Tuesday, June 8, 2010

Contracts - Termination - Termination for non-fulfiment of a contingent condition

Grounds for Lawful Termination

  • By performance
    • When both parties discharge their obligations – no obligation to communicate that.
  • By consent or agreement
    • Express contractual provision – Renard Constructions; Pan Foods; Walker v ANZ Banking Group Ltd (No 2)
      • Pan Foods
        • Bank had express contractual provision that allowed it to terminate in the event of Pan Foods’ economic downturn
        • Termination had to be in a particular form
        • These provisions operate like any other.
    • Later contract (e.g. settlement or novation)
    • Abandonment - Fitzgerald v Masters
      • Nothing happens so the court can infer that the parties have chosen to terminate their relationship.
      • BUT where money had changed hands, courts are going to be very reluctant to follow this
  • By frustration – Codelfa
    • External events can overcome what is intended to be achieved
    • Codelfa, assumed that a council could not be injuncted
    • Frustration is not examinable in this course
  • Some but not all breaches (e.g. breach of essential terms, repudiation)
    • So apart from express contractual right to terminate, a party can bring a contract to an end if there has been a serious breach of a term
    • May involve a breach of an essential term or a breach which of itself contains a renunciation, in its entirety, of the agreement (repudiatory)
    • May involve a breach of an intermediate term which has really serious consequences.
  • Non-fulfillment of a contingent condition


  • Irrespective of the grounds for termination, all termination operates in the same way
  • SO, Contract discharged de futuro
  • Prospective effect – for the future, not retrospectively
    • SO when a contract is legitimately brought to an end, then neither party is bound to future obligations, but any terms which regulate the remedies still exist
    • Because the contract isn’t obliterated, it ceases to have effect for the future but actual obligations still enforceable
    • So all obligations within the agreement subsist for the purpose of finding out what the parties respective rights and obligations are
  • Terms regulate remedies
    • Codelfa
  • Accrued rights and obligations accrued unconditionally under the contract are still enforceable
    • McDonald v Dennys Lascelles Ltd

Contrast Rescission and Termination

  • This is the normal remedy when there has been improper formation, i.e. one party has lied etc.
  • Normal remedy where excuse for non-performance
    • Duress, undue influence etc
  • Retrospective effect
  • Contract set aside ab initio – as if it never existed. Operates very differently from termination de futuro
  • Parties restored to status quo ante
  • Rescission and Termination are mutually exclusive remedies
  • Rescission should not be used in the context of termination for breach, keep the word rescission for advice on excuses for non-performance
    • Termination = termination for breach

Effect of Wrongful Termination [not covered in lecture]

  • Termination without foundation has serious consequences
    • Repudiation or renunciation of contract
    • Renard Constructions
      • Right to terminate
      • Damages for breach or
      • Restitutionary action on quantum meruit for reasonable value of services rendered

Termination for Non-Fulfillment of Contingent Conditions

  • What are Contingent Conditions?
    • Many contracts are made conditional on the concurrence or non-concurrence of a particular event
    • SO a specified occurrence that neither of the parties is prepared to guarantee will occur
  • Why have them?
    • For cases where they don’t want to go ahead with the contract unless until that particular event occurs.
  • Example I
    • This contract is subject to the purchaser obtaining developmental approval from the Warringah Shire Council: (c) For the redevelopment of the residue of the property sold hereunder for business and commercial purposes. Gange v Sullivan
  • Example II
    • This contract is subject to:
      • (b) The purchaser receiving approval for finance on satisfactory terms and conditions. Meehan v Jones.

Effect of Non-Fulfillment

  • Contract can be legitimately terminated de futuro
  • Contrast non-performance of promissory conditions
    • A promissory condition is an essential term of the contract (Whitlock v Brew) – Shell Oil lease
      • The lease was an express term of the contract that the purchaser had to perform
      • So when you are dealing with the breach of an essential term you are dealing with a breach
      • When you are dealing with the non-fulfillment of a contingent condition you are not dealing with a breach.
    • So look to whether the condition is promissory or contingent.

Two Main Kinds of Contingent Conditions

· Conditions of formation

· Conditions of performance

Conditions of Formation

  • Preliminary agreements “subject to contract”
    • i.e. the parties have wanted to commit to an agreement and wanted a more formal contract.
    • Subject to contract = parties do not intend to be bound unless/until that contract has been formally drawn up.
  • The contract itself is contingent upon an actual condition – so unless/until that condition is realised there is in fact no contract
    • SO the contract is not enforceable unless/until that condition comes to be
  • Masters v Cameron
    • Contract for sale and purchase for land
    • At the vendor’s insistence she asked for a subject to contract clause to be included
    • Prior to the settlement date the purchaser decided to treat the farm like he already owned it and then ran into money problems and tried to walk away.
      • This was allowed by the court.
    • “This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions.”
  • Preliminary agreement only “pre-contractual compact”
  • But contrast “subject to finance” clauses

Conditions of Performance

  • Don’t prevent a contract from coming into existence
  • Contract formed but some or all of parties’ obligations deferred pending outcome
  • Terms of contract govern what to be done and when
  • E.g.-contract for sale and purchase of land “subject to finance”
    • Purchaser required to take reasonable steps to satisfy the condition
    • BUT obligation to pay balance is postponed pending successful application for finance

Bias in favour of conditions of performance

  • Wherever possible, courts will treat contingent conditions as conditions of performance.
    • Artificial to deny binding contract unless event happens Perri v Coolangatta Investments (1982) 149 CLR 537,552
    • By finding that the contract is in existence, the court can impose implied duty of co-operation à la Secured Income
    • Because of implied term that each party is required to take all reasonable steps to give the other party the benefit of the contract.

Who can Terminate for Non-Fulfillment?

  • Either party can generally terminate:
  • This Contract is entered into subject to purchasers’ sale of their property No 9 Korokan Road, Lilli Pilli.” Perri v Coolangatta Investments Pty Ltd
    • Parties entered into a contract for sale and purchase of land but it was contingent upon the sale of land at Lilli Pilli
    • So a purchase subject to the sale of the other property
    • The problem was how long the purchaser had to sell the other beach house
    • The court implied a reasonable time
    • A reasonable time depends on the circumstances of the particular case and what would be reasonable in other sorts of circumstances
    • The purchaser was unable to sell the beach house – the vendor was upset by this and sought to terminate the agreement on the basis that the purchaser had had more than a reasonable time to sell the beach house
    • The High Court of Australia upheld that termination
      • High Court of Australia held that had the vendor been unable to terminate the agreement he would have been locked in permanently

Qualification I

  • Unless clause expressly confers right to terminate on one party only
    • “This contract is subject to and conditional upon the approval of the Beaudesert Shire Council to a plan of subdivision and engineering plans on terms and conditions satisfactory in all respects to the purchaser within six calendar months from the date hereof. In the event that such approval is not obtained then the Purchaser may at their option cancel this contract …” Sandra v Booth
  • So take note of whether the termination should be a right of one or both parties.

Qualification II

  • Unless terminating party is in breach of express or implied duty of co-operation Perri
  • SO, if you have failed to take reasonable steps to bring about the condition then you lose your right to terminate
  • This duty of co-operation can be express or implied, it doesn’t matter
    • Perri, the purchasers were in breach of their duty of co-operation so their right to terminate was sterilised.

Qualification III

  • A party for whose benefit a condition has been inserted may consciously decide to waive the condition
  • SO, unless condition has been validly waived
    • prior to termination
      • Perri, the purchaser sought to waive their right to terminate but the other party had already initiated their right to terminate.
    • by party for whose benefit condition included
      • but sometimes it will be for both parties benefit
  • But cf Sandra v Booth

Qualification IV

  • Unless other bars to termination exist (eg, affirmation discussed below)
  • i.e. if a party acts inconsistently with their right to terminate

When Can Contract be Terminated?

  • Parties can themselves always provide for how a contract can be terminated.
  • Party cannot normally terminate unless:
    • Time designated has elapsed and;
    • Condition still unfulfilled
    • When no designated time, reasonable time implied Perri at [567]
  • Also, if one purports to terminate without the right, then they are in breach
    • Need unequivocal consent
  • A wrongful termination = Repudiation

How can Contract be Terminated?

  • No need to give party further time before terminating Perri at [570]
    • All that the T party has to do is communicate their decision to the other side. There is no need to give them an extra chance or notice of your intention etc.
  • Subject to express terms, sufficient if communicate decision to terminate to other side Perri at [46]
    • Can be by words or conduct. – Unless the contract specifies otherwise
    • So in Perri, what they did was issue proceedings in the Supreme Court which was found to be sufficient communication. (Gibbs J.)
  • Contract normally continues on foot til party elects to terminate unless term self-executing Suttor v Gundowda
    • So unless one has actually terminated, the contract continues. And the condition may be fulfilled in the interim so lose your right to terminate because the contract is no longer conditional. SO need to assess what the client wants: do they want to get out of a contract or do they want an extension of time.
  • Suttor v Gundowda
    • Contract for sale and purchase of pastoral property subject to consent of Treasurer by a certain date which came and went
    • It was also a situation where there was a complex formula to determine the vendor’s tax liability which was to be subtracted and he did not properly understand it.
    • So he ended up with way less than what he expected
    • By the time the consent of the treasurer had passed, he had not yet understood the problem
    • SO the vendor took no steps to terminate and nor did the purchaser.
    • When the V discovered he had made a bad bargain he sought to bring the contract to an end but by then the Treasurer’s consent had arrived and the contract became unconditional.
      • This was actually an action by the purchaser for specific performance that the V no longer wanted to perform.
      • Interesting discussion in the case where the court will grant an action for specific performance in a case where it will cause hardship for one of the parties.

Self-Executing Provisions

  • This is the exception to the fact that you have to communicate your decision to the other side to bring the contract to an end.
  • The contract comes to an end if the specified event doesn’t occur by the specified date.
    • “The purchaser agrees to make application to the Warringah Shire Council for such approval within seven days…and in the event of the said Council not granting the approval...by the 31st day of May 1965, Contract to be deemed cancelledGange v Sullivan
    • In the event of the consent of the Treasurer not being obtained within two months from its date the contract shall be deemed cancelled. Suttor v Gundowda
  • If these two clauses were given its clear and ordinary meaning then the result seems clear.
  • BUT the High Court of Australia has been loath to take these provisions at face value because of the fear that they could privilege wrongdoers
  • E.g. if a party takes no reasonable steps to fulfil the contingent .condition
  • SO, in cases where parties can affect the fulfilment of the contingent condition, the High Court of Australia has tended to ignore the plain meaning and treat the contract as voidable rather than void
    • This = you still have to make a conscious position to bring the contract to an end.
  • These clauses are regarded as requiring the parties to make a conscious decision to terminate

  • MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd (NSW CA)
  • Suttor principle in regard to self-executing provisions rule of construction only, not a rule of law.
    • This means there is room for discretion whether you apply it or not.
  • So approach in Suttor may appliu less strongly where express words very clear:
    • Eg- “This contract will be deemed to be automatically rescinded and of no force and effect if…”
  • OR Events specified in condition are outside parties’ control so no potential breach of implied duty of co-operation
  • In Quinn (QLD CA)
  • Last year’s case = upheld notion that there is a plain disposition to treat contingent conditions as voidable rather than void.
  • SO principle in Suttor requires greater clarification.

  • SITUATION NOW: SUMMARY: Lawyers have to warn clients that when there is a self-executing provision within the contract, that if they want an extension of time, then they have to negotiate for that before the due date.
  • Similarly a party wanting to get out of the contract is best communicating their intention to terminate to the other party despite the fact that the words of the contract are clear.

Restrictions on Right to Terminate

  • Breach of implied duty of co-operation [see above]
  • Estoppel
  • Duty not to exercise contractual rights unconscionably Godfrey Constructions (1972) 128 CLR 529
  • Implied duty to exercise rights in good faith? Renard, Hungry Jack’s
  • Affirmation/waiver

Affirmation of Contract

  • Loss of right to terminate if party with knowledge of facts acts as if contract on foot Tropical Traders v Goonan, Sargent v ASL
  • E.g. a contractual right to terminate for breach and instead of terminating, you demand that the other side perform.
  • Right to terminate is inconsistent with the right to continue.
  • Rationale
    • It is the essence of election that the party electing shall be “confronted” with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice. Spencer, Bower & Turner p 313, cited in Immer at 619.

Effect of Election

  • Election once made is irrevocable Tropical Traders, Sargent v ASL
  • Scope of Affirmation
  • Applies equally to:
    • Termination for non-fulfilment of contingent conditions
    • Termination for breach
    • Rescission ab initio for pre-contractual misconduct such as fraud, duress, unconscionable dealings etc.

Requirements of Affirmation

  • Before a contract can be said to be affirmed there needs to be
    • Affirming conduct and
    • Affirming conduct with a particular kind of knowledge
  • So before you lose your right to terminate, the other party has to say that you had knowledge of the relevant facts that trigger your right to bring the contract to an end, and then you acted in a way that was consistent only with the continuation of the agreement. You acted in a way inconsistent with right to terminate.
  • As to conduct, can be:
    • deliberate (conscious waiver) or (These cases seldom a problem)
    • by default (by conduct inconsistent with right to terminate) Sargent v ASL at 55 per Mason J
      • eg.-Carr v Berriman
        • The purchaser’s solicitor demanded that the other side perform the contract
      • e.g.-Sargent v ASL
        • Before the vendor had attempted to get out of the agreement, they had been accepting payment of the purchase price.
      • There is a suggestion in these cases, that when a party does something which is only a minor acknowledgement of the right to terminate… (See next page.)

Acknowledging Existence of Contract

  • Mere recognition of existence of contract, without more, probably not affirmation. Sargent v ASL at 656, Immer at Mason J at 617.
  • COndust must be clear and unequivocal.

Election Quote

  • “An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other….So words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.” Sargent per Mason J ibid.
  • What does this mean?
  • Conduct must be unequivocal Immer at 611 per Brennan J; 620 per Deane J etc
  • Reasonable parties looking on would consider that that party was abandoning their right to terminate.
    • Objective standard allows the court to manipulate the outcome of cases.
Immer v Uniting Church
  • Facts
  • UC sold some air rights in Sydney
  • In Sydney, the planning codes allow a party that does not wish to go high-rise to sell the air rights above their building as long as its done with council approval
  • Terms of Sale
    1. Transfer subject to council approval by 1 April 1989
    2. Cl. 7-gave Immer express right to terminate if approval not given by 1 April
    3. Approval not given by that date but parties mistakenly assumed consent forthcoming
    4. On this basis, and under some pressure from UC’s lawyers, Immer sent transfer document to Church 26 June for their signature
    5. Immer elected to terminate in August when Council imposed extensive conditions on approval. Not unconditional approval.
  • Issue: Had Immer lost its right to terminate for non-fulfillment of a contingent condition by this act of sending the transfer to UC?
  • High Court of Australia held they hadn’t b/c Immer’s conduct was not sufficiently unequivocal.
    1. Brennan J: The approval had only been sent provisionally because it realised that the UC was acting unreasonably. I.E. it was sent on the assumption that council approval would be forthcoming and the UC would be in a position to hand over its air rights in a few months
      • So inconceivable that Immer would hand over its right to terminate irrespective of whether the church was in the position to affect the transfer or not.
  • SO basically, the High Court of Australia ensured that justice was done by holding that in the circumstances, the conduct wasn’t unequivocal enough.
  • SUMMARY: When looking for the right to terminate, look out for any conduct that may present itself as an example of affirmation.


  • Does knowledge required for election mean:

1. Knowledge of facts which in law give rise to right of termination [eg, that council approval not granted by due date]

      • Khoury v Govt Insurance Office (1984) 165 CLR 622, 633 or
      • In Immer, this would involve Immer being aware of the fact that as of 1/4 the council had not given its approval
      • So knowledge of the facts that would allow them to activate cl. 7 to bring the contract to an end.

2. Knowledge of legal right to terminate itself, Coastal Estates v Melevende

    • “It would seem however that at least where the alternative rights arise under the terms of one contract, a party may be held to have elected to affirm it notwithstanding that he was unaware of the actual right to avoid it…Even in such a case, however, the party alleged to have elected to affirm the contract must at least be aware of the facts giving rise to the right to avoid the contract.” Khoury (1984) 165 CLR 622, 633-4 as quoted in Immer by Deane et. al. – Went to the first test.
      • If this the case, then knowledge of the breach will not lose them their right to terminate, they have to know that this goes to right to terminate.

In any event…

  • Need for actual knowledge of legal right to terminate not required (displaced) in cases where right expressly recorded in contract. Sargent v ASL – goes to rule as to signature.
  • Where a party is legally represented, agent’s knowledge may be imputed to client Sargent
  • Conduct of solicitor/agent may also bind client/principal. Sargent; Carr v Berriman
    • Principal bound by the acts or the knowledge of an agent acting within the bounds of their authority.
    • Solicitor’s are the alter-ego of their client.

Sargent v ASL – Useful test for requisite knowledge for affirmation.

  • Two contracts for sale and purchase of land on terms

o i.e.-deposit then balance paid in instalments

  • Vendors were Turnbulls and Sargents
  • They entered into separate agreements with ASL and were the vendors.

o Both of the contracts contained a contingent condition (Cl. 16) = if the project was affected by a town-planning scheme other than that annexed to the contract, either party could terminate

o Clause 16: Should it be established prior to completion that at the date of this Agreement the property was affected by any town and country scheme of interim development...otherwise than as stated in the Fourth Schedule hereto...either party shall be entitled to rescind this Agreement by notice in writing to the other.

o Land was zoned non-urban

  • Solicitors forgot to annex the planning scheme to the contract
  • = under cl. 16, its terms were satisfied so either party could have terminated because the relevant plan wasn’t annexed.
  • So the V’s could have terminated if they wanted to, but they continued until after three years someone offered them more money so they asked their solicitors and became aware of their contractual right to terminate.
  • Issue: Had they lost their right to terminate – had they acted with the necessary knowledge?

Application of law to facts

  • As to conduct - clear

o Instalments and interest

o Requests for payment

o All examples of knowledge of vendor’s rights.

o This conduct was justifiable only on the basis that the contract was continuing

  • As to knowledge of facts:

o Sargent - actual knowledge of scheme, that the land was deemed non-urban.

o Turnbull - imputed knowledge via his solicitor

  • But both deemed to have knowledge of legal right to terminate in contract [cl 16] – because it was an express term of the contract.

Good Faith and Termination for non-Fulfillment of Contingent Conditions

  • Limited scope for application
  • Difficult to argue that it is unreasonable to terminate.

o Sargent v ASL

§ Nothing in the case that suggests that the parties were unreasonable in relying on cl. 16. They were legally disbarred from relying on it but that’s a separate issue.

o It may be easier to find issues of bad faith where a party is attempting to argue that a contract has been affirmed.

o Immer

a. It was quite unreasonable for the UC to attempt to hold Immer to a contract where it was quite clear that Immer would not be able to complete the transfer for two years.

Recovery of Deposits

  • When a contract is terminated for breach, the innocent parties can hold on to any monies already handed over.
  • When a contract is terminated for non-fulfilment of a contingent condition, then no issue of breach ever arises so the monies must be returned
    • SO Deposit paid over in anticipation of contractual performance must be returned as monies had and received on total failure of consideration. Masters v Cameron, Perri v Coolangatta Investments
      • Underlying rationale is unjust enrichment, hence the name of the action. (Yannoulatis, AWM)
  • Payor not in default so deposit cannot be forfeited
  • BUT, if you breach your implied duty of cooperation and the other party terminates, they may be able to hold the deposit because you are in breach.

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