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Breach of contract37

A cause of action for breach of contract in Australia arises where one party fails to perform its obligations under a contract. This may occur by way of a failure to perform or an anticipatory breach (in essence, a failure to perform that is foreshadowed by a party's actions or inaction). The burden of proof lies with the party alleging the breach of contract, regardless of whether the breach is said to have constituted a failure to perform or an anticipatory breach.

i Failure to perform

A failure to perform can occur by non-performance, defective performance, late performance (where time is of the essence) and by a breach of a contractual warranty.

Where a breach of contract occurs, the non-breaching party will generally accrue a right to claim damages but will not always be entitled to an automatic right of termination. The question of whether a breach gives rise to a right to terminate the contract will depend upon the agreement between the parties and any relevant legislation. But generally, a right to terminate does not arise unless the breach strikes at the 'root of the contract' (such as a breach of a condition as opposed to a mere warranty) or amounts to a sufficiently serious breach of a non-essential term which indicates a refusal by the party to be bound by the contract. Importantly, where a breach has occurred, the non-breaching party may elect to affirm the contract and continue with its performance, but in doing so will relinquish their right to terminate the contract in reliance upon the breach.

ii Anticipatory breach or repudiation

An anticipatory breach occurs where a party repudiates one or more of its obligations under the contract. This can arise where a party indicates that it is either unwilling or unable to perform the terms of the contract, and the other party consequently terminates the contract prior to performance.

An anticipatory breach arises at law at the time the non-breaching party terminates the contract based on an anticipated non-performance. Unlike a failure to perform, if a party repudiates its obligations under a contract, the non-breaching party has an automatic right to termination. If the non-breaching party does not terminate the contract there will be no anticipatory breach, and breach will instead occur at the time of the failure to perform.

The test for repudiation in Australia involves a very high threshold. The courts have made clear that it is 'is not to be lightly found' and will determine whether repudiation has occurred objectively by inquiring into 'whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.'

Defences to enforcement

There are a number of arguments that parties to a contract may raise in defending a claim for breach of contract. These range from straightforward arguments (such as pleading a statute of limitations, which precludes the plaintiff from bringing a claim), to the complex and fact-sensitive (such as pleading that a contract has already been repudiated by the party bringing a claim). This section of the chapter describes a number of the common defences to enforcement raised in Australia.

i Statutes of limitation

Strict time limits apply in Australia for the commencement of proceedings for breach of contract, and most other causes of action. A party is precluded from raising a cause of action that is filed after the expiration of the statutory limitation period.

In Australia, the general rule is that a cause of action in contract arises immediately upon the breach of contract occurring, even if the breach is unknown to the prospective plaintiff until a later point in time. Pleading that a claim is validly time-barred by a statute of limitations is perhaps the simplest means by which a party can resist a breach of contract claim.

The limitation periods applicable in Australia can vary from state to state. For breach of contract in NSW, Victoria, Western Australia, South Australia and Queensland a party must commence proceedings within six years of the breach occurring, For breach of a deed proceedings must be commenced within 12 years of the breach occurring.

ii Force majeure and frustration

Australian contract law is very familiar with the doctrines of force majeure and frustration, particularly in the context of supply and energy agreements.

Force majeure is generally dealt with in Australian contracts by way of a specific contractual term addressing the consequences of an extreme or unexpected event that renders the performance of a contract different from what was agreed by the parties, or altogether impossible. Contracts can differ on the rights and liabilities arising from a force majeure event, but the affected party is often entitled to additional compensation or time for performance, excused from non-performance or even entitled to discharge the contract as a whole.

The doctrine of frustration is governed by the common law in Australia. It will be applicable when, without default of either counterparty, a contractual obligation becomes incapable of being performed because the circumstances called for in the performance of the contract have become radically different from that which was contemplated by the parties when entering into the agreement. Frustration operates in the absence of an express reference to the concept in the contract. This means that parties to an agreement in Australia which does not make provision for force majeure may still avail themselves of relief via the (similar) doctrine in frustration.

iii Duress, undue influence and unconscionable conduct

If it is established that a contract was entered into by a party under duress, undue influence or unconscionable conduct, Australian law provides that the contract may be voidable by the party subjected to this conduct. In the event that the innocent party is later subject to a breach of contract claim in respect of the contract, that party is entitled to seek to have the contract 'rescinded' on equitable principles, and can potentially also counterclaim for damages. A successful claim for 'rescission' results in the contract being treated as if it never existed.

iv Mistake

Where both parties have entered into a contract on the basis of a shared misapprehension of the facts or of their rights under the contract (a 'common mistake'), Australian law holds that contract void or voidable. A common mistake between all parties to a contract rarely occurs in practice, and thus, the more typical situation is where a mistake infects only one party's entry into a contract. In the circumstances of a 'unilateral' mistake, Australian courts will treat the contract as effective and enforceable unless that party's entry into the contract was induced by misrepresentation or affected by unconscionable conduct by the counterparty. These concepts are discussed in Section VII.