Types of Contract Terms and Breach Consequences

It is a well settled principle in law that when a contract has been breached a party’s failure to perform primary obligations in the contract, it becomes voidable. This implies that the innocent party can terminate the contract at his at his own volition. According to the court in L’Estrange v E. Graucob Ltd that once a contract has been signed the parties’ bears a moral and legal imperative to perform their contractual obligations. It is instructive to note that the contractual obligations of a contract are usually envisaged in a terms of a contract. A term of the contract has been defined to be any provision that form the subject matter of the contract and engenders a legal obligation.  There are several types of terms of a contract and which have disparate significance and impacts on the rights of the parties if breached. These terms are differentiated according to their gravity. However, the chief objective of this paper is to rigorously analyze whether the breach of a condition which may likely to give the innocent party a right to terminate the contract even if the breach is minor. The aim is to determine if the aforementioned position is in consonance with the position in Australia. Conversely, to bring to force a more comprehensible and persuasive argument on the concept breach of a condition in Australia it will be prudent to apply some common law decisions decided the English Courts.

It is a cardinal rule that the impact of discharge of contract contracts for breach of a term is conditional on whether the term is a warranty, a condition or an intermediate. The issue that lends itself for determination is whether a party may discharge the contract only for a trivial breach of a condition. the traditional classical approach according to Bettini v Gye is that a breach of a condition even if trivial engenders a right to terminate the contract. The locus classicus that provides the definition of a condition in Australia is the landmark ruling of Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd where the court held that a condition is a term of the contract that goes to the its root and that if breached the innocent party has the right to terminate the contract. On the other hand, it is a long standing principle in English Common Law according to Poussard v Spiers that termination of the full contract for breach of a term will only be justified if an award of the remedy of the damages will not be a sufficient remedy for the innocent party. In contrast, Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  took to the view that an innocent party will be entitled to terminate the contract if the breach of the terms takes away a material benefit that the innocent party would have derived from the contract. 

Classical Approach to Termination for Breach of a Condition in Contract Law

A term can be regarded as a condition by; statute i.e. section 19(a), (b) of the Goods Act 1958 (vic) and section 70 (1), (2) of the Trade Practices Act 1974 (Cth), by the mutual agreement of the parties as was averred by the court in L Schuler AG v Wickman Machine Tools Sales Ltd and if it held to be a condition by construction and interpretation of the terms.

The rigid English and Common Law position has been that once a term has been rendered to be a condition any breach of such a term will give the innocent party a right to bring the contract to an end irrespective of the consequences it may have on the contractual obligations or benefit of the parties. The problem in the determination of an innocent’s party right to terminate the contract for breach is compounded by the issue of whether the term is an essential term.  What will be intriguing yet seemingly perplexing are circumstances when there has been a breach of the term that goes to the root of the contract or is an essential but the breach is minor.  So the question that begs is what is the ‘litmus test’ that is applied in making such a determination? The definite answer to these issues will obviously reflect itself at the end of this essay. More significantly though, there appears to be conflict between traditional and contemporary legal positions in the application of the following four tests that emerge from this discourse;

That an innocent party will have a right to terminate the contract unilaterally if-

1. The breach is of a term that goes to the root of the contract
2. The breach is of an essential term and its consequences deny the innocent party  a material benefit of the agreement that would have been derived from performance contract
3. Stipulation of the Parties
4. Damages is not adequate remedy

This test has been popularly referred by the courts as ‘the test of essentiality’. Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd firmly pronounced that a term will be held to go to the root of the contract if one takes to into account the whole contract and finds that a strict guarantee/ promise of performance was given and the terms is so significant that the innocent party would not have entered into the contract but for the guarantee/ promise. It should be borne in mind that even if the term has been regarded as a condition on the face of it, the court will seek to establish if the innocent party would have entered into the contract if he had not relied on the strict guarantee of performance. The courts must therefore examine the language that was applied by the parties and if the parties saw the need to promote the certainty of the agreement.

Contemporary Approaches to Termination for Breach of a Condition in Contract Law

The High Court in Luna Park (NSW) Ltd v Tramways Advertising Pty Ltdwhile overturning the decision at the NSW court of appeal held that an innocents party right to terminate the whole contract unilaterally for a breach will arise if the term has a direct impact on the substance of the contract or if the term and the term is so fundamental that failure to perform the term will be tantamount to failure to perform the whole contract. Notably, this is not a significance departure from the position adopted by the NSW Court of Appeal. The view by the court in Tramways authoritatively gives life to the proposition that in Australia a minor breach of a condition will not entitle the innocent party to unilaterally terminate the contract as long as the breach of the term is not tantamount to a failure to perform the whole contract and that an innocent party would still have entered into the contract even despite of the absence of a guarantee as to its performance. In other words, a minor breach of term that is condition by its general nature will not automatically imply unilateral termination of the contract by the innocent party. 

This test was for a condition and discharge of contract by breach propounded by Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd where he affirmed that an innocent party has the right to terminate the contract if the term that has been breached i.e. a condition is so essential to the contract that the breached will take away the whole benefit that the innocent party had bargained for in the contract. Ideally, the consequences of the breach of the essential term must be the actual ones and so severe that the innocent party looses the whole benefit of the contract that he would have gained if the term had not been breached. This test of an essential term and consequences of breach on an innocent party has been aptly summarized in Decro-Wall International SA v Practitioners in Marketing Ltd  where the court reasoned that an innocent’s party decision to unilaterally terminate a contract following a breach of a term will be valid in the legal sense and binding on the other party in breach if the consequences of the breach have a material and adverse impact on him and it would be unfair to let him continue being a party to the contract.

Alternative Approaches to Termination for Breach of a Condition in Contract Law

The High Court of Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd supported the ratio extracted from Hong Kong Fir. It affirmed Lord Diplock popular wisdom and reasoning by contending that it that the seriousness of a breach of a term that is not essential to the contract and the breach of an essential term embodied in a contract justifies the unilateral termination of the contract by an innocent party to it. The High court of Australia further added a wider interpretation by holding that the test objective test should be applied in establishing the innocent’s party entitlement to terminate the contract. One should determine what a reasonable person facing the situation as the innocent party in the contract would have done when the term was breached.  This obvious robust interpretation of the law implies that even a minor breach of an essential term such as a condition such would not give rise to the right to terminate the contract unless it is proved that a reasonable person would have in the same circumstances would have acted that way.  Going by Australia’s position with respect to the test in Hong Kong it can be conceded that in Australia the position seems to be that a minor breach is not a serious breach within the meaning of the High court of Australia reasoning in Koompahtoo and can thus not give rise to termination of the contract. In addition, a minor breach of a section of a condition will today not call for termination if there is no evidence to show that the innocent party will be substantially de deprived of the benefit he bargained for when entering the contract. 

The general rule is that where the parties in a contract make a mutual agreement that a certain term of a contract is a condition then it will be regarded as such.Rather interestingly, Lord Dipock in the dictum he gave in Photo Production Ltd v Securicor Transport Ltd argued that the concept of breach of a condition if should only be left to parties that have made mutual agreement through a meeting of their minds that any breach of a term that has been expressly recognized as a condition in the contract shall entitle the other party to elect to terminate the contract even if the breach is trivial. The courts in Australia have only supported the mutual agreement of Lord Diplock’s view only to the extent that the term will be treated as a condition if the parties made a mutual agreement but does not advocate for exclusive application of the concept of breach of a condition.  

Conclusion

The Australian Capital Territory in O’Neall vs Barra Rossa Pty Ltd affirmed that parties in a contract have the freedom to elect the terms that which will be regarded as when breached the innocent party will have right to bring the contract to an end. However, the agreement about such terms must be made clearly, expressly and without creating any difficulty in construing the meaning. In the Australian decision of ANZ Banking Group Ltd v Beneficial Financial Corporation the use of the express term condition in a contract by the parties does not as a matter of law imply that it is a condition in the legal sense. The court will only find a term in a contract to be a condition in the strict legal sense through construction and interpretation of the terms in question after it has examined cogent evidence of intention from the parties. The intention of the parties in this case has to be clear and devoid any ambiguities. This implies that in Australia even a minor breach of a condition that was term, expressly created by the parties in the contract who effect when breached is termination does will not call for a compulsory termination of the contract. The courts have to be satisfied on a balance of probability that the parties had an intention to terminate the contract. For the most part, the courts construction and interpretation of the wording created by parties will find that the parties only intended to terminate the contract for breach of the whole condition and not a minor part of it. It is worth noting that, Australia supports the classical view that if the parties through mutual agreement and by express wording in the contract intended that the innocent party will have the right to terminate the contract upon breach of a condition irrespective of the gravity of the consequences they will be left to stick to their agreement even if the breach was minor and had trivial consequences.   

As a rule of general of practice in common law contract law pursuant to the case of Poussard v Spiers if a part is in breach of a condition, the innocent party will be allowed to terminate the contract as a remedy if damages would not be an adequate remedy. This implies that in the event of a minor breach of a condition the innocent’s party unilateral termination of the contract will not be legitimate if the damages could be an adequate remedy. In Australia the position is that if after the breach of a condition there is evidence to prove that that damages will be an adequate remedy the courts are always unwilling to the contract terminated but rather they hold view that the parties should be given an opportunity to continue performing their obligation. The Australian courts in many cases have preferred that the innocent party be awarded damages for any financial or economic loss that has been suffered and the parties continue to perform their contractual obligations. In Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd the Australian courts blatantly manifested their unwillingness to hold a term as a condition and insisted that  the parties should be allowed to continue performing the their obligations. Therefore it can be argued that a minor breach of condition will trigger an award of damages and not a whole termination of a contract. According to Bentsen v Taylor Sons and Co damages for breach condition will be assessed according the magnitude of the consequences of the breach on the innocent party.  

Conclusion

On a balance of all legal and scholarly contentions revealed in this paper the overriding argument across all tests is that a minor breach of a contract will not justify the termination of the contract. It has been divulged that the position of Australia contract law may be significantly different from the rigid and strict common law position. Suffice to say, the drafters and implementers of the Australia Contract law have conscious to the fact that a condition may be breached partially, wholly and substantial. In this sense the breach of the condition is considered to be minor if it is partial and therefore the parties still have an opportunity to continue with performance but damages must be awarded to the innocent party that has suffered damages as a result of the breach. Against this backdrop, it is instructive to note that in the case of an anticipatory breach of a condition, Australia contract law as envisaged in the case of Stevter Holdings Lfd v. Katra Constructions Pty Lfd provides that even a minor breach is an indication that the party in breach is not willing to perform his contractual obligations and therefore termination of a contract will be legitimate 

Books & Articles

M. Shea ‘Discharge from performance of contracts by failure of condition.’ (1979) 6 The Modern Law Review42, 623-645.

Adam Rollnik, ‘Termination for Breach of Contract.’ (2009) 3 Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia 23, no. 1

Desmond Butler,Christensen Sharon, Willmott Lindy, and Dixon Bill, ‘Contract Law Case Book.’(2013).

W, Carter, G. J. Tolhurst, and Peden Elisabeth, ‘Developing the Intermediate Term Concept.’ (2006) Journal of Contract Law22

Jane Swanton, ‘Discharge of Contracts for Breach.’ (1981) 69 Melb. UL Rev. 13.

John Carter,W., and Hodgekiss C, ‘Conditions and Warranties: Forebears and Descendants.’ (1977) 8 Sydney L. Rev.  31.

John Carter., Harland David, and Edmund Kevin Lindgren. Contract law in Australia. (Sydney: Butterworths, 1996)

Roger, Brownsword, ‘Retrieving Reasons, Retrieving Rationality?: A New Look at the Right to Withdraw for Breach of Contract.’ (1992).

Roger. Gamble, ‘Australia and the Intermediate Term-No Country for Old Rules.’ (2008) 34 Monash UL Rev. 457.

Case Law

Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549,556

ANZ Banking Group Ltd vs Beneficial Financial Corporation [1983] 1 NSWLR 199 at 204

Bentsen v Taylor Sons and Co [1893] 2 QB 274

Bettini v Gye (1875) LR 1 QBD.

Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 2 All ER 216

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474, Court of Appeal

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61

L Schuler AG v Wickman Machine Tools Sales Ltd [I974] 1 AC 235

L’Estrange v E. Graucob Ltd [1934] 2 KB 394

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66

O’Neall vs Barra Rossa Pty Ltd (1989) 96 FL3 436

Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

Poussard v Spiers (1875) LR 1 QBD 410.

Stevter Holdings Lfd v. Katra Constructions Pty Lfd [I975] 1 NSWLR 459

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 63