Principles concerning termination for breach
46 Broadly, a party to a contract can terminate it for breach by the other party where:
(1) the contract itself provides that, if the breach in question occurs, the terminating party can terminate the contract; or
(2) the breach deprives the terminating party of substantial performance of the contract; or
(3) there is "anticipatory breach", that is, the conveying (or in some circumstances, the existence) of an unwillingness or inability to render substantial performance of the contract.
47 It is not necessary to say anything here about the first of those categories, except to note in passing that termination on this basis may not support a claim for damages for loss of the bargain: Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620.
48 The second category has been considered recently in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61; (2007) 233 CLR 115.
49 The majority judgment (Gleeson CJ and Gummow, Heydon and Crennan JJ) asserted that a breach of contract by one party may entitle the other party to terminate where the breach is of an obligation agreed by the contracting parties to be essential (par [47]), and also where there has been a sufficiently serious breach of one or more non-essential terms (par [49]). That is, the Court treated the parties' assessment that compliance with a term was essential for substantial performance as sufficient to establish that non-compliance with that term negatived substantial performance; but also asserted that sufficiently serious breaches of other terms could also negative substantial performance.
50 In the same case the majority judgment said this about the third category: termination may be justified if "the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it", where renunciation is "an unwillingness or inability to render substantial performance of the contract" (par [44]). However, it is also the case that uncommunicated but proven permanent incapacity to afford substantial performance is sufficient for anticipatory breach: Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 at 423 per Brennan J, and cases there cited, and Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 262 per Mason CJ.
51 An associated question concerns the time for performance of the contractual obligation. A contract may specify a time for performance of an obligation or contain an implied term that the obligation is to be performed within a reasonable time; and it may be that, while the obligation itself is essential, the time for its performance is not. It was once the case that "the law" (as opposed to equity) generally treated the time for performance of an essential obligation as itself essential; whereas equity would not do so unless the parties expressly or by implication manifested an intention that this be so. Now, pursuant to s 13 of the Conveyancing Act 1919, the approach of equity applies generally. The result has been to somewhat blur the distinction between essential terms and non-essential terms, in cases where time considerations are important; and perhaps also to blur the distinction between the second and third of the three categories I have identified.
52 I say this because, where the time requirement for the performance of an essential term is not itself made essential, in accordance with the approach of equity to the question, it can under certain conditions be made essential by the giving of a notice. However, it appears also that where there is a time requirement for the performance of a non-essential term, that time may be made essential by notice: Louinder v Leis [1982] HCA 28; (1982) 149 CLR 509 at 526 per Mason J, with whom Stephen J agreed and with whom Gibbs CJ and Wilson J agreed generally. It could be suggested that this only applies where the non-essential term is a step in a process that the contract requires to occur before an essential term can be performed: in Louinder the term in question was the submission by the purchaser of land to the vendor of a transfer of the land. However, I do not think the approach in Louinder can be so limited. In any event, the rationale stated by Mason J for his approach was that the unreasonable delay involved in not complying with the notice amounted to a repudiation, suggesting that what he had in mind was a breach within category (3) rather than category (2). To similar effect is the judgment of Brennan J in Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Limited [1989] HCA 23; (1989) 166 CLR 623 at 643-649.
53 The requirements for such a notice are broadly that (a) there be no relevant breach by the party giving the notice, (b) there be a relevant breach or unreasonable delay by the other party, (c) the notice must specify a time for performance of the relevant term that is reasonable, (d) the notice must make it clear that failure to comply will be regarded as a breach entitling the giver of the notice to terminate, and (e) the party giving the notice must be itself ready willing and able to proceed to performance of whatever is required on its part to entitle it to performance of the relevant term: Louinder, Laurinda.
54 A further and more difficult question is whether, when one party has committed a breach satisfying one or more of the three categories, but the other party is also in breach of the contract, the latter can terminate despite its own breach. The answer is that generally it can, at least unless the obligations breached are interdependent or the breach by the party wishing to terminate has caused the breach that this party wishes to rely on.
55 As regards the former exception, it seems clear for example that, under a contract for the sale of land, the obligation of the vendor to transfer the land and the obligation of the purchaser to pay the price on completion are mutually dependent and concurrent; and that generally neither party who fails to perform its obligation when the time for performance arrives can terminate for the other party's failure at that time to perform its obligation: Foran, at 396 per Mason CJ, 417 per Brennan J and 433 per Deane J. However, there is a question whether this is a true or merely apparent exception to the general position stated in the previous paragraph, because the correct analysis may be that in such a case there is no breach at all, rather than that there is an inhibition on terminating for breach. Although Mason CJ says (at 396) that in these circumstances a party in breach "cannot terminate for the other party's breach", Deane J (at 433) says "neither … will be guilty of breach of contract … unless the other party tenders performance of his concurrent obligation". Brennan J's discussion (at 417) seems neutral between the two positions, perhaps being closer to that of Deane J. Two of the cases referred to by Mason CJ seem rather to favour Deane J's view: see Michael Realty Pty Limited v Carr [1977] 1 NSWLR 553 at 571C per Mahoney JA, Frankcombe v Foster Investments Pty Limited [1978] 2 NSWLR 41 at 48G per Holland J.
56 As regards the latter exception, it seems clear that a party cannot rely on an event as a ground for terminating a contract if that event has been caused by that party's own breach of contract: see for example Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 at 440-442, Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Limited [1984] 3 NSWLR 613, Plumor Pty Limited v Handley (1996) 41 NSWLR 30. The latter two cases also decided, correctly in my opinion, that the onus of proof lies on the party resisting termination, that is, the party who wishes to assert that the event that would otherwise justify termination was caused by the party seeking to rely on that event.
57 In the absence of such interdependence or a proved causal link, the circumstance that a party is itself in breach does not generally disentitle it to rely on the other party's breach of contract, if that breach would otherwise entitle the former to terminate: Nina's Bar, State Trading Corporation of India Limited v M Golodetz Limited [1989] 2 Lloyds Reports 277, Roadshow Entertainment Pty Limited v (ACN 053 006 269) Pty Limited (1997) 42 NSWLR 462. This position is assumed in the decision of the High Court of Australia in The Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64. Even if the terminating party's breach were itself sufficient to justify termination, in my opinion the better view is that this would not of itself preclude termination by that party, so long as the terms breached were independent and the causal link referred to earlier was not established: see Golodetz at 285-287, Roadshow at 481. (This passage from Roadshow was quoted with approval by Powell JA, with whom Meagher JA agreed, in Kyrwood v Drinkwater [2000] NSWCA 126 at [154]; although opposing views have been expressed by Fitzgerald JA in dissent in that case, and by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 143-144 and White J in Rona v Shimden Pty Ltd [2005] NSWSC 818; (2005) 12 BPR 23,287 at [92].) However, since entitlement to damages for loss of the bargain would generally require proof of readiness, willingness and ability to perform on the part of the party claiming damages, the party terminating in those circumstances may be unable to claim damages for loss of the bargain.
58 I should also refer to House of Lords authority that where both parties to an arbitration agreement are in breach by not taking steps to bring about the hearing of the arbitration, neither can rely on the other's breach to terminate the agreement: Bremer Vulkan Schiffbau und Maschinenfabrik v South Indian Shipping Corporation Limited [1981] AC 909, Paal Wilson and Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854. In my opinion, these decisions can be accommodated in the framework I am supporting, in the following way. Each party to the arbitration has an obligation to take steps to move the arbitration along, even in the case where there is delay by the other party, before that delay becomes so great as to amount to a breach justifying termination; so that if one party's delay does become so great as to justify termination because of the other party's breach in failing to take steps to move the arbitration along, the case falls within the second of my suggested exceptions.
59 A difficulty with my analysis is raised by discussions of anticipatory breach in DTR Nominees Pty Limited v Mona Homes Pty Limited [1978] HCA 12; (1978) 138 CLR 423 and in Foran.
60 In DTR at 433, Stephen, Mason and Jacobs JJ said this:
A party in order to be entitled to rescind for anticipatory breach must at the time of the rescission himself be willing to perform the contract on its proper interpretation. Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach …
61 This was quoted with approval in Foran by Mason CJ at 406-407 and Dawson J at 452, although Dawson J also referred to contrary views. A contrary view was forcefully stated by Deane J in Foran at 437-438 as follows:
In these circumstances, it is strictly unnecessary that I express any view on the question whether one party to a contract is precluded from rescinding it by accepting a repudiation of the contract by the other party if he is not in a position to prove that he is, or but for the repudiation would have been, ready, willing and able to perform the contract. However, in view of the discussion of that question in other judgments, it would seem desirable that I indicate that, notwithstanding some statements of authority to the contrary, I do not accept the proposition that a party must incur the expense necessary to put himself in a position where he can positively demonstrate actual or potential readiness and willingness to perform a contract before he can accept the repudiation of the other party and thereby rescind. In my view, that proposition is unjustified by either principle or common sense. Absence of actual or potential readiness or willingness to perform a contract will prima facie preclude a successful action against the other party for specific enforcement of the contract or for the recovery of damages for its breach. It does not, of itself, preclude rescission of the contract by acceptance of the other party's repudiation. Were it otherwise, the law would require the useless and futile expenditure by an innocent party of whatever time, effort or money was necessary to place himself in a position where he could positively demonstrate actual or potential ability to perform a contract in order to be able to bring it to an end on the ground that it had already been repudiated by the other party. Indeed, it is difficult to see why, as a matter of principle or common sense, actual breach or even repudiation by one party to a contract should prevent that party from rescinding the contract by accepting a repudiation of the contract by the other party. Put differently, it is difficult to see why the law should insist that, even though both parties to a contract have repudiated it, the contract must hang like an albatross around their necks unless and until they can reach a new agreement about its termination. The point can be illustrated by the hypothetical example of express repudiation by each party to a contract followed by acceptance of the other's repudiation and unilateral rescission of each of them. How can it be said that, in those circumstances, the law continues to require that each perform the contract?
62 In my opinion all these views are obiter dicta; and in my respectful opinion the view expressed by Deane J is correct.
63 DTR was a case between vendor and purchaser in which the vendor had indicated an intention to perform the contract according to a certain construction of it, which the High Court held to be a wrong construction; the purchaser had purported to terminate the contract on the basis that the vendor would not complete the contract as correctly interpreted; and the vendor had purported to terminate the contract on the basis that the purchaser's purported termination was repudiation. The majority of the High Court (Stephen, Mason and Jacobs JJ, Aickin J agreeing) held that neither purported termination was effective: the purchaser's, because the vendor's conduct did not justify an inference that the vendor intended not to perform the contract according to its terms; and the vendor's, because the purchaser's purported termination "did no more than evince an intention not to proceed with the contract on the basis of the incorrect interpretation then being advanced by the [vendor]" (at 433). That is, on the facts, the majority held that the plaintiff's conduct did not amount to anticipatory breach or repudiation; and accordingly, when the majority went on to state the passage quoted earlier, this was obiter.
64 In my respectful opinion, the support given in Foran by Mason CJ and by Dawson J to the proposition from DTR, and similar views expressed in Foran by Brennan J, are weakened by a failure to carefully keep distinct three questions:
(1) the availability of termination to put an end to obligations to perform a contract in the future;
(2) availability of termination plus a cause of action for at least nominal damages; and
(3) availability of termination plus a cause of action for substantial damages for loss of the bargain.
65 Mason CJ in Foran does advert to this distinction at 406-407, but he notes that Rawson v Hobbs [1961] HCA 72; (1961) 107 CLR 466, on which he relies, relates to "readiness and willingness as a material element in the existence of a plaintiff's cause of action"; that is, to questions (2) and (3) above. He goes on to extend the requirement to question (1), referring to the statement in DTR quoted earlier; but then on p 406, he says that "Insistence on the plaintiff being ready and willing is a means of ensuring that a plaintiff will not succeed in an action for breach of contract if the contract has gone off through his wrongful default or conduct", a consideration applying only to questions (2) and (3), not to question (1). Then Mason CJ then goes on to comment on the more stringent requirements for readiness and willingness in the case of actual breach which, if extended beyond cases of interdependent obligations, is contrary to authorities referred to in par [57] above.
66 Brennan J's discussion at 424-7 seems to be to similar effect; and at 430-431 Brennan J carefully distinguishes between two aspects of readiness and willingness in the case of a purchaser's termination for anticipatory breach: to be entitled to terminate at all, the purchaser must not be substantially incapable of completing in due course; while to obtain damages, the purchaser must prove on the balance of probabilities that it would have been able to complete.
67 Dawson J at 452-453 expresses similar views, but relates them to a statement that "a party should not be able to sue for breach if he is unable or unwilling to carry out his part of the bargain"; that is, he seems to be considering questions (2) and (3), and not question (1).
68 As a matter of principle, it seems to me that the view of Deane J is preferable. If the only question is whether a purported termination is effective to put an end to the contract so as to discharge both parties from future performance, then anticipatory breach by one will justify termination by the other whether or not the latter is ready and willing to perform. However, if the latter wants to obtain any relief on the basis of the termination, beyond mere discharge of future obligations, then as part of its cause of action it must prove readiness, willingness and ability. It is no longer necessary to explicitly allege this (UCPR 14.10), but if it is put in issue, the onus lies on the plaintiff to prove it in order to establish such a cause of action.
69 In my opinion, the view of Deane J in Foran is strongly supported by the following considerations, based on the decision of the High Court in Amann Aviation. In that case, the plaintiff Amann Aviation was in breach of contract, but the breach was insufficient to justify termination by the Commonwealth. The Commonwealth's purported termination was held to be a repudiation, and Amann Aviation's acceptance of this repudiation was held to be effective to terminate the contract. Amann Aviation's non-essential breach did not preclude it from effectively terminating the contract for the Commonwealth's repudiation; and indeed, its readiness, willingness and ability to perform in the future was sufficient to support its claim for damages. If however Amann Aviation's actual breach had not been non-essential, or if Amann Aviation had been shown to be permanently unable to afford substantial performance, then the Commonwealth's termination would have been effective; and Amann Aviation as well as the Commonwealth could have relied on the Commonwealth's termination to resist any call for further performance.
70 The views of Stephen, Mason and Jacobs JJ in DTR, and of Mason CJ, Brennan and Dawson JJ in Foran, in effect propose an intermediate position, where the breach by the party in the position of Amann Aviation is insufficient to have the effect that repudiation by the party in the position of the Commonwealth is effective to terminate the contract, but yet somehow too much to permit the party in Amann Aviation's position to do what Amann Aviation did, namely treat the Commonwealth's purported termination as a repudiation and itself terminate. In my respectful opinion there is no such intermediate position that can be justified. Suppose that the breach ultimately relied on by the party in the position of the Commonwealth were the permanent inability of the party in Amann Aviation's position to substantially perform the contract, and it was unclear whether or not this was established. Surely the position would then be that the contract was at an end, either because of the termination by the party in the position of the Commonwealth or because of the termination by the party in the position of Amann Aviation; and so far as concerned obligations for performance in the future, it would not be necessary to determine which was the true position. It would of course be necessary to do so if either party was claiming damages, but that is not the question here under consideration.
71 I would add that the actual decision in DTR does not support such an intermediate position, because that decision turned on a finding of fact that, in the circumstances, the purported termination by the purchaser was not a repudiation, because it conveyed only the intention not to perform the contract on the interpretation then being advanced by the vendor. That finding reflects the very reasonable reluctance of the courts to find repudiation when what is really happening is a bona fide and reasonable dispute about the true effect of the contract.
72 The view I have been supporting (that a party in fundamental breach of contract can terminate for fundamental breach by the other party, but generally cannot claim damages for loss of the bargain) has some support from two articles that deal with the question: Andrew Beech "Terminating a contract: dispensing with the requirement of readiness and willingness" (1992) Journal of Contract Law 5 pp 47-59, and Wayne Courtney "Termination of contract by a party in breach" (2008) The Journal of Business Law 3 pp 226-245.
73 The support from the second of those articles is more tentative than that from the first. In this article, Mr Courtney points out that, unless the fundamental breaches by each party happen to occur simultaneously, the problem would arise only where the fundamental breach occurring second cannot take effect as an acceptance of the earlier fundamental breach by the other party: if it can do so, then the contract must be at an end by virtue of the later breach operating as an acceptance of the earlier breach. Where the later breach cannot take effect as acceptance of an earlier fundamental breach by the other party, for example because the party guilty of the later breach had affirmed the contract, Mr Courtney (at 243-245) favours Deane J's approach, but notes three objections. The first two objections seem to me to fail to keep distinct the question of discharge of future obligations from the question of availability of damages; while a third objection, namely that where both parties are repudiating neither can terminate, seems clearly incorrect. Unless the repudiatory acts happen to occur simultaneously, the later of them will as a matter of law terminate the contract, albeit that neither party will be able to claim damages for loss of the bargain.