Breach, essential terms, termination PDF

Preview

Summary

You are given about 2 hours to write an essay given a scenario related to the first few topics in contracts 2 (Performance, Breach, Termination etc...)...

Description

S4638498, Low Laura (L), as an owner of a growing catering business, entered into a written license agreement for 12 months with Quick Kitchens Pty Ltd (QK) to access their commercial kitchen. The issue is whether or not QK had breached a term of the contract as such it gives L the right to terminate the contract. Also, this issue is whether L’s non-performance of 3.1 after serving a termination notice breached the contract. From QK’s misconduct, it is deduced they have breached the term 2.2, that: “Quick Kitchen shall ensure that all kitchen equipment listed in Appendix A is in proper operational condition for the duration of this Agreement.” Note, the equipment provided was each in disrepair at least once during the contract. The dishwasher was never operational, and on minimum 16 occasions, the gas oven has been frequently non-operational. Further, the need for repair obviously implied the deep fryer was non-operational beforehand in December. The deep fryer was removed as well in January and February for repair implying it was inoperable beforehand. From the sustained unmitigated inability to use the equipment can only be construed as QK ceasing care or action to repair it as such that it would be fully operational and ready to use by L throughout the duration of the license agreement. Determining the severity of the breach depends on whether the term is essential, or not. The term is essential (conditional) where it goes to the root of the contract, so much so it may be seen by the innocent party as being a substantial failure of the whole contract. Breach of a conditional term gives the victim-party the right to terminate the contract at will. The test of Essentiality from Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd, (Koompahtoo) requires consideration of the language (of the contract), context of the contractual relationship and its commercial purpose. Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW), (Tramways) to that extension asserted that the term must be so important the promisee “would not have entered into the contract unless [they] had been

assured of a strict or substantial performance of the promise.” The phrase used ‘shall ensure’ (in 2.2) is persuasive but alone cannot be proof of its essentiality. Relative to term 3.1 where the contract asserts, “it is agreed that time for payment is of the essence,” is indicative of express essentiality agreed upon, further enforcing term 2.2 is not explicitly conditional.

So the next issue is if 2.2 is implicitly essential. L, as an owner of an expanding catering business, intended to facilitate the business’ growth by professionalising it, i.e, (beginning with at least) the transition of food production in a residential to a commercial kitchen. On the issue of ‘objective importance’, (Tramways Advertising) a reasonable person that is promised access to a commercial kitchen would assume firstly assume its equipment properly works; or at least has minimal issues. Had only a singular instance occurred where one of the equipment was inoperable, the consequences would be very minor. Considering this plus the term’s construction however, the term cannot be deduced to be essential. It seems that it is not the actual substance of the term in fact, but the gross repeated breaches that impelled L to give notice of termination.

Now onto whether QK’s misconduct was a breach of an intermediate term sufficient to terminate. To determine this, Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (Hongkong) examined whether the “occurrence of the event deprive[s] the [innocent party] of substantially the whole benefit” it intended to receive. QK’s complete failure to perform 2.2 and its consequences do not just end with L, but with her business. The business expansion implies greater customer demands, and therefore complex larger-scaled, food production that only a commercial kitchen can handle. On this also relies the business’ reputation and sustaining the customer base. Use of unreliable equipment inevitably will cause profound issues with quality and quantity of food production. Not only do multiple aspects of her business are dependent primarily on the Food production process (and thus the profound effects of its failure), it is the repeated offenses over the course of nearly half of the

contract’s lifetime –and the sheer likelihood of it occurring in the future– that the breach goes to the very root of the contract. But does QK’s blatant misconduct amount to repudiation?

Repudiation is determined either expressly or implicitly through the breaching party’s conduct they intend only to perform inconsistently by the terms of the contract, or at least a fundamental obligation of the contract, demonstrating they are not ready, willing or able to perform. The test to determine repudiation can be sourced from Koompahtoo: “"the test is whether the conduct of one party is such to convey, to a reasonable person, In the situation of the other party, renunciation of the contract as a whole or of a fundamental obligation under it.” Campbell J (Koompahtoo) saw the contract had been validly terminated, deduced not through breach of an essential term but of an intermediate term breached continuously constituting repudiation of the contract. Though the consequences were more severe as a result of Sanpine’s breaches, it still remains applicable as precedent as the case demonstrates repudiation through one’s sustained misconduct in the contract. As previously established, it was the constant failure to perform this obligation (2.2) from the beginning of the contract and the absolute certainty their non-performance will persist until its end, that it can be deduced QK is repudiating this obligation. In proving QK has repudiated, it may be possible to prove

After issuing a notice of termination for repudiation of 2.2, L ceased to pay the monthly fee for June, failing to perform term 3.1, to “make each monthly payment of $800…” This, as was established, is suggested to be explicitly essential. It was argued (though controversially) by Keane JA in Highmist Pty Ltd v Tricare Ltd (Highmist), provided the innocent party were “ready, willing and able to perform its contractual obligations” where the other party has repudiated, the innocent party can rescind as to reduce the damages. Interpreting L’s nonperformance of term 3. As such, L’s non-performance was not as such breaching the contract.

To conclude, the analysis of L and QK’s contract demonstrates QK’s consistent nonperformance of term 2.2, though an intermediate term, amounted to repudiation of that obligation, thereby entitling L with the right to terminate. In accepting QK’s repudiation, failed to perform essential term 3.1, but because it was to cushion and minimise the damages created by the repudiating party L was entitled to rescind her obligations.

Word Count: 1107...