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Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited

(2007) 233 CLR 115

Overview

The Court considered classification of terms and the relevance of 'intermediate' terms.

The Court, by majority (Kirby J adopting a different approach to classification) formally adopted the concept of intermediate terms.

The majority observed that there were two circumstances in which a party can terminate a contract for breach:

  1. When the term breached is a condition (essential term)
  2. Where there has been a 'sufficiently serious breach of a non-essential term'. This type of term falls between the 'essential' conditions and 'non-essential' warranties and may be referred to as 'intermediate' terms.

Breaches of intermediate terms will be 'sufficiently serious' to allow breach where the breach goes 'to the root of the contract'; that is, they are 'such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract'.

Justice Kirby, dissenting in his reasons for dismissing the appeal, considered there was no basis for distinguishing intermediate terms from other 'non-essential' terms or 'warranties'.

 

Facts

The case involved a joint venture between Koompahtoo and Sanpine for development of land north of Sydney. Sanpine was the manager of the project. Koompahtoo was the land owner.

The trial judge found that Sanpine had commited significant and repeated breaches of the contract in management of the joint venture.

The issue for determination was whether the breaches allowed termination of the contract.

 

Judgment (the Court)

Chief Justice Gleeson and Justices Gummow, Heydon and Crennan

The majority held that there was a category of 'intermediate terms' for which the right to terminate depends on the seriousness of the breach. This category falls between the categories of conditions (essential terms allowing termination) and warranties (non-essential terms allowing only damages).

[47] ... there are two relevant circumstances in which a breach of contract by one party may entitle the other to terminate. The first is where the obligation with which there has been failure to comply has been agreed by the contracting parties to be essential. Such an obligation is sometimes described as a condition. In Australian law, a well-known exposition was that of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd ... The widespread statutory adoption of the distinction between conditions and warranties, or essential and inessential terms, is an established part of the background against which the common law has developed. ...

[48] ...  It is the common intention of the parties, expressed in the language of their contract, understood in the context of the relationship established by that contract and (in a case such as the present) the commercial purpose it served, that determines whether a term is "essential", so that any breach will justify termination.

[49] The second relevant circumstance is where there has been a sufficiently serious breach of a non-essential term. In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, the English Court of Appeal was concerned with a stipulation as to seaworthiness in a charterparty. Breaches of such a stipulation could vary widely in importance. They could be trivial or serious. The Court of Appeal held that to the accepted distinction between "conditions" and "warranties", that is, between stipulations that were in their nature essential and others, there must be added a distinction, operative within the class of non-essential obligations, between breaches that are significantly serious to justify termination and other breaches. This was a recognition that, although as a matter of construction of a contract it may not be the case that anybreach of a given term will entitle the other party to terminate, some breaches of such a term may do so. Diplock LJ said that the question whether a breach by one party relieves the other of further performance of his obligations cannot always be answered by treating a contractual undertaking as either a "condition" or a "warranty". Of some stipulations "all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise".

...

[51] It may be true that this Court has yet to accept Hongkong Fir as an essential element in the grounds for decision in any particular case. However, in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd, Mason ACJ, Wilson, Brennan and Dawson JJ referred to Hongkong Fir with evident approval and said that the concept of the intermediate and innominate term brings a greater flexibility to the law of contract. ...

[52] The practical utility of a classification which includes intermediate terms, and the consequent greater flexibility of which the Court spoke in Ankar, appears from several consequences. First, the interests of justice are promoted by limiting rights to rescind to instances of serious and substantial breaches of contract. Secondly, a just outcome is facilitated in cases where the breach is of a term which is inessential.

[53] ... we rest our decision in the appeal not upon the ground of breach of an essential obligation, but upon application of the doctrine respecting intermediate terms.

[54] We add that recognition that, at the time a contract is entered into, it may not be possible to say that any breach of a particular term will entitle the other party to terminate, but that some breaches of the term may be serious enough to have that consequence, was taken up in Ankar. Breaches of this kind are sometimes described as "going to the root of the contract", a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. Since the corollary of a conclusion that there is no right of termination is likely to be that the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.

[55] A judgment that a breach of a term goes to the root of a contract, being, to use the language of Buckley LJ in Decro-Wall International SA v Practitioners in Marketing Ltd, "such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract", rests primarily upon a construction of the contract. Buckley LJ attached importance to the consequences of the breach and the fairness of holding an injured party to the contract and leaving him to his remedy in damages. These, however, are matters to be considered after construing the agreement the parties have made. A judgment as to the seriousness of the breach, and the adequacy of damages as a remedy, is made after considering the benefit to which the injured party is entitled under the contract.

[56] A question as to contractual intention, considered in the light of the language of the contract, the circumstances in which the parties have contracted and their common contemplation as to future performance, is different from a question as to the intention evinced by one of the parties at the time of breach, ...

[In this case the Court found that the breaches in this case did deprive Koompahtoo 'of a substantial part of the ebnefit for which it contracted' and therefore they were justified in terminating the contract].

[emphasis added; footnotes omitted]

 

Justice Kirby

Justice Kirby agreed that the appeal should be allowed but offered a different assessment of the classification of terms.

[78] ... The expression of such principles has an importance that transcends the individual dispute. The rules affect not just this appeal, but innumerable other cases, most of which will never come before a court. Doctrine matters. Where it is relevant to do so, this Court should contribute to the clarification of legal principles. That is how individual decisions that reach this Court advance the expression of the common law of Australia.

[79] ... I prefer a statement of the common law rules different from that adopted in the joint reasons. ...

[99] ... I am prepared to accept that it is useful to maintain the rule that some contractual terms, limited in number, are so critical to particular contracts that their breach will give rise to an automatic right to terminate. I accept that such terms can be identified and characterised a priori as "essential". I would not disagree that whether or not a term is to be so characterised is a question to be determined with reference to the actual content of the contract, viewed in the context of the entire commercial relationship between the parties.

[100] With respect, however, I have reservations that the reasoning of Jordan CJ in Tramways Advertising supplies the relevant test. ...

[101] ... It is difficult to see how reference to the "common intention" of the parties at the time of contract formation advances the decision in a case such as the present. It is an artificial criterion in that it demands the drawing of inferences as to the parties' reactions to contingencies that in fact might (and usually would) never have been anticipated. It also affords scope for the importation of subjective considerations in a manner inconsistent with the modern general approach to the formation of contracts. In my view, it is preferable to place the "test" on a different footing and to inquire into the objective significance of breach of the term in question for the parties in all the circumstances. I would favour that approach. If it is adopted, it is difficult to see what purpose purporting to conduct a retrospective investigation of the "common intention" of the parties serves. The court creates an objective postulate. It applies it to the facts. There is then no need to resort to the fiction that Tramways Advertising introduces.

[102] The actual consequences of a default that has occurred in fact ought not to be taken into account in determining whether or not the term of the contract that is breached is "essential" in character. If the position were otherwise, the purpose of maintaining a separate a priori class of "essential" terms would be defeated. It would be impossible to distinguish between an "essential" term and a "non-essential" term in respect of which serious breach could be said to "go to the root" of the contract.

[103] Intermediate or innominate terms: The persistence of the law with the distinction between essential and non-essential terms necessarily gave rise to serious risks of practical injustice. It was this realisation that led to the invention of so-called "intermediate" or "innominate" terms. It was Diplock LJ who inserted this new class of contractual terms somewhere between "conditions" and "warranties". ... It became entrenched in a number of decisions of English courts and judges that followed.

[104] At the time of these developments, it was, for the most part, normal for Australian courts to follow English decisions affecting basic doctrines of the common law without serious question. Thus, the "intermediate" or "innominate" term entered into the discourse of this Court without any real consideration of its conceptual soundness or practical usefulness. However ... this Court has not until this appeal given it unequivocal endorsement in a decision for which such recognition comprised part of the ratio decidendi of the case. ....

...

[106] The joint reasons suggest that an "intermediate" term will have been breached where default in respect of a non-essential term is so significant as to go "to the root of the contract", a very imprecise and apparently self-justifying notion. Whether a breach goes "to the root of the contract" is said to depend upon "the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach" as well as whether or not damages would provide appropriate relief in the circumstances. Of paramount importance is the "construction of the contract" itself.

[107] Respectfully, I disagree with this approach. If the classification of a contractual term as "intermediate" is nothing more than a function of ex post facto evaluation of the seriousness of the breach in all of the circumstances then the label itself is meaningless. It is not assigned on the basis of characteristics internal to, or inherent in, a particular term, as the joint reasons themselves acknowledge. Rather, it is imposed retrospectively, in consequence of the application of the judicial process. Effectively, there is no basis, and certainly no clear or predictable basis, for separating "intermediate" terms from the general corpus of "non-essential" terms or "warranties" prior to adjudication in a court. This throws into sharp relief the extreme vagueness of the Hongkong Fir "intermediate" term. Its imprecision occasions difficulties and confusion for parties and those advising them. It has the potential to encourage a proliferation of detailed but disputable evidence in trial courts and consideration of such evidence in intermediate courts. It renders uncertain the distinctions between the several categories said to provide a legal justification for the very significant step of terminating an otherwise valid contract.

[108] Several additional factors militate against the incorporation of the so-called "intermediate" term into Australian law. It is a comparatively recent invention, finding little or no reflection in the common law that preceded Hongkong Fir. It is inconsistent with the approach of Australian legislation dealing with breach of contract in particular contexts. It is not reflected in the general codifications of contractual remedies law adopted in some common law countries. It is inconsistent with approaches suggested on the part of law reform bodies in England and Australia. It finds no reflection in the relevant parts of the United States Restatement of the law. Nor is it adopted in the Uniform Commercial Code of the United States. There is nothing like it in the United Nations Convention on Contracts for the International Sale of Goods 1980. Nor does it appear in the UNIDROIT Principles of International Commercial Contracts 2004. Even where recognising a classification analogous to "essential" terms, none of these codifications encumbers itself with an artificial additional subdivision of the broad class of "non-essential" terms that remains.

...

[110] I acknowledge that, in a sense, whether there are two or three species of contractual terms might well be in large part a "terminological problem". However, getting the classification right has significant implications for countless contracting parties and legal practitioners, as well as for trial judges. ...

[111] However, the central point is that the performance of legal tasks is not assisted when misleading, imprecise and self-fulfilling labels are invoked in an attempt to rationalise results in individual cases after the event. Such labels comprise a source of needless complication and disputation. If what is required is an evaluation of whether the circumstances of a particular breach are of such an objectively serious nature as to vindicate unilateral termination, then this Court should formulate the relevant principles to say so. Continued reference to the vague and artificial concept of "intermediate terms" inhibits this exercise and obscures clear thinking in the performance of the legal task in cases such as the present.

[footnotes omitted; emphasis added]

His Honour then advanced a possible alternative formulation

[78] It follows that I would endorse the argument advanced in the ninth Australian edition of Cheshire and Fifoot:

"It is difficult to see the necessity for introducing [an 'intermediate'] category of terms as a means of legitimising termination by reference to the extent of loss actually caused by a breach. Unless otherwise agreed, a breach that substantially deprives the other party of the benefit of a contract should entitle that party to terminate it, no matter whether the term in question is essential, intermediate, or inessential. The identification of a third kind of term distinct from, and intervening between, essential terms (conditions) and inessential terms (warranties), further proliferates an already over-elaborate terminology, and is an obvious invitation to circularity of reasoning. Many judgments acknowledge, even if only indirectly, that loss of substantial benefit may be sufficient as such to justify termination by the injured party."

[114] ... a right to terminate arises in respect of: (1) breach of an essential term; (2) breach of a non-essential term causing substantial loss of benefit; or (3) repudiation (in the sense of "renunciation"). The common thread uniting the three categories is conduct inconsistent with the fundamental postulate of the contractual agreement.

[115] This scheme of classification affords the requisite "flexibility" to ensure just outcomes in individual cases - a proper concern upon which the joint reasons rightly place emphasis. However, it avoids the need to invent so-called "intermediate terms". It also simplifies the determination of the consequences of breach of a contractual term, removing needless steps from the process of reasoning. Under taxonomies incorporating the "intermediate term", a finding that a term has been breached requires a determination of whether that term is essential or non-essential. If it is the latter, the court must then inquire as to whether it is of an "intermediate" character. If the answer to this question is in the affirmative, the court must make a further determination of whether the breach was of "sufficient seriousness" to warrant termination. The latter two steps are interrelated. However, when the "intermediate term" is excluded, the process of reasoning is simplified and clarified. Either the term breached is essential or it is non-essential. It cannot somehow be somewhere in between. If it is the former, termination will be justified. If it is the latter, the court can turn its attention directly to the objective indicia of "substantial loss of benefit" without feeling a need to affix the "intermediate" label on the contractual terms ex post facto.

[footnotes omitted; emphasis added]