Termination by Breach

Contractual Right to Termination

A contractual right to terminate for breach will arise if provided for in the contract eg. a clause in a lease may provide if the tenant fails to pay the rent, the lessee is entitled to terminate the contract. Whether a right to terminate for breach given by the contract has arisen will be determined by a construction of the contract. The existence of a contractual right to terminate will generally not exclude the right of a party to terminate for repudiation at common law: Rawson v Hobbs.

Common Law Right to Termination

The right to terminate for breach will arise where there is a breach of an essential term or a serious breach of an intermediate term of the contract.

Incorporating Oral Terms

It must be determined which of those pre-contractual oral statements form part of the contract (terms) and which do not (mere representations or puff). It is only those terms which form part of the contract which will enable an injured party to sue for breach of the contract.

Mere Puff

Some statements made in the course of negotiations are clearly exaggerated and thus unlikely to be true. The common law does not provide a remedy for statements that any reasonable person would not believe in the truth of the statement.

Term vs. Representation

A representation is a statement that induces the representee to enter into the contract but the truth of the statement is not guaranteed by the representor.

The general test to determine whether the statement is a mere representation or a term is the intention of the parties, that is, did the maker of the statement intend to guarantee the truth of the statement. This intention is ascertained objectively: what would a reasonable third person have understood the statement to be (Oscar Chess Ltd v Williams).

The following are guidelines used by the court when determining whether a pre-contractual oral statement is a mere representation or a term.

(a) Words and conduct of parties

If the words of the statement maker indicate that he or she warrants the truth of the statement, this is strong evidence that the statement was intended to be contractual in nature.

(b) Knowledge or expertise of the statement maker

Where the statement maker is in a better position than the other party to ascertain the accuracy of the statement, it is probably a term (Oscar Chess v Williams).

Where the statement maker professes to have personal knowledge of the relevant information, it is more likely that he or she can be regarded as guaranteeing its truth. However, if the statement maker is merely passing on information of which he or she has become aware, but does not profess to have any personal knowledge, it would be more difficult to establish the statement as promissory.

In Dick Bentley Production v Harold Smith Motors, a motor dealer told the plaintiff a car had done only 20 000 miles rather than 100 000 miles. The statement was of a promissory nature, even though innocently made as the seller was a motor car dealer and in a much better position to know the state of the car. Conversely in Oscar Chess v Williams the buyer was in fact a car dealer and so the court held that as the seller had no expertise and only repeated the year of manufacture from the registration book, he know less than the buyer, thus, the statement was a representation not a term.

(c) Oral statements not reduced to writing

Where a statement is made orally and it is not included when the contract is reduced to writing, it is probably not a term (Routledge v Mckay.).

(d) Interval of time

Where there is a long interval between the making of a statement and the conclusion of the contract, it is probably not a term of the contract but merely a representation (Routledge v McKay).

In Routledge v McKay the seven day interval between the representation that the bike was a 1941 rather than a 1931 was relevant for finding for the defendant.

Classification of Terms

The relevant classification depends upon the intention of the parties, ascertained objectively, at the time when the contract was made (Associated Newspapers Ltd v Bancks).

Essential Terms

A condition of a contract is a term which is essential or is so important to the contract that if breached the innocent party has the right to terminate the contact and sue for damages (Tramways Advertising v Luna Park).

Test of essentiality – one party would not have entered into the contract unless assured of the strict or substantial performance of the term and the other party knows or ought know of this (Associated Newspapers Ltd v Bancks).

The fact that a term is described in the contract as a condition, is persuasive not conclusive (L Schuler AG v Wickman Machine Tool Sales Ltd).

Warranty

A warranty is a term that is subsidiary to the main purpose of the contract (Bettini v Gye).

A breach of a warranty entitles the innocent party to damages only and does not give him or her right to terminate the contract.

A consistent approach to the meaning of "warranty" is taken in the sale of goods legislation. "Warranty" is defined in s.3 of the Sale of Goods Act 1896 (Qld) to mean -

"an agreement with reference to goods which are the subject of a contract of sale but collateral to the main purpose of such contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated".

Intermediate Terms

An intermediate term may be defined as one capable of a variety of breaches, some serious some trifling (Bunge Corporation New York v Tradax Export SA Panama)

An intermediate term cannot be categorized as either a condition or warranty (Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd).

In Bunge Corporation & Tradax it was established that to determine whether a term is an intermediate term, two steps must be followed:

·  it is necessary to determine the type of term the parties intended using general objective test i.e. is it a term or warranty; and then

·  if it is a term that is capable of both major and minor breaches (intermediate term) how serious was the breach?

If the breach was serious in that it deprived the innocent party of substantially the whole of the benefit of the contract, the innocent party has the right to terminate the contact and sue for damages, and if the breach was not to serious, the innocent party will only be entitled to damages.

Time clauses are terms which are capable of only one kind of breach, namely to be late, and therefore cannot be an intermediate term (Bunge Corporatin New York v Tradax Export SA).

This approach was adopted in Australia in Ankar v National Westminster Finance.