We come now to the last phase of the contracting process. In the great majority of contracts, things go reasonably smoothly and the contractual obligations are carried out, not always to the letter, but at least in a way which is reasonably satisfactory. It is always open to the parties to make adjustments as they go along and to sort out any minor problems as they arise. But what if things go badly wrong? What if one of the parties commits a breach which cannot be sorted out by negotiation?

To start with every breach, no matter how small, generates a potential right to damages. Sometimes this right is more hypothetical than real because of the need to prove actual loss. The onus is on the victim of breach to prove what he or she has suffered loss as a result of the breach. We will examine the process of assessment of damages. But, in addition to the right to damages, some breaches - some, not all - enable the innocent party to terminate the contract. This is the most drastic contract remedy and it is a legally hazardous process. This is because, as I have just said, not all breaches justify termination. This means that if a person terminates, and it turns out that he or she was not legally justified in terminating, then he or she is the one in breach. The boot in then on the other foot.

So, it is essential to explore the answer to the question: which breaches justify termination and which do not? The answer is that the breach must be a "serious" breach but this is obviously a somewhat indefinite expression. The law has to accommodate a vast array of types of contracts which may be broken in an even vaster array of ways. The law about breach and termination is, accordingly, very complex. We can only get some idea of its complexity in this course.

So we turn to the meaning of serious breach.

Serious breach - its various meanings

One formula which has been used over the years, and which owes its origins to the sale of goods legislation, is that a breach of a "condition" justifies termination whereas a breach of "warranty" does not. So this approach depends on categorising the terms of a contract into conditions and warranties. This is what Lord Denning was talking about in

when he discussed (middle page 429) the difference between condition and warranty, used in the sense of justifying or not justifying termination. But this very case shows how unsatisfactory this use of language is. The problem, of course, is that both words are used in all sorts of different senses, as Lord Denning pointed out in relation to his use of "warranty" in Oscar Chess where he was using the word merely to mean "promise".

You can see the use of the language of "condition" and "warranty" in both the

and the word "condition" in the

Unfortunately the Trade Practices Act uses the word "rescission" instead of "termination". This is inaccurate. It is nevertheless quite common, as pointed out earlier at the beginning of the chapter on frustration.

A typical case in which the language of condition and warranty is used in the technical sense is

where Jordan CJ attempted to define what is meant by "condition". You can see this on page 515 last para "The question whether a term in a contract..." He made the point that the parties may expressly stipulate in the contract whether a term is essential in the sense that any breach of it, even a trivial breach, will justify termination. But if the contract is not explicit, then it is a matter of construction by reference to the presumed intention of the parties. As you know by now, this type of question is a very moveable thing and open to different points of view.

This is amply demonstrated by the facts of this case. There was a clause which provided that boards advertising the joys of Luna Park would be "on the tracks at least eight hours a day throughout the season". It was established in evidence that the boards were on the tracks for an average of eight hours a day but that each board was not necessarily on the tracks for eight hours each day. The questions were

The answers to these questions went back and forth as the case progressed through the court system. In the end a majority in the High Court said that there was a breach and that it was an essential breach which justified termination. But other judges thought otherwise which goes to show how uncertain this kind of inquiry is.

While we are looking at the Tramways Advertising case, it is worth noting that the judgment of Jordan CJ has subsequently been treated by the High Court as a definitive statement of the law on breach. On pages 504-506 there is a pretty full statement of the rules, a sort of mini text book which is a useful source. Many of these rules we have yet to cover.

One rather strange rule which is relevant to the immediate question we are examining is stated by Jordan CJ on p 505 end of 3rd para where he says that if someone terminates a contract on the wrong basis but it turns out that there was after all a valid basis for termination, then the termination is effective in law. This is strange because if someone purports to terminate on the wrong basis, this is itself a serious breach and one would have thought that the other party could immediately terminate for that reason. But the rule stated by Jordan CJ has been often repeated in subsequent cases.

The condition/warranty approach to the question of which breaches justify termination of the contract is now rarely followed. It has even been held the use of the word "condition" in the contract - eg "it is a condition of this contract that..." etc - is not determinative. The word does not necessarily mean "condition" in the technical sense used in the sale of goods legislation. For example it is very common for business people to talk of the "terms and conditions" of the contract. Accordingly, modern contracts are drafted more explicitly so that the clause will say something like "This term of the contract is essential and any breach of it will justify termination by..." etc.

The courts have approached the question (whether termination is justified for a particular breach) in other ways from just the condition/warranty analysis.

Another way of approaching the basic inquiry about whether a particular breach justifies termination is to ask what the effect of the breach is rather than what is the particular term which has been broken. It is said that a breach which goes to the root of the contract will justify termination. But, again, this is a moveable thing and open to different interpretations in particular circumstances. The case which pioneered this approach and which made it clear that the condition/warranty analysis was not the exclusive way of dealing with the question was

The facts are probably not very important. This was a charter of a ship for 24 months. The owner was obliged to keep the ship in good repair. It was in fact not available to the charterer for some 7 months out of the 24. The charterer terminated the contract. The owner then said that it treated the termination by the charterer as itself wrongful and sued the charterer for damages. The question was therefore whether the charterer was wrong in terminating or whether it was justified. The actual decision is peculiar because it was held that the charterer was wrong in terminating. This illustrates what was said earlier about the hazards of terminating. The owner was undoubtedly in breach - and, one would have thought, in a pretty substantial way - and yet it ended up winning the case because its breach was not regarded as sufficiently serious and it was the charterer who committed the serious breach by wrongfully terminating!

This is a common pattern in termination cases and reflects a very unsatisfactory aspect of the law of contract, namely, that there is no mechanism (equivalent to contributory negligence in negligence cases) whereby the courts can decide that both parties were at fault and make a proportionate order for damages accordingly.

Anyway, the important point which emerges from this case is that not all terms can be categorised as conditions or warranties. Some terms are intermediate terms or "innominate" terms. Take the obligation of the owners to provide a properly maintained and seaworthy ship. This could be broken in very many ways, ranging from the trivial to the fundamental. The important question in relation to a particular breach is not whether the term is a condition or warranty but what effect the breach has on the contract as a whole. One formula that is used in this context - and the form of words used by Diplock LJ in Hong Kong Fir - is whether the breach deprived the other party of substantially the whole of the benefit of the contract.

We have previously come across Lord Diplock using his favourite word "synallagmatic" when we looked at the Harvela case. It was in the Hong Kong Fir case that he first used it. It means simply "bilateral".

The core to his analysis is on p 515 2nd last para "There are, however, many contractual undertakings..." and on p 516 2nd and 3rd paras.

The recognition of intermediate or innominate terms has been approved in the High Court in

where in the short extract from the joint judgment of Mason A-CJ, Brennan, Wilson and Dawson JJ you can see that Lord Diplock’s approach was welcomed as bringing "a greater flexibility to the law of contract".

So, in answer to the basic question: which breaches justify termination? We have so far two approaches, viz breach of condition and a breach which goes to the root of the contract. There are still other approaches. One is when one party by his or her words or conduct manifests an apparent intention not to be bound by the contract. This is dealt with under the next heading.

If one party does something or indicates by words that he or she is essentially repudiating his or her obligations, then this will be sufficient to justify the other party terminating the contract. Repudiatory conduct can take very many forms. It would amount to repudiatory conduct if the party:

An example of sticking to an erroneous interpretation is

where Tramways did not acknowledge that failing to display each board for at least 8 hours in each day was a breach and, furthermore, that they could not and would not change their system. Luna Park was justified (as it turned out) in treating this as a repudiatory breach (or, alternatively, as a breach of condition).

Another case where this type of approach was taken is

Note that in discussing termination for breach the judges in this case talk of "rescission". I have already made the point that this is, in my opinion, not correct usage but nevertheless we have to live with it because eminent judges persist in using the word "rescission" in connection with breach.

In this case a landlord failed for a substantial time to register the lease or provide a lease in a form which could be registered. You will learn in the Property course that registering a lease is what makes it all legal and safe. (Prior to registration, the tenant only has an equitable lease.) So, it was pretty important that the lease be registered. The tenant sent a notice on 21 August to the landlord asking it to get on with it and saying that if the lease was not registered within 14 days then the tenant "reserved its rights". The landlord’s solicitor’s reply was sent on 3rd September saying that it had forwarded the notice to the landlord and were awaiting instructions.

Was the landlord’s failure a breach at all and, if it was, was it repudiatory conduct? The contract did not provide a deadline for registering the lease, nor was it an express term that the lease should be registered. But it was conceded by the landlord that there was an implied obligation to effect registration within a reasonable time. So there was a breach. This left the question whether it was a sufficiently serious breach.

Brennan J pointed out that this was not a case where time was of the essence (very bottom of p 580). We will see that one way of ensuring that a time clauses is always treated as a basis for termination is to specify that "time is of the essence". So the mere fact that the landlord did not arrange for registration within a reasonable time did not necessarily mean that the breach was sufficiently serious. The delay must be one where the landlord has evinced an intention no longer to be bound or shows an intention to perform in a manner substantially inconsistent with his obligations. It is all a matter of degree. As Brennan J noted on p 582 2nd para "When delay in performance is prolonged, the point at which repudiation might be inferred is necessarily uncertain."

Because of this uncertainty, it is advisable to avoid the risk of wrongful termination by sending a notice to complete. In fact Equity has taken a particular view about time clauses (where time is not of the essence) and requires the sending of such a notice. This then raises further complications because there is law about what is an adequate notice to complete. This notice did not specifically state that time would be treated as of the essence at the expiry of the notice nor did it explicitly say that the tenant would treat non-compliance with the notice as amounting to repudiatory conduct which would justify termination. It was also arguable that the notice did not give enough time to the landlord to comply.

Mason CJ was of the view that the notice sent in this case did not give enough time and so the tenant had acted too quickly in purporting to terminate the contract and was therefore in the wrong. But this was a minority view.

Brennan J also thought that the notice was defective because it gave too short a time and because it did not make clear that time would be treated as of the essence after the sending of the notice. But Brennan J went on to say that it was still possible to establish repudiation without a notice or where there was a defective notice, as here. In this case the events after the notice was sent, particular the somewhat laid-back letter of 3rd September, in combination with the attitude displayed by the landlord before the notice was sent amounted to repudiatory conduct.

Deane and Dawson JJ came to the same conclusion, namely that the notice was not adequate but that the solicitor’s reply "bordered on the contemptuous" and evinced an intention not to take the contract seriously. Objectively, the landlord’s conduct was therefore repudiatory with the result that the tenant was justified in terminating.

This case illustrates the intricacies that the law about breach can involve. It also again illustrates what a near thing disputes about whether termination was legally justified or not often are. In this case 5 judges overall thought that termination was justified and 3 thought that it was not.

One point which is worth noting is that it seems to be the case that attitude plays a part in the court deciding whether or not a breach is repudiatory. If in Laurinda the solicitor had written a rather different letter, expressing his concern that the lease had not been registered and giving every assurance that the problem would be attended to as a matter of urgency, then I am sure the outcome would have been different. There is a practical lesson: always smile and be polite when committing serious breaches of contract!

So far, we have been concerned with the general common law right to terminate a contract for breach. That is, we have looked at the law which applies when the contract is silent about termination. One way of reducing, but not eliminating, the hazards of termination for breach is to make it clear in the contract itself which breaches justify termination and which do not. This should not be done by merely using the language of "condition" and "warranty" because, as already pointed out, nowadays that use of language has fallen into disfavour. Instead, the contract can say which clauses must be observed to the letter and what consequences follow from breach. We have already seen that one particular type of stipulation, namely, a time clause can be made expressly essential by using the formula of "time is of the essence". But this can also be done with other types of clauses.

The consequence of spelling out with some precision that a breach gives the right to terminate may be that any breach, however trivial, can give the right to terminate. This may be somewhat harsh. The High Court in the next case responded to this possible harshness by developing an extraordinary principle.

This was a case of a commercial lease. The tenant was experiencing financial difficulties and was constantly late in paying the rent. In many instances the tenant paid up the outstanding rent but then fell into arrears again. The tenant was trying, but was not succeeding in meeting its obligations. The landlord in the end terminated. (The language of termination in lease cases is special and the contract talks of the landlord’s "right to re-enter the premises" and "forfeiture" of the lease.) The ultimate question was not so much whether the landlord had properly exercised its right to terminate (to re-enter) - there was no doubt that the landlord had such a right - but whether the landlord could claim the usual measure of contract damages following termination. One entitlement, when a contract is terminated for breach, is to be able to claim loss of future profits - sometimes called damages for loss of bargain. In the case of a lease, this means loss of future rent for the balance of the term provided for in the lease. This type of claim is subject to one qualification, namely, that the landlord is under a duty to mitigate by making reasonable efforts to find another tenant. In this case the landlord claimed what it had lost by way of future rent less an amount representing future rent from a new tenant which the landlord eventually found.

The question was whether the landlord, who, it should be remembered, had legally terminated the lease, was entitled to lost future rent. Why this should not be so is a bit of a mystery. What the High Court had to say is that, when someone is provided with a contractual right to terminate which may operate quite harshly (because, for example, it can be used for a relatively trivial breach), then the court will not award damages for loss of bargain unless the contract very clearly says so.

One way of looking at this is a causation argument. What caused the landlord to lose the future rent? The answer that the High Court put forward was: the termination of the lease, that is, the landlord’s decision to terminate when the breaches by the tenant were not really so bad and the tenant was doing its best to fulfil its obligations. Gibbs CJ made it clear that the breaches by the tenant were not sufficiently serious to justify termination under the general law, that is, in the absence of a specific clause conferring the right to terminate. If the landlord wished to claim the full measure of contract damages when using the contractual right to terminate then the contract must be explicit. In this case the relevant clause 9(a) only referred to damages for past breaches.

The lesson to be learnt from the Shevill case is to make sure that the contract is absolutely clear that damages for loss of bargain can be claimed if the contract is terminated under a clause conferring the right to terminate. It is a simple matter to draft around the Shevill problem.

Mention has already been made of time clauses and how being late does not necessarily amount to a serious breach unless the contract makes it clear by use of the "time is of the essence" formula. If this formula is not used, then time clauses have traditionally been regarded as "rubbery". Indeed equity took a protective role and generally regarded time clauses as not essential. In other words, in the absence of a stipulation that time is of the essence, just being late is not a serious breach justifying termination.

The law just about time clauses is itself complex. The casebook deals with this on pp 549-553. Where there is no stipulation that time is of the essence, the common law courts nevertheless regarded time clauses in contracts for the sale of land as being of the essence. But equity intervened and would grant an order for specific performance to the party who was late, so long as he or she had not acted unconscionably. In response to this, the dangers of terminating were lessened by using the notice procedure which we looked at in the Laurinda case. Once a proper notice had been sent, then this established that time was from then on "of the essence" and a further delay would justify termination of the contract.

We can only look at one case where the time problem is discussed.

The issue in this case was whether a breach of a time clause was serious enough to justify termination. This was a contract for the purchase, sale and shipment of soya bean meal. The purchaser was obliged under the contract to give the seller 15 days’ notice nominating a port and vessel for shipment. The purchasers were 4 days late in giving this notice. The sellers then said that they treated this as a repudiatory breach and terminated the contract and sued for damages.

The buyers (not surprisingly) argued that, although they were late, this was a trivial breach and should be tested by reference to the Hong Kong Fir approach, namely, to assess what effect being 4 days late had on the contract as a whole. On this argument, so the buyers said, the breach did not justify termination.

The House of Lords took a very hard-nosed approach. They held that the time clause was essential (a "condition" in terms of the language of condition/warranty). Lord Wilberforce said that applying the Hong Kong Fir approach to a time clause was fundamentally flawed because the reason for the approach adopted in Hong Kong Fir was that the clause in that contract, like many contract clauses, could be broken in so many different ways. But, as Lord Wilberforce so wisely said, there is only one way to break a time clause, and that is to be late.

This argument is all very well, but it is perfectly clear that there can be a trivial breach of a time clauses or a serious breach of a time clause.

All the law Lords stressed that in mercantile contracts like this time clauses are very important because they provide certainty. In other words these sorts of contracts are not the place for rubbery time clauses. This case also reflects the very important role that the English courts play in sorting out shipping disputes. Shipping litigation is a major and successful export industry for the UK and so it must deliver what the shipping world wants in terms of the applicable law. There is, for understandable reasons, a premium on certainty and security in these types of contracts (they are not "rubbery").

The same basic question which we are looking at arises in connection with instalment contracts. How do you know whether a failure to perform with respect to a particular instalment is a serious breach justifying termination or a not so serious breach which sounds in damages only? The answer to this is found in

where a common sense approach was adopted. In instalment contracts, typically goods, or possibly services, are delivered over time in discrete bits. The problem is to know whether the failure to deliver, or the defective delivery of a particular bit, is enough to justify termination. Usually, a failure in relation to one instalment will not be sufficient. But what about two? Or three? And so forth. The same problem arises when payments have to be made in instalments.

The answer in the Maple Flock case was that one assesses the ratio quantitatively that the breach bears to the whole and also the probability that the breach will occur again. This formula can be seen on p 592 last para. When applied to the facts of this case, the result was that the breach was held not to be serious enough to justify termination. The 16th instalment of flock out of 67 deliveries contemplated by the contract was defective in that it had too much chlorine in it. It was established in evidence that the supplier had a good quality control system and that it was very unlikely that this problem would arise again. Hence there was not a sufficient breach to justify termination. This meant that the buyer who had purported to terminate had done so wrongfully and was itself in breach in a fundamental way.

Yet another problem which can arise is where the contract stipulates for a lump sum payment, that is, the contractor gets nothing until the job is done. Technically this is called an entire contract. (It is possible for the contract to stipulate a single lump sum but for the contract not necessarily to be an entire contract. That is, it is contemplated that the contractor will get paid in instalments.) There is obviously the potential for hardship with a lump sum contract which is also an entire contract if the contractor has performed almost the whole job but there are some aspects which are not satisfactory or incomplete. The other party may then say: "You get nothing until you have completed the job." There may even be a dispute about whether the job is in fact completed. It is common for there to be a dispute about the quality of the job, with one party saying that it is not good enough and the other saying that it is OK.

The harshness is illustrated by the early case of Cutter v Powell (p 539 of case book) where a sailor worked for almost an entire voyage but then died just before the end of the voyage. The Court held that his estate was entitled to nothing because he had not completed the voyage and this was an entire contract.

In response to this sort of result, the courts developed the doctrine of substantial performance which does allow payment of the sum but subject to a set-off for any amount which is damages for defective or incomplete performance. The problem with the application of the doctrine of substantial performance is that the contract must be substantially performed. This, of course, raises the question of what substantial performance is. This is a question of fact in each case. The application of the doctrine of substantial performance is illustrated by

A contractor agreed to install a hot water and heating system for a total of £560. The other party refused to pay anything after the system had been installed because he claimed that it was so badly done that the contractor was entitled to nothing. The trial judge found that the defects amounted to £174.50. It seems that the system was very unsatisfactory in a number of respects. The trial judge ordered that the contractor be paid the £560 less the £174.50 plus some extra bits and pieces. In other words, the trial judge regarded the contract as having been substantially performed. The person for whom the job was done appealed. The issue was whether the contract had been substantially performed when the defects amounted to between one-third and one-quarter of the contract price. This is obviously a question to which there is no certain answer. All the judges in the English Court of Appeal said that the trial judge was wrong and that the contract had not been substantially performed. This meant that the contractor was entitled to nothing. Sachs LJ was unsympathetic to the contractor, saying that all this could have been avoided if he had simply fixed up the defects before resorting to litigation.

Obviously this case is merely an illustration. There is no point of law which comes out of it. There are other cases in which the judges have applied the doctrine of substantial performance more liberally, even though the defects amount to something like one-quarter of the contract price.

Yet another angle on the complex question of breach is something called anticipatory breach. Suppose a contract provides for performance by a contractor on a particular day, let us say the 1st November. Suppose it is clear on the 1st October that the contractor is not going to be able to perform on the 1st November. Does the other party have to wait till 1st November and then terminate the contract? Or can, he or she terminate at an earlier time? If it is necessary to show a breach (what is more, a serious breach) before one can safely terminate, then, logically, it would be impossible to terminate before a breach actually occurs. But then it is often pointless - and possibly wasteful of resources - to wait around for an inevitable breach before being free to go elsewhere. As a matter of commercial necessity, business people need to be able to get on with it.

The law has responded to this problem by allowing termination of a contract before actual breach. This is called anticipatory breach. Although the law allows this, it can be a very risky procedure. We have seen that terminating when there has been an actual breach is sometimes a risky process and may backfire on the person who decides to terminate if it turns out that he or she has terminated wrongfully. The risk is all the more so in anticipatory breach cases.

In some cases the risk will be less so if, for example, the contractor has said ahead of the time for performance "I will not be able to do it." Then the other party can safely terminate on the basis of anticipatory breach. But the more usual case is where it seems very obvious that the contractor is not going to be able to perform on the day but the contractor is protesting that everything will be alright on the day. In this sort of case, terminating on the basis of anticipatory breach is not safe because the court has very little to go on when trying to make up its mind whether the contractor would have been able to perform on the day. Some of these issues are discussed in

This is a shipping case where the charterer of a ship was intending to load a cargo in early July at the port of Basrah. The ship arrived at the port but the charterer could not find a cargo. In a charter contract, there are a certain number of days allowed for delays of this sort - called "lay days". Before the lay days had expired, the owner cancelled the charterparty and re-chartered the ship to someone else. In other words, the owner of the ship anticipated that the charterer would not be able to get a cargo in time and terminated the contract before the charterer was in actual breach, that is, before the lay days had expired.

The 1st three pages of the judgment of Devlin J say very little about the doctrine of anticipatory breach. Devlin started to talk about anticipatory breach on p 596. The core of his discussion is on pp 596-598 and it these pronouncements which have become the classic statement on anticipatory breach. Devlin made the point that anticipatory breach may arise in two ways:

"The two forms of anticipatory breach have a common characteristic that is essential to the concept, namely, that the injured party is allowed to anticipate an inevitable breach." (p 597 last para)

The first type may be in the form of "I want to but I can’t" or it may be in the form "I won’t". But it does not matter. There is no element of fault that is relevant here. The law makes no distinction between deliberate contract breakers and unwilling contract breakers ie those who want to perform but cannot for some reason. Devlin makes this point on p 598 3rd para.

The second type is where the risk lies because the other party may misjudge whether the contractor has put it out of his or her power to perform. But the law is sensible about this and tests it objectively, that is, by reference to what is reasonable. Devlin J dealt with this on p 596 very last para. He gave some examples of where the contractor has apparently put it out of his power to perform. One example was a sale of goods case where the seller sold the goods to someone else. Of course, it is possible that he could repurchase the goods so that he was ready to deliver on the day but in such a case the other party is entitled to assume that the seller has put it out of his power to perform and so this would be a safe case for anticipatory breach. On the other hand, Devlin J made the point on p 601 last para that acting on rumour heard on the market would not be a safe bet. Anticipatory breach must be based on facts not supposition. And it is based on the facts as they reasonably appear to the party at the time he or she decides to terminate on the basis of anticipatory breach.

Anticipatory breach is not always easy to disentangle from actual breach. For example, if someone says, ahead of the day for performance, "I will not perform" then this may itself be an actual breach because there is an implied term in every contract that a person will not repudiate his or her obligations. This is stated by Jordan CJ in the Tramways Advertising case on p 506 2nd last para "One essential promise which is implied in every contract..."

A related issue is when one party insists on a particular interpretation of the contract which the other party does not agree with. We have seen in the Tramways Advertising v Luna Park case that this may be repudiatory conduct which justifies the other party terminating. But this is not necessarily the case, as is shown by

This case really does illustrate how unpredictable is the outcome of litigation arising out of breach of contract. In a contract for the sale of land (lots 1-9) the vendor promised to lodge and register a plan of subdivision with the municipal council. The plan was attached to the contract. The plan attached to the contract actually covered 35 lots, that is, it covered more lots than the contract was dealing with. In fact the vendor lodged a plan that only covered lots 1-9 which were the subject of the contract of sale. Without any warning to the vendor the purchaser terminated ("rescinded") the contract on the basis that the vendor had lodged a plan which was different from the one annexed to the contract. The vendor then responded by saying that the purchaser was in breach by wrongfully repudiating the contract and the vendor then terminated the contract and claimed that it was entitled to keep the deposit.

This case is dealt with, at least in part, on the basis that the vendor by insisting on its interpretation of the contract was committing an anticipatory breach. But this aspect of the case really does not matter, that is, it does not matter whether the vendor’s conduct is seen as an anticipatory or actual breach.

The trial judge said that the vendors were in breach of the term which dealt with lodging the plan of subdivision but the breach was not serious enough to justify termination. Therefore the purchasers were in breach by wrongfully terminating and the vendors could keep the deposit.

The High Court got itself into an extraordinary knot. The starting point was that the vendor was in breach by lodging a plan which did not accord with the plan attached to the contract. They then said that there was a bona fide dispute about the interpretation of a term of the contract. In the 3rd last para on p 588 they then say that insisting on a wrong interpretation of the contract does not necessarily mean that such insistence is evincing an intention not to be bound by the contract. So putting forward a wrong interpretation of the contract is not necessarily repudiatory conduct.

They then go on to say, like the trial judge did, that the purchasers were not entitled to treat the vendor’s conduct as repudiatory and that therefore the purchasers were not entitled to terminate on that basis. One would have thought that would then be the end of the matter. But No. The High Court then went on to ask whether the vendor was entitled to terminate ("rescind") because of the purchaser’s wrongful purported termination. Amazingly they said that the vendor was not entitled to terminate. Why? Because the purchaser’s motive in terminating was honest and it did not intend to repudiate its obligations if the vendor had stuck to the contract. The vendor was insisting on its incorrect interpretation of the contract so the purchaser cannot be blamed for responding to that by purporting to terminate.

The upshot of all this was that neither party had effectively terminated the contract. In fact what subsequently happened was that both parties (not surprisingly) thought that the contract was no longer on foot and so nothing more was done. The High Court came to the conclusion that there was mutual abandonment of the contract. This meant that no-one had justifiably terminated and that the contract simply came to an end. This would mean that the purchaser would get back its deposit.

As already indicated, this case shows how hazardous is the process of terminating. I have already made the point that one has to be careful because if one makes a wrong assessment of the crucial question - has the other party committed a sufficiently serious breach? - and one then terminates, the wrongful termination will itself be a repudiatory breach and the boot will be on the other party’s foot. But this is not necessarily so according to DTR Nominees. It may be that a purported termination in response to a purported termination is no termination and then the boot shifts back to the first party again!. How on earth do you advise a client in such a situation?

We have sampled some of the problems which arise in connection with termination for breach of contract. We now turn to some further aspects of the termination process.

Election and waiver

If we assume that the innocent party (that is, the party not in breach) has got over the first hurdle and it is quite clear that he or she is entitled to terminate for breach (the breach is a breach of a condition or it is repudiatory or possibly an anticipatory breach and so forth), the next step is that he or she must then do something about it. He or she must elect whether to terminate or not. This is the same process that we saw when we looked at rescission (in its proper sense), that is, rescission for misrepresentation or mistake or any of the other doctrines which make a contract voidable. The same principles apply. The innocent party is put to his or her election and must make a decision. Once the decision is made either way, he or she is bound by his or her election.

The innocent party may lose the right to terminate, for example, if he or she does nothing or indicates in some way that the contract is still on foot. Remember that this is called affirmation - where the innocent party affirms the contract with knowledge of the breach (or the misrepresentation in the case of rescission). This is called waiver of breach, which is not a particularly accurate expression because waiver of breach more naturally means waiving a breach in the sense of not insisting on performance and not suing for damages. But waiver of breach means waiving the right to terminate after a serious breach.

Another rule which is relevant to the innocent party’s conduct is that the innocent party, when confronted by a breach by the other party, must be able to show that he or she was ready, willing and able to perform his or her obligations. It is sometimes possible for the contract breaker to say "Yes, I was in breach but you were not going to perform either." The consequence of this argument, if successfully established by the contract breaker, is that the innocent party may not be able to terminate or may be unable to claim damages for breach of contract. The rule that the innocent party must be ready, willing and able to perform does not apply if it would be futile to tender performance or where the contract breaker has made it clear that he or she does not expect the innocent party to perform. The best discussion of this requirement is in the judgment of Dawson J in Foran v Wight on p 671 4th para to p 673.

Sometimes it may be difficult to know whether the innocent party must be taken to have elected or not. This is particularly so if he or she has given the contract breaker a chance to remedy the breach. Some of these issues are taken up in

A contract for the sale of land provided for payment of the purchase money by instalments over time on specified dates. The contract provided that time was of the essence. The buyer paid the balance of the deposit a day late. He then made three further instalment payments at roughly 12-month intervals. Each one was late by a few days but was accepted. The fourth instalment was paid early. The last instalment of £17,500 was due on the 6 January 1963 which happened to be a Sunday. On 7 January the buyer paid outstanding interest which was due but sought an extension of time for payment of the balance. The vendor’s solicitor sent a letter (see p 628 3rd para) which said that the purchaser could have until 14 January to pay but at the same time the letter made it clear that this was without prejudice to its right to the strict enforcement of the contract. Payment was not made on 14 January and the vendor terminated the contract.

The issue was whether the vendor had waived its right to terminate by the letter. In other words had it elected not to terminate by sending the letter? Alternatively, had the vendor effectively given up its insistence on time being of the essence when it had consistently accepted late payments over the years? You can see a summary of the arguments put by the purchaser in the first para of the judgment of Kitto J on p 628.

As to the pattern of late payment by the purchaser and acceptance by the vendor, did this create some kind of estoppel? On the facts of this case Kitto J said that it did not. He acknowledged (3rd last line p 628 "It may be...") that a pattern of late payments accepted by the payee could have the effect of lulling the purchaser into thinking that time was no longer of the essence. But not so here. It seems that there is a pretty heavy onus on someone who is trying to argue this.

What about the granting of more time in respect of the last payment? Did this amount to an estoppel? Again Kitto said No in the 2nd para on p 629 "Nor do I think ...".

He then turned to the question whether the extension of time and the acceptance of the interest payment amounted to an election not to terminate for the failure to pay the full amount on 6 January. If it did then the question arose whether the new date specified - 14 January - was a varied essential date for payment. Kitto consideeds these points on p 630. This is of some practical importance because it is frequently the case that the innocent party gives the contract breaker another chance. Does such conduct mean that the innocent party risks losing the right to terminate? If this was so, then the sensible practice of trying to sort out the problem would be discouraged and people would have to stand on their strict legal rights.

The answer is a sensible one in that the law does encourage the settlement of disputes and it is possible to give a person who is in breach more time without running the risk of being taken to have elected to affirm the contract. Top para p 630 Kitto said that the innocent party is not bound to elect at once. "It might keep the question open, so long as it did nothing to affirm the contract..." This is what happened in this case. The acceptance of the interest payment (dealt with n last para p 630) similarly could not be construed as an affirmation of the contract. Had the interest included interest for the future, then this would have been an act of affirmation. But in this case the interest which was accepted was past interest which had accrued.

The final point to note (which again shows how complicated breach questions are) is referred to at the very end of the extracted judgment. Everything we have examined so far in this case is the position at law. There is an obvious hardship if a person has paid almost all the purchase price and is a little bit late right at the end and forfeits everything as a result of applying the legal principles. This is just such a case and Kitto referred to the equitable doctrine of relief against forfeiture which is meant to meet the hardship of just such a case as this one. The matter had to go back to the Supreme Court for this issue to be sorted out.

Here we have a case where one party mistakenly went ahead with a contract because it did not realise that it had the right to rescind. This was a contractual right to rescind which is common in sale of land contracts. The purchaser can cancel without penalty if some necessary pre-requisite cannot be achieved. In this case the contract provided that the purchaser could rescind if council approval for a transfer was not forthcoming. Immer thought that council approval had been obtained when in fact council had not given its approval. Was Immer’s subsequent action to be treated as affirmation? The answer given by the High Court was No. The key to election is that the party who must elect must be confronted with a situation where he or she must make a choice. Here Immer’s conduct was not referable to making a choice because it thought that everything was going along smoothly. Therefore its conduct was not to be treated as an affirmation of the contract. It is not unlike the rule we saw when looking at misrepresentation in the case of Coastal Estates v Melevende where it was said that a person cannot be taken to have affirmed a contract until he or she knows of the right to rescind.

Of course, it may be too late to rescind or terminate for some other reason, such as the other party has made some material alteration of position in reliance on the contract being on foot.

Consequences of termination for breach

We move now to examine what the consequences of termination for breach are. We have seen when we looked at frustration that termination has the effect of stopping the contract from the moment of the frustrating event onwards. The same is true when a contract has been terminated for beach. All rights and obligations which have accrued before the moment of termination are binding and any obligations which would have fallen due after termination do not have to be fulfilled. (Of course, the innocent party has a right to damages for losses arising from early termination of the contract.)

Remember, some types of contract terms do survive termination. We saw this when we looked at the Codelfa case where Mason J said that the arbitration clause was still operative.

The law of breach, like the law of frustration, has had to develop rules to sort out the parties’ respective positions after termination for breach, though this time there is the fact that one of the parties is at fault, whereas in frustration cases neither party is at fault.

The first case deals with the same sort of problem we came across in connection with frustration, namely, where payments have been made under the contract and then it is terminated. What happens to the money?

The facts are complicated and involve a guarantee but this can be ignored because a guarantor’s obligation is simply dependent on what the original obligation was. There is also an added complication because a contract was assigned. Basically what the facts boil down to is that a contract for the sale of land was terminated because the vendor was unable to complete. But in the meantime the purchaser had been in default in making a payment and had been given more time to pay. So the position was somewhat messy. The basic issue was: what were the rights and liabilities of the parties at the time of termination? The importance of the case is the definitive statement by Dixon J on this issue.

In this case the purchaser had to pay a deposit and then instalments at set times. Transfer of title and the last amount for payment were to occur in the future. The contract was terminated after the deposit had been paid and after an instalment was due but before transfer of title to the land.

Thus:

½ ¾ ¾ ¾ ¾ ¾ ý ¼ ¼ ¼ ¼ ½

Generally in an ordinary contract for the sale of land or goods the price has to be paid on delivery ("settlement" in the case of land). But if the contract has specified that amounts of money will be paid on particular days by way of instalments, then these instalments become debts due to the vendor as they fall due. Therefore, the purchaser in this case owed the unpaid instalment at the time the contract was terminated.

Dixon J explains very clearly the difference between rescission in its true sense (eg for fraud or mistake, etc) and termination for breach. He does this on top of p 662. As a matter of logic, if a contract is terminated, then any accrued rights are enforceable.

However, on the 10th line there is an important qualification to this (It does not, however, necessarily follow ..."), which we have come across before, and that is the total failure of consideration rule. In a contract for the sale of land where the purchaser pays instalments in advance, the instalments are legally due once they have fallen due but, in the end, the purchaser is relieved from having to pay them (or can get them back) if the purchaser in fact gets nothing. Of course in a contract for the sale of land, the purchaser either gets title or nothing. So, the purchaser is relieved against having to forfeit the instalments. If they have been paid, they can be recovered. If they are owing, they do not in the end have to be paid.

There are actually 2 rules at work here: a restitution rule that money paid where there is a total failure of consideration can be recovered; and an equitable rule which provides what is called relief against forfeiture. Dixon did say that it was the legal rule which was at work in this case.

If the contract has been terminated because of default by the purchaser, although instalment may have to be returned by the vendor, the vendor is still able to sue for damages. This leaves the vendor with a nice practical problem. In theory he or she should return the instalments and then sue for damages. No-one in their right mind would do that.

Now, one last little rule. Relief against forfeiture or the total failure of consideration rule, as just described, do not apply to a deposit, which is treated as a special form of instalment which can be forfeited if the purchaser is in default.

It is now appropriate to deal with

at this point because it illustrates the operation of the total failure of consideration rule. Remember that there has to be a total failure of consideration, meaning that the person who has paid the money has received nothing. In Papadopoulos a contract for building a ship provided for the payment of instalments and that failure to pay an instalment permitted the shipbuilder to terminate and retain instalments already paid. The buyer defaulted on the second instalment and the shipbuilder terminated. Did the instalment already paid have to be returned on the basis that the buyer had got nothing for its money? Was the unpaid instalment still due and enforceable? Normally in a contract for the sale of goods or land the buyer would be able to get back instalments. But this was not just a contract to provide an item of goods, namely, a very large ship. This was treated as a complex contract involving work, skill and materials - like a building contract. There were design elements, drawings had to be produced, etc. The court accordingly did not see this as the same as a simple contract for the sale of goods and therefore there was no total failure of consideration. The shipbuilder could keep the instalment already paid and could successfully sue for the instalment which should have been paid.

It is also appropriate to look at

which also illustrates what we learned from McDonald v Dennys Lascelles. We saw that accrued rights are enforceable. In Bot the contract required the payment of a deposit. Part of the deposit was paid. The balance was due on 5th Feb 1976. It was not paid. The purchasers wrongfully repudiated the contract and the vendors accepted this and therefore the contract was terminated. The issue was whether the vendors could sue for the balance of the deposit. Remember that Dixon J had said that a deposit was different from an ordinary instalment because a purchaser in default will lose the deposit whether or not there has been a total failure of consideration. That would mean that an unpaid deposit is due and could be sued for. This is in fact what was decided in Bot v Ristevski, though the court made heavy weather of it because of some contrary precedents.

The next case explores further the respective rights of the parties. What if there is fault on both sides? We have seen briefly that a victim of breach must be able to show that he or she was ready, willing and able to perform. What if it is pointless to insist on this requirement?

This is another case where one wonders how on earth it ended up in the High Court having regard to the amount involved. The facts are relatively simple. Purchasers paid a deposit of $7500 for the purchase of land. Settlement was due on 22 June, time being of the essence. The vendors were obliged under the contract to register a right of way in favour of the purchasers but on 20th June they informed the purchasers that they would not be able to get this done by settlement date. The 22nd June came and went without action by either party. The purchasers then terminated ("rescinded") the contract on 24th June on the basis that the vendors were not ready to complete. They sought the return of the deposit. This is all the case was about: could the purchasers get back their deposit?

On the face of it, this seems to be a clear-cut case. But the evidence at the trial showed that the purchasers were having difficulty obtaining finance and probably would not have been able to carry out their side of the contract on 22 June. Of course they in fact did not carry out their side of the contract on the 22nd June. The vendors argued that because the purchasers were not ready, willing and able to perform on the day of settlement, they could not complain about the vendors’ inability to register the right of way.

Well, this simple problem got the courts into a terrible knot. Some judges thought that the vendors were right (a majority of the NSW Court of Appeal) and that therefore the purchasers should forfeit their deposit and some (the trial judge and the majority in the High Court) said that the purchasers were right and that they did not have to be ready, willing and able to perform on the day when it would be futile to do so. In fact some of these judges used estoppel to say that the vendors by their conduct were estopped from insisting on performance by the purchasers. So, in the end common sense prevailed and the purchasers were able to get back their deposit.

On the question of being ready, willing and able to perform, it is reasonably clear that this does not mean that the innocent party must bear a heavy onus of showing that he or she was actually ready, willing and able to perform. To start with it is assumed unless the contract breaker raises this issue. If the contract breaker does raise the issue, the innocent party bears a light onus of showing that he or she was not wholly disabled from performing.

One way of looking at this case is to say that, when the vendors indicated that they would not be able to perform on the day, this was an anticipatory breach which, of course, then gave the purchasers the right to elect to terminate forthwith. They chose not to do so. The result was that the contract was still on foot and both parties were therefore bound to perform, including the purchasers. They did not perform or tender performance on the day. But the common sense answer to this was, of course, that they were relieved of the obligation to perform on the day because of the vendors’ conduct.

Mason CJ dissented - but only on his interpretation of the facts. He said that the purchasers would not have been ready and willing to perform on the day of settlement. They were not induced by the vendor's conduct into not tendering the money on the 22nd. They would not have done so anyway, according to Mason CJ. In short, they did not act to their detriment as a result of the vendor's conduct. Because the purchasers would not have been ready and willing to perform, they did not have the right to terminate.

There is a great deal said in Foran which goes to show how a relatively simple problem can be elaborated in skilled hands.

The final issue to deal with under the general heading of termination for breach is this. Suppose one party wrongfully repudiates the contract and this is accepted by the other side so that the contract is terminated. Suppose further that the effect of this is to deny the innocent party a payment that would have been due for work performed by the innocent party. We came across this problem before when we looked at frustration, but there the answer, in the absence of legislation, was that the loss lies where it falls. The rule is different if there has been breach.

To start with the person who has done the work can sue for damages and recover in that way. But in

it is made clear that the innocent party could also claim in restitution on a quantum meruit. The advantage of doing this is pointed out by the casebook editors in the note on p 704 when they say that it may be advantageous to sue on a quantum meruit if the innocent party was in a losing contract, that is, one on which he or she would not have made a profit.