Breach of Condition and Contract Termination in Australia

This essay provides a comprehensive analysis of breach of contract conditions in Australian law, examining whether a minor breach of a condition gives the innocent party the right to terminate the contract. It explores key legal principles, including the definitions of 'condition' and 'warranty,' and analyzes relevant case law, such as Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd and Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd. The essay discusses the traditional classical approach, which suggests that any breach of a condition, even if trivial, allows for termination, and contrasts it with contemporary views that consider the severity of the breach and its impact on the innocent party's benefits. The analysis includes an examination of essential terms, stipulations by parties, and the adequacy of damages as a remedy, ultimately concluding that Australian law generally requires a significant breach that substantially deprives the innocent party of the contract's benefits before termination is justified.

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Introduction
It is a well settled principle in law that when a contract has been breached a party’s failure to
perform primary obligations in the contract, it becomes voidable.1 This implies that the innocent
party can terminate the contract at his at his own volition. According to the court in L'Estrange v
E. Graucob Ltd2 that once a contract has been signed the parties’ bears a moral and legal
imperative to perform their contractual obligations. It is instructive to note that the contractual
obligations of a contract are usually envisaged in a terms of a contract. A term of the contract has
been defined to be any provision that form the subject matter of the contract and engenders a
legal obligation.3 There are several types of terms of a contract and which have disparate
significance and impacts on the rights of the parties if breached. These terms are differentiated
according to their gravity. However, the chief objective of this paper is to rigorously analyze
whether the breach of a condition which may likely to give the innocent party a right to terminate
the contract even if the breach is minor. The aim is to determine if the aforementioned position is
in consonance with the position in Australia. Conversely, to bring to force a more
comprehensible and persuasive argument on the concept breach of a condition in Australia it will
be prudent to apply some common law decisions decided the English Courts.
It is a cardinal rule that the impact of discharge of contract contracts for breach of a term is
conditional on whether the term is a warranty, a condition or an intermediate.4 The issue that
lends itself for determination is whether a party may discharge the contract only for a trivial
breach of a condition. the traditional classical approach according to Bettini v Gye5 is that a
breach of a condition even if trivial engenders a right to terminate the contract. The locus
classicus that provides the definition of a condition in Australia is the landmark ruling of Luna
Park (NSW) Ltd v Tramways Advertising Pty Ltd6 where the court held that a condition is a term
of the contract that goes to the its root and that if breached the innocent party has the right to
terminate the contract. On the other hand, it is a long standing principle in English Common Law
1 Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2
2 [1980] UKHL 2
3 Carter, John W., David J. Harland, and Kevin Edmund Lindgren, Contract law in Australia ( Sydney:
Butterworths, 1996).
4 Swanton, Jane, ‘Discharge of Contracts for Breach.’ (1981) 13Melb. UL Rev. 69.
5 (1875) LR 1 QBD
6 [1938] HCA 66

according to Poussard v Spiers7 that termination of the full contract for breach of a term will
only be justified if an award of the remedy of the damages will not be a sufficient remedy for the
innocent party. In contrast, Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen
Kaisha Ltd8 took to the view that an innocent party will be entitled to terminate the contract if
the breach of the terms takes away a material benefit that the innocent party would have derived
from the contract.
A term can be regarded as a condition by; statute i.e. section 19(a), (b) of the Goods Act 1958
(vic) and section 70 (1), (2) of the Trade Practices Act 1974 (Cth), by the mutual agreement of
the parties as was averred by the court in L Schuler AG v Wickman Machine Tools Sales Ltd9 and
if it held to be a condition by construction and interpretation of the terms.
The rigid English and Common Law position has been that once a term has been rendered to be a
condition any breach of such a term will give the innocent party a right to bring the contract to an
end irrespective of the consequences it may have on the contractual obligations or benefit of the
parties.10 The problem in the determination of an innocent’s party right to terminate the contract
for breach is compounded by the issue of whether the term is an essential term. What will be
intriguing yet seemingly perplexing are circumstances when there has been a breach of the term
that goes to the root of the contract or is an essential but the breach is minor. So the question that
begs is what is the ‘litmus test’ that is applied in making such a determination? The definite
answer to these issues will obviously reflect itself at the end of this essay. More significantly
though, there appears to be conflict between traditional and contemporary legal positions in the
application of the following four tests that emerge from this discourse;
That an innocent party will have a right to terminate the contract unilaterally if-
a) The breach is of a term that goes to the root of the contract
b) The breach is of an essential term and its consequences deny the innocent party a
material benefit of the agreement that would have been derived from performance
contract
7 (1875) LR 1 QBD 410
8 [1962] 1 All ER 474, Court of Appeal
9 [I974] 1 AC 235
10 Shea, A. M. "Discharge from performance of contracts by failure of condition." (1979): 42 The Modern Law
Review 623-645.

c) Stipulation of the Parties
d) Damages is not adequate remedy
Breach goes to Root of a Contract
This test has been popularly referred by the courts as ‘the test of essentiality’. Jordan CJ in
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd11 firmly pronounced that a term will be
held to go to the root of the contract if one takes to into account the whole contract and finds that
a strict guarantee/ promise of performance was given and the terms is so significant that the
innocent party would not have entered into the contract but for the guarantee/ promise. It should
be borne in mind that even if the term has been regarded as a condition on the face of it, the court
will seek to establish if the innocent party would have entered into the contract if he had not
relied on the strict guarantee of performance. The courts must therefore examine the language
that was applied by the parties12 and if the parties saw the need to promote the certainty of the
agreement.
The High Court in Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd13while overturning the
decision at the NSW court of appeal held that an innocents party right to terminate the whole
contract unilaterally for a breach will arise if the term has a direct impact on the substance of the
contract or if the term and the term is so fundamental that failure to perform the term will be
tantamount to failure to perform the whole contract. Notably, this is not a significance departure
from the position adopted by the NSW Court of Appeal. The view by the court in Tramways
authoritatively gives life to the proposition that in Australia a minor breach of a condition will
not entitle the innocent party to unilaterally terminate the contract as long as the breach of the
term is not tantamount to a failure to perform the whole contract and that an innocent party
would still have entered into the contract even despite of the absence of a guarantee as to its
performance. In other words, a minor breach of term that is condition by its general nature will
not automatically imply unilateral termination of the contract by the innocent party.
Essential term and Consequences of Breach on Innocent Party
11 (1938) 38 SR (NSW) 632
12 Ibid n 8
13 Ibid n 5

This test was for a condition and discharge of contract by breach propounded by Lord Diplock,
in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd14 where he affirmed that an
innocent party has the right to terminate the contract if the term that has been breached i.e. a
condition is so essential to the contract that the breached will take away the whole benefit that
the innocent party had bargained for in the contract.15 Ideally, the consequences of the breach of
the essential term must be the actual ones and so severe that the innocent party looses the whole
benefit of the contract that he would have gained if the term had not been breached.16 This test of
an essential term and consequences of breach on an innocent party has been aptly summarized in
Decro-Wall International SA v Practitioners in Marketing Ltd17 where the court reasoned that an
innocent’s party decision to unilaterally terminate a contract following a breach of a term will be
valid in the legal sense and binding on the other party in breach if the consequences of the breach
have a material and adverse impact on him and it would be unfair to let him continue being a
party to the contract.
The High Court of Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd18
supported the ratio extracted from Hong Kong Fir19. It affirmed Lord Diplock popular wisdom
and reasoning by contending that it that the seriousness of a breach of a term that is not essential
to the contract and the breach of an essential term embodied in a contract justifies the unilateral
termination of the contract by an innocent party to it. The High court of Australia further added a
wider interpretation by holding that the test objective test should be applied in establishing the
innocent’s party entitlement to terminate the contract.20 One should determine what a reasonable
person facing the situation as the innocent party in the contract would have done when the term
was breached. This obvious robust interpretation of the law implies that even a minor breach of
an essential term such as a condition such would not give rise to the right to terminate the
14 Ibid n 7
15 Carter, J. W., G. J. Tolhurst, and Elisabeth Peden, ‘Developing the Intermediate Term Concept.’ (2006). Journal
of Contract Law 22
16 Brownsword Roger, ‘Retrieving Reasons, Retrieving Rationality?: A New Look at the Right to Withdraw for
Breach of Contract’. 1992.
17 [1971] 2 All ER 216
18 [2007] HCA 61
19 Ibid n 14
20 Butler, Desmond, Sharon Christensen, Lindy Willmott, and Bill Dixon,. Contract Law Case Book (2013).

contract unless it is proved that a reasonable person would have in the same circumstances would
have acted that way. Going by Australia’s position with respect to the test in Hong Kong it can
be conceded that in Australia the position seems to be that a minor breach is not a serious breach
within the meaning of the High court of Australia reasoning in Koompahtoo21 and can thus not
give rise to termination of the contract. In addition, a minor breach of a section of a condition
will today not call for termination if there is no evidence to show that the innocent party will be
substantially de deprived of the benefit he bargained for when entering the contract.
Stipulation by Parties
The general rule is that where the parties in a contract make a mutual agreement that a certain
term of a contract is a condition then it will be regarded as such.Rather interestingly, Lord
Dipock in the dictum he gave in Photo Production Ltd v Securicor Transport Ltd22 argued that
the concept of breach of a condition if should only be left to parties that have made mutual
agreement through a meeting of their minds that any breach of a term that has been expressly
recognized as a condition in the contract shall entitle the other party to elect to terminate the
contract even if the breach is trivial. The courts in Australia have only supported the mutual
agreement of Lord Diplock’s view only to the extent that the term will be treated as a condition if
the parties made a mutual agreement but does not advocate for exclusive application of the
concept of breach of a condition.
The Australian Capital Territory in O'Neall vs Barra Rossa Pty Ltd23 affirmed that parties in a
contract have the freedom to elect the terms that which will be regarded as when breached the
innocent party will have right to bring the contract to an end. However, the agreement about such
terms must be made clearly, expressly and without creating any difficulty in construing the
meaning. In the Australian decision of ANZ Banking Group Ltd v Beneficial Financial
Corporation24 the use of the express term condition in a contract by the parties does not as a
matter of law imply that it is a condition in the legal sense. The court will only find a term in a
contract to be a condition in the strict legal sense through construction and interpretation of the
21 Ibid 19
22 [1980] AC 827 at 849
23(1989) 96 FL3 436
24 [1983] 1 NSWLR 199 at 204

terms in question after it has examined cogent evidence of intention from the parties. The
intention of the parties in this case has to be clear and devoid any ambiguities.25 This implies that
in Australia even a minor breach of a condition that was term, expressly created by the parties in
the contract who effect when breached is termination does will not call for a compulsory
termination of the contract. The courts have to be satisfied on a balance of probability that the
parties had an intention to terminate the contract. For the most part, the courts construction and
interpretation of the wording created by parties will find that the parties only intended to
terminate the contract for breach of the whole condition and not a minor part of it. It is worth
noting that, Australia supports the classical view that if the parties through mutual agreement and
by express wording in the contract intended that the innocent party will have the right to
terminate the contract upon breach of a condition irrespective of the gravity of the consequences
they will be left to stick to their agreement even if the breach was minor and had trivial
consequences.
Damages not an Adequate Remedy
As a rule of general of practice in common law contract law pursuant to the case of Poussard v
Spiers26 if a part is in breach of a condition, the innocent party will be allowed to terminate the
contract as a remedy if damages would not be an adequate remedy.27 This implies that in the
event of a minor breach of a condition the innocent’s party unilateral termination of the contract
will not be legitimate if the damages could be an adequate remedy. In Australia the position is
that if after the breach of a condition there is evidence to prove that that damages will be an
adequate remedy the courts are always unwilling to the contract terminated but rather they hold
view that the parties should be given an opportunity to continue performing their obligation. The
Australian courts in many cases have preferred that the innocent party be awarded damages for
any financial or economic loss that has been suffered and the parties continue to perform their
contractual obligations. In Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance
25 Gamble, Roger, ‘Australia and the Intermediate Term-No Country for Old Rules’ (2008) 34 Monash UL Rev.
457.
26 Ibid n 7
27 Carter, John W., and C. Hodgekiss, ‘Conditions and Warranties: Forebears and Descendants’ (1977) 31Sydney L.
Rev. 8.

(Australia) Ltd28 the Australian courts blatantly manifested their unwillingness to hold a term as
a condition and insisted that the parties should be allowed to continue performing the their
obligations. Therefore it can be argued that a minor breach of condition will trigger an award of
damages and not a whole termination of a contract. According to Bentsen v Taylor Sons and Co29
damages for breach condition will be assessed according the magnitude of the consequences of
the breach on the innocent party.
Conclusion
On a balance of all legal and scholarly contentions revealed in this paper the overriding argument
across all tests is that a minor breach of a contract will not justify the termination of the contract.
It has been divulged that the position of Australia contract law may be significantly different
from the rigid and strict common law position. Suffice to say, the drafters and implementers of
the Australia Contract law have conscious to the fact that a condition may be breached partially,
wholly and substantial. In this sense the breach of the condition is considered to be minor if it is
partial and therefore the parties still have an opportunity to continue with performance but
damages must be awarded to the innocent party that has suffered damages as a result of the
breach. Against this backdrop, it is instructive to note that in the case of an anticipatory breach of
a condition, Australia contract law as envisaged in the case of Stevter Holdings Lfd v. Katra
Constructions Pty Lfd30 provides that even a minor breach is an indication that the party in
breach is not willing to perform his contractual obligations and therefore termination of a
contract will be legitimate.
Bibliography
Books & Articles
A. M. Shea ‘Discharge from performance of contracts by failure of condition.’ (1979) 6 The
Modern Law Review 42, 623-645.
28 (1987) 162 CLR 549,556
29 [1893] 2 QB 274
30 [I975] 1 NSWLR. 459

Adam Rollnik, ‘Termination for Breach of Contract.’ (2009) 3 Commercial Law Quarterly: The
Journal of the Commercial Law Association of Australia 23, no. 1
Desmond Butler,Christensen Sharon, Willmott Lindy, and Dixon Bill, ‘Contract Law Case
Book.’(2013).
J. W, Carter, G. J. Tolhurst, and Peden Elisabeth, ‘Developing the Intermediate Term Concept.’
(2006) Journal of Contract Law 22
Jane Swanton, ‘Discharge of Contracts for Breach.’ (1981) 69 Melb. UL Rev. 13.
John Carter,W., and Hodgekiss C, ‘Conditions and Warranties: Forebears and Descendants.’
(1977) 8 Sydney L. Rev. 31.
John Carter., Harland David, and Edmund Kevin Lindgren. Contract law in Australia. (Sydney:
Butterworths, 1996)
Roger, Brownsword, ‘Retrieving Reasons, Retrieving Rationality?: A New Look at the Right to
Withdraw for Breach of Contract.’ (1992).
Roger. Gamble, ‘Australia and the Intermediate Term-No Country for Old Rules.’ (2008) 34
Monash UL Rev. 457.
Case Law
Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987)
162 CLR 549,556
ANZ Banking Group Ltd vs Beneficial Financial Corporation [1983] 1 NSWLR 199 at 204
Bentsen v Taylor Sons and Co [1893] 2 QB 274
Bettini v Gye (1875) LR 1 QBD.
Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 2 All ER 216
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474, Court of
Appeal
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61
L Schuler AG v Wickman Machine Tools Sales Ltd [I974] 1 AC 235
L'Estrange v E. Graucob Ltd [1934] 2 KB 394
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66

O'Neall vs Barra Rossa Pty Ltd (1989) 96 FL3 436
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Poussard v Spiers (1875) LR 1 QBD 410.
Stevter Holdings Lfd v. Katra Constructions Pty Lfd [I975] 1 NSWLR 459
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632