Contract Law
Performing the Contract
Rights and Obligations
When the performance of contractual obligations commences the parties must begin doing what they are meant to do as per the proper interpretation of the terms. During performance, if there is a change in circumstances or needs, they can either re-negotiate deliberately or just carry on and accept a change in practice. Either way the proper interpretation of formal rights and obligations is affected. If there is a dispute a court will interpret the contract principally by what the parties intended at first, and subject to any proven changes in their intentions.
It is compulsory to perform every obligation imposed by the contract, and to continue performing until it is complete. That applies even if the advantages to the parties are unequal, and even if the contract is unfair. A contract operates like a set of laws agreed upon by the parties and will be upheld by a court. There are exceptions, however, which we address under Vitiating Factors, below.
If a party fails in performing a major term of the contract, then the contract may be terminated and a suit for restitution, damages and so forth may ensue. If they fail in performing a minor term, then a suit for damages only is an option to pursue. However, if non-performance or altered performance is accepted by the counter-party, or if it appears so, then over time with repeated acceptance, a court would deem the terms of contract have been altered, as implied by conduct. More detail on these issues is to be found elsewhere in this chapter.
Ceasing the Contract
Frustration
At times it becomes impossible to complete the performance of a contract to its desired outcome. This can be the result of a change in government policy, a court injunction, a natural disaster, a war, or a range of other things. When performance is impossible due extraneous factors that the parties have no control over and could not anticipate, we call this frustration. When recognised by a court, frustration allows a contract to be terminated with no award of damages claimable by either party.
A court declares a contract frustrated when continuing the performance of obligations requires very different actions from those agreed to. The bar is set high because courts try to keep contracts afoot. A party’s own failure to perform is different. A party to a contract cannot stop performing for some lesser reason such as unprofitability or inconvenience and claim that that has frustrated the contract.
The remedy given by a court is to terminate the contract from the moment when frustration began. Money, goods and services already exchanged are mostly non-returnable. However this is not a lottery. While damages for non-performance are unavailable, parties may still sue for unjust enrichment if they fail to perform in spite of already having been paid.
An important case on the doctrine of Frustration is Codelfa Construction v State Rail Authority of New South Wales Codelfa contracted with the NSW State Rail Authority to build a railway tunnel going to King’s Cross. There were complaints of night time noise from nearby residents. A court trial ensued and an injunction was given so that they could only work two shifts, instead of the three shifts contracted for, allowing residents peace at night time. This injunction made it impossible to build the rail tunnel within the specified time (and was in conflict with legislation that had been passed to protect the work).
Codelfa, unable to complete the contract on time, faced heavy liability and sued the SRA. In this matter the court found the contract was frustrated.
The court said that, ‘Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…. It was not this that I promised to do.’
On first inspection it may look like the court was just helping Codelfa avoid an unfair situation where penalties (liquidated damages – see earlier pages) would fall payable. But for frustration to be recognised there must be a fundamental change in what is necessary to fulfill the promises made.
Repudiation or Termination for Breach of Terms
Parties can terminate a contract at will, within what is permitted by the contract terms. When a party simply ceases performing their obligations under a contract, this called repudiation. They may state that they are ceasing to perform, or it may be implied by a period of non-performance.
Upon repudiation, the other party can then terminate the contract if they wish. They may sue for damages or for specific performance. (See later) to be compensated for what they would reasonably expect to receive had the contract been performed in full.
Repudiation can happen lawfully if the counter-party breaches an essential term, but not a minor term. The case for intermediate terms depends on the situation. The seriousness of the breach is also a factor. Termination can also occur lawfully for unreasonable delay.
In other circumstances, if you terminate prematurely, then you are the party guilty of repudiation and can be sued. It is possible to terminate by mutual agreement at any time. A contract may also contain terms specifying that it is to be terminated once certain conditions are met.
In Associated Newspapers v Bancks, Bancks the creator of Ginger Megs among other cartoons, signed a 10 year contract in 1949 with Associated Newspapers. He was to draw cartoons and they would be published on the first page of the cartoon section of two newspapers. Associated Newspapers eventually moved the cartoons to the third page without consent and against protest. Bancks gave notice of termination.
The court had to determine whether the obligation to print on the first page was an essential term (that is, a condition), the breach of which would permit termination. The court reasoned that any stipulation that goes to the root of the matter is a condition of the contract.
The court said that it was a condition of the contract for Bancks to draw the cartoons, and this makes the obligation to print the cartoons on the front page of the comics section equally important. The newspaper would not have employed Bancks unless it was assured he would perform his promise, and Bancks would not have made the promise unless he was assured his work would be published in a particular manner. Therefore Associated Newspapers had breached an essential term and Bancks was entitled to terminate his contract, bearing no liability.
A contract may stipulate that ‘time is of the essence.’ This is common terminology employed in a lot of contracts, which is to be watched for. This means that when an obligation must be performed by a certain time, this is an essential term. As long as the intention is clear there are no exceptions. Failure to meet the deadline is a fundamental breach resulting in the right to terminate.
The circumstances also may show that timing is essential to gaining the benefit for which the contract was entered into. When that is so time can be construed to be of the essence if the facts allow.
Termination for Delay
If time is not of the essence you can still sue if there is some sort of loss involved, but you cannot not terminate. A party wishing to terminate anyhow can do so by giving notice of their intention. If you give notice to the counter-party after an unreasonable delay, specifying reasonable time for completion, then time becomes of the essence. Failure to meet the notice period creates the right to terminate.
An example of termination after notice is found in Luarinda v Capalaba Park Shopping Centre. Laurinda, a commercial tenant, took occupancy in a shopping centre in Brisbane, but the centre management failed to register the lease. That meant there was nothing but an equitable lease. (Meaning they had rights from having paid, but not a full leasehold estate). The tenant eventually engaged solicitors who gave notice to complete the registration in 14 days. But registration would take longer than that.
The court ruled that there is a difference between a party intending to carry out a contract only ‘if and when it suits him,’ and a party being willing to carry out a contract ’as it suits him to do it and when its suits him to do it.’ In the former case it is easy to say there is no intention to be bound. But that is not so clear in the second as the party seems to be seeking flexibility with time.
Capalaba’s behaviour evinced an intention only to perform in a manner substantially inconsistent with its obligations. The delay was accompanied by an intention not to complete their obligations until it suited them to do that. This allowed Laurinda to treat them as having repudiated the contract.
The notice period given was unreasonable as it gave only 14 days for registration when more time than that was needed to complete a registration. But due to the great length of the total delay by Capalaba, the brevity of notice time did not matter. In all the circumstances the notice was valid.
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.
Luarinda Pty Limited v Capalaba Park Shopping Centre Pty Limited [1989] 166 CLR 623.