The Consequences of conduct not being consistent with the remedy sought

The recent decision of the New South Wales Supreme Court in Upside Property Group Limited v Tekin [2016] NSWSC 1260 highlights the risks associated with the termination of a contract as a result of an alleged repudiation and the effect a party’s conduct can have on the attempted exercise of contractual rights.

Background

The case concerned the termination of a contract for the sale of four parcels of land at 10-16 Cecil Avenue, Castle Hill (Property).

Celal Tekin (Tekin), the registered proprietor of the Property, entered into a contract on 21 October 2014 (Contract) to sell the Property to the plaintiff, Upside Property Group Limited (Upside). The parties also entered into a side deed on the same day (Side Deed).

The settlement date under the Contract was 1 December 2014 (Settlement Date).

The Side Deed relevantly granted Tekin the right to re-sell the Property prior to the Settlement Date provided that both parties accepted the terms of the sale agreement.  The Side Deed provided for the splitting of the purchase price paid on the re-sale between Tekin and Upside if it was higher than the price payable by Upside under the Contract.

The Property was marketed for re-sale and received a number of offers, however all offers were rejected as the terms were not acceptable to either one or both parties.  

In late November 2014, Upside proposed that the Settlement Date be extended to allow the parties to work together to refinance Tekin’ debts so that the Property could be re-sold by auction at a later date.

The Settlement Date passed and the parties continued to discuss whether to refinance Tekin’s debts, procure a re-sale to another purchaser, or for Upside to proceed with the purchase.

On 4 December 2014, Tekin’s lawyers served a notice to complete (Completion Notice) on Upside requiring Upside to complete the purchase of the Property by 18 December 2014 (Completion Date).

The Completion Date passed without settlement being effected and neither party was able to tender any evidence of any attempt to organise settlement.

Rather the evidence indicated that between December 2014 and early March 2015 Tekin and Upside were actively working together to procure a purchaser for a re-sale of the Property and also taking steps to refinance Tekin’s debts.

On 13 March 2015, Tekin’s lawyers served a notice of termination (Termination Notice) on Upside stating that Tekin was terminating the Contract as a result of Upside’s failure to comply with the Completion Notice and that the deposit paid by Upside was forfeited by Tekin.

Upside’s solicitors responded by letter dated 19 March 2015 in which Upside’s solicitors challenged the validity of the Termination Notice, asserted that the invalid termination was a repudiation of the Contract by Tekin and that Upside accepted the repudiation and exercised its right to terminate the Contract.

Upside then commenced proceedings on the basis of Tekin’s invalid termination and sought damages as compensation for the loss Upside claimed to have suffered as a result.

Tekin contended that the Contract was validly terminated by the service of the Termination Notice, or alternatively, that Upside’s conduct between 1 December 2014 and 13 March 2015 amounted to a repudiation of the Contract on the grounds of gross and protracted delay and Tekin was entitled to accept the repudiation and terminate.

Decision

The Court found that the Notice specified an incorrect timeframe for Upside to complete the Contract and therefore the failure to complete in accordance with the Notice was not a breach of an essential term of the Contract. 

Repudiation of a contract is where one party by their words or actions clearly shows:

  • an unwillingness or inability to render substantial performance of a contract; or
  • an intention to fulfil a contract in a manner substantially inconsistent with that party's obligations.

    The Court determined that despite the service of the Notice both parties conducted themselves in a manner that suggested completion of the Contract was not required whilst they attempted to resell the Property or refinance Tekin’s debts.  It was this mutual pursuit of the alternate options to settlement that was the primary reason for the delay, without going so far as to be deemed a mutual abandonment of the Contract.

    As Tekin failed to satisfy the Court that Upside’s behaviour amounted to a repudiation of the Contract the Court found that Tekin’s invalid termination was in itself a repudiation of the Contract.

    Upside was required to establish that it was ready willing and able to perform its obligations under the Contract, including the payment of the purchase price, at the time Tekin repudiated the Contract by serving the Termination Notice before it would be entitled to recover damages (Hensley v Reschke (1914) 18 CLR 452). 

    Upside was unable to produce sufficient evidence of its financial position or that it had access to finance to enable it to complete the Contract to satisfy the Court it was ready, willing and able to complete at the time of termination.

    Upside’s inability to provide it was ready, willing and able to complete was sufficient grounds for Darke J to dismiss Upside’s claim however Darke J also provided his reasons for determining that Upside had also not established that it had suffered loss as a result of Tekin’s repudiation.

    The issue of whether Upside had suffered loss turned largely upon whether the value of the Property at the time of the repudiation was greater than the purchase price under the contract.

    Both parties tendered expert evidence from valuers as to the market value of the Property in March 2015.

    Darke J was rather scathing in his judgment of the expert evidence submitted by the valuer on behalf of Upside and the lack of disclosure given in support of the reasons for the conclusions contained in the report.

    As a result the Court did not accept the evidence of Upside’s expert and found that even if Upside had been able to prove that it was ready willing and able to settle in March 2015, Upside had not suffered any loss.

    The Court rejected Upside’s claim for damages and dismissed Upside’s claim against Tekin with costs.

    Lavan Legal’s comment

    This case serves as a good reminder of the care that must be taken before terminating a contract or commencing a claim for damages on the basis of repudiation.

    Parties must be aware that the Court will look to their conduct in circumstances of a breach and equity may afford a party a defence where the parties’ conduct does not align with the legal rights they are purporting to enforce.   

    In this particular case, notwithstanding Tekin’s failure to terminate the Contract strictly in accordance with its terms, the Court found that the parties, by their conduct, indicated that completion of the Contract was not required. It would therefore appear unlikely that Tekin would have succeeded in satisfying the Court that the termination was valid even if the Termination Notice was properly served.

    Finally this case shows how important your choice of expert is. Two experienced valuers provided evidence in this matter however the evidence of one of the valuers was given far more weight that the other whose evidence was deemed inadequate and unsubstantiated.