NSW Court of Appeal on whether termination of a contract is precluded after an election to sue for specific performance

By 27/06/2014Contract
termination of contract

In Galafassi v Kelly [2014] NSWCA 190 the NSW Court of Appeal provides helpful guidance on the legal principles relating to termination of a contract for the sale of land.

Background

The case concerned a dispute over a contract for the sale of residential property in Paddington NSW.

On 30 December 2011, the settlement date, the purchasers failed to complete the purchase of the property (for $6.5 million).

On 4 January 2012 the purchasers’ solicitors wrote to the vendor’s solicitors stating that the purchasers were financially incapable of purchasing the property unless the purchasers’ own home in Bronte was sold.

On 20 January 2012 the vendor commenced an action by summons seeking an order for specific performance of the contract, alternatively damages.

On 24 January 2012 the purchasers sent an email to the vendor:

David and I feel absolutely sick about not being able to go through with the purchase of your house. We had every intention of doing so and it has broken our hearts. We can’t apologise enough and totally empathise with your position. We are mortified. If we had the money we would happily be living in it by now. …

The email went on to say that the purchasers did not have the money to complete because they had sold their house in Bronte for less than expected, they had ultimately agreed to swap their house with the purchaser’s house, and they had lost all their savings in the process.  The email then concluded:

“Please reconsider taking us to court. It just makes a very sad situation much worse. We can no longer buy your beautiful house. Again, we apologise profusely. We don’t have the finances to go through with the purchase. For the sake of both our families, I implore that you find a way to settle this less publicly.

Understandably, all of this is not your concern. You thought you had sold the house and the sale has fallen through. We sincerely hope that you can understand our position and find it in your hearts to deal with this in another way.

ps…our lawyer was not entirely comfortable with us writing this letter and does not want it used against us. His advice is to state that this “appeal” is without prejudice and should not be used in a legal case against us, or in the press, and is very much confidential.” [Emphasis added]

On 24 February 2012 one of the purchasers sent an email to the vendor’s husband which said, inter alia:

I am being perfectly honest when I say that there is no way that we could comply with an order to complete the purchase of Paddington if your order was granted. We don’t have the means to raise the funds to settle on Paddington.[Emphasis added]

On 17 April 2012 the vendor filed a statement of claim verified by affidavit which asserted a readiness and willingness to perform the contract, and sought specific performance, alternatively damages.

On 24 April 2012 the vendor’s solicitors served a notice of termination of the contract on the purchasers, on the ground of certain correspondence including the purchasers’ solicitor’s letter of 4 January 2012.

On the same date the vendor entered into a contract for sale of the property for $5.5 million, which sale completed on 30 May 2012.

On 6 June 2012 the vendor filed an amended statement of claim which abandoned the claim for specific performance and instead sought damages for the deficiency on the resale of the property ($850,000).

The purchasers disputed the vendor’s claim for damages including on the basis that it was necessary for there to be further repudiatory conduct by the purchasers (which was denied) after the vendor affirmed the contract by instituting proceedings for and pleading a claim for specific performance, in order to give rise to a right to terminate the contract for repudiation.

Legal Principles

Gleeson JA (Bathurst CJ and Ward JA agreeing) observed as follows:

  1. The institution of proceedings for specific performance is an election to affirm a contract, but does not waive the breach of contract.  Rather the commencement of an action for specific performance waives reliance on the breach of a fundamental term entitling the vendor to terminate the contract (at [77], [83], [87]).
  1. In contrast no election arises until judgment in respect of the choice between the inconsistent or alternative remedies of specific performance or damages.  The purpose of seeking alternative relief is to keep the promisee’s options open (at [75]).
  1. Whilst an election between inconsistent rights is irrevocable once made, it does not follow that an innocent party who seeks (and obtains) specific performance is treated as affirming the contract irrevocably so that the innocent party cannot later terminate the contract and claim damages if the repudiating party persists in failing to perform (at [76]).
  1. Similarly an innocent party is entitled to terminate the contract and claim damages even if there is a current action for specific performance, if there is a further breach of an essential term or some further conduct amounting to a repudiation (at [80]-[82]).
  1. An election to terminate must generally occur within a reasonable time of the discovery of circumstances giving rise to the right.  There is no requirement to terminate immediately.  The promisee may keep its options open so long as it does nothing to affirm the contract and so long as the promisor’s position is not prejudiced in consequence of the delay (at [88]).
  1. There is no need for a notice to complete to be issued before termination where there has been a repudiation by a party of its obligations under a contract (at [98]).
  1. Where inability to perform a contract is declared that conduct amounts to a refusal to perform and the innocent party need not prove that the other party was actually unable to perform as a matter of fact (at [62]).
  1. To prove factual inability to perform it must be shown that the party in question has become wholly and finally disabled from performing the essential terms of the contract altogether.  Factual inability must be proved “in fact and not in supposition” (at [64]).

Outcome

The Court held that the purchasers’ solicitor’s letter of 4 January 2012 and the emails of 24 January and 24 February 2012 constituted clear statements of the purchasers’ inability and unwillingness to perform the contract, such as to constitute a continuing repudiation of the contract day by day from 4 January 2012 (at [65], [67]).

The statement of financial incapacity was a statement of existing fact, and a continuing representation unless and until it was withdrawn or modified (at [66].

The primary judge did not err in finding that the purchasers had a factual inability to perform, in light of the acknowledgment in the 24 January 2012 email that they had lost all their savings in the process of selling their Bronte property, that they did not have the finances to perform the contract, and there was no evidence of any step taken by the purchasers to put themselves in the position of being able to complete the contract (at [70]).

The Court held that whilst the vendor’s institution of proceedings for specific performance constituted an election to affirm the contract, the vendor was not precluded from later terminating the contract on 24 April 2012 by reason of the purchasers’ continuing repudiatory conduct (at [84]).

The purchasers contended that by filing and serving the statement of claim with a claim for specific performance on 17 April 2012 the vendor further affirmed the contract, and there was no further repudiatory conduct by the purchasers after 17 April 2012 and before 24 April 2012 when the contract was terminated.

Without expressing a concluded view on whether the filing of the statement of claim amounted to a further affirmation of the contract, the Court found that the purchasers never withdrew their declarations of inability and unwillingness to perform prior to 17 April 2012, and those declarations were confirmed after 17 April 2012 by the purchasers failing to agree to the vendor’s pleaded claim that the contract should be performed (at [90]).  This evinced an intention never to complete the contract.

The Court upheld the decision below, that the vendor was entitled to terminate the contract on 24 April 2012 and claim damages for its repudiation.

Comment

Amongst other things this case is a reminder about the importance of understanding the nature and consequences of the election between inconsistent rights that is required to be made when a contract is said to be repudiated.

An election to sue for specific performance will affirm the contract and preclude its later termination in the absence of further repudiatory conduct by the repudiating party.

An election to terminate the contract and sue for damages will not entitle that party to later sue for specific performance, because the contract no longer exists.