Contracts - Termination for Breach

Introduction

• Every Breach, no matter how small will give rise to damages
• However, some breaches will give right to terminate.

PERFORMANCE

Types of breach – When can it be said that a breach has occurred? And what kind of breaches give rise to right to terminate?

• 1. When can it be said that a breach has occurred?
• Failure to perform as specified when performance is due
• Unwillingness or Inability to Perform (‘repudiation’ or ‘renunciation’) REASON IS IRRELEVANT
• Performance means exact or precise performance, not substantial performance
• 2. Only reasonable efforts have to be made to satisfy a term.
• 3. A breach cannot occur until a promise has become due.
• But breach may be manifest before performance is due (repudiation) i.e. there may be an order of obligations and an obligation is conditional upon the other party performing their obligations
• A problem can occur when a breach occurs midway in these tit-for-tat contracts
• Need to determine
• The point at which the contract stops
• What performance has fallen due at that stage and what hasn’t
• It may be that one party gets some benefit but is absolved because it didn’t get to their turn.
• BUT sometimes, a duty to perform does not depend on what the other party does (tenancy contract) – so tenant can’t refuse to pay the rent because the house is in poor repair.
• More common is they are concurrent.

• BREACH
• Two kinds
• Failure to perform –
• fail to perform as and when agreed, incomplete/ineffective/delayed performance = breach
• Every obligation has a substantial and a temporal element.
• Unwillingness to perform
• A party indicates an unwillingness or inability to perform their contractual obligations.
• This is known as repudiation or renunciation
• Can be an express repudiation or announcement
• Or can be inferred from conduct – a party might be behaving in a way that indicates they are not into it.
• The timing of this breach is important because one party’s attitude or announcement will be manifest before their obligation is due.
• So you can claim your remedies there and then.
• Once the threat is made you can terminate the contract.
• If a person does terminate in response to a breach and it turns out that they were not legally justified, then they are in breach and this give the other party a right to terminate

Ways to avoid the hazards of an action for termination

• Include an express term

Express Contractual Rights to Terminate I

• One way of making a time clause essential is to include a ‘time is of the essence’ clause
• Express clauses to terminate have to be followed exactly.
• If Contractor (R) misses deadlines, then Principal (MfPW) can demand Contractor ‘show cause’ (‘please explain’) as to why contract should not be terminated
• (Renard)
• Occurrence of following events shall constitute good cause for BKC…to terminate this agreement: (d) HJ fails to comply with any terms, conditions or provisions of this agreement
• (Burger King)
• “Either party may terminate this arrangement by giving to the other notice in writing…effective 32 days after posting”.
• (Garry Rogers)

Contractual Rights to Terminate II

• Restrictions
• Implied duty of good faith
• This can work to constrain these express contractual rights
• The termination power needs to be used for a proper purpose (Burger King) but no HC authority on the matter – so relate this issue back to implied duty of good faith
• Damages for loss of bargain
• A more practical constraint
• The consequences of spelling out with precision that the breach of a particular term gives rise to a right to terminate means that any tiny breach can give rise to that right
• SO, this termination may give rise to a right to damages even if the breach is trivial
• The HC has responded to this possible harsh effect by developing this principle (Shevill)

Shevill

• Facts
• The contract was a commercial lease
• The tenant was experiencing financial difficulties and was constantly late in paying the rent
• The tenant was trying to meet their obligations but they couldn’t so landlord brought action to terminate
• Issue
• Had the landlord properly exercised their right to terminate?
• And could the landlord claim the usual measure of contract damages?
• Outcome
• Normally the innocent party can damages for loss of the bargain which in the case is usually a lot
• The limitation is usually that the landlord is under a duty to mitigate by getting another tenant
• In this case he was claiming damages for loss of the bargain and wanting the whole lease paid out
• SO should the landlord be entitled for lost future rent?
• When someone is provided with an express right to terminate and it can be used harshly then the court will not award damages for loss of bargain unless the contract clearly says so
• Look at it in terms of causation: The loss of bargain was because of the termination, not a substantial breach.
• The HC said that an express term that loss of bargain damages can entitle parties to them

Right to terminate at law

• No express right to terminate for breach.
• Q: Which breaches justify termination?
• A: Serious breaches
• Q: What is a serious breach?
• A:
• Breach of an important term (breach of a “condition” rather than a “warranty”)
• Based on status of terms – focus on the term
• breach causing substantial loss of benefit
• Rather than look at the term, look at the consequences of the breach. – focus on the consequences of the breach
• “repudiation” or repudiatory conduct (a.k.a. “renunciation”)
• Focus on the attitude of the contract breaker
• Their unwillingness or inability to perform
• These are overlapping issues and can be brought in the alternative

Condition v Warranty

• Condition = a contractual duty, the failure of which is a breach of the contract that gives rise to the right to terminate
• Parties may designate a term to be a condition
• Where no express designation, matter of construction:
• Promise so important to promisee that s/he would not have entered into the contract unless assured of strict or substantial performance of the promise (Jordan CJ in Tramways)
• Language
• Nature of contract
• Other terms of contract

Substantially deprive party of benefit

• The test amounts to this: does the event deprive a party substantially of the whole benefit expected to derive from the contract? (Hong Kong Fir, per Diplock LJ)
• The question then is, does the breach go to the root of the contract? (Hong Kong Fir, per Upjohn LJ)

Repudiation I

• One party:
• says that he or she will not perform
• says that he or she cannot perform
• maintains an interpretation of the contract which is erroneous
• unjustifiably terminates

Repudiation II

• Focus is on whether a party, by words or conduct, has indicated an unwillingness or inability to continue with the contract.
• Overlaps with other approaches
• But useful argument where:
• Party performs with many and constant breaches, each of which was not so serious but the cumulative effect of which was serious
• Party indicates in advance that s/he will not or cannot perform.

Repudiation III

• Series of breaches:
• Carr v Berriman
• Progressive Mailing House v Tabali
• Laurinda v Capalaba Park Shopping Centre

‘Anticipatory Breach’ I

• Two situations:
• Party has indicated by words or conduct that he or she will not or cannot perform on the day; or
• Party has put it out of his or her power to perform on the day

‘Anticipatory Breach’ II

• How certain must it be that the promisor will breach?
• How serious must the breach be?
• If seriousness depends on consequences, how are the consequences established?

Erroneous Interpretation of Contract

• Luna Park v Tramways Advertising (1938)
• DTR Nominees v Mona Homes (1978)
• What role does “good faith” play in determining whether an erroneous interpretation amounts to repudiation?

Notices to complete

• Two scenarios:
• Time inessential, but a date for performance set in contract
• Time inessential, and no date for performance set in contract
• A valid notice must set out:
• A time for performance
• A reasonable time for performance
• The consequences of not performing

Exercising the Right to Terminate

• Election
• Affirmation/waiver
• Readiness and Willingness

Election

• Has the party elected by unequivocal words or conduct?
• Note application in situations of delay: Tropical Traders v Goonan
• Did the party have knowledge of the necessary facts which gave rise to the right to terminate?

Terminating Party “Ready, Willing and Able”

• Innocent party unable to terminate the contract unless he or she is ready, willing and able to perform his or her own obligations at the time for performance.
• Note operation where anticipatory breach