LAW Case

North South University

LAW 200 Section: 11 Group: 11 Date: 10-08-2014 Ashik Ahmed Razu

1110835030

Md Fazle Ikra Talukder

1110758530

Al Imran Ifad

1110755030 1

LETTER OF TRANSMITTAL August 10th, 2014 To,

Barrister Ms. Lomat ara Chowdhury Lecturer, North South University Bashundhara, Dhaka. Subject: Submission of the Term Paper on LAW 200

Dear Mam, We are truly delighted to complete our LAW 200 term paper. We have generated what we believe to be the most appropriate. We tried our best to complete the assignment in this very short span of time and with the quality of your expectation. We wish the assignment would be meeting your expectations and standards.

We truly appreciate this task as it helped us to learn the practical situation of the prospects and the various aspects of termination of a contract upon a breach. We sincerely hope that you will appreciate our efforts. We have enjoyed working on this assignment and have learnt a lot.

Sincerely yours,

Ashik Ahmed Razu Md Fazle Ikra Talukder Al Imran Ifad

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Table of Contents

Letter of transmittal............................................................................................... 2

Abstract ................................................................................................................. 4

Introduction ........................................................................................................... 5

Concepts ................................................................................................................ 6

Discussion: ........................................................................................................... 11

Conclusion: .......................................................................................................... 14

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Abstract

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Purpose – This paper provides supplement to the right of termination of the innocent party of a contract for breach and communication of the termination to the other party.

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Design/methodology/approach – The study is made analyzing similar cases from various secondary sources and upon applying the knowledge that we gathered from the class lectures.

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Originality/value – Although we may carry out outlining one concept from another. However, it is evident that there are specific terms when a party has the right to terminate a contract for breach and it is not at all far from clear.

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Keywords: Termination of contract, Right to terminate, Breach of contract, Conditions, Warranty, Criticism of terms of contract, Repudiation.

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Paper type: Research type

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Introduction An innocent party‘s right to terminate a contract arises from a particular type of breach of contract by a defaulter. The factual matrix of the breach and the nature of the term breached in each case inform the innocent as to whether the right has arisen. In this paper I have used the term ―the innocent‖ to describe the party who is seeking to terminate and the word ―the defaulter‖ to describe the other party to the contract. However, it is not uncommon for the defaulter to be able to point to other breaches by the ―innocent‖. Common law rights to terminate arise in one or more of the following three ways: -

Any breach of a condition (or essential term) of the contract;

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A serious breach of an intermediate term of the contract; or

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Conduct that shows the defaulter is unable or unwilling to comply with the contract.

Contractual rights to terminate are of two main types: -

Termination of the contract in total; or

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Termination of the engagement of a contractor,

In both cases arising from actual conduct, as described in either the contract‘s termination clause or a term arising under statute.

Frequently, the common law right to terminate is the most important consideration.

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Concepts Rights of Termination: The right to terminate a contract is a right enjoyed by one party (the promisee) to terminate the performance of a contract, including for breach of contract or repudiation of obligation by the other party (the promisor). When reference is made to a ‗right to terminate‘ this is a shorthand expression to describe any right enjoyed by a promisee to terminate the performance of the contract. In this work, the principal concern is with a right to terminate for the promisor‘s breach of contract or for the promisor‘s repudiation of obligation. Exercise of the right brings about a termination or discharge of the parties‘ unperformed obligations. Generally, the right relates to the performance of the contract as a whole, and most of the discussion in this book assumes that is the perspective of the right. However, the right may also arise in relation to ‗part‘ of a contract.

There has not always been a common law right to terminate partly performed contracts. At one time, the promises made by contracting parties were considered to be independent covenants. By the later part of the 18th century this was recognized as potentially causing great injustice where the innocent party was obliged to provide evidence of its full performance of the contract to claim damages for breach by the defaulter, even when the defaulter had long been in the most serious breach of the contract. In Boone v Eyre1 the vendor sold to a purchaser a plantation in the West Indies, complete with a stock of slaves. The purchase price was £500 plus an annuity of £160 per year. The purchaser stopped paying the annuity because he discovered that the slaves were not legally owned by the vendor at the time of the sale. Lord Mansfield rejected the purchaser‘s argument but said that where covenants go to the whole of the consideration on both sides, they are mutual. However he held that the legal ownership of the slaves was not such a covenant and damages was an adequate remedy for this breach. In Bettini v Gye2 an opera singer, Bettini, was engaged by Gye for a three month season and was required to be in London six days before the opening night for rehearsals. Bettini arrived only two days before opening night because of illness and Gye refused to continue with the contract. The court considered whether the requirement to be in London 6 days before opening night was a

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condition precedent to the obligation of Gye to employ Bettini or was an independent agreement. Lord Blackburn said it was the latter. Bettini was entitled to damages for wrongful repudiation of the contract and Gye was not entitled to terminate the contract. The term breached was considered to be an independent agreement; it was akin to a collateral contract that had been breached and therefore did not give rise to the right to terminate. This is to be contrasted with Poussard v Spiers and Pond.3 Spiers and Pond engaged Poussard to sing the lead role in a new opera. The opera was scheduled to open on 28 November and Poussard attended numerous rehearsals up to 23 November when she became ill. On 25 November, Spiers and Pond were told that Poussard would probably be unable to sing on opening night. They engaged a replacement who sang in her place. On 4 December Poussard had recovered and wanted to sing, but they refused to let her. She sued for breach of contract but failed, as the court said that her earlier inability to sing went to the essence of the contract. The promise to sing from opening night onwards was a condition and its breach entitled them to terminate. This approach of distinguishing between conditions precedent and independent agreements morphed through time into calling the two classes of terms conditions and warranties. The term ―warranty‖ had been previously viewed as a representation that, if breached, entitled the innocent to a remedy in deceit. Over time, ―warranty‖ became a term that described a less important term of the contract.

Breach of Contract: In general "breach" in relation to a contract means a failure, without legal justification, to perform an obligation under the contract as required by the contract. Legal justification may take various forms. For example a party may be justified in withholding performance if the other party is already in breach of a countervailing obligation. Supervening impossibility may justify a party in not performing. A statute may make it unlawful to perform and thereby justify non-performance. Non-performance of an obligation may be justified if performance requires the co-operation of the other party and the other party obstructs performance. So far as we are aware, the only difficulty in relation to the definition of breach of contract which might lend itself to a legislative solution is a slight uncertainty about the nature of a breach of a contractual warranty. Is a breach of a warranty about past, present or future facts, which is not an 7

obligation to do or pay anything, a breach of contract which can trigger the normal remedies for breach of contract so far as applicable? The fact that breach is commonly defined by reference to a failure to "perform" may give rise to a doubt. If, for example, X enters into missives to sell heritage and warrants that there has been no adverse planning decision affecting the subjects, and it turns out that there has been such an adverse planning decision, it would be straining language to say that X has failed to "perform" an obligation. And yet there is no doubt that breach of a contractual warranty ought to be treated as a breach of contract. The point is not purely theoretical. Doubts on this point may have been partly responsible for some of the problems which arose in the case of Winston v Patrick. Clause 9 of the missives in that case stated: "The seller warrants that all statutory and local authority requirements in connection with the erection of the subjects of sale and any additions, extensions and alterations thereto have been fulfilled." It was discovered that an extension to the house had not been built in accordance with the requirements of the local building authority and was defective. The pursuers pleaded that the defenders were obliged to construct the extension "in accordance with their obligation in the said missives" and, having failed to do so, were in breach of contract. The Second Division held that there was no obligation in the clause to do anything. On that narrow, basis the pursuers' case was dismissed. Clearly the pursuers should have pleaded a breach of the warranty. It is unsatisfactory that there should be any doubt as to whether breach of a contractual warranty is a breach of contract. The matter could easily be resolved by legislation. Should it be made clear that breach, in relation to contract, covers the situation where a contractual warranty, not involving any obligation to perform, proves to be untrue? An affirmative answer to this question does not mean that all remedies for breach of contract will necessarily be applicable to a breach of a warranty which does not involve any obligation to perform. Some remedies are, of their nature, available only in relation to a breach consisting of a failure to perform. Indeed, the distinctive feature of a contractual warranty which does not 8

involve any obligation to perform may be that there is no primary obligation but only a secondary obligation to pay damages in the event of the warranty being untrue.

Repudiation: Section 7(2) of the Contractual Remedies Act 1979 provides: ―Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.‖ The test for repudiation requires an unequivocal assertion of an intention not to be bound by the contract. As the section makes clear, the repudiation can either be evidenced expressly by the party‘s words or impliedly by the party‘s conduct. Repudiation will not be inferred lightly and therefore, where there is any real doubt about the meaning to be taken from the words or conduct that doubt will generally be resolved in favour of the party alleged to have repudiated.

While the concept of repudiation is reasonably straightforward, its application is often difficult and particular care is required when seeking to cancel a contract on the grounds of repudiation. Some of the difficulties with repudiation were illustrated in two decisions of the Court of Appeal in 2002: Oxborough v North Harbour Builders Ltd [2002] 1 NZLR 145

Oxborough v North Harbour Builders Ltd Oxborough v North Harbour Builders concerned a contract to build a house. The builder was late and an independent report showed defects which would cost between $35,000 and $45,000 to repair. The Oxboroughs commenced proceedings for specific performance and for an interim preservation order in relation to progress payments. The builder maintained that it would complete the job to an acceptable standard and offered to precede through the dispute resolution procedures in the contract. The Oxboroughs subsequently amended their claim to assert that they were entitled to cancel the contract because the builder was in breach and had repudiated the contract.

The High Court and Court of Appeal both held that the Oxboroughs had affirmed the contract. Although a claim for specific performance is not normally regarded as affirmation, the Courts held that the Oxboroughs‘ overall conduct amounted to an affirmation ―In the present case, the 9

Oxboroughs‘ proceedings for specific performance were accompanied by the application for the preservation order in relation to the progress payments. That in itself may be thought to be relatively neutral but overall their correspondence and conduct all supported an objectively reasonable conclusion that at the time when they sued for specific performance they were unequivocally electing to keep the contract alive.‖ The Oxboroughs also alleged a continuing repudiation by the builder through its breaches of the contract, rejection of the independent report and other statements made in a letter from its solicitors. That argument was also rejected. The Court of Appeal noted the distinction between breach and repudiation. A breach will only amount to repudiation where the breach, taken together with the other conduct of the defaulting party, shows an intention not to perform. Where the party allegedly in default disputes that breach has occurred and agrees to submit to a dispute resolution procedure, there will be no repudiation. The Court of Appeal held. ―Thus to find repudiation against the builder, it is necessary to be satisfied that it was unequivocally asserting its intention not to perform the contract according to whatever remaining obligations truly lay upon it thereunder. It can therefore be seen that the builder was effectively taking a stance which was the exact opposite of repudiation.‖ The Oxboroughs‘ claim therefore failed.

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Discussion: How to cancel

Sections 8(1) and 8(2) provide: (1) The cancellation of a contract by a party shall not take effect— (a) Before the time at which the cancellation is made known to the other party; or (b) Before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, an intention to cancel the contract, if— (i) It is not reasonably practicable for the cancelling party to communicate with the other party; or (ii) The other party cannot reasonably expect to receive notice of the cancellation because of that party‘s conduct in relation to the contract.

(2) The cancellation may be made known by words, or by conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to cancel is made known.‖ Cancellation is generally effected by a written notice of cancellation. As section 8 makes clear, no particular form of notice is required so long as the intention to cancel is made clear. There is also no requirement in section 8 to specify the reason for cancelling (and, as is discussed below, there was until recently an incentive not to do so). Cancellation can also be effective where the cancelling party makes it clear by conduct that it intends to cancel. Prior to an amendment in December 2002, there was a far more stringent requirement for cancellation to be made known to the other party. This caused some harsh results, such as where a purchaser of land plainly repudiated and walked away from the contract and the vendor sold to another party without giving notice to the original purchaser. If the vendor had not communicated their intention to cancel to the defaulting purchaser, the subsequent sale would constitute an invalid cancellation and, therefore, repudiation. The 2002 amendment addresses that concern by expanding the exception in section 8(1)(b). The use of ―reasonable‖ in that section does, however, create some uncertainty about the circumstances in which cancellation will be effective without notice. In particular, it is unclear whether every repudiation will permit cancellation without notice. 11

The contract is a legal document that protects the interests of the customer and the supplier and is legally binding to both parties. The clauses in the contract relating to termination of the contract should be closely examined, so that there are no surprises when the contract is terminated by one or other of the parties. The contract will stipulate how the contract can be terminated by either party and the clauses relating to termination will determine the steps to be taken. Sometimes there are penalties attached to early termination and these should be clearly understood. A case on point which highlights the principles applied by the Courts is Battery World Pty Limited v Heavenly Bound Pty Limited & Ors. The franchisee‘s legal team argued that by the agreement simply expiring at the end of its term, that ―expiry‖ did not mean ―termination‖. Therefore a number of clauses that were expressed to have operation only upon ―termination‖ of the Franchise Agreement would not apply to protect the franchisor. The purpose of the ―termination‖ clauses was to enable the franchisor to continue to operate the franchise after the franchise expired. The agreement enabled the business assets, such as customer information, permits and other approvals and the Franchise premises to be retained by the franchisor. The Franchisees argued that these ―termination‖ terms and conditions were dependent on clause 11 of the agreement, which set out circumstances for termination other than through the effluxion of time.

The franchisee also relied on the case of Orrong Strategies Pty Ltd v Village Roadshow Ltd (Habersberger J, Supreme Court of Victoria, 25 January 2007, unreported). In that case, the Judge relied on various cases that recognized that the word ―terminate‖ by itself was ambiguous. However the Judge in the Battery World case found that the Judge still took the conventional approach looking at the proper meaning of the word in question and the commercial purpose and result. If an agreement which you entered into is terminated unexpectedly it‘s important to be aware of your position legally – in terms of whether the agreement was terminated correctly, what rights the other party has in respect of your work following termination, and finally, what rights (if any) you have following the termination.

When an agreement is terminated without notice by the other party, it is important first to figure whether that party had the ability to terminate in those circumstances. If a contract has been

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terminated invalidly, and someone is disadvantaged by the termination, then he needs to understand what rights he has and how best to act on them. The other party will still be legally bound to perform their obligations under such contract, and as long as you yourself are not in breach of the contract, you have the ability to take them to court to have the contract enforced. Construction contracts often contain detailed terms for wrapping up the contract, and the owner should review these terms and ensure compliance. For example, the contract may require the terminated contractor to assign its subcontracts to the owner, or to protect and preserve its work. At the same time, the contract may require the owner to take certain actions upon termination; for example, when terminating for convenience, the owner may have to pay the contractor within a set number of days. Proper close-out should help avoid issues from lingering after termination.

From the above discussion, it is clear that when a party has right to terminate a contract for breach is not very far from clear and it might be clarified. Although, termination of contract is often time vague and the terms and condition of termination of contract is not mentioned properly

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Conclusion: If a contract is silent on termination, it can be terminated for breach at common law. The breach must be sufficiently serious which can be very difficult to establish. The contract may specify when a party may terminate. The circumstances typically include the other party becoming insolvent or committing a 'material breach' of the contract. The term 'material breach' is often used, and has been said by the Victorian Supreme Court to mean the same as 'fundamental breach‘. A fundamental breach is one that deprives the terminating party of substantially the whole of the benefit it was entitled to receive under the contract. Effectively, phrases such as 'material breach' and 'breach of a material term' merely re-state the common law. Because it can be difficult to establish that a sufficiently serious breach occurred, a contract should not be terminated for a breach at common law, or on the basis of a contractual term permitting termination for breach, without careful consideration and legal advice. Do not terminate unless it's serious termination on the basis of a breach that is not sufficiently serious will be invalid. The other party will be entitled to treat the invalid termination as a repudiation' of the contract. This is because by purporting to terminate, the terminating party is clearly stating that it no longer intends to perform its own side of the bargain (because it regards the contract as at an end).If the termination is invalid, the tables are turned and the other party is entitled to decide whether or not to accept the repudiation (thus terminating the contract)and sue for damages for wrongful termination. The right to terminate may be lost if the terminating party takes any steps that suggest to the other party that the contract has been affirmed (i.e. remains 'on foot'). A party that believes it is entitled to terminate must ensure that nothing is done or said that inadvertently affirms the contract. A right to terminate must be exercised within a 'reasonable' time. The terminating party must demonstrate that it has elected to terminate the contract by unequivocal words or conduct communicated to the other party. Procedures such as dispute resolution and notice provisions must be followed exactly as described in the contract. Termination without breach by giving 'reasonable notice Generally, agreements without a specific duration or termination for convenience mechanism will be regarded as containing an implied term that either party can

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terminate by giving reasonable notice. This rule does not apply to all contracts; for example, a builder is unlikely to have an implied right to terminate a construction contract for convenience.

Reference - Bell, Principles sec 50; Mackay v Dick & Stevenson (1881) 8 R (HL) 37. See also Unidroit Principles art 7.1.2. - Treitel, Remedies for Breach of Contract: A Comparative Account, 380-381; European Principles, 179-180. - Furmston, M. P.: „The law of contract―, LexisNexis Butterworths (2003) - Birds, J./ Bradgate, R. / Villiers, C.(Ed.): „Termination of contracts―, Wiley Chancery (1995) - Re Moore and Co Ltd and Landauer and Co [1921] 2 KB 519; see also Bowes v Chaleyer (1923) 32 CLR 159

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