Elect to Protect – The importance of election to repudiate a contract

Elect to Protect – The importance of election to repudiate a contract

By Leila Idris (Special Counsel), Michelle Ang (Senior Associate) and Alexandra Pantelis (Law Clerk) in the Melbourne office

Willis v Crosland[1] highlights the significance of:

• a party seeking to sue under a contract for breach should make an election to repudiate a contract as soon as possible where the other party’s conduct amounts to repudiation of the contract.
• the distinction between exercising contractual rights to terminate and repudiation.
• when considering general condition 21 of Victoria’s standard form contract of sale, building reports must have a clear meaning regarding the form of the defect to avoid any ambiguity as to their substance.

Background

The Purchaser sought to terminate a contract for sale of land in Bullengarook, Victoria (Contract) pursuant to general conditions 21.2 and 22.2 on the basis that a Building & Pest Inspection Report from a registered building practitioner disclosed [at 21] “major building defect, termite activity and severe damage”. The Purchaser’s written notice to end the Contract was sent by email to the Vendor’s solicitor at 7.51pm on 18 December 2019. At the time of notice, the Purchase had paid $185,000 of the deposit, and the balance remaining was $2,500.

Condition 21 titled ‘Building Report’ included the following:

21.2 The purchaser may end this contract within 14 days from the day of sale if the purchaser:

(a) obtains a written report from a registered building practitioner or architect which discloses a current defect in structure on the land and designates it as a major building defect;

(b) gives the vendor a copy of the report and a written notice ending this contract; and

(c) is not then in default.

21.3 All money paid must be immediately refunded to the purchaser if the contract ends in accordance with this general condition.

The Vendor issued a Notice of Default and Recission to the Purchaser, namely for failure to pay the full deposit by 18 December 2019.

On 27 February 2020, the Purchaser commenced proceedings at the Supreme Court of Victoria to recover the $185,000 deposit paid.

The trial judge dismissed the Purchaser’s claim determining that the Purchaser was not ‘ready, willing and able’ to complete the payment of the deposit before midnight 18 December 2019. Therefore, the purchaser was ‘then in default’, and could not terminate under general condition 21.

On appeal

The Purchaser appealed to the Court of Appeal the grounds that the trial judge erred that the Purchaser:

1. was not entitled to terminate pursuant to general condition 21, on the basis that the Purchaser was in default at the time the termination notice was served.
2. was required, to establish that she was ‘ready, willing and able’ to perform the Contract for valid termination under general condition 21.

Their Honours Sifris, Walker JJA and Macaulay AJA granted leave and allowed the appeal on both grounds. A summary of their Honours’ reasons are as follows:

1. Meaning of ‘in default’ under general condition 21
   • Their Honours found that “not in default” meant to not be “in breach” of the contract.
   • Accordingly, the trial judge erred in determining that the Purchaser was in default when the termination notice was served, as time for payment of the full deposit had not yet lapsed.
2. Distinction between repudiation and contractual right to termination
   • There will be no breach if the time for performance has not fallen due. Further, following repudiatory conduct the other contracting party must elect to either accept or terminate the contract.
   • Their Honours held that there was no repudiation, and the Purchaser had a right to terminate the Contract, as the Vendor failed to elect to affirm or terminate the Contract. Instead, the Vendor proceeded to serve a Notice of Default, acting as if the Contract remained afoot.
3. Relevance of “ready, willing and able”
   • Their Honours determined that it was not a relevant enquiry for the Purchaser to be ‘ready, willing and able’.
   • Therefore, the trial judge erred in determining that the Purchaser was in default when serving the notice of termination, as being “ready, willing and able” was not relevant in exercising a contractual right of termination.
4. Meaning of “major building defects”
   • Their Honours held that substance takes precedence over form regarding the language used by the registered building practitioner, thus the exact words “major building defect” was not required as alleged by the Vendor.

Lesson

A party seeking to sue under a contract should assess as soon as possible whether there has been a repudiation of the contract. If so, the party should act quickly to make an election to accept the repudiation and terminate the contract.  If a party fails to make an election, the rights and obligations of the parties under the contract remain on foot. Such conduct may be perceived by the Court as an intention to enforce the contract and any unaccepted repudiation of the contract is of no consequence.

[1] Willis v Crosland [2021] VSCA 320