Our recent Legal Business Bulletin article reported the decision of Galafassi v Kelly [2014] NSWCA 19. We have received a query in relation to the extent of an irrevocable election when a breach in a contract arises. To provide further clarity in relation to this matter we set out the question posed and the response below.

Question

If specific performance is sought can an innocent party later seek to terminate the contract for breach of an essential term or repudiation?

Answer

A right to terminate will be lost if the promisee, by unequivocal words or conduct, evinces an intention to continue with performance of the contract: Sargent v ASL Developments (1974) 131 CLR 634, 641.

However, as the decision in Galafassi v Kelly demonstrates, a vendor who elects to sue for specific performance will not be precluded from later terminating the contract and claiming damages for the continued refusal by the purchaser to complete, if the purchaser, after the institution by the vendor of proceedings for specific peformance, commits a breach of an essential term or otherwise evinces an intention to no longer be bound (at [83]).

This was the issue at heart in Galafassi v Kelly. It was accepted by the Court that the institution of proceedings for specific performance could be taken as affirmation of the contract by the Vendor. The question then became whether such an affirmation was irrevocable to prevent the vendor from subsequently terminating for the failure of the purchasers to complete.

The Court in resolving this issue had regard to the High Court case of Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444. In that decision it was found that a vendor who is entitled to end a contract by reason of the purchaser’s failure to complete, but who elects to sue for specific performance, is not thereby precluded from later ending the contract and claiming damages for the continued refusal by the purchaser to complete, if the purchaser’s conduct evinces an intention to no longer be bound by the contract.

While this may appear to be inconsistent with the insistence by the Court that an election once made is final, Mr Sumption QC explained the position in Safehaven Investments Inc v Springbok Limited (1996) 71 P & CR 59 at 68:

The correct analysis in this case is not that the innocent party is terminating on account of the original repudiation and going back on his election to affirm. It is that he is treating the contract as being at an end on account of the continuing repudiation reflected in the other party’s behaviour after the affirmation.

Similarly, it was said in Ogle v Comoyuro that, “if there is a further breach of an essential term or some further conduct amounting to a repudiation while the action for specific performance is pending, the existence of the action will not then prevent the vendor electing to rescind.”

In Galafassi v Kelly the purchasers, in their email communications, expressed an inability to perform the contract after the institution of the proceedings. It was argued that the subsequent filing by the vendor of the Claim and Statement of Claim acted as a further affirmation of the contract. The Court, while not expressing a concluded view on whether this amounted to affirmation, noted that the purchasers’ unretracted declarations of inability and unwillingness to perform acted as a continuing repudiation which, until retracted, could be accepted at any time. Accordingly, the vendor was entitled to abandon the specific performance proceedings and claim damages.

Question

Does the situation differ if an order for specific performance is actually obtained?

Answer

In Johnson v Agnew [1980] AC 367, the House of Lords confirmed that obtaining a decree for specific performance was an affirmation of the contract. However, the House did not find that the innocent party’s decision to affirm was irrevocable so as to prevent them from brining the contract to an end in the event the other party persisted in their failure to perform.

The key difference is that where an order has been obtained, the conduct which will justify the innocent party to terminate the contract must occur after the date of the order. In other words, if after obtaining a decree of specific performance the other party complies with the terms of the order and performs the contract, the innocent party will not be justified in terminating for breach or repudiation.

On the other hand, if the repudiating party continues to refuse to be bound by the contract after the order is obtained, then the innocent party will not be bound by their earlier election; they can treat the contract at an end and claim damages on account of the continuing repudiation reflected in the other party’s behaviour.