In most contractual agreements, when an issue arises that pertains to a potential breach of contract, a party has two options: keep the contract on foot and thus seek specific performance; or terminate the contract and sue for damages. Once an unequivocal election has been made, usually it is irrevocable.

However, the recent case of Galafassi v Kelly [2014] NSWCA 190 highlights that this election is not irrevocable in relation to innocent parties; they can elect to terminate the contract after seeking specific performance, in certain circumstances.

Galafassi v Kelly

The Applicants (Purchasers) entered into a contract to purchase a property from the Respondents (Vendors) for $6,350,000. However, on the date of settlement the Purchaser advised that they did not have the requisite funds to complete the contract.

Consequently, the Vendor commenced proceedings for specific performance and, in the alternative, damages. The Vendor was advised by the Purchasers that they would be unable to specifically perform the contract as they did not have the funds.

The Vendor later terminated the contract on the grounds of repudiation by the Purchasers. They resold the property and sought $850,000 from the Purchases for the loss that arose from the resale. The Purchasers disputed the claim for damages on two grounds. The first issue for the court to consider was whether it was necessary for there to be further repudiation by the Purchasers after the Vendor had made a claim for specific performance, to bring about a right to terminate the contract. The second issue was whether the Vendor had failed to mitigate their losses on the resale of the property.

At first instance His Honour gave judgment for the Vendor against the Purchases. The Court found that the Vendor was entitled to terminate the contract and seek damages for the breach. It also found the Vendor had made reasonable efforts to reduce their losses.

On appeal, the Purchasers submitted that the Vendor elected to affirm the contract by instituting proceedings for specific performance and that there was no further repudiation after this affirmation. In the alternative, the Purchasers submitted that the Vendor’s claim for damages should be reduced, as they did not mitigate their losses with respect to the resale of the property.

Decision

In coming to their decision, the Court highlighted that the Purchasers were seeking to avoid the consequences of their repudiation by contending that the Vendor elected to affirm the contract and was thereby precluded from terminating the contract.

The Court found that there was an election between two inconsistent rights. This involved whether to accept the Purchasers’ breach and terminate the contract, or choose to insist upon further performance. If a party chooses to terminate the contract, then that election has been made. Therefore, once an election between inconsistent rights is made it is irrevocable.

While this may be the case, the Court found that this does not apply where an innocent party seeks (and obtains) specific performance. It is, therefore, treated as affirming the contract irrevocably, so as to prevent the innocent party from later bringing the contract to an end if the repudiating party persists in its failure to perform.

The Court found that while commencing proceedings for specific performance may have been taken as an affirmation of the contract, the Purchasers’ continual refusal after the institution of the proceedings to perform the contract entitled the Vendor to subsequently accept the repudiation and terminate the contract.

The Purchasers failed on all grounds of appeal, except one and were ordered to pay 65% of the Vendor’s costs, and the sum of $602,500.82 in damages.