Shevill v Builders Licensing Board

149 CLR 620
42 ALR 305

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(Judgment by: Gibbs CJ)

Between: Shevill
And: Builders Licensing Board

Court:

Judges:
Gibbs CJMurphy J
Wilson J
Brennan J

Subject References:
Landlord and Tenant

Hearing date: 4 November 1981
Judgment date: 1 September 1982

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Judgment by:
Gibbs CJ

The Honourable Mr. Justice Aickin died before judgment was given.

This is an appeal from a decision of the Court of Appeal Division of the Supreme Court of New South Wales which, by a majority, dismissed an appeal from a judgment given by Carmichael J. in favour of the present respondent, the plaintiff in the action. The appellants were the guarantors of the due performance by Shevill Truck Sales & Service Pty. Ltd. ("the lessee") of all the terms and conditions of a lease dated 22 April 1976 under which the lessee held certain land at Milperra for a term of three years commencing on 7 March 1976. The land was transferred to the respondent on 13 July 1976, and thereafter the lessee attorned tenant to the respondent. Subsequently the guarantee was assigned to the respondent. The lease, so far as it is material, reserved a yearly rent of $35,655 which the lessee covenanted (by cl. 3) to pay in advance by equal monthly instalments of $2,971.25. Clause 9(a) of the lease provided as follows: 

"The Lessor and the Lessee COVENANT AND AGREE:

(a)

That if the rent hereby reserved or any part thereof shall be unpaid for the space of fourteen (14) days after any of the days on which the same ought to have been paid in accordance with the covenant for payment of rent herein contained (although no formal or legal demand shall have been made therefor) or if the Lessee commits or suffers to occur any breach or default in the due and punctual observance and performance of any of the covenants obligations and provisions of this lease or of any Rules made hereunder or if the Lessee be a company an order is made or a resolution is effectively passed for the winding up of the Lessee (except for the purpose of reconstruction or amalgamation with the written consent of the Lessor which consent shall not be unreasonably withheld) or if the Lessee goes into liquidation or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or stops payment of or is unable to pay its debts within the meaning of any relevant Companies Act or ordinance or if execution is levied against the Lessee and not discharged within thirty (30) days or if the Lessee (being an individual) becomes bankrupt or commits an act of bankruptcy or brings his estate within the operation of any law relating to bankrupts then and in any one or more or either of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease."

During the whole time when the respondent was the owner of the land, the lessee was constantly late with its payments of the rent. The respondent pressed for prompt payment but accepted late and sometimes partial payments. From April 1977 to August 1977 the lessee's account was constantly in debit. The largest debit balance reached was $6,971.25, in June, but payments subsequently made reduced that balance. In June and July 1977 three of the cheques given by the lessee in payment of rent were dishonoured. It is unnecessary to go further into the details of the evidence. It is enough to say that the only possible inference is that the lessee was experiencing financial difficulty which made it unable to make the payments of rent at the times required by the lease. It is however impossible to conclude that the lessee was unwilling to comply with its obligations. Finally, on 3 August 1977, two months' rent (amounting to $5,442.50) remained unpaid. On that date the respondent issued and served a statement of claim claiming possession of the land. It was conceded that the effect was to forfeit the lease, although the lessee did not in fact give up possession until ordered to do so in October 1977. The respondent, in the present proceedings, claimed $5,442.50, the rent due to 3 August 1977, and damages for breach of the covenants of the lease and interest. At some time after the proceedings were commenced the arrears of rent were paid. The learned trial judge gave judgment for the respondent for damages of $41,261 plus interest. Damages were assessed by having regard to the amount which the respondent would have received by way of rent during the remainder of the term and after giving credit for the amounts of rent which it was able to receive from the property during that period. The amount of the assessment is not contested. 

It is not now disputed that the appellants are liable under the guarantee for whatever damages are payable by the lessee to the respondent. The question for decision is whether the lessee is in the circumstances liable for damages. 

The primary submission made on behalf of the respondent was that since the breaches of contract committed by the lessee entitled the respondent to terminate the contract, it followed that when the respondent exercised its right to do so it became entitled to damages for loss of the benefits which performance of the contract would have conferred upon it. This submission treated the breaches of the covenant to pay rent as a breach of an essential term of the contract. In the alternative it was submitted that the conduct of the lessee revealed such an unwillingness or inability to perform the contract as to amount to a repudiation of it.

This argument proceeded on the basis that the general principles of the law of contract, so far as they are relevant to the questions that arise in this case, are equally applicable to leases. A contrary view was expressed in Total Oil v. Thompson Garages [1972] 1 QB 318 , at p 324 , where Lord Denning M.R. said that repudiation which is accepted does not come to an end like an ordinary contract on repudiation and acceptance, and drew an analogy with the case of frustration. The learned authors of Brooking and Chernov: Tenancy Law and Practice in Victoria, 2nd ed. (1980), at p. 197, dispute this view and cite a number of cases, from New Zealand and Canada as well as from Australia, which in their opinion support the conclusion that a lease may be determined by an acceptance of a repudiation. I need not enter upon this controversy. I am content to assume that the ordinary principles of contract law are applicable. 

As Lord Wright pointed out in Heyman v. Darwins Ltd. [1942] AC 356 , at p 378 , repudiation is an ambiguous word and is used in various senses. We are of course concerned only with a case in which it is admitted that there was a valid and binding contract. Such a contract may be repudiated if one party renounces his liabilities under it - if he evinces an intention no longer to be bound by the contract (Freeth v. Burr (1874) LR 9 CP 208, at p 213 ) or shows that he intends to fufil the contract only in a manner substantially inconsistent with his obligations and not in any other way (Ross T. Smyth & Co. Ltd. v. T. D. Bailey, Son & Co. [1940] 3 All ER 60 , at p 72 ; Carr v. J. A. Berriman Pty. Ltd. (1953) 89 CLR 327 , at p 351 ). In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages: Heyman v. Darwins Ltd. (1942) AC, at p 399 . It is convenient to say that the injured party in these circumstances rescinds the contract, although there is, of course, no rescission ab initio : Johnson v. Agnew [1980] AC 367 , at pp 392-393 . The present case was not one of this kind. There is nothing to suggest that the lessee had any intention other than to fulfil the contract, according to its terms, to the best of its ability. However, if one party, although wishing to perform the contract, proves himself unable to do so, his default in performance will give the other party a right to rescind the contract, if the breach goes "so much to the root of the contract that it makes further commercial performance of the contract impossible": Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 QB 26 , at p 64 . There is high authority for treating such cases as a form of repudiation of the contract: Suisse Atlantique Societe d'Armement Maritime SA v. N.V. Rotterdamsche Kolen Centrale [1967] 1 AC 361 , at pp 421-422 ; Federal Commerce v. Molena Alpha [1979] AC 757 , at pp 778-779 . In Honner v. Ashton (1979) 1 BPR 9478 , at p 9490 , Mahoney J.A. said that he thought that the right to terminate for fundamental breach should be seen as, in principle, distinct from the right to terminate for repudiation. For present purposes, it is immaterial whether repudiation and fundamental breach are treated as separate categories, for in either case the innocent party can rescind the contract and recover damages to compensate him for the failure to perform the contractual obligations. Counsel for the respondent, in their alternative argument, sought to bring the case within this principle. A third situation in which a right to rescission arises is where there has been a breach of a fundamental or essential term of the contract. In Suisse Atlantique Societe d'Armement Maritime SA v. N.V. Rotterdamsche Kolen Centrale (1967) 1 AC, at p 422 , Lord Upjohn said:

"A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the facts and circumstances be regarded by the innocent party as a fundamental breach."

The test accepted in Associated Newspapers Ltd. v. Bancks (1951) 83 CLR 322 , at p 337 , is whether the term

"is of such importance to the promisee that  he would not have entered into the contract unless he had been assured of a  strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor."

The primary argument of the respondent is that cl. 3, the covenant for the payment of the rent, read in conjunction with cl. 9(a), was a fundamental or essential term and that any breach of it which resulted in rent being unpaid for fourteen days gave to the respondent the right to terminate the contract and sue for damages for the breach. 

It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease. However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement: see Wickman Tools v. Schuler A.G. [1974] AC 235 , at p 251 . In other words, a right to forfeit a lease might arise "in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture": Campbell v. Payne and Fitzgerald (1953) 53 SR (NSW) 537, at p 539 . In the present case cl. 9(a) undoubtedly gave to the respondent a right to re-enter if rent should be unpaid for fourteen days. That right was subject to the provisions of s. 129 of the Conveyancing Act, 1919 (NSW), as amended, but that Act is not material in the present case. However, the respondent's argument is that because cl. 9(a) gave a right to re-enter for any breach of cl. 3 that resulted in rent being unpaid for fourteen days, the covenant in cl. 3 as to payment, together with the provisions of cl. 9(a), became an essential term, or at least gave the respondent the same rights as are available under the general law to a party who elects to terminate a contract for repudiation or fundamental breach. 

In my opinion it does not follow from the fact that the contract gave the respondent the right to terminate the contract that it conferred on it the further right to recover damages as compensation for the loss it will sustain as a result of the failure of the lessee to pay the rent and observe the covenants for the rest of the term. Clause 9(a) specifies a number of circumstances in which the rights conferred by that clause will arise. The first of those circumstances - where the rent is unpaid for fourteen days - is not described by reference to any breach, although it necessarily involves a default. The second case - that in which the lessee commits or suffers to occur any breach or default in the observance of any of the covenants of the lease - does depend entirely upon the lessee causing or suffering a breach to occur. The other conditions on which re-entry is available do not necessarily involve a breach of any covenant or condition of the lease. In some cases, whether or not there has been a breach, the right of re-entry given by cl. 9(a) may become available although the circumstances would not suggest that the position of the lessor under the lease has been substantially affected or threatened. For example, a lessee, who usually makes prompt payment of the rent, may allow a small amount of rent to fall in arrears for fourteen days. He may commit a minor breach of covenant, such as an insignificant failure to paint or repair or keep the premises clean. He may make an arrangement with his creditors the effect of which will nevertheless be that he can continue to pay the rent fully and on time. In all these circumstances the lessor is given the right to re-enter. However it would require very clear words to bring about the result, which in some circumstances would be quite unjust, that whenever a lessor could exercise the right given by the clause to re-enter, he could also recover damages for the loss resulting from the failure of the lessee to carry out all the covenants of the lease - covenants which, in some cases, the lessee might have been both willing and able to perform had it not been for the re-entry. 

The words of cl. 9(a) afford no support to the respondent's argument. The rights which the lessee is to have if any of the circumstances mentioned in the clause exist are exhaustively defined by the clause. There are preserved to the lessor "any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event." In my opinion these words refer, distributively, to the three different sorts of circumstances in which the provisions of cl. 9(a) take effect. First there is the case in which the rent has been unpaid for fourteen days; in that case the lessor can recover the arrears of rent. The second case is that in which the lessee commits or suffers to occur any breach or default in the performance of the covenants, and in that case the remedy preserved is for breach of covenants. Thirdly, events may occur (such as liquidation and bankruptcy) which do not amount to breaches of covenants. It would appear that it is to such events, and to no other, that the words "damages as a result of any such event" refer. It is true that the word "events", where it first occurs in the clause, refers to the non payment of the rent and to the breaches of covenants as well as to the other events mentioned, but if it had this wide meaning in the phrase "any such event", the reference to "breach of covenants", at least, would be redundant. If this view of the clause is correct the only remedy of the respondent in the present case was to recover arrears of rent. 

However, if I am wrong, and if the words "any such event" include the non payment of rent for fourteen days, cl. 9(a) does no more than preserve any right to recover damages resulting from such non payment. The clause does not confer a right to recover damages which result from the fact that the lessee will pay no further rent during the remainder of the term. It does not refer to damages for the loss of the benefits conferred by the lease as a whole. Although cl. 9(a) deals with the situation in which the lessor may bring the lease to an end, there is nothing in its provisions to indicate any intention to give to a lessor who exercises the right to re-enter the same rights as would have been available to him if he had accepted a repudiation of the contract or had rescinded it on the ground that the lessee had committed a breach of an essential term. It would have been easy, although inequitable, to provide that in any of the circumstances mentioned in cl. 9(a) the lessor would be entitled to damages for loss of the benefits which performance of the covenants of the lease would have conferred on him in the future. However, the rights of the lessor are limited to the recovery of arrears of rent and damages for breaches and other events that occurred before re-entry. Assuming that non payment of the rent was an "event", damage caused by the fact that the lessor chose to re-enter, and thereby absolved the lessee from the obligation to pay rent during the remainder of the term, did not result from that event within the meaning of the clause on its proper construction. The main argument which was submitted on behalf of the respondent must therefore fail. 

In my opinion the alternative argument submitted on behalf of the respondent is also unsuccessful. It may be that cl. 9(a) excludes the rights that would ordinarily flow from an accepted repudiation of the contract. Whether or not that is so, the evidence does not reveal that the lessee committed breaches which went to the root of the contract. Counsel for the respondent relied particularly on the submission that the circumstances made it probable that the lessee would have continued to be late with its payments of the rent. We were referred to Maple Flock Co. v. Universal Furniture Products (Wembley) Ltd. [1934] 1 KB 148 , at p 156 where the words of Bigham J. in Millars' Karri and Jarrah Co. (1902) v. Weddel, Turner & Co. (1908) 14 Com Cas 25, at p 29 were cited with apparent approval. Bigham J. said: 

"Thus, if the breach is of such a kind, or takes place in such circumstances as reasonably to lead to the inference that similar breaches will be committed in relation to subsequent deliveries, the whole contract may there and then be regarded as repudiated and may be rescinded. If, for instance, a buyer fails to pay for one delivery in such circumstances as to lead to the inference that he will not be able to pay for subsequent deliveries . . . the other contracting party will be under no obligation to wait to see what may happen; he can at once cancel the contract and rid himself of the difficulty."

Those words however must be read as applicable to the facts of the case in relation to which they were spoken, and they cannot be understood as laying down the proposition that if one party to a contract commits any breach, however slight, and the inference is that he would probably commit similar breaches in the future, this in law amounts to repudiation: see Decro-Wall SA v. Marketing Ltd. [1971] 1 WLR 361 , at p 369; (1971) 2 A11 ER 216, at p 223 . The evidence in the present case made it possible to infer that the lessee would have continued to find it difficult to make prompt payments of rent, but it did not show how long the difficulties of the lessee were likely to last or whether its financial position was likely to improve or to deteriorate. They did not show that the rent would not be paid - in fact, in the past, the rent had rarely been more than two months in arrears. Little evidence was given on this issue, and the learned trial judge did not make any finding of fact with regard to it; it was not necessary for him to do so, because of the effect which he attributed to cl. 9(a). It is in my opinion not possible to conclude that there was a fundamental breach of the contract which would have entitled the respondent to rescind it under the general law, and to recover damages for total breach. 

For these reasons in my opinion the respondent was entitled to recover the arrears of rent but was not entitled to the damages which the learned trial judge awarded. It may be that the respondent was entitled to mesne profits from 3 August 1977 until it obtained possession in October 1977, but these were not claimed. Since the arrears of rent were paid before judgment, the learned trial judge should have entered judgment for the appellants. I would therefore allow the appeal and would order that judgment in the action be given for the appellants but that the respondent should have the costs of the action up to the time when the arrears of rent were paid.