The Fundamental Breach Issue
166 The question arising under this head is whether, having given the December notice, the Sweeneys had elected to affirm the HoA and thus abandoned its common law right to terminate that agreement for fundamental breach, being the breach by Waters Lane of its obligations under cl 4.1. The primary judge referred to the election issue but did not directly decide it although he considered that the giving by the Sweeneys of the December notice did not prevent them from relying upon their common law rights as cl 17.8 provided that the remedies available to the Sweeneys under the HoA were cumulative to those available to them under the common law.
167 Three issues arise with respect to this matter. The first is whether the failure by Waters Lane to use "all reasonable endeavours" to satisfy the Conditions Subsequent by the Sunset Date as required by cls 4.1 and 7.1 amounted to a breach of a fundamental term entitling the Sweeneys to terminate the HoA after 20 January 2006 under the general law. The second is whether having given a notice under cl 8.2(a) with respect to the breach of cls 4.1 and 7.1, the Sweeneys had elected between alternative and inconsistent rights (being the right to terminate conferred by the combined operation of cls 8.1(b) and 8.2(b) on the one hand and the right to terminate for breach of fundamental term under the general law on the other). The third issue is whether, if there was an election by the Sweeneys which would otherwise have the legal effect of an abandonment of their right to terminate at common law for fundamental breach, nevertheless that right was preserved by the provisions of cl 17.8 of the HoA.
168 With respect to the first issue the appellants submitted that whether or not cls 4.1 and/or 7.1 constituted fundamental terms was to be determined in accordance with the well-known test formulated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641 where the Chief Justice said:
"The question whether a term in a contract is a condition or warranty, i.e. an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor."
169 It was submitted that this test was not satisfied in the present case as cl 6 of the HoA contemplated the entering into of a further development agreement to contain such other terms and conditions as were reasonably required by one party and agreed to by the other and which were not materially inconsistent with the terms of the HoA. Accordingly, as the HoA contemplated a further more detailed agreement, cls 4.1 and 7.1 were not terms which were of such importance to the Sweeneys that they would not have entered into the HoA unless they had been assured of a strict or substantial performance of them. It was further submitted that the critical promise in the HoA from the point of view of the Sweeneys was cl 12.2 under which Waters Lane was to procure Sintan to waive payment of interest on all amounts secured under the Sintan mortgage during the term of HoA and any subsequent agreement. As the Sweeneys were desperate they would have accepted just about anything provided that Waters Lane was locked into a form of development agreement with respect to the Property in order to relieve their dire financial position.
170 In my view those arguments are without merit. The fact that the HoA contemplated the entering into of a further, more detailed development agreement did not detract from the binding force of the HoA pursuant to which the obligation to enter into the further agreement was provided. Furthermore, that fact as well as the waiver of interest provision in cl 12.2 could not be said to detract from what I regard as the fundamental purpose and objective of the HoA, namely, the satisfaction of the Conditions Subsequent by the Sunset Date. So much is confirmed by Recital B to the HoA (see [19] above). Accordingly, the obligation upon Waters Lane as the Developer to use all reasonable endeavours to achieve that objective was clearly fundamental to, and went to the root of, the HoA. I have no difficulty concluding that those provisions fell within the Luna Park test of essentiality. The appellant's contention to the contrary should be rejected.
171 The second issue raises the question of election. The most cited general statement of the doctrine is that of Stephen J in Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 at 641-642. Relevantly, his Honour said:
"The doctrine of election as between two inconsistent legal rights is well established, but certain of its features are not without their obscurities. The doctrine only applies if the rights are inconsistent the one with the other and it is this concurrent existence of inconsistent sets of rights which explains the doctrine; because they are inconsistent neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence. …
In many instances what may pass for an application of the doctrine is, in truth, but the inevitable consequence of the party's conduct, a consequence that would follow even if no such doctrine existed. Thus in the common case of avoidance of a contract for breach it is not any doctrine of election that prevents the avoiding party subsequently from enforcing the contract but rather the fact that the contract has, by his act of avoidance, ceased to exist … On the other hand, if he chooses instead to keep the contract on foot and sue for damages rather than rescind for breach, recourse must be had by the other party either to election or, if the facts will support it, to an estoppel if that breach should later be sought to be relied upon so as to avoid the contract. …
For the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the two inconsistent rights which he possesses …
The nature of the knowledge which an elector must possess is a matter upon which the authorities are somewhat at variance. An elector must at least know of the facts which give rise to those legal rights, as between which an election must be made; without that knowledge the doctrine of election will not be available to make irrevocable his choice of one particular right … The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as 'full knowledge of the material facts'"
172 At 646 his Honour continued:
"The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease … However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election … There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right … For an election there need be no actual, subjective intention to elect … an election is the effect which the law attributes to conduct justifiable only if such an election had been made…"
173 In the same case Mason J (at 658) observed:
"If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon ." (Emphasis added)
174 The appellants accepted that the present case fell into the category of an election by the Sweeneys between two inconsistent rights where they had performed an act which was of such a nature that, irrespective of their actual intention, the law treated them as having exercised their election to pursue only one of those rights. Within this category of case, the words or conduct ordinarily required to constitute an election must be unequivocal in the sense that they are consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other.
175 The appellants further submitted that in a case where a party to a contract has the right to terminate that contract both at common law as well as pursuant to a provision of the contract itself, the exercise of the latter right is an unequivocal act constituting an election to treat the contract as remaining in force. In other words, the exercise of the contractual right to terminate is itself an affirmation of the contract for that right would not exist unless the contract remained in force. With respect, the argument is circular.
176 In Champtaloup v Thomas [1976] 2 NSWLR 264 at 268, Glass JA, with whom Street CJ agreed, observed that the constituents of an election to affirm a contract had been recently defined by the High Court in Sargent and included the following proposition:
"If a party, aware that he must make a choice, exercises rights under the contract, he is held to have elected to affirm. This is because he has acted adversely to the other party, and induced him to believe that performance of the contract is insisted upon."
177 In the same case, Mahoney JA, with whom Street CJ also agreed referred (at 274) to the right to elect in terms of whether to affirm or rescind a contract according to its contractual terms. In other words, for there to be an election between two inconsistent rights in the present context, one such right must be to affirm the contract or insist upon its continued performance according to its terms whereas the other right must be to terminate the contract.
178 If this is so and the doctrine of election arises only where the rights are inconsistent in the sense that exercise of one affirms the continued existence of the contract whereas the other terminates it, then when the choice is between termination of the contract according to its terms or termination at common law, each involves a right to terminate with the result that neither is inconsistent with the other and the doctrine of election has no part to play.
179 Thus in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 31, Mason J said:
"Termination in the exercise of a contractual power is not an affirmation of the contract which debars the innocent party from suing for damages for breach on the ground of repudiation or fundamental breach. This is because the termination, so far from insisting on performance by the party at fault, brings to an end his obligation to perform his promise in specie ."
180 In the same case Brennan J (at 50) observed:
"…a lessor who enforces a forfeiture in accordance with the lease as soon as he is entitled to do so after he has knowledge of the lessee's anticipatory breach cannot be taken to elect not to enforce a claim for damages. The mere continuance of the lease pending forfeiture is not an election either way. The election to be made by a lessor is between continuing to bind the lessee to performance of his executory obligations and putting an end to those obligations so that the substitutionary liability in damages will arise."
181 Of particular relevance to the present case is the following statement of Deane J, with whom Dawson J agreed, in Tabali at 55-56:
"It follows from the foregoing that, in the circumstances which had arisen, the landlord had both a contractual right to terminate the lease by re-entry under cl 10.1 for breach of covenant and, on the application of the ordinary principles of contract law, a common law right to terminate for fundamental breach. The landlord was not obliged to elect between the two grounds for terminating the lease: it was entitled to rely upon them both. A party entitled to terminate a contract for repudiation or fundamental breach may rely upon both a specific contractual right to terminate the contract and the common law right to terminate unless, as a matter of construction, the former excludes the latter … More specifically, where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides …"
182 Finally, in Immer (No 145) Pty Ltd v Uniting Church of Australia Property Trust (NSW) (1993) 182 CLR 26 at 30, Brennan J remarked:
"An act amounting to an election must be unequivocal. Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act."
183 The appellants submitted that by giving the December notice which expressly provided that they had an opportunity to rectify or correct the non-performance of the breaches specified in the schedule to the notice within 20 Business Days, the Sweeneys had elected to affirm the HoA thereby abandoning any common law right which they would otherwise have had to terminate it for fundamental breach.
184 The basis of this submission is that by exercising its right to give a notice under cl 8.2(a) and then to terminate pursuant to cl 8.2(b), the Sweeneys were affirming that the HoA remained on foot to enable them to exercise their rights under those provisions. In other words, whereas the right to terminate at common law would bring the HoA immediately to an end thereby discharging each party from any obligation to further perform it, the right to issue the notice under cl 8.2(a) only existed if the HoA was not brought to an end. Further, the notice required Waters Lane to perform the HoA by rectifying the alleged breaches under threat of the Sweeneys terminating pursuant to cl 8.2(b) in the event that the breaches were not rectified.
185 In my view the giving by the Sweeneys of the December notice and its purported termination of the HoA upon giving notice under cl 8.2(b) did not constitute an election to abandon its right to terminate the HoA at common law for fundamental breach. The former, contrary to the appellants' submission, did not require Waters Lane to perform the HoA by rectifying the alleged breaches; on the contrary, it merely notified the appellants that they had an opportunity to rectify them which was purely academic in terms of the breach of cls 4.1 and 7.1. After all it was the appellants' submission, recorded earlier in these reasons, that any breach of cl 4.1 as at 14 December 2005 was incurable within the 20 Business Days allowed by cl 8.2(a) for the rectification of that breach.
186 Furthermore the December notice itself asserted that neither the giving of the notice nor anything specified in it constituted an admission by the Sweeneys that any of the breaches specified in the schedule to the notice was capable of remedy by the appellants by 20 January 2006 or at all.
187 In my opinion, the giving of the December notice did not constitute an unequivocal act on the part of the Sweeneys which either affirmed or purported to affirm the continuing existence of the HoA. It could not have done other than have conveyed to the appellants their intention to exercise their right under cl 8.1 to terminate the HoA for material breach. As such, there was no inconsistency between exercising the right to terminate under cl 8 in accordance with its terms on the one hand or the right to terminate at common law for fundamental breach on the other. The primary judge was therefore correct to conclude that by giving the December notice, the Sweeneys had not elected to abandon their right to terminate at common law for fundamental breach.
188 Accordingly, it is unnecessary to consider whether cl 17.8 of the HoA had the effect of preserving the Sweeneys' common law right to terminate in the event that that right had otherwise been lost as a consequence of the application of the doctrine of election.