By Russell Cocks, Solicitor
First published in the Law Institute Journal
Breach of contract is an unfortunate, but relatively common, event. What consequences flow from a breach of a contract of sale of land?
Most contracts are in standard form – either a contract of sale of land or a contract note. There is no effective difference between these two documents as the contract note adopts the General Conditions (GC) set out in the contract of sale. GC 7 of the contract of sale (which therefore applies to all standard form contracts) provides that a party who breaches the contract must pay to the other party (the innocent party) ‘compensation for reasonably foreseeable loss’.
Whilst either party may breach a contract in any number of ways, it is usually a breach at the business end of the contract – the time for final settlement – that attracts most attention. A purchaser who fails to pay the balance of purchase price, or a vendor who fails to be in a position to deliver the property or make title, will be in breach and therefore liable to pay ‘reasonably foreseeable loss’ to the innocent party. If it is the purchaser who is in breach then there is a separate and distinct obligation to pay penalty interest (also GC7), although a vendor will never be liable to pay interest to the purchaser as the vendor owes no money under the contract.
The first issue to determine is – at what time must the losses have been reasonably foreseeable? It may be abundantly apparent at the time of breach that an innocent party will suffer a loss, but that is not the relevant time. As the parties are agreeing at the time of contract that reasonably foreseeable losses will be compensated, the relevant time for determining foreseeability is the time when the contract was being entered into. It is for this reason that a practice has arisen recently of including conditions in the contract (or the Vendor Statement, which is a contractual document) to the effect that the parties agree that specified outcomes are reasonably foreseeable consequences of a purchaser’s failure to settle.
Such conditions seek to prescribe foreseeability and are a response to a generally restrictive view of foreseeability taken by successive Dispute Resolution Panels and the few courts that have considered the issue. However it is likely that a judicial body called upon to determine the foreseeability of a particular event will not be swayed by broad statements in the contractual documents. A guide to the attitude of courts to claims that consequences are foreseeable may be taken from current events. Traffic accidents are at least as common as contract breaches. Loss and damage from accidents are foreseeable, but to what extent? Yarra Trams has recently sought to convince Magistrates that it is reasonably foreseeable that a person who crashes into a tram will not only damage the tram, but will also cause loss to Yarra Trams in the form of a penalty imposed on Yarra Trams pursuant to the contract between Yarra Trams and the government. Accidents cause delays and delays, at least for Yarra Trams, cause penalties. However these claims have been unsuccessful, with Magistrates describing such consequential losses as ‘far fetched’. Perhaps Yarra Trams might seek to make these penalties more ‘reasonably foreseeable’ by emblazoning their trams with appropriate signs, but it is unlikely that this would change the view of sensible Magistrates. Likewise, it is suggested that including in contractual documents general protestations as to losses that a vendor might possibly incur as a result of a purchaser’s default is unlikely to convince a judicial body that losses that do actually occur were indeed ‘reasonably foreseeable’. The parties might agree in a contract that the world may come to an end, but the fact that it does is not made any more foreseeable by that agreement.
Even if the vendor suffers a loss that was reasonably foreseeable, it is still uncertain as to whether the vendor can refuse to settle unless the purchaser pays the amount claimed by the vendor for this loss in addition to the balance due at settlement under the contract. GC 7 refers to the payment of ‘compensation’ and there is authority to suggest that such a right gives the innocent party the right to sue for damages after settlement, but does not give the innocent party the right to insist upon payment at settlement or issue a Rescission Notice if payment is not made. Naturally enough the parties can agree that a defaulting party will pay an amount by way of compensation to the innocent party at settlement so as to resolve the dispute and avoid further legal action, but it would appear open to a purchaser who does not accept the vendor’s claims to seek specific performance of the contract and require the resolution of the vendor’s claim for ‘reasonably foreseeable loss’ to be resolved at a later time. The good thing for the vendor in such circumstances is that at least the vendor knows where to find the purchaser.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.