Stephen Hill and Arvi Heikkonen Trading As Benchmark Homes v Canberra Centre Holdings Limited [1995] ACTSC 85 (1 August 1995)

SUPREME COURT OF THE ACT

STEPHEN HILL and ARVI HEIKKONEN Trading as BENCHMARK HOMES v. CANBERRA CENTRE
HOLDINGS LIMITED
No. SC437 of 1990
Number of pages - 8
Contract

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MILES CJ

CATCHWORDS

Contract - agreement for loan - repudiation by lender - whether breach must go to entire root of contract before borrower entitled to terminate contract - it need not.

Contract - agreement for loan - repudiation by lender - whether words and conduct of borrower established election to accept breach or election to affirm contract or neither - whether making of independent alternative contract was unequivocal evidence of election to accept breach - it was.

Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. (1962) 2 QB 26 at 64
Sargent v. ASL Developments Limited [1974] HCA 40; (1974) 131 CLR 634 at 658
Shevill and Another v. The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625-626

Holland v. Wiltshire [1954] HCA 42; (1954) 90 CLR 409
J.W. Carter on Breach of Contract (2nd ed) at para. 1085
Khoury and Another v. Government Insurance Office of New South Wales [1984] HCA 55; (1984)

165 CLR 622

HEARING

CANBERRA, 3 and 17 February 1995
1:8:1995

Counsel for the plaintiffs: Mr. R. Parker, QC with Mr. G. Waugh

Solicitors for the plaintiffs: Snedden Hall and Gallop

Counsel for the defendant: Mr. A. Meagher

Solicitors for the defendant: Mallesons Stephen Jaques

ORDER

THE COURT ORDERS THAT:
The plaintiffs have leave to enter interlocutory judgment for damages to be assessed.

DECISION

MILES CJ On 23 December 1994 I published my findings on the issues of fact and law as I saw them. I reserved leave to the parties to list the case for further hearing in order to enable them to draw to my attention any arithmetical errors in my findings and to make further submissions on the pleadings if so desired. On 3 February 1995 counsel for both parties appeared and after some arithmetical matters were canvassed, I indicated that I would correct certain figures. I also gave leave to the plaintiffs to file in court an amended statement of claim. The statement of claim so amended included an allegation of repudiation by the defendant of its obligations under the contract and acceptance by the plaintiffs of such repudiation. I further granted leave to the defendant to file a further amended defence on the issue of repudiation and to further cross-examine Mr. Heikkonen and to call further evidence on that issue. On 7 February 1995 I caused to be published an addendum and correction to the figures.

2. In accordance with the leave granted, the defendant filed a further amendment to the defence on 14 February 1995 in the following terms:

"5A. In answer to paragraph 5A of the Amended Statement of Claim, the
defendant:
(a) denies that on or about 28 October 1988 it repudiated its
obligations under the loan agreement;
(b) says that as at 28 October 1988 it was not in breach of any term
of the loan agreement requiring it to advance moneys to the
plaintiffs;
(c) says that any statement made by Mr. Kane on 28 October 1988 only
constituted an anticipatory breach of the loan agreement in respect of
its ultimate obligation to advance a total amount of $750,000;
(d) denies that on 28 October 1988 or at any relevant time thereafter
the plaintiffs:
(i) treated any conduct of the defendant as a repudiation of the loan
agreement;
(ii) terminated or purported to terminate the loan agreement for
repudiation;
(e) says that on and after 28 October 1988 the plaintiffs affirmed the
loan agreement."

3. On 15 February 1995 the plaintiffs took out a notice of motion to have parts of paragraph 5A of the further amended defence struck out but the notice of motion did not proceed.

4. On 17 February 1995 Mr. Heikkonen was further cross-examined by counsel for the defendant and Mr. Kane gave evidence on behalf of the defendant. I subsequently received and considered written submissions on behalf of the parties on the issue of repudiation and I was informed later in open court that neither party wished to speak to those written submissions.

5. As a result of the further evidence and further submissions, I withdraw my finding that at the meeting on 28 October 1995, prior to the alteration of the amount shown on the progress payment documents, Mr. Kane used the precise words, "Well, watch me." I find, however, that words either in those terms or words to similar effect were used by Mr. Kane at that time. Apart from the question of the words then used, I prefer the evidence of Mr. Heikkonen where it conflicts with the evidence of Mr. Kane.

6. Having seen both Mr. Heikkonen and Mr. Kane give evidence and in particular seen the response of each to questions put in cross-examination, it is necessary to be only brief in giving reasons for my preference for the evidence of Mr. Heikkonen. Mr. Heikkonen was not broken down to any significant extent in cross-examination. What he said when further cross-examined on 17 February 1995 was consistent with what he had said in chief. Although Mr. Heikkonen conceded that he had read a copy of my findings before being subjected to further cross-examination, I do not think that his awareness of those findings affected his truthfulness under further cross-examination. Furthermore, I am quite convinced that when Mr. Heikkonen gave his evidence-in-chief he was unaffected by any awareness of the significance of the exact point in time of the termination of the contract or by any understanding of the legal concepts of repudiation, acceptance and election.

7. It is likely that both Mr. Heikkonen and Mr. Kane recognized, before entering the witness box on 17 February 1995, that what was said on 28 October 1988 was of particular importance on the issue of whether or not the contract was repudiated during their meeting on that day. However, I do not think that either man gave deliberately false evidence as a result of his recognition of that importance. Nevertheless, the fact is that Mr. Heikkonen had already given clear evidence-in-chief and the further cross-examination substantially confirmed that evidence.

8. Furthermore, I am firmly convinced that Mr. Kane had no real understanding about the calculation of the amounts allowed by the defendant as the progress payments to which the plaintiffs were entitled from time to time. Mr. Kane relied on the figures prepared by Mrs. Jobling. She was not called to give evidence. Although the plaintiffs, prior to 28 October 1988, never challenged the defendant's calculations, the defendant had not put the plaintiffs in possession of the information which was necessary to enable the plaintiffs to know whether or not their entitlement was calculated accurately by the defendant. The Court is in a similar position of ignorance.

9. Reference should be made to the unequal bargaining power of the parties. The development project was under way and the plaintiffs had already entered into arrangements with another financier which were cancelled when the loan contract with the plaintiffs was made. Mr. Heikkonen mortgaged his interest in the land in favour of the defendant in order to secure repayment to the defendant of the moneys to be advanced by way of loan. The plaintiffs proceeded with the development project and incurred substantial debts to sub-contractors in the expectation that advances to a total of $750,000 would be made available in accordance with the McCann valuations. The difficulties facing the plaintiffs on 28 October 1988 when informed by the defendant that no further monies were available under the loan were immediate and substantial. Those difficulties were much greater than any faced by the defendant, an institutional lender which advertised publicly its "special finance package for builders" with "fast loan approvals and progress payment claims". The defendant sought to use its bargaining strength after 28 October by determining (somehow) the maximum amount that it was prepared to advance for each progress payment and then negotiating through Mr. Kane with Mr. Heikkonen as to the minimum amount required by the plaintiffs to pay the sub-contractors and otherwise keep the development project from collapsing. Curiously, Mr. Kane under cross-examination kept referring to the "minimum" amount which the defendant was prepared to advance, when clearly he must have meant the maximum amount. His confusion may be explicable but it hardly adds to the strength of his evidence.

10. Another matter which leads me to a degree of dissatisfaction with Mr. Kane's evidence was his persistent inability to answer clear and repeated questions about his understanding as to how the defendant's calculation of progress payments was arrived at. This inability was not confined to the calculation as at 28 October 1988. It was most glaring in relation to the progress payments after that date, when the amounts decided upon by the defendant from time to time were almost arbitrary and the amounts agreed with Mr. Heikkonen were reached only after a process of negotiation. All that is inconsistent with the terms of the agreement of 19 August 1988.

11. Some of the internal documentation of the defendant was referred to in argument and I will refer to only some of it.

12. Exhibit AK is the original application for loan on the defendant's standard form. It appears to have been signed by the plaintiffs on 4 August 1988. It was received by the defendant on 12 August 1988 and assigned an account number 2.200066. In a boxed section marked "Society Use", it clearly shows, "Builders Loan $750,000 for 9 mths at 15.0%" approved by Messrs Bastian and Mackie (directors of the defendant) on 16 August 1988 and further approved (presumably after guarantees were obtained from the plaintiffs) on 23 August 1988. The boxed section has attached to it and over it a similar boxed section, presumably removed from another standard form, dated 24 October 1988 and marked "Partial cancellation $61,000, new principal sum $689,000". It is common ground that the plaintiffs did not at any stage make written application for partial cancellation of the loan agreement, or for its variation, in any way. There was no evidence that they made an express oral application. On 28 April 1989 the defendant recorded the creation of a new account, No. 383179303 in the name of Benchmark Homes for an amount of $61,000 which the document (Exhibit U) noted as the difference between "approved 689,000 and 750,000". Again the creation of the new account was the unilateral act of the defendant and not the result of any request by the plaintiffs or any agreement between the parties.

13. On another standard application form dated 24 May 1989 (Exhibit V), there is noted an approval for a loan for $160,000 (Account No. 383179304 for 9 months at an interest rate of 18%). In contrast with the original application of 4 August 1988, Exhibit V is not signed by either of the plaintiffs. I conclude that Exhibit V is essentially a matter of internal documentation of the defendant. It shows that the loan or proposed loan of $160,000 at 18% paid out the loan of $61,000 on Account No. 383179303. The assent of the plaintiffs to this course is shown in Exhibit W (a letter from the defendant to the plaintiffs bearing date 24 May 1989) and evidenced by the signature of the plaintiffs dated 7 June 1989.

14. None of the above further findings of fact dissuade me from my previous finding that Mr. Kane's conduct on 28 October 1988 amounted to a breach of the defendant's obligations to make progress payments in accordance with the agreement constituted by the letter dated 19 August 1988 upon which the plaintiffs sue. Indeed, in the light of the rulings already published, Mr. Meagher, for the defendant, accepted that he was not permitted to go behind that finding. However, Mr. Meagher submitted that the breach was not such that it went to the root of the contract and therefore did not entitle the plaintiffs to terminate it. Mr. Parker QC, for the plaintiffs, submitted that the breach did not have to be of such character or magnitude.

15. The concept of a repudiation constituted by a breach going to the root of the contract derives from high authority. The term was used (whether or not for the first time) in Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. (1962) 2 QB 26 at 64 and repeated by Mason J in Sargent v. ASL Developments Limited [1974] HCA 40; (1974) 131 CLR 634 at 658 (see below). However I think that it would be misleading to concentrate on the term "root of the contract". The point is that the breach must be of such magnitude to entitle the innocent party to treat the contract as at an end. There is no need for breach of a fundamental term. The test of the magnitude of the breach is an objective one. The following passage is from the judgment of Gibbs J (as he then was) in Shevill and Another v. The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625-626:

"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 213 or
shows that he intends to fulfil the contract only in a manner
substantially inconsistent with his obligations and not in any other
way (Ross T. Smyth and Co. Ltd. v. T.D. Bailey, Son and Co. (1940)
3 All ER 60 at 72; Carr v. J.A. Berriman Pty. Ltd. [1953] HCA 31; (1953) 89 CLR 327
at 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 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 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. There is high authority for treating such cases as a form of
repudiation of the contract: Suisse Atlantique Societe d'Armement
Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale (1967) 1 AC 361,
at 421-422; Federal Commerce v. Molena Alpha (1979) AC 757 at
778-779. In Honner v. Ashton (1979) 1 BPR 9478 at 9490, Mahoney JA
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."

16. I have no hesitation in finding that the breach on the part of the defendant in announcing that no further advances could be made under the loan meets the tests laid down. The defendant's conduct evinced to the reasonable person on an objective evaluation that the defendant was no longer bound by its promise to make advances up to $75,000 in accordance with the contract. The defendant's conduct also made further commercial performance of the contract impossible in that no further advance was to be made; it made further commercial performance by the plaintiffs also impossible since the development project was in the contemplation of both parties dependant upon the generation of funds from the defendant. I do not accept that the breach was merely "anticipatory" or that the defendant had created a situation where fulfilment of the "ultimate" obligation to advance a total of $750,000 remained open.

17. The next point is whether Mr. Heikkonen accepted the repudiation and terminated the contract. Mr. Meagher submits that he did not and that Mr. Heikkonen elected to affirm the contract, accepting a further advance of $30,000 on 28 October 1988 and accepting further advances at later dates, all "under the original loan agreement". It should be noted that the defendant has not pleaded waiver by the plaintiffs of the breach nor variation of the agreement sued upon.

18. The associated matters of termination by acceptance of breach, affirmation of contract after breach and election often create difficulties. The cases are clear that the right to terminate must be exercised by unequivocal words or conduct evincing an election to terminate the performance of the contract and to sue for damages. That conduct may be manifested by the making of an independent and alternative contract: Holland v. Wiltshire [1954] HCA 42; (1954) 90 CLR 409. But the right will be lost if the innocent party with sufficient relevant knowledge by unequivocal words and conduct evinces an intention to continue with the performance of the contract. The acceptance of rent by the lessor after a breach by a lessee giving the lessor the right to re-enter is a common example of an election to affirm, but every case depends upon the circumstances: see Shevill v. Builders Licensing Board.

19. The cases are not so clear on whether the relevant knowledge on the part of the innocent party is the awareness of the legal right to elect to terminate (rather than to elect to affirm) or the awareness of the facts which give rise to legal recognition of that right. J.W. Carter on Breach of Contract (2nd ed) at para. 1085 states that the High Court decisions in Sargent v. ASL Developments Ltd and Khoury and Another v. Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622 expressly leave the question open whether knowledge of common law rights is required. However there is a strong statement of principle by Mason J in Sargent v. ASL (at 656) as follows:

"A person confronted with a choice between the exercise of alternative
and inconsistent rights is not bound to elect at once. He may keep
the question open, so long as he does not affirm the contract or
continuance of the estate and so long as the delay does not cause
prejudice to the other side. An election takes place when the conduct
of the party is such that it would be justifiable only if an election
had been made one way or the other (Tropical Traders Ltd. v. Goonan
[1964] HCA 20; (1964) 111 CLR 41). So, words or conduct which do not constitute the
exercise of a right conferred by or under a contract and merely
involve a recognition of the contract may not amount to an election to
affirm the contract.

The central problem in these cases lies in ascertaining what in the
eye of the law are the elements essential to the making of a binding
election, in particular whether knowledge of the existence of the
alternative right is a prerequisite in the party against whom election
is alleged. The question is complicated because in some instances
election may take place as a matter of conscious choice with knowledge
of the existence of the alternative right and in other cases it may
occur when the law attributes the character of an election to the
conduct of a party.
.....
(658) If a party to a contract, aware of a breach going to the root
of the contract, or of other circumstances entitling him to terminate
the contract, though unaware of the existence of the right to
terminate the contract, exercises rights under the contract, he must
be held to have made a binding election to affirm. Such conduct is
justifiable only on the footing that an election has been made to
affirm the contract: the conduct is adverse to the other party and may
therefore be considered unequivocal in its effect. The justification
for imputing to the affirming party a binding election in these
circumstances, though he be unaware of his alternative right, is that,
having a knowledge of the facts sufficient to alert him to the
possibility of the existence of his alternative right, he has acted
adversely to the other party and that, by so doing, he has induced the
other party to believe that performance of the contract is insisted
upon. It is with these considerations in mind that the law attributes
to the party the making of a choice, though he be ignorant of his
alternative right. For reasons stated earlier the affirming party
cannot be permitted to change his position once he has elected."

20. In Khoury v. GIO of NSW at 633, the joint judgment of Mason J, Brennan J, Deane J, Dawson J (with whom Murphy J agreed), contains the following passage:

"Where an election is not shown to have been consciously made, the
words or conduct relied upon to impute it must unequivocally evidence
'the exercise of one of the two sets of rights and (be) inconsistent
with the exercise of the other': per Stephen J, Sargent's Case. It
would seem however that, at least where the alternative rights arise
under the terms of the one contract, a party may be held to have
elected to affirm it notwithstanding that he was unaware of the actual
right to avoid it: cf. Sargent's Case. Even in such a case however,
the party alleged to have elected to affirm the contract must be at
least aware of the facts giving rise to the right to avoid the
contract: see Sargent's Case.

21. I propose to proceed then on the footing that the law is that it is not necessary to look to the actual intention of Mr. Heikkonen at the relevant time, but only to his awareness and that is to say his awareness of the facts, not his awareness of the rights of the plaintiffs. That said, there are various aspects of the evidence upon which the defendant relied but which are of little or no weight and need not be discussed at length. For instance, the defendant's progress payment documents on and after 28 October 1988 continued to bear the account number referable to the original loan application of 4 August 1988. The plaintiffs received statements of account which appear to call for interest without differentiating between what was payable before 28 October 1988 and what was payable additionally after that date. It was submitted that the statements of account showed that the parties kept the original agreement on foot. However, the receipt of such accounts does not, in my view, constitute unequivocal evidence of intention to affirm, especially in the light of Mr. Kane's contention on 28 October 1988 that the $30,000 was advanced as a new loan.

22. It was also suggested on behalf of the defendant that in requesting a progress payment of $50,000 on 28 October 1988 prior to the defendant's breach, Mr. Heikkonen was making a distinct claim for what he knew or ought to have known to be more than the plaintiff's entitlement at that stage. In my view what he displayed was no more than a belief that prior to the defendant's refusal the entitlement of the plaintiffs under the loan had not been exhausted. Neither he (nor Mr. Hill) had knowledge of the precise amount to which the plaintiffs were entitled. Mr. Heikkonen's belief was in general terms correct in that the plaintiffs were entitled to a positive payment. Bearing in mind the unequal position of the parties to which I have already referred, I am convinced that the conduct of Mr. Heikkonen is justifiable only on the basis that he was aware of the entitlement in general terms and aware of the defendant's breach. However, in the difficult circumstances in which the plaintiffs had been placed by that breach, Mr. Heikkonen had little option but to use the opportunity to accept whatever the defendant was prepared to offer and to enter into what were fresh contractual arrangements with the defendant. The issue does not need to be decided whether there was one single new contract or a series of several new contracts every time negotiations ended in a further progress payment on and after 28 October. My finding is that there was no affirmation of the contract sued upon.

23. For completeness I mention one remaining matter. As Mason J observed in Sargent v. ASL Developments Ltd , there are situations where the conduct of the innocent party following breach of contract is not sufficiently unequivocal to constitute an election either to terminate or to affirm and where the party may be regarded as keeping the question open, so long as the party in breach is not induced to act to its detriment or to believe that the performance of the contract is insisted upon. However, my findings are that again on an objective analysis the conduct of the defendant in offering to advance $30,000 on 28 October 1988 whilst continuing to insist that the plaintiffs had exhausted their entitlement under the original agreement evinced an intention to enter into a new contract and that the acceptance by the plaintiffs of that offer did not constitute a continuance or revival of the former contract already terminated.

24. For these additional reasons I adhere to my previous opinion that the plaintiffs should have leave to enter interlocutory judgment for damages to be assessed. I will give further directions as to the conduct of the case.