Penola Trading Co Pty Ltd v Sunny Springs Pty Ltd [2009] HCATrans 339 (11 December 2009)

Last Updated: 22 December 2009

[2009] HCATrans 339

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M77 of 2009

B e t w e e n -

PENOLA TRADING CO PTY LTD

Applicant

and

SUNNY SPRINGS PTY LTD

Respondent

Application for special leave to appeal

KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 11 DECEMBER 2009, AT 2.41 PM

Copyright in the High Court of Australia

MR P.G. CAWTHORN, SC: If the Court pleases, I appear with MR C.G.K. MADDER for the applicant. (instructed by B2B Lawyers)

MR C.R. NORTHROP: If the Court pleases, I appear for the respondent. (instructed by Williams Winter)

KIEFEL J: Yes, Mr Cawthorn.

MR CAWTHORN: The Court of Appeal found that in serving a notice under the heads of agreement, that is to say, a default notice, they are not acting on that notice to terminate the contract. The applicant was not confronted with a choice whether to terminate the contract or to affirm it. The notice that was given on 11 November 2004 presupposes that there were breaches of the contract committed by the applicant entitling the respondent to terminate. The breaches were the failure by 11 November 2004 to take reasonable steps to satisfy the conditions which were required to be satisfied within six months. The Court of Appeal found in its judgment at paragraph 105 that the applicant was in breach as at 11 November 2004 and that there was a right to terminate.

The applicant’s case is that the breach was a once and for all breach. Accordingly, since the respondent did not terminate for that breach, knowing it was entitled to do so, it could only thereafter terminate for repudiation based on a later breach distinguishable from the earlier breach. The issue that we say is of general application and importance is whether if the covenant to take reasonable steps or to exercise reasonable endeavours is breached, the breach is a once and for all breach or a continuing breach continuing throughout the period allowed for satisfaction of the conditions. The Court in Larking - - -

KIEFEL J: But, in the circumstances of this case, even if it were a continuing obligation, has it not been found against you that you have acted in accordance with that obligation?

MR CAWTHORN: Well, we accept that we repudiate it, but the point is that on 11 November, when the notice was given, we were in default. We were given a notice saying, “If you do not comply, we will terminate the contract”. At that point the respondent was obliged, we submit, to elect whether to terminate or to go on with the contract.

BELL J: And in the failure to elect at that point, what do you say was the position that the parties were then left in? You could just sit there and wait the contract out?

MR CAWTHORN: If we sat there and waited the contract out, the contract would come to an end. Our learned friend says the contract would have come to an end on 24 February 2005. Because we were the ones at fault, according to Suttor v Gundowda, his client would be entitled to a deposit, but that is to rewrite history, because his client terminated before that date on 11 February 2005 and purported to accept our repudiation. Now, in those circumstances, both parties having contended that the contract was at an end before it would have expired by effluxion of time, if we are right and they could not terminate for repudiation because they had elected to affirm the contract, then their own conduct would be repudiation. That is clear from Ogle v Comboyuro, which the solicitor acting for our client accepted on 18 February.

So both parties, as it were, said the contract was terminated before the time expired. So in those circumstances, according to this Court in DTR Nominees, the contract was either abrogated or abandoned, both parties did not want to go ahead with it or, alternatively, since our client was not endeavouring to claim damages, then there was no embargo on it terminating even if it was in breach. That point was considered recently by the Court of Appeal in New South Wales in Sharjade v Commonwealth, which is tab 9 of our bundle. If both parties are saying they wish to terminate and we were endeavouring to claim damages, then the contract would be terminated.

What makes this different is that before the effluxion of time had occurred the respondent purported to accept the repudiation, we say, wrongfully. The special leave point that we submit is present here is this, that if a covenant to take reasonable steps or to exercise reasonable endeavours is breached, then the breach is a once and for all breach and not a continuing breach. In Larking, which is behind our tab 5 – it was a case which involved an obligation to fence within a reasonable time – it was found that the breach, because it required something to be done within a reasonable time or, as it were, a certain time, was a once and for all breach. We submit that the clause in this case – and they are very common clauses, clauses requiring reasonable endeavours to be exercised – is one that if breached is a once and for all breach and the question is, is there a point in time where reasonable steps have not been taken so that the conditions cannot be satisfied? If there is, we submit, the breach is once and for all. That is consistent, in our respectful submission, with Larking, although Larking deals with a different point.

KIEFEL J: Is it a once and for all breach if the party can be seen to have no intention of complying?

MR CAWTHORN: Yes.

KIEFEL J: Is that not the finding of the Court of Appeal?

MR CAWTHORN: The Court of Appeal said you were in breach.

KIEFEL J: It also said you had no intention completing the acquisition of approvals.

MR CAWTHORN: That was a repudiation that we had no intention to proceed, but, as is made apparent from Sargent, and we have referred to this in our outline, it does not matter whether your right to terminate is conferred by a repudiation or under the contract. Sargent is our tab 1 and at page 655 Justice Mason said, towards the bottom of the page:

It matters not whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach – in each instance the alternative right to insist on performance creates a right of election.

We submit that by not acting on the notice of default on 11 November and then taking steps that are only consistent with the contract continuing in operation, there was an affirmation of the contract, which means that it could then only be terminated for a different breach. The facts of affirmation were these: seeking information so as to obtain the freehold owner’s consent – and this is in the Court of Appeal’s judgement, page 44; stating on 26 November that it would not entertain any further discussions regarding fresh heads of agreement, and would rely on the current heads of agreement, page 45; stating on 3 December it would rely on the heads of agreement, page 45; and then taking steps to satisfy the obligations it had under the heads of agreement to obtain the consent of the freehold owner to an assignment of lease on 7 February. Those acts were consistent only with the contract continuing.

It then purported to accept the alleged repudiation on 11 February 2005 before the expiration of the six months. We submit that if the breach was a once and for all breach, then the respondent was required to elect following the service of a default notice whether to terminate or affirm. The respondent having served the default notice requiring the default to be rectified within seven days and then the applicant stating on 18 November, which is within the seven days, that it would not comply with the notice, the respondent then and there was required to elect whether to terminate. It was confronted with a choice. It had the right to determine the contract under the terms of the contract. The notice said “the Vendor will rescind”, and that is at page 43 of the application book, line 4. The notice recited a series of breaches and said:

the Vendor will rescind the Agreement pursuant to General Condition 11.6 of the Law Institute Contract –

unless you rectify the breaches. So it had the right to terminate. Upon the reasoning of the Court of Appeal a breach of the reasonable endeavours type clause, assuming a reasonable time to comply has passed, is not a once and for all breach but a continuing breach and if the breach of such a clause is a continuing one, the breach may be a repudiation, which repudiation may continue. The Court of Appeal referred to Immer which was a case where there was a continuing right to rescind. This case is one where the choice, in our respectful submission, arises once and for all. Immer was not confronted with a choice, the respondent here was.

BELL J: When the respondent chose not to act on the notice served, was it 11 November? I may have the date wrong, but, in any event, do you say there was no obligation or it was not open for it to contend that your client breached the contract by its failure to take reasonable steps thereafter to comply with the conditions?

MR CAWTHORN: But the point had been reached by 11 November where the conditions could not be satisfied and that was found both by the trial judge and the Court of Appeal.

BELL J: So the answer to it is that by the failure to immediately act in accord with the tenor of the notice on your contention, it was open to your client to sit the period out?

MR CAWTHORN: Well, both parties at this stage, in our submission, were posturing. They were posturing about who was entitled to recover the deposit.

KIEFEL J: That might be beside the point, but the other party not acting immediately may have the legal effect that your clients were given more time to comply. It does not mean that any delay on their part in terminating the contract is put beyond them, does it?

MR CAWTHORN: They did not extend the time under the notice.

KIEFEL J: No, but there might have been an implied extension. If they do not terminate, it might follow that there is an implied extension, but that is quite a different thing from saying that they are put to an election about what they have to do in relation to the contract. Mere delay in accepting a repudiation and bringing a contract finally to an end is not sufficient for that purpose.

MR CAWTHORN: But we accept that, but that is in the context where one has repudiation and then continuing acts which are further acts of repudiation. In this case you have had a right to terminate under the contract and, as Sargent makes clear, that right is a right that puts the innocent party at the point of election.

KIEFEL J: But an election has to be clear. What act do you rely upon to say that they positively affirmed the contract if, as you say, it was incapable of performance at that point?

MR CAWTHORN: The most significance act they took was to obtain, as they were obliged to under the contract, the consent of the freehold owner. Under the terms of the contract the respondent had an obligation to obtain the consent of the freehold owner. On page 88 of the application book the terms and conditions set out the various obligations on our part and then an obligation e in the middle of the page:

The Freehold Owner of the Premises consenting to the assignment –

Now, that was an obligation that the respondent had to obtain that consent. They sought information from us about our financial position and then said that they were satisfied the consent was obtained on 7 February. That was only consistent with the contract continuing in existence and not being terminated. So the seeking of information from us, the statement – and the Court will appreciate that there were discussions about the entry into a fresh heads of agreement and then an extension of time, which was consistent with knowledge on the respondent’s part that the time to comply with conditions had expired. They said on 6 November, application book page 45, that they would not entertain any fresh discussions, but would rely on the heads of agreement. They said again on 3 December they would rely on the heads of agreement and then, as I said, they obtained the consent of the freehold owner. Those acts were only consistent with an endeavour to continue on with the contract.

KIEFEL J: Or to ensure that there was going to be no argument about whether or not they had complied with their obligations when they terminated the contract.

MR CAWTHORN: We say it was only consistent with their performance, because if they had a right to terminate back in November, they had a right to terminate.

KIEFEL J: Yes, but they might have been faced with an argument from you that they had not done what they were required to do and that you did not regard your conditions as impossible. I mean, it is not a totally unequivocal act.

MR CAWTHORN: In our respectful submission, when you put all the acts together they are unequivocal and they make it clear that they – the express statements, “We will rely on the heads of agreement” means that they will be relying on the heads of agreement, not terminating, but continuing on with the agreement. Now, in GEC Marconi Systems v BHP, which is behind tab 6, there is a useful summary of the principles by Justice Finn. His Honour says, on page 91, paragraph 363:

An election to affirm in respect of a breach of contract or of a repudiation does not prevent the elector from relying upon an available later breach . . . or repudiation –

So that is a reference, both to breach and repudiation –

to terminate the contract provided that there is a later breach or repudiation that is distinguishable from the earlier breach –

Then reference is made to Larking –

on the distinction between a “once and for all” and “continuing” breach.

The question whether or not such a breach of the clause that we are concerned with is a once and for all or continuing breach has importance in a number of areas. It has importance in the context of election, which is what this case is about. It has importance in the context of cases about limitations because if a reasonable endeavours clause is breached and that breach is a continuing breach, that would have the effect of postponing the commencement of time for the purpose of limitations. Features of this kind were adverted to by Justice Dixon in Larking at page 238. So it is an important question about whether a breach of a clause of this kind is a once and for all or a continuing breach.

The breaches that are referred to in the notice on 11 February, the failures and so forth, are the same breaches, the same failures adverted to in the default notice on 11 November. So, in our respectful submission, there needed to be a later breach or repudiation which was distinguishable from the earlier breach in order to allow the acceptance of the repudiation when it was accepted later or purported to accept later. In our respectful submission, the Court of Appeal wrongly stated that Sunny Springs, having given the default notice, was able to keep open the question of Penola’s repudiation. In our respectful submission, it was put to an election following the service of the default notice, which plainly adverted to breaches. It was too late to cure them. It said, “We will rescind”. It contemplated that it had the right to rescind.

BELL J: The conduct that you rely on as to Sunny Springs insisting on performance of the conduct after the date in the notice is?

MR CAWTHORN: The conduct we refer to is stating on 26 November it would rely on the heads of agreement. If I can take the Court to page 45. On page 45 in the Court of Appeal’s reasons you can see first at page 44, paragraph 37, “Mr Scully responded to Mr Galimberti’s letter” seeking information so as to enable “to consider whether the landlord should consent to the assignment”. Then paragraph 38, line 5 of that paragraph, “He added that Sunny Springs ‘will [rely] on the current Heads of Agreement”. Then the statement was repeated on 3 December, that is the last line of that paragraph. Then there is the satisfaction of the obligation to get the owner’s consent which, we submit, when you put all that together, it was clear that they were not saying, “We are going to terminate the contract”. They were not saying they were simply allowing time to elapse. They were saying, “We will go ahead with the contract.” In our respectful submission, it had elected to affirm the contract. If the Court pleases.

KIEFEL J: We need not trouble you, Mr Northrop.

No question of principle arises in this matter and the proposed appeal has insufficient prospects of success. Special leave is refused with costs.

The Court will now adjourn to 12 noon on Wednesday, 16 December 2009 in Canberra.

AT 3.03 PM THE MATTER WAS CONCLUDED