Summary Contract: Cases and Materials chapter 20, discharge by failure of contingent terms PDF

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Chapter 20 – Failure of a contingent condition CONTINGENT CONDITIONS      

Parties may make the performance of their contract conditional upon the occurrence of a specified event that neither party promises to ensure will occur. This sort of qualifying term is sometimes called a contingent condition. The term is a condition in the sense that the performance of the contract is conditional upon the specified event taking place. The term is contingent in the sense that neither party undertakes to ensure that the event specified in the condition will occur. Parties may also make performance of their contract conditional upon a particular event not occurring. A contingent condition may qualify the performance of all of the obligations under a contract or a particular obligation only.

DIFFERENT USES OF THE WORD “CONDITION” Contingent and promissory conditions    

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A contract term may be described as a contingent condition where the performance of the contract is conditional on the occurrence of an event that neither party promises to ensure. If the event does not occur, then one or both of the parties will be entitled to terminate the contract. However, there will be no breach of the contract because neither party has promised to ensure that the condition will occur and hence no right to damages will accrue. The word ‘condition’ is also sometimes used to refer to a contractual promise which is essential in that a breach of the promise by one party will entitle the other party to terminate the contract and claim damages. o For example, where a contract for the sale of land fixes a date at which the parties must perform their respective obligations – payment of money and transfer of the property – and further states that performance by each party on this date is essential, then at the time for performance of the obligations will be a promissory condition. If one party fails to perform at the specified time, the other party may terminate the contract and will have a right to damages for the breach of the condition. Whether a condition is promissory or contingent depends on the construction of the contract in the circumstances of the case (McTier v Haupt [1991] 1 VR 653, 658-9).

Contingent conditions to performance and formation   

Where a contingent condition qualifies the performance of a contract, the parties will not be obliged to perform the contract until the condition is fulfilled. Their obligations to perform is in a sense ‘suspended’. However, the presence of a contingent condition relating to performance does not prevent a contract from coming into existence. Even before the condition is fulfilled the parties will be

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bound to the contract and may not do anything inconsistent with the relevant contractual obligations. A contingent condition may also qualify the formation of a contract. Where a contingent condition qualifies formation of a contract, the parties are not bound by the contract unless and until the condition is fulfilled. While the issue depends on the construction of the parties’ agreement, courts tend to prefer to treat a contingent condition as qualifying performance, and not formation (Perri v Coolangatta  see lecture notes). In support of this approach, the High Court has explained: “In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens.” (Perri v Coolangatta at 552)

Contingent conditions precedent and subsequent to performance  

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A contingent condition precedent to performance is one that must be fulfilled before the parties are bound to perform their contract (Meehan v Jones). A condition subsequent is one where the parties’ obligation to perform is immediately binding, but will come to an end should the event specified in the condition occur (Maynard v Goode). In dealing with contingent conditions, it is more important to identify the effect of the condition than to attach the labels ‘precedent’ or ‘subsequent’ (Meehan v Jones at 592).

THE DUTY TO CO-OPERATE 

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Where a condition is contingent, the parties do not undertake to ensure that the condition is fulfilled. Nonetheless, the parties may be under some obligation with respect to the condition. The contract may expressly require one or both of the parties to use a certain level of effort in attempting to ensure that the condition is fulfilled, e.g. by requiring a party to use his or her ‘best endeavours’ or ‘best efforts’ (e.g. Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 133). In the absence of an express obligation of this kind, the parties may be under an implied duty to co-operate. A duty to co-operate will require the parties to do everything reasonably within their power to see that the condition is fulfilled (e.g. Perri v Coolangatta). If a contingent condition is not fulfilled due to a breach of the implied duty to co-operate, the party in breach will not be entitled to rely on the failure of the condition as a reason for terminating the contract (Perri v Coolangatta at 545, 566). Where a party breaches the duty to co-operate in fulfilling a contingent condition, damages will usually be available to the other party. It is possible that the damages will be discounted to take account of the fact that, even if the party in breach had co-operated, the condition might not have been fulfilled.

NON-FULFILMENT When will a contingent condition not be fulfilled? 

A contingent condition will not be fulfilled where the events that occur are contrary to what was contemplated in the condition.

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A contingent condition will also fail where the condition is not fulfilled within the period of time required by the contract. The time for fulfilment of a contingent condition may be expressly specified in the contract. If no time is specified, courts will construe the contract as requiring the condition to be fulfilled within a reasonable period of time (Perri v Coolangatta). What amount of time is reasonable will be determined by the circumstances of the case.

Objective or subjective test?  

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Whether the fulfilment of a contingent condition is judged by an objective or a subjective test depends on the language of the condition. In some cases the condition will clearly refer to an objective fact. In other cases, a contingent condition may depend on a discretionary judgement on the part of one of the parties, e.g. one party may have to be ‘satisfied’ with or ‘approve’ a particular matter. Whether a duty of reasonableness should apply to a condition of satisfaction has not been resolved in Australian contract law. However per Mason J in Meehan v Jones; o There is some ground for thinking that the parties contemplated that the question was to be left to the honest judgement of the [party given the discretion] rather than the judgement of the court as to whether [that party] acted reasonably in the circumstances. [On the other hand] it would make for greater consistency to say that, if the purchaser is bound to act reasonably in seeking to obtain finance, he is bound to act reasonably well as honestly in deciding whether finance was satisfactory. So understood the special condition would reserve an even balance between the vendors and the purchaser.

THE CONSEQUENCES OF NON-FULFILMENT OF A CONTINGENT CONDITION Non-fulfilment excuses performance   

Non-fulfilment of a contingent condition excuses performance, even where non-fulfilment of the condition may seem objectively unimportant. As Mason J noted in Perri v Coolangatta Investments Pty Ltd, ‘the expression of a provision in the form of a condition precedent endows it with the character of essentiality’ (at 554). In determining whether or not a condition has been fulfilled, the courts adopt a strict approach; exact compliance is required (Highmist Pty Ltd Tricare Ltd [2005] QCA 357, [41]).

Void or voidable 

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The consequences of a contingent condition not being fulfilled are determined as a matter of construction of the contract in question. However, some general principles may be discerned. If a contingent condition which relates only to a particular obligation is not fulfilled, then generally the parties will be excused from performance of that obligation, although the contract will remain on foot. If a contingent condition relating to performance of the whole of a contract is not fulfilled, the contract will generally be voidable (Perri v Coolangatta). This means that one or both of the parties may individually have a right to elect to terminate the contract.

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If neither party elects to do so, the contract will continue on foot. If the contract is terminated, neither of the parties will be liable in damages merely for the fact that the condition has not been fulfilled, unless there has been a breach of the implied duty to cooperate. In some cases the contract may provide that, upon non-fulfilment of a contingent condition, the contract will be ‘deemed to’ or will ‘automatically’ come to an end. In Suttor v Gundowda Pty Ltd, the Court held that where the event upon which the condition depends may be brought about by the default of one of the parties (e.g. by failing to take reasonable steps to co-operate in fulfilling the condition), the contract is voidable at the option of the party not in default, (1950) 81 CLR 418, 441. Thus, despite the fact that the words used by the parties appear to have provided for automatic termination, the High Court held that the condition had the effect of making the contract voidable, not void. If neither party is in default, the contract is voidable at the option of either party. However, where the condition concerns an event over which neither party has control, e.g. where the performance of a contract is subject to “it not raining” (New Zealand Shipping Co Ltd v Societe des Ateliers et Chantiers de France [1919] AC 1, 9), courts have been more willing to accept that parties intended automatic termination in the event that the condition is not fulfilled. Any concern that a party could take advantage of its own default (which seems to have motivated the approach in Suttor v Gundowda Pty Ltd) could be dealt with through the application of estoppel principles, rather than overriding the parties’ clearly expressed intentions that the contract was automatically terminated where the contingent condition was not fulfilled. Brereton J in Waterman v Gerling Australia Insurance Co Pty Ltd held that where a provision provided that a contract ‘shall be deemed to have ceased’ upon the non-fulfilment of a condition, the contract was automatically brought to an end when that condition was not met. However, where one party acts to his or her detriment on the assumption that the contract is continuing, the other party may be estopped from asserting that the contract has automatically come to an end if he or she induced the assumption on the other party (MK & JA Roche Pty Ltd v Metro Edgley Pty Limited [2006] NSWSC 810).

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The legal effects of a contract being deemed voidable as opposed to void are:

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1) Where a contract is merely voidable, the innocent party may enforce the contract, but the contract cannot be enforced against him. If a contract is void, neither party can enforce the contract.

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2) Rights in a voidable contract are transferable; rights cannot be transferred in a void contract.

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3) If a party improperly transfers property to a bona fide purchaser for value, the injured party may recover the property if the contract governing the transaction is void but not if it was voidable.

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4) Voidable contracts may be ratified by the party with the power to avoid the contract once the reason for such avoidance – such as minor age, mental impairment, duress, undue influence or mistake – no longer exists. Void contracts cannot be ratified.

 Notice 

Where a contingent condition fails to be fulfilled, a notice is not required before the contract can be terminated (Perri v Coolangatta at 546, 569-70).

Who can elect to terminate?  

Whether one or both of the parties can terminate a contract for non-fulfilment of a contingent condition will depend on the construction of the contract (Perri v Coolangatta). It seems that typically both parties will be entitled to terminate. However, if the condition was not fulfilled because of the default of one of the parties – in failing to co-operate – that party will not be entitled to rely on the failure of the condition as a reason for terminating the contract (Perri v Coolangatta).

WAIVER OF A CONTINGENT CONDITION 

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Both parties acting together may agree to waive a contingent condition, in which case they will be bound by that agreement and may not terminate the contract for non-fulfilment of the condition. In some cases fulfilment of a contingent condition may also be waived by one party acting alone. Where a party waives compliance with a contingent condition, that action prevents either of the parties from terminating the contract or refusing to perform the contract on grounds of non-fulfilment of the condition. One party alone will have a right to waive compliance with a contingent condition where the condition is for the benefit of that party (Perri v Coolangatta). Whether or not a contingent condition is for the benefit of one party is a matter of construction. In Gough Bay Holdings Pty Ltd v Trywhitt-Drake, the Court concluded that the condition benefited the vendors as well as the purchaser and, accordingly, that the condition was not capable of being waived by the purchaser ([1976] VR 195, 204). Even though a contingent condition is for the benefit of one party, thus entitling that party to waive fulfilment of the condition, the other party may still be entitled to rely on nonfulfilment of the condition as a reason for terminating the contract in the absence of a waiver. o For example, in Perri v Coolangatta the High Court considered that a condition making a contract for the sale of land subject to the sale of the purchaser’s property was capable of being waived by the purchaser. o However, provided the condition had not been waived by the purchaser, the vendor was entitled to terminate the contract for non-fulfilment of the condition.

RESTRICTIONS ON THE RIGHT TO TERMINATE FOR NON-FULFILMENT OF A CONTINGENT CONDITION

Prevention 

A party may lose its right to terminate for non-fulfilment of a contingent condition if the party has prevented its performance or has intimated that he or she does not intend to perform the contract (Nyhuis v Anton).

Other restrictions   

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The right to terminate a contract for non-fulfilment of a contingent condition is subject to a number of other restrictions. Generally, the restrictions that apply to the right to terminate for breach, apply to the right to terminate for non-fulfilment of a condition. Of particular importance is the principle that a party who waives the right to rely on nonfulfilment of a contingent condition will be bound by this decision once it has been communicated to the other party. The right to terminate for non-fulfilment of a contingent condition may also be restricted by the doctrines of estoppel and good faith. Where one party falsely leads the other party to believe that he or she will not exercise his or her right to terminate the contract on the basis of non-fulfilment of a contingent condition, this may constitute misleading or deceptive conduct in trade or commerce in breach of s 18 of the Australian Consumer Law. The court may be prepared to make an order under s 237 of the Australian Consumer Law that prevents the party from terminating the contract on the basis of non-fulfilment of a contingent condition....