice in writing to the other.

• Vendors terminated the contract.

Repudiation

24.53 – With repudiation, emphasis is on the conduct or attitude of the party who manifests and unwillingness or inability to perform.

“Breach of contract by repudiation occurs when a party evinces an intention no longer to be bound by it, or to fulfil it only in a manner substantially inconsistent with his obligations… or an intention to perform ‘if and when it suits’…

An actual intention to repudiate is not necessary: the issue is resolved objectively by reference to the effect it would have on a reasonable man.

Conduct that is clearly self-disabling is repudiatory.”

Ken: An act of repudiation always gives the innocent party the right to terminate. So, if a party repudiates a contract, the innocent party is not obliged to issue a notice of default even if the contract expressly provides for the obligation to issue a notice of default, requiring the guilty party to rectify the default in question – Rigg v Lee Loy Seng [1987] WAR 333

Ken: This is closely allied to termination by reason merely of breach but repudiation is a far more serious matter and not lightly to be inferred – para 24.53 Text.

Repudiation can have the following character (for the purposes of summarising, I have extracted points of more general importance):


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a. Evincing an intention not to be bound by the terms of the contract or to fulfil it in a manner that is substantially inconsistent with the obligations thereunder. Repudiation comprises the manifestation of inability as well as recalcitrance – and can be manifest by a breach of a substantially inessential term. This is a very important test. Later on in this lesson, we will discuss how an innocent party to a contract who was uncertain as to whether the “guilty” party had in fact gone so far as to repudiate the contract (bearing in mind the strictness of the test) might improve his position ie to establish that the party in breach had indeed repudiated. This can be a significant tactical consideration that experienced practitioners are very well aware of.

b. An actual intention not to be bound is not necessary – the issue is to be resolved objectively (as always).

c. A party may have acted in a repudiatory way even though he wishes to perform a contract but is unable to do so.

d. Conduct that is self disabling is clearly repudiatory.

e. A refusal to perform because of an erroneous interpretation of a provision contained could be repudiatory (and this frankly is a recurring difficulty faced by litigation lawyers frequently – to advise clients whether their own clients should refuse to perform under a contract for if an incorrect decision is made, then their own failure to perform would be considered repudiatory). See the reference to Trawl mentioned above for an illustration of that difficulty.

The matters outlined above have been selected as being generally representative but it is not possible nor desirable merely to copy-type the content of your text. Therefore place consider in great detail the various formulations at paras 24.54 – 24.56 Text and the cases therein contained namely Laurinda; Shevill; Kennedy v Vercoe. As already mentioned, the correctness of the characterisation of conduct as being repudiatory or not can have profound effects on the person who makes that decision (and his lawyer)

24.55 – A repudiation can arise either from a party showing an intention not to be bound by the entire contract, or by showing that he or she does not intend to be bound by a term or terms which are of sufficient importance in the contract – Laurinda v Capalaba Park Shopping Centre

The question of whether a party is in breach of contract has shown the requisite intention which enables the termination to occur is decided by reference to how their conduct would appear to a reasonable person in the position of the other contracting party. A party’s subjective intention are irrelevant to this test as an objective test is applied in assessing conduct – Laurinda v Capalaba Park Shopping Centre

Laurinda v Capalaba Park Shopping Centre

24.56 Repudiatory conduct as conduct such that ‘a reasonable man could hardly draw any other inference than that the building owner does not intend to take the contract seriously, that he is prepared to carry out his part of the contract only if and when it suits him’.


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‘There is a difference between evincing an intention to carry out a contract only if and when it suits the party to do so and evincing an intention to carry out a contract as and when it suits the party to do so.

In the first case the party intends not to carry out the contract at all in the event that it does not suit him.

In the second case the party intends to carry out the contract, but only to carry it out as and when it suits him.

It is much easier to say of the first than the second case that the party has evinced an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with his obligations and not in any other way.

However, in some situations the intention to carry out the contract as and when it suits the party may be taken to such lengths that it amounts to an intention to fulfil the contract only in a manner substantially inconsistent with the party’s obligations and not in any other way.’

“It is not necessary for repudiation of a contract that the repudiator make plain that he will never perform his contractual obligations at all… ‘Shilly-shallying attitude in regard to the contract’ or ‘procrastination… persistently practised’ can in some circumstances reach the stage of repudiation even though accompanied by assurances of ultimate performance at some future time.”

“If A, a party to contract acts in such a fashion of ignoring and not complying with his obligations under it, B, the other party is entitled to say : ‘My rights under this contract are being completely ignored and my interests suffering by non-performance… to such a fundamental and essential extent that I declare he is treating me as if no contract existed which bound him’… that procrastination is so persistently practised as to make a most serious inroad into stage the rights of the other party to a contract. There must be a stage when the person suffering from that is entitled to say ‘this must be brought to an end.”

24.54 Shevill v Builders Licensing Board (1982)

“He evinces an intention to be bound by the contract or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way. In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages.

However, if one party, although wishing to perform the contract, proves himself unable to do so, his default in performance will give the other party a right to terminate the contract, if the breach goes ‘so much to the root of the contract that it makes further commercial performance of the contract impossible’ – Hongkong Fir Shipping.

It is immaterial whether repudiation and fundamental breach are treated as separate categories, for in either case the innocent party can terminate the contract and recover damages to compensate him for the failure to perform the contractual obligations.”


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24.59 – Repudiation ‘is a serious matter, not to be lightly found or inferred’ – Ross T Smyth & Co Ltd v T D Bailey Son & Co.

Repudiation ‘is a drastic conclusion’ – Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980]

24.60 – Refusal to perform a contract because of an erroneous interpretation of provisions contained in it could be repudiatory conduct, and if it is found that a party has terminated without justification, this will be a repudiatory act in itself which entitled the other party to terminate – Kennedy v Vercoe (1960)

Ken: One real life and recent example which encompasses one or more of the above categories was a case in which there was a dispute over whether certain specifications were incorporated into a contract, or whether the contract was entirely oral. The consequences were dramatically different. One party took the view that the other party was bound to comply with the terms of the written documents, the other party took the view that the documents in question bound the parties, the other took the view that the contract was entirely oral.

When the latter party refused to perform in accordance with the written terms, the former party purported to “accept” the repudiation and thereby bring the contract to an end. The risk that it took was that in so doing, it was itself evincing an intention not to be bound if it was found to be the case that the contract was after all entirely oral.

Anticipatory Breach

24.61 – Repudiation can also take place in consequence of a party making an anticipatory breach of contract. A party who by words or conduct indicates an intention not to perform a promise before performance falls due commits an anticipatory breach.

Anticipatory breach can occur expressly or by implication.

24.62 – The anticipatory breach may be established by reference to an act of abandonment of the contract by the party concerned or where the party demonstrates an intention to fulfil in a manner inconsistent with the obligation under the contract.

Conduct amounting to repudiation may be motivated by impossibility of performance or by an unwillingness to perform.

Ken: Separate treatment needs to be given to the concept of anticipatory breach either in the abandonment of the contract before the date for performance or evincing an act to perform the contract in a manner inconsistent with its terms.

24.63 - In Foran v Wight (1989), Mr and Mrs Wight contracted to sell land to Mr and Mrs Foran on 24 Dec 1982. The Forans paid deposit of 10 per cent upon entry into the contract.

• A term of the contract required Wights to register a right of way in relation to the land prior to completion. On 20 June 1983 Wights advised they had not yet done and would not be in a position to complete the contract on the due date.


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• In light of this the Forans abandoned their efforts to secure the necessary finance for completion.

• On 22 June 1983 the Forans did not attempt to perform their obligation of paying the balance.

• On 24th June the Forans purported to terminate the contract. • The Wights denied the validity of the termination notice on the grounds that the Forans

would not have been able to raise the necessary finance to complete the purchase on June 22.

• After having the right of way registered on 22 July, the Wights unsuccessfully sought to enforce completion of the contract by the Forans.

• The dispute between the parties was as to whether the FOrans had validly terminated the contract and were therefore entitled to a refund of the deposit. If the termination was invalid, the Wights were entitled to forfeit the deposit on account of the Forans’ failure to complete the purchase of the property.

• HC held that even though the Forans failed to tender performance or were not ready and able to complete on the contractual date for performance, the Wights’ anticipatory breach was converted by repudiation into an actual breach entitling the Forans to terminate.

• Brennan J held that an intimation of non-performance of an essential term amounted to repudiation which releases a party who acts on it from performance. This party does not have to terminate the contract.

• “When a party gives an intimation of non-performance to another and the other acts upon it, the other is dispensed from performing his obligation but if the other would not have completed his obligation in any event, liability for breach cannot be visited on the party who gave the intimation”.

(IE If A says not going to perform and B makes choice to not perform based on A’s anticipatory breach then is rights for A to terminate on B’s breach. BUT if A was not able to perform anyway regardless of anticipatory breach then B has no anticipatory breach and no right for A to terminate… check?)

Ken: Essential is the need to act on the anticipatory breach even if the innocent party does not actually terminate the contract - see Text para 24.64 and Foran v Wight.

Ken: The basis for the rights accruing to an innocent party in the case of anticipatory breach where the innocent party does not actually terminate the contract arises either by way of estoppel by conduct or waiver – see para 24.64 Text and the discussion of Foran v Wight – the facts of the case are as set out in para 24.63 Text.

The expression “anticipatory” breach means that in advance of the time for performance the “breach” has occurred either when the guilty party renounces his liabilities under the contract or makes performance impossible – Ryder v Frohlich. This is analogous to the situation of ‘breach” itself except that this takes place in advance of the time for performance.

Ken: The facts are not that complicated, but you do need to know which act was done by whom. Read the extract in your text for a more comprehensive discussion of the facts. Ultimately, as always, the principles are more significant (though you would need to follow the facts to understand how these principles were developed in this case itself). Relevantly, the following principles are set out in your text:


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a. An act of anticipatory breach can have the character of the intimation of the non performance of an essential term (ie in the sense that the breaching party does not intend to perform that term – hence the expression “anticipatory breach” – as the breach has yet to occur.

b. In a case of anticipatory breach, the innocent party does not have to terminate the contract, but if it acts upon the intimation of non performance, then (to use the vocabulary of His Honour Brennan J reproduced at para 24.64) the other (the innocent party) is dispensed from performing his obligation but if the other (again the innocent party) would not have completed his obligation in any event, liability for breach cannot be visited on the party who gave the intimation.

c. Deane and Dawson JJ described the applicable principle as being based on estoppel (with Gaudron J deciding the case on principles of waiver). If one thinks about it more deeply, this is indeed a classic estoppel type situation. Think about it it this way: if the innocent party could never itself have completed his obligation anyway, then the innocent party cannot be said to have “acted” upon the intimation of breach (“acting” upon a representation being, as you might recall, being central to any estoppel based relief). You are not expected to have to revisit the principles of estoppel to the extent that you studied in contract 1 – you are however expected (and obviously do need) to understand the principles in order to apply them to the extent described in this lesson.

Ryder v Frohlich [2004] NSWCA:

• Ryder was an investment banker • Protected Equity Investments Pty Ltd was a private company wholly owned by Ryder’s family

trust. • Frohlich was also an investment banker and Coastal Capital Ltd (coastal) was his family

company. • Agreed to create a diversified fund. At March 2001 the diversified fund had made no profit. • Ryder decided to take full-time employment. • Frolich continued his efforts and attracted additional business, capital in Diversified fund

rose significantly. Ryder played no part in attracting this further business. • The judge found that a partnership existed between Ryder and Frohlich, a fundamental term

of which was that Ryder and Frohlich would contribute equally in terms of time and effort to the establishment of the diversified fund.

• Court held that the partnership has been dissolved when Ryder went to work for someone else.

• Ryder appealed to the NSW court of Appeal which dismissed the appeal and affirmed that the partnership had been terminated by Ryders anticipatory breach and Frolich’s acceptance of that breach by his agreement to Ryder’s departure.

• Court of Appeal in Ryder v Frohlich cited with approval Heyman v Darwins Ltd: “The three sets of circumstances giving rise to discharge of contract are: 1. Renunciation by a party of his liabilities under it; 2. Impossibility created by his own act; and 3. Total or partial failure of performance.

Week 3 – Discharge of Contract by Breach └ Effecting Termination and the Effects of Termination

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All these acts may compendiously described as repudiation, though that expression is more particularly used of renunciation before the time for performance has arrived.”

24.67 – The third of these is the ordinary case of actual breach and the first two state the two modes of anticipatory breach.

Ken: The scenario of an anticipatory breach gives rise to a number of interesting scenarios.

Although it is the case that, based on Foran v Wight the innocent party does not have to actively terminate the contract but is entitled to certain estoppel-waiver based relief if he acts on the intimation (by the breaching party) of that breach, the obvious (and hopefully self evident) corollary is that in the case of an anticipatory breach of an essential term, the innocent party can if it wished, bring the contract to an end by reason of the anticipatory breach – assuming that the breach was of a nature that would entitle the innocent party to do so in the first place, of course.

Thus in paragraph 24.67 of your text, in the context of the discussion of Ryder v Frohlich, another important case 3 situations were set out in which a contract can be “discharged” of which two – renunciation by a party of his liabilities and impossibility created by one’s own act, were in that paragraph described as instances of anticipatory breach (the third being of an “ordinary” case of actual breach).

Paragraph 24.67 of your text sets out the principles a little incompletely and you need to be vigilant when you examine that passage. The “circumstances” of breach or anticipatory breach, as the case may be could not by themselves cause a contract to be “discharged” – it is the act of the innocent party in bringing the contract to an end/terminating the contract ultimately (if so entitled) which would cause the contract to be discharged rather than the fact of the breach or anticipatory breach as the case may be. This is fairly clear from the tenor of the discussion of breach and repudiation generally (see the earlier discussion) and hopefully is fairly obvious (ask yourself – can the act of the party in breach/anticipatory breach unilaterally cause a contract to be discharged? The answer would fairly self evidently be in the negative).

A failure to terminate the contract by reason of the breach/repudiation therefore can have very significant consequences also.

If for example you have a sale of land that the vendor anticipatorily breaches by intimating unequivocally that he proposes to breach it by selling to a third party at some time in the future, then (say) you do not accept that breach and thereby bring the contract to an end – or otherwise do not act on it by bringing yourself within the principles in Foran, the consequence may be that on the day for performance, a contractual right to terminate may itself arise in favour of the vendor (being the party originally in breach) – ie the vendor may have changed his mind and may issue a notice demanding settlement by which time the purchaser is in no position to complete and may itself be in breach by not settling.

Effecting Termination and the Effects of Termination

24.69 Termination of a contract at common law for a failure by a party to perform his contractual obligations requires an election by some unequivocal works or conduct to terminate the contract.


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In most cases this is done by means of service of a notice of termination upon the party in breach.

24.70 – A notice of termination must be expressed in sufficiently clear terms such that a reasonable person would understand te notice to be one terminating the contract – Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997].

• Letter headed ‘Notice to Vacate the Premises’ • Stated that ‘Landlord’s solicitor has advised us that you are in breach of your lease’ and ‘you

are in breach of your lease and we have been instructed to terminate this current lease’. • Court held this was not an effective terminations, letter merely stated that the landlord had

given instructions to terminate the lease. • Furthermore, the letter did not state that the lease was terminated forthwith nor did it

contain any demand for immediate possession of the premises.

Ken: When it comes to termination for breach, the following are the general principles:

a. An election comprising some unequivocal words or conduct is required, usually by service of a notice of termination.

b. The parties are discharged from further performance although obligations that were to be performed prior to the terminating breach are enforceable – so if a vendor brings a contract to an end by reason of a purchaser’s breach, he can sue for the payment of a deposit if the same can be regarded as an obligation that accrued before the time for termination (if of course it has that character – and that cannot always be assumed). And the right to sue for the payment of a deposit needs to be regarded as conceptually a different thing from suing for damages for breach of contract. The former is an obligation under the contract whereas damages is compensation for breach of the contract – this is set out in very general terms here just to avoid any confusion, as damages itself will be a very significant topic to be addressed in great detail towards the end of the semester.

24.71 – The effect of termination is that it discharges both parties from their future obligations under the contract. Obligations that were to be performed prior to the terminating breach are enforceable – McDonald v Dennys Lascelles Ltd (1933).

a. The concept of being discharged from future performance at its most simplistic can be illustrated in any number of examples – a lessor who terminates by reason of the breach of the lessee is no longer obliged to rent the premises to that lessee; a party to the supply of some equipment or thing by way of hire will be discharged from his obligation to continue hiring that thing or equipment and will obviously be discharged from the obligation to pay any hire charges that would otherwise have accrued and the “guilty” party will also be discharged from his obligation to continue the hiring of the equipment to the innocent party. The tute addresses this issue in part.

b. Where the item in question has actually been supplied already and it is the defect in the item that gives rise to the alleged entitlement to terminate, complicated questions can often arise as to how to account for any benefits that have accrued to the innocent party by reason of the hire or supply of the defective equipment eg it has been of some use and if some credit is given for its use prior to its return (since upon the cessation of the period of hire, the defaulting hiring party is obviously entitled to the return of the


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item – and this is simply a function of the nature of termination generally that the parties are discharged from their obligations).

c. These are far beyond the scope of this unit and in fact, often one needs to call in an accountant to calculate the precise amounts that are due to the respective parties, as this can lead to difficult questions of accounting and balancing the benefits that have hitherto accrued. The position is also complicated by the fact that there are numerous statutes that address the entitlement of the parties in the event of, say, the sale or supply or hire of defective goods and if a right to return those goods arises as a result of termination of any relevant contract and how the price or value of the goods that were supplied is to be addressed in any action.

d. It is, again, a nature of the unit and of the discipline of contract law that one needs to quarantine these considerations and focus on fundamental contractual principles as taught incrementally. In this unit where, in any assessment, the question of termination for breach or repudiation specifically arises, you need to be very aware of the rights and obligations of the parties upon termination based on general contractual principles as contained in this lecture summary and the text and these need to be the subject of your focus rather than on ancillary considerations.

Where a contractual right to terminate is exercised, the terminating party must comply with the mode of termination where it is provided for in the contract (typically, again, by notice of some sort – but as indicated per Rigg where the contract has been repudiated, one does not need to comply with the requirements of notice even where these have been prescribed under the contract).

As far as repudiation is concerned, the rules are as follows:

24.73 – The repudiation must be accepted by the innocent party for termination to occur. To achieve this, ‘all that is required is for the injured party to communicate clearly and unequivocally his intention to treat the contract as discharged” – Stocznia Gdynia v Gearbulk Holdings.

Acceptance of the repudiation can also occur through the equally unequivocal conduct by the injured party – Vitol SA v Norelf Ltd

Prior to acceptance of the repudiation, the party in breach may be able to retract the repudiation and insist upon performance of the contract. However, for retraction to occur the party in breach must give notice for the retraction and the circumstances must be such that it is, at the time of retraction, reasonable for the innocent party to be expected to be able to perform the contract – Foran v Wight.

The effect of acceptance of the repudiation is that both parties are discharged from their future obligations under the contract – Stocznia Gdynia v Gearbulk Holdings

a. The intention to treat the contract as discharged must be communicated clearly.

b. On a date prior to performance, prior to acceptance of repudiation it may be possible for the repudiating party to renounce the repudiation and then to require performance. Under the facts of Foran v Wight this was not possible because the repudiation had in that case been already acted upon.

Week 3 – Discharge of Contract by Breach └ Restrictions on the Right to Terminate

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c. “Acceptance” of repudiation is the logical opposite of “not accepting” the repudiation – the former has the effect that the injured party communicates his intention to treat the contract as discharged – see paragraph 24.73 text.

d. The corollary is that if acceptance of the repudiation had not occurred and the promisee had not acted on the repudiation or had not altered its position in any way, then it may be possible for the promisor to withdraw a repudiation. See the discussion at paragraph 24.73 of your text generally for this discussion, and more.

Restrictions on the Right to Terminate

24.75 – A part who has a prima facie right to terminate a contract may, nevertheless, be precluded from exercising that right for a number of reasons, including:

1. That party is in breach of the contract or not ready willing and able to perform; 2. That party has elected not to terminate the contract; 3. That party has not acted in good faith; or 4. The equitable doctrine of relief against forfeiture precludes that party from terminating the

contract.

Party Not ready, Willing and Able or itself in breach

24.76 – A party who is unable or unwilling to perform his obligations under a contract is not able to exercise common law rights to terminate for a breach by other contracting party – DTR Nominees v Mona Homes.

With respect to anticipatory breach, the party terminating the contract does not have to show that he would have been ready to perform on the day performance was due. However, they must shown that at the time of termination they were not already unwilling or unable to perform – Foran v Wight

Amaya v Everest Property Holdings Pty Ltd [2010] NSWCA.

• The facts concerned contracts of also in which purchasers had failed to comply with notices to complete issued by the vendor in relation to three separate contracts.

• The vendor then terminated the contracts. • The three purchasers challenged the validity of the terminations on the basis that the

vendor was not, as a matter of fact, ready, willing and able to complete on the date stipulated in the notice to complete.

• This was true, in that the vendor had not arranged for all the necessary documentation necessary for settlement on the said date.

• CoA held that the vendor would not need to be actually ready willing and able to settle on the relevant date if:


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1. The purchasers had sufficiently intimated that they would not be attending settlement, and 2. The vendor had acted on that intimation by not getting ready to settle on the due date. Only if both these requirements were established on the facts, would the vendor be excused from being ready, willing and able and thereby entitled to terminate the contracts. On the facts, this was found to be the case in relation to two of the contracts, but not the third.

24.77 – Where both parties to a contract commit a breach the question of the right to terminate depends on the order in which the breaches occurred. If party A’s breach is followed by party B’s breach, because party B had not breached the contract at the time party A did, Party B has the right to terminate the contract.

Ken: If a party is not ready willing and able to perform or itself is in breach, then it will not be able to terminate for the other’s breach.

Your text indicates that the order of contractual performance is important – see para 24.76. It is not until one party fails to tender performance that a breach occurs. The issue then arises whether at that point in time (of the breach) the other party could not then terminate unless it was ready willing and able to perform “in substance” at the time of termination. In general, the answer is that it could not, but a significant body of law has grown in respect of what this requires but for the purposes of this unit the treatment in your text is adequate.

Take the sale of land merely as a common example – at common law, a purchaser of land cannot ordinarily terminate for failure of the vendor to complete if the purchaser itself does not have sufficient funds and could not complete the contract –

Accordingly (and take note in particular of the discussion in Foran v Wight):

a. A purchaser of land ordinarily would have been unable to terminate for breach on the part of the vendor unless it was itself ready willing and able to perform (this is the position at common law but remember that in WA where the common form REIWA general conditions are adopted, the position is different).

b. However in Foran it was observed that where the vendor had already anticipatorily breached the agreement, then the purchaser having acted on the anticipatory breach, would not necessarily have to show that he would have been ready willing and able to perform on the day of performance but it must show at the time of termination that it was “not already unwilling or unable to perform”. (And you will note that Foran was important for another point, already discussed, namely whether the innocent party had to terminate in the first place).

Election not to Terminate

24.81 – As noted above an innocent party must elect to terminate the contract. Once an election to terminate the contract is made it cannot be retracted – Newbon v City Mutual Life Assurance Society Ltd (1935).

However, the innocent party may also elect not to terminate the contract, but rather affirm it – Mehmet t/as Altan fashins v Kesidis [2009] NSWCA.


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Once a party has so elected that party cannot later seek to terminate the contract (on that breach).

Ken: The concept of “election” is that having once made an election either way (to terminate or to affirm) it cannot ordinarily be retracted.

An election by definition is when a party, confronted with a choice between alternative and inconsistent rights¸ elects to enjoy one right and surrender the other- see para 24.82 Text; Bell

Ordinarily this would pose no real difficulties – so for example a seller of a car in the event of a breach by the buyer on the day of sale may elect to bring the contract to an end and then sell the car to someone else (thus surrendering his right to insist on the sale from the purchaser).

In the case of a sale of land however, an action for specific performance (which essentially is an action that affirms the contract – specific performance will be discussed in greater detail in week 13) will not preclude the vendor from terminating and then suing for damages for the purchaser’s breach.

In summary, an action for specific performance being an equitable remedy needs to be brought promptly and the ongoing failure of the purchaser may entitle the vendor to terminate the contract.

You are not expected at this stage to understand fully nor apply the law of specific performance now save that the bringing of an action for specific performance isn't inconsistent at the time it was brought, with a subsequent action to terminate the contract and sue for damages.

Another example – where time is of the essence of the contract, granting an extension of time does not necessarily amount to an election to affirm the contract – it is (as explained in Bell at para 24.87) an act consistent with the continuance of the contract but also consistent with the reservation of a right to terminate.

24.87 – “Acts consistent with the continuance of the contract but also consistent with the reservation of a right to terminate in certain events may not amount to an election’ – The Bell Group v Westpac Banking Corporation.

24.85 – Immer Pty Ltd v Uniting Church in Australia Property Trust:

“An act amounting to election must be unequivocal. Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act”.

Ogle v Comboyuro Investments Pty ltd (1976).

Held that even though a vendor may have commenced proceedings for a decree of specific performance of a contract for the sale of land where time is of the essence, he has not necessarily lost the right to terminate the contract for the purchasers breach.

This is so because, if there is an ongoing failure of the purchaser to perform, it may have the consequence that the vendor may have to sell the land to another person, and thus lose his right to specific performance.

However, the vendor may still retain the right to terminate the contract and seek damages.


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Furthermore, even if the vendor in such a case obtains an order for specific performance he may, with the approval of the court, elect to have the contract terminated.

24.88 – Finally, Words or conduct that merely recognise the existence of a contract do not, of themselves, amount to an election to affirm the contract - Sargent v ASL Developments.

Tele2 International Card Company SA v Post Office Ltd, summary of the principles of election:

1. If a contract gives a party right to terminate upon the occurrence of a defined actions or inactions of the other party and those actions or inactions occur, the innocent party is entitled to exercise that right the innocent party has to decide whether or not to do so. Its decisions is, in law, an election.

2. It is a prerequisite to the exercise of the election that the party concerned is aware of the facts giving rise to tits right and the right itself.

3. The innocent party has to make a decision, because if it does not do so then ‘the time may come when the law takes the decision out of its hands, either by holding it to have elected not to exercise the right which has become available to it, or sometimes by holding it to have elected to exercise it’.

4. Where, with the knowledge of the relevant facts, the party that has the right to terminate the contract acts in a manner which is consistent only with it having chosen one or other of two alternative and inconsistent courses of action option to it (ie to terminate or affirm the contract), then it will be held to have made its election accordingly.

5. An election can be communicated to the other party my words or conduct. However, in cases where it is alleged that a party has elected not to exercise a right, such as a right to terminate a contract on the happening of defined events, it will only be held to have elected not to exercise that right if the party ‘has so communicated its election to the other party in clear and unequivocal terms’.

Ken: I digress to discuss a matter of some significant practical importance raised briefly earlier in the context of repudiation.

Now, quite often an innocent party to a contract which it thinks has been breached will issue a notice or demand of some sort to request or demand that the allegedly breaching party “fix” the breach.

This without more obviously makes perfect sense. It is expensive and risky to go to court and if possible the parties will try to resolve the matter as between themselves if at all possible.

There is also another good reason to issue such a request or demand.

Quite often, the innocent party might, say, be tolerably confident that the guilty party has breached the contract in question in some shape or form but it is not as comfortable in taking its chances on treating the breach as being of the type that entitles it to terminate, or that the guilty party has without more repudiated – bearing in mind that if the hitherto innocent party has made the wrong call and terminated the contract when the breach (and assuming that the guilty party was in breach in the first place) was not of the type that would entitle the innocent party to terminate then the hitherto innocent party might itself be at risk of having repudiated.


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Asking the allegedly guilty party to “fix things”, as explained in Bell would not amount to an affirmation of the contract – but if the guilty party then did refuse, that could at least potentially strengthen the innocent party’s position if he then saw fit to terminate the contract. He could then perhaps argue that the guilty party’s continued or delayed refusal to perform the terms of the contract would amount to “recalcitrance” or similar or “shilly shallying” – see the pungent descriptions at para 24.56 text.

I can say that this is very often done in practice.

In one sense, if the guilty party did comply with the “request” then for the most part, well and good. An interesting variation of all this however is that if the guilty party did comply then somewhat ironically the innocent party might in some cases be disappointed particularly if he was relying on the fact of the breach to bring the contract to an end (this is something that we discuss in the tute) – eg when he had had enough of the guilty party and would have been keen to terminate the contract by “taking its chances” on the severity of the breach or repudiation in terminating – the guilty party by fixing the defect could then have likely demonstrated that he was no longer recalcitrant (if he ever was!) or that there would no longer be any breach upon which the innocent party could base an action for termination (though everything depends on the circumstances).

Termination not in Good Faith

24.91 – The right to terminate a contract for breach is subject to an obligation to act in good faith – Burger King v Hungry Jacks.

Factors that have been held relevant in determine whether a termination was in good faith include:

(See text for cases on each point)

1. The deliberation and seriousness of the breach relied on. 2. Dishonest conduct by the breaching party. 3. The degree to which the relationship has been damaged. 4. The length of notice. 5. Whether the terminating party was prejudiced or misinformed. 6. Whether the terminating party’s conduct was a cause of the breach. 7. Whether the terminating party was aware that specific harm would follow from termination.

Ken: This is a concept that was dealt with in Contract 1.

Your text sets out in para 24.91 an extract from Cheshire and Fifoot in which 8 factors relevant to whether termination was in good faith.

You would be aware of the following counterpoints to this argument from your studies in contract 1:

a. Australian courts have not uniformly endorsed the universal implication of good faith in contracts.

b. The exercise of a legitimate contractual power will not ordinarily be regarded as being in bad faith – the Contract 1 cohort may recall the relatively recent decision of Topseal v


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Sika [2008] WASC 57, a decision of our own Supreme Court which is directly on point wherein the Court noted: There have been many cases concerned with the imposition of implied obligations of good faith in the performance of a contract. An obligation of good faith in the exercise of a contractual power is not inconsistent with a legitimate pursuit by such party of its own commercial self interest – even if the exercise of that power may render the contract itself sterile paras 55 and 56. Topseal was specifically a case involving an exercise of a contractual power to terminate an agreement.

c. It is true that bad faith was found in the Burger King case (described as the leading case) but it must be said that that case was fairly extreme. In essence, there was there found not an exercise of a legitimate contractual power but was an exercise of a direct plan to prevent HJ from expanding and to enable BK to develop the Australian market on its own, unhindered by its contractual obligations. The ground for the termination was the breach by HJ to develop the Australian market – against the background of the fact that HJ had itself imposed a freeze on HJ’s recruitment programme and withdrawal of financial and operational approval of new restaurants – a rather unusual situation.

Ultimately I would suggest that the bad faith/termination not in good faith argument would be rather difficult to succeed on.

Relief Against Forfeiture

24.92 – In many cases termination of a contract for its breach may lead the breaching party to lose some interest in property because of his breach of contract or as a result of the contract being terminated from some other reason.

However, that interest may be protected by a court pursuant to principles relating to the equitable doctrine of relief against forfeiture.

In Myman v Rose [1912], Loreburn LC said that equity’s jurisdiction here was ‘to prevent one man from forfeiting what in fair dealings belongs to someone else, by taking advantage of a breach from which he is not commensurately and irreparably damaged’.

24.93 – The jurisdiction to relieve against forfeiture is underpinned by the principle of unconscientiousness. Relief will be granted if it would be unconscientious to allow forfeiture to occur – Stern v McArthur.

24.94 – In Broad terms, equitable intervention on the basis of these principles relates to circumstances involving fraud, accident, mistake or surprise – Shiloh Spinners Ltd v Harding.

In cases other than those involving accident or mistake, one must establish that the conduct of the party seeking to enforce the right of forfeiture has ‘in some significant respects caused or contributed’ to the breach of the contract by the other party – Tanwar enterprises Ptd Ltd v Cauchi (2003).


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RHG Mortgages Securities Pty Ltd v BNY Trusts Co [2009], in order to establish a case for relief against forfeiture, a plaintiff needs to do the following:

1. Identify the right or rights that would be forfeited; 2. Identify the legal rights, the exercise of which would effect the forfeiture; and 3. Identify the reasons why the exercise of those legal rights would be unconscientious.

24.97 – The willingness of courts to exercise their jurisdiction to relieve against forfeiture fluctuates from time to time. In Australia the most recent High Court decision on the matter in Tanwar Enterprises Pty ltd v Cauchi, suggests that the courts are currently less willing to grant relief than in past.

In Tanwar the court made it clear that it should be reluctant to interfere with deliberately negotiated contractual rights and that the jurisdiction to relieve against forfeiture does not authorise it to remake a contract into a form that it thinks is more reasonable or fair.

24.98 – Although the principle of relief against forfeiture can apply in a number of contexts, this chapter will confine its analysis to contracts for the sale of land where a purchaser seeks relief against forfeiture of his interest following termination of the contract by a vendor.

24.99 – In this context, relief against forfeiture will be permitted if it would be unconscientious for the defaulting purchaser to lose his or her interest in land as a result of the termination of the contract by the vendor. In such cases the defaulting purchaser will sleek the remedy of specific performance rather than relief against forfeiture, because at that time, the contract having been validly terminated by the vendor, the purchaser no longer has any interest – the vendor has already forfeited the interest.

The logical consequence is that the purchaser cannot seek relief against forfeiture for a non-existent interest. He must seek specific performance of the contract – Tanwar.

In determining whether the contract should be specifically enforced, the court will need to ascertain whether it was, in all the circumstances, unconscientious for the vendor to have forfeited the purchaser’s interest.

24.100 – A common example… where the purchaser has failed to complete a transaction within the time stated in an essential contractual time stipulation (essence of time) and the vendor subsequently terminates the contract.

Union Eagle ltd v golden achievement Ltd – house of Lords rejected a purchaser’s application for specific performance in circumstances where the vendor had terminated the contract after the purchaser was late by 10 minuets in seeking to tender the balance of the purchase price where time was the essence of the contract.

(See excerpt in text).

24.101 – Leading case in Australia is Tanwar Enterprises v Cauchi:

• Purchaser of land pursuant to three separate contracts was granted two lengthy extensions of time to complete the transactions.

L00 LAW1212 Contract law 2 - StudentVIP

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