Memorandum of Advice
Re: Commercial lease, residential lease, indefeasibility, in personam and fraud
Question 1
Issue
Whether ML can terminate the contract and recover the $1.0 million already paid?
Whether XDL’s execution of contractual obligations was frustrated by the COVID-19 disease outbreak in China?
Legal Principles
The plaintiff/terminating party have the burden of proof to show that the defendant/performing party failed to perform its obligations as stipulated under the contract.[1] There are two elements of breach of contract, namely (1) existence of a valid, binding contract; and (2) breach of a term of the contract by the defendant. Some of the circumstances under which a party may terminate the contract include (1) breach of condition/essential term, (2) serious breach of intermediate-term, (3) repudiation, (4) express contractual provision, and (5) delayed performance.[2] A contractual term is considered to be “essential” if the promisee “would not have entered into the contract unless assured of strict or substantial performance of the term, and if that ought to have been apparent to the promisor”.[3] The contractual parties may be discharged from performing their obligations under the contract because of events which are beyond their control and renders the contract physically or legally impossible to execute.[4] The performance of the promise under the contract is the consideration of that contract, but not an isolated promise.[5] In Steel v Tardiani [1946],[6] the Court emphasized that partial performance of a divisible contract by the performing party is only the other part prevent further performance or accept the work. When the contract is terminated or rescinded, the party in breach must restore to the other party what he received.
Application to Facts
ML can terminate the contract due to XDL’s breach of an essential term
Miners Ltd (ML) may terminate the contract with XD Ltd (XDL) for breach of contract. ML will have the burden of proof to show that XDL failed to perform its obligations as stipulated under the contract.[7] There are two elements of breach of contract, namely (1) existence of a valid, binding contract; and (2) breach of a term of the contract by the defendant. There existed a valid, binding contract between ML and XDL. Clause 1 of the contract required XDL to design Tonka 1 truck with a DOG 360 engine and Clause 3 strictly required the truck to be capable of hauling 200 tonnes. However, XDL breached these clauses, specifically by using a different engine for Tonka truck, which was less efficient compared to a DOG 360 engine.
The Court will assess whether the term breached by XDL was considered under “essential term” category. The fact that ML entered into the contract with XDL specifically because of XDL would design the truck using a DOG 360 engines that could haul 200 tonnes under Clause 3 demonstrate that known and understood by XDL.[8] The facts indicate that ML would not have entered into the contract unless XDL was able to provide or use DOG 360 engines for Tonka design trucks. It can be determined that XDL was aware of these requirements as it was provided with a copy of the supply contract between Energy International Ltd (EIL) and ML.[9] The supply contract copy included provisions imposing liquidated damages on ML if it fails to deliver the required amount of coal on time. Furthermore, ML provided XDL with its engineer’s report confirming that to “meet the production schedule, the new truck acquisitions must each be capable of hauling 200 tonnes.” Therefore, the DOG 360 engines clause in the contract was an essential term/condition breached by XDL, and thus, ML could terminate the contract. The Court will find that XDL breached an essential term (Clause 3) since trucks delivered to ML could only haul 180 tonnes, not 200 tonnes as required under Clause 3.
Execution of the contract was not frustrated by COVID-19
XDL argue that the difficulty in sourcing key parts such as DOG 360 engines was due to COVID-19 in China, applying the defence of contract frustration. However, contract frustration is applicable if XDL can prove that COVID-19 in China was an unforeseeable event that arose at the fault of neither party after the formation of their contract and prevents the performance.[10] It can be established that COVID-19 imposed difficulties on the shipment of the key components. Therefore, the contract was required to be complete in the circumstances radically different from what was undertaken by XDL. [11] The XDL could source the key components in the US, including the DOG engines, although this would have imposed an increased cost. Therefore, the Court is likely to find that the contract was not frustrated by COVID-19 in China, and XDL could still be able to perform its obligation under the contract.[12]
ML can recover the $1,000,000 already paid
The contract between ML and XDL can be considered to be a Divisible Contract since the consideration and payment was apportioned according to specific performance. Under Divisible Contract of substantial obligations or obligations that require only a portion of performance by the performing party, the other party can recover substantial obligation.[13] Therefore, since ML paid $1.0 million upon XDL signing the contract, and XDL was partial, ML will recover the partial payment if it does not accept the XDL’s delivery and terminate the contract.
Conclusion
The Court is likely to find that trucks delivered by XDL were different from those provided under the contract, breaching an essential term of the contract. The Court will also find that XDL’s work was partial, and ML did not accept the delivery, which will entitle ML to recover the amount paid in advance after contract termination.
Question 2
Issue
Whether ML is entitled to damages from XDL for breach of contract?
Legal Principles
A party will be entitled to damages as a result of another party’s breach of a contractual duty. The party performing the contractual obligations is expected to take reasonable care and employ its skills and expertise when carrying out its duties under the contract. The term is implied under the contract. In Goldberg v Shell Oil[14], the Court articulated the elements required to be proved or satisfied for a claimant to be entitled to breach of contract damages. They include (1) Breach of Contract, (2) Causation, (3) Remoteness, and (4) Mitigation.[15] The remedy for breach of contract is damages recovery, and the elements of a breach include the existence of a valid, binding contract and breach of the term(s) of contract by the defendant. In March v Stramare,[16] the Court applied “But-for” test to establish the causation, arguing that the defendant is liable if the loss suffered by the plaintiff would not have accrued “but-for” breach of its contractual duties. The loss must not be too remote, and the plaintiff should establish remoteness based on the tortious principles in case of a concurrent tortious breach.[17] The claimant is expected to mitigate its loss and is not entitled to damages or loss; it could have avoided using reasonable steps.[18] Damages sought to compensate the plaintiff and place it in the same position they would have been in if the contract wasn’t executed.[19] Damage may be granted for loss concerning expectation loss or reliance loss.
Application to Facts
There was a valid, binding contract between ML and XDL. XDL was expected to take reasonable care and employ its skills and expertise when carrying out its duties under the contract. ML will prove the XDL’s breach by failing to exercise reasonable care and skills in tightening the brake lines. ML will establish that XDL had an implied obligation to manufacture a high-quality truck by taking reasonable care and its defective performance breached the contract. The XDL’s mechanics failed to exercise reasonable care and skills to properly tighten the brake lines, which contributed to Tonka 2’s brakes to fail. XDL would be liable as the loss suffered by ML would not have accrued but for the breach of contract.[20] If XDL’s mechanics tightened the brake lines of Tonka, brake failure could not occur, and it could not cause damages. Actions of XDL’s mechanics constituted a tortious breach, and their defective performance resulted in damage to the scaffolding ($30,000), repair costs ($40,000), the liquidated damages ($160,000), and the damage to the contractor’s tools. ML will establish remoteness based on the tortious principles in case of a concurrent tortious breach where XDL failed to exercise reasonable skills and care. Based on Hadley v Baxendale, damages are not too remote if the parties may reasonably consider it as either arising naturally based on the usual course of things from the breach (limb 1) or to have reasonably been in the contemplation of the parties at the time they made the contract as the probable result of a breach (limb 2).[21] It is crucial for ML to take reasonable steps to reduce their loss.[22] Based on fact, the resulting damages would have been greater if the truck had not been urgently repaired. ML relied on XDL to perform the contract, and this would equate to $240,000 in damages.[23]
Conclusion
The Court is likely to establish that XDL had implied duty to perform its contractual obligations with reasonable care, skills and expertise. It breached its duty by failing to tighten Tonka 2’s brake. Its actions or inaction resulted in loss and damages. Therefore, XDL will be liable for the loss, and the Court is likely to grant ML the remedy of damages it sustained.
Question 3
Issues
Whether the notice by ML requiring the performance of contractual obligations by XDL was necessary after an oral agreement between parties to discharge obligations?
Whether the notice for XDL to complete its performance was effective and the status of its contract for the purchase of Tonka 3?
Legal Principles
Mutual agreement to relieve every party from outstanding rights and obligations under the contract is supported by consideration. In McDermott v Black, the Court found that when one party in contract completely perform its obligation, any release by the parties should be made under seal or supported by new consideration.[24] According to Tallerman & Co v Nathan’s Merchandise, any contract between parties, whether in writing or not, can be discharged by oral agreement.[25] When an oral agreement made between parties become inconsistent with the written contract that existed, the Court has made assumptions that the contractual parties intended to discharge and replace the contract with an oral agreement.[26] In Morris v Barron & Co., the Court emphasized that where an oral agreement discharges the existing contract and purports to make replacement of the contract with a new agreement required to be in writing, the discharge of parties’ obligations and rights under the contract is effective, but the new contract is not effective.[27]
Application to Facts
Given that ML and XDL’s contract was created by an agreement between ML and XDL, it can be extinguished by an agreement. Therefore, if an oral agreement was made with intentions to discharge the contract, the release of rights and obligations by ML and XDL under the contract is binding and effective. However, the oral agreement must be valid for it to be enforceable and for the contractual parties to create a binding agreement to discharge obligations and rights under the contract, there must have been valid consideration.[28] The oral agreement discharged the parties’ rights and obligations in the contract. Therefore, the notice by ML requiring the performance of contractual obligations by XDL was not necessary because the oral agreement between parties effectively discharged the rights and obligations of contractual parties. There is also a mutual exception rule that applies to the circumstance. As of 15 December, XDL had not commenced work nor had ML made any payments under the contract. The mutual abandonment of obligations under the contract would amount to valid consideration, which shows that XDL and ML effectively and mutually intended to discharge the contract. Furthermore, neither party has performed its obligations, and fresh consideration is not necessary or required.[29] ML cannot replace discharge and replace the contract. Whether total discharge or mere variation took place is based on ML and XDL’s intention.[30] The parties intentions in an oral agreement were to fully discharge the contract, mainly because neither party performed its obligations under the contract.[31]
Conclusion
The Court will most likely find the oral agreement enforceable and discharged the initial contract, relieving both parties of their obligations to each other. The Court will establish that neither party executed its obligations by the stipulated time under the contract. Therefore, the contract status from 15 September is discharged and abandoned, mainly because both parties had been relieved of their obligations and rights to complete and execute it. The Court may hold it immaterial and unnecessary for ML to demand performance of the contract for Tonka 3 from XDL and argue that the notice is ineffective for a discharged contract.
[1] Hobbs v Petersham Transport Co Pty Ltd [1971] HCA 26.
[2] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] 233 CLR 115.
[3] Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd [1938] SR (NSW) 632.
[4] Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497.
[5] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL.
[6] Steele v Tardiani (1946) 72 CLR 386.
[7] Hobbs v Petersham Transport Co Pty Ltd [1971] HCA 26.
[8] Associated Newspaper Ltd v Bancks (1951) 83 CLR 322; Tramways Advertising v Luna Park.
[9] Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR 632, 6.
[10] Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd [2011] VSCA 116, 74.
[11] Codelfa Construction v State Rail Authority of NSW (1982) 149 CLR 337, 40.
[12] Davis Contractors Ltd v Fareham Urban District Council 1956] UKHL 3.
[13] Hoenig v Isaacs [1952] 2 All ER 176.
[14] Goldburg v Shell Oil Co. [1990] 95 ALR 711.
[15] Ibid.
[16] March v (E & M) Stramare Pty Ltd [1991] 171 CLR 506.
[17] Hadley v Baxendale [1854] EWHC J70
[18] Dunkirk Colliery v Lever [1878] 9 Ch. D. 20, 25.
[19] Wenham v Ella (1972) 127 CLR 454, 460, 471.
[20] Hadley v Baxendale [1854] EWHC J70.
[21] Czarnikow Ltd v Koufos [1969] 1 AC 350.
[22] Dunkirk Colliery Co v Lever (1878) 9 ChD 20.
[23] Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64.
[24] McDermott v Black [1940] 63 CLR 161.
[25] Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd (1957) 98 CLR 93.
[26] British &Bennington’s v NW Cachar [1923] AC 48, [1922] All ER 224.
[27] Morris v. Baron & Co. [1918] AC 1.
[28] The Hannah Blumenthal [1983] 1 AC 854.
[29] Atlantic Shipping & Trading Ltd v Louis Dreyfus & Co [1922] AC 250, 262– 3; Federal Commissioner of Taxation v Orica (1988) 154 ALR 1, 33. See [6.165].
[30] Tallerman & Co v Nathan’s Merchandise.
[31] Atlantic Shipping & Trading Ltd v Louis Dreyfus & Co [1922] AC 250, 262– 3; Federal Commissioner of Taxation v Orica (1988) 154 ALR 1, 33. See [6.165].