Tuesday, June 8, 2010

Contracts - Consequences of Termination - Recovery of Instalments and Deposits

Recovery of Sums Fixed by Contract

  • Money sums fixed by contract may be recoverable in action for debt or liquidated sum
    • Eg-contract price for work performed
    • Eg-liquidated damages clauses in building contract
  • Liquidated demand = demand for fixed sum in which only liability is at issue (not quantum)
  • Liability issue=has debt accrued?

Advantages over claim for damages

  • Summary judgment procedure
  • Reverse onus of proof-defendant must prove payment Young v Queensland Trustees Ltd (1956) 99 CLR 560
  • Open to both party in breach and innocent party

When is contract sum recoverable as debt?

  • Debt must have accrued
  • Whether debt accrued depends on proper construction of contract. Hoenig v Isaacs [1952] 2 All ER 176,178,181
  • Two main factors:
    • Classification of obligations as dependent or independent
    • Does obligation to pay depend on exact performance?

Dependent Obligations

  • No right to recover price as debt without due performance
  • Fact performance is prevented by other party’s breach immaterial

Independent Obligations

  • Obligation to pay on specific day irrespective of performance by other party

Example I: Sale of Goods

  • Normally, price recoverable only if property [ownership] in goods has passed to buyer. Goods Act 1958 (Vic) s 55
  • If property has not passed and purchaser rejects goods
    • No action for price
    • Damages only

Example II: Sale and Purchase of Land

  • Obligation to pay purchaser price and obligation to tender title normally concurrent or dependent obligations
  • Contract price not recoverable as debt if title not transferred

Example III: Employment Contracts

  • Right to wages dependent on performance of work Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435

Independent Obligations-Terms Contract

  • Whilst contract on foot, unpaid instalments recoverable as debts since contract stipulates for payment on fixed date irrespective of settlement McDonald v Dennys Lascelles at 476-477

Contrast Position where Terms Contract terminated

  • Unpaid but overdue instalments cease to be due and payable McDonald v Dennys Lascelles at 479
  • Rationale - conditional obligation to pay only Ibid 477-78
  • Cf

McDonald v Dennys Lascelles Overview

    • Contract for sale of land on terms to company
    • Purchaser’s obligations guaranteed by Co. director
  • Facts: Two Main Contracts
  • Contract 1- sale and purchase of property on terms
    • Johnsons - vendor
    • Besleys - purchasers
  • Contract 2 - Besleys resold property to Rye Grazing prior to settlement on same terms as Contract 1 [except price]
  • Possible as long as Besleys continued to meet their obligations under contract 1 and settlement of both contracts occurred on same day
  • Terms of Contract 2 Altered
  • Besleys assigned their interest as vendor under Contract 2 to Dennys Lascelles
  • Rye Grazing needed more time to pay instalment under Contract 2
  • Dennys Lascelles agreed to extension only if Rye’s obligations under Contract 2 were guaranteed by Rye Grazing’s directors, McDonald and Holdsworth
  • Breach of Contract 2
  • Purchasers under both Contract 1 & 2 failed to make payment of next instalment (£1000) on due date
  • Vendor (Johnsons) terminated Contract 1
  • Rye Grazing wrongfully terminated Contract 2
  • Contract 2 regarded by all parties as at end
  • Substitute vendor (Dennys Lascelles) under Contract 2 then sought to recover £1000 from guarantors as debt
  • Legal Questions
  • Did termination of Contract 2 relieve Rye of obligation to pay overdue instalment of £1000?
  • If so, did guarantors’ liability to guarantee Rye’s obligations also cease?
  • Held:
  • Guarantors of contractual obligations secondarily liable = guarantors only liable if purchaser primarily liable McDonald at 480-81
  • A guarantor not liable under guarantee where principal debt cannot be enforced. McDonald at 471
  • After termination, guarantor not liable for any unpaid sums as debtor no longer primarily liable

Does Obligation to Pay depend on Exact or Precise Performance?

  • Is lump sum contract entire or divisible?
  • Lump sum contracts may or may not be entire
  • Entire contracts:
    • complete or exact performance is condition precedent to right to payment Cutter v Powell (1795) 6 TR 320; 101 ER 573

Where Lump Sum Contract not Entire

  • Exact performance not a condition of payment Hoenig v Isaacs
  • Right to payment accrues upon substantial performance
  • Even repudiating party can recover

Partial Performance

  • Contrast partial performance:-
    • Breach goes to root of contract Bolton v Mahadeva
    • Lump sum not recoverable as debt
    • Innocent party can terminate & pay nothing Sumpter v Hedges

Has there been substantial or only partial performance?

  • Classification of breach depends on:
    • Nature of breach/defect
    • Cost of remedying breach relative to total contract price or relevant severable instalment (as case may be)
  • Bolton v Mahadeva, Connor v Stainton

Right to Set Off Rectification Costs as Damages

  • Substantial performance still breach entitling other party to damages for cost of rectifying any defects [unless other party has prevented complete performance] Hoenig v Isaacs
  • Innocent party must pay price, but entitled to deduct amount of any set off or cross claim for cost of rectification Hoenig v Isaacs

Divisible Contracts Pt I

  • Consideration divided up into parts according to work to be performed or goods to be supplied
    • Eg-building contract

Divisible Contracts Pt II

  • Parties (including those in breach) can recover sums for parts completed prior to termination even though another part not complete
  • Instalments may be entire or require only substantial performance

Partial Performance by Wrongdoer [not examinable]

  • No work, no pay!
  • Restitutionary options not available See e.g. Sumpter v Hedges [1898] 1 QB 673

Partial Performance and Innocent Parties Pt I

  • Innocent party may seek either:
    • Damages for breach or
    • Reasonable fee for services on a “quantum meruit” [e.g., as in Renard Constructions]

Partial Performance and Innocent Parties Pt II [do lightly only]

  • Action on “quantum meruit”
  • Historically one of number of “common counts” including:
    • Monies had and received
    • Quantum valebat ( reasonable sum for goods delivered)
  • Now regarded as restitutionary action grounded in unjust enrichment
  • Only available if contract terminated [or ineffective]
    • Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256 per Deane J

Recovery of Money Already Paid prior to Termination-Deposits Pt I

  • Deposit = guarantee or earnest Brien v Dwyer, Romanos v Pentagold Investments [2003] HCA 58
  • Non-payment = breach of condition Brien v Dwyer

Deposits Pt II

  • Payor in breach – reasonable deposit forfeited McDonald v Dennys Lascelles at 470
  • But equitable relief against forfeiture of excessive deposits because penalty
  • Workers Trust and Merchant Bank Ltd v Dojab Investments Ltd [1973] AC 573,578.
    • But see Property Law Act 1958 (Vic) s 49 (2) [Ct may have discretion to order return of deposit]

Deposits Pt III

  • Payor not in breach - deposit must be returned
  • Restitutionary action for monies had and received
  • Rationale - avoidance of unjust enrichment. Baltic Shipping Co v Dillon (1993) 176 CLR 140, 232
    • Unjust factor = total failure of consideration Foran v Wight [at least in sale of land cases]

Recovery of Contract Price following Termination

  • Money sums paid taken into account in assessing damages Baltic Shipping v Dillon
  • Contract price only recoverable if:
    • Total failure of consideration or
    • Relief against forfeiture granted because retention of money in nature of penalty McDonald v Dennys Lascelles

Total Failure of Consideration

  • Failure of consideration must be total
  • Partial failure of consideration=no recovery
    • Eg - Baltic Shipping v Dillon
    • Ship sinks 8 days into 11 day cruise

Example: Termination of Terms Contract

  • Use common law action for monies had and received (provided no express forfeiture clause)
  • McDonald v Dennys Lascelles at 477
  • Instalments must be returned to purchaser [whether innocent or party at fault]
  • But where purchaser at fault, vendor can retain:
    • Deposit
    • Counter-claim for damages for breach [offset?]

Relief against Forfeiture of Instalments in Equity

  • Only use where vendor has express contractual right to forfeit deposit and instalments
  • “If the purchaser fails to comply with any of the terms of the contract the money paid will be forfeited to the vendor who will be at liberty to rescind the contract.” Pitt v Curotta
  • Seek relief against forfeiture of instalments [and excessive deposits] in equity because in nature of penalty McDonald v Dennys Lascelles 470, 476.

Forfeiture Clauses and Defaulting Vendor!

  • Purchaser can:
    • seek specific performance or
    • terminate contract and seek return of deposit and instalments (if any) as monies had and received
  • Terms of forfeiture clause do not apply to situation…

Relief against Forfeiture of Land

  • Court can give defaulting purchaser relief against forfeiture of interest in land despite breach of essential term Legione v Hateley; Stern v McArthur, Tanwar
  • Relief given in form of order for specific performance but:
    • Only if unconscionable to enforce right to terminate
      • Eg-vendor caused/contributed to breach Legione
    • Only if purchaser has means to settle
    • Otherwise seek return of instalments

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