HIGH COURT OF AUSTRALIA

Gibbs C.J., Murphy, Wilson and Brennan JJ. The Honourable Mr. Justice Aickin died before judgment was given.

 

 

 

SHEVILL v. BUILDERS LICENSING BOARD

(1982) 149 CLR 620

1 September 1982

 

 

Landlord and Tenant

Landlord and Tenant—Lease—Rent—Covenant to pay—Breach—Right to re-enter—Re-entry—Whether landlord entitled to damages for breach of covenant.

Decisions


1982, September 1.
The following written judgments were delivered: -
GIBBS C.J. This is an appeal from a decision of the Court of Appeal Division of the Supreme Court of New South Wales which, by a majority, dismissed an appeal from a judgment given by Carmichael J. in favour of the present respondent, the plaintiff in the action. The appellants were the guarantors of the due performance by Shevill Truck Sales &Service Pty. Ltd. ("the lessee") of all the terms and conditions of a lease dated 22 April 1976 under which the lessee held certain land at Milperra for a term of three years commencing on 7 March 1976. The land was transferred to the respondent on 13 July 1976, and thereafter the lessee attorned tenant to the respondent. Subsequently the guarantee was assigned to the respondent. The lease, so far as it is material, reserved a yearly rent of $35,655 which the lessee covenanted (by cl. 3) to pay in advance by equal monthly instalments of $2,971.25. Clause 9(a) of the lease provided as follows:
"The Lessor and the Lessee COVENANT AND AGREE:
(a) That if the rent hereby reserved or any part thereof shall be unpaid for the space of fourteen (14) days after any of the days on which the same ought to have been paid in accordance with the covenant for payment of rent herein contained (although no formal or legal demand shall have been made therefor) or if the Lessee commits or suffers to occur any breach or default in the due and punctual observance and performance of any of the covenants obligations and provisions of this lease or of any Rules made hereunder or if the Lessee be a company an order is made or a resolution is effectively passed for the winding up of the Lessee (except for the purpose of reconstruction or amalgamation with the written consent of the Lessor which consent shall not be unreasonably withheld) or if the Lessee goes into liquidation or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or stops payment of or is unable to pay its debts within the meaning of any relevant Companies Act or ordinance or if execution is levied against the Lessee and not discharged within thirty (30) days or if the Lessee (being an individual) becomes bankrupt or commits an act of bankruptcy or brings his estate within the operation of any law relating to bankrupts then and in any one or more or either of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease." (at p624)


2. During the whole time when the respondent was the owner of the land, the lessee was constantly late with its payments of the rent. The respondent pressed for prompt payment but accepted late and sometimes partial payments. From April 1977 to August 1977 the lessee's account was constantly in debit. The largest debit balance reached was $6,971.25, in June, but payments subsequently made reduced that balance. In June and July 1977 three of the cheques given by the lessee in payment of rent were dishonoured. It is unnecessary to go further into the details of the evidence. It is enough to say that the only possible inference is that the lessee was experiencing financial difficulty which made it unable to make the payments of rent at the times required by the lease. It is however impossible to conclude that the lessee was unwilling to comply with its obligations. Finally, on 3 August 1977, two months' rent (amounting to $5,442.50) remained unpaid. On that date the respondent issued and served a statement of claim claiming possession of the land. It was conceded that the effect was to forfeit the lease, although the lessee did not in fact give up possession until ordered to do so in October 1977. The respondent, in the present proceedings, claimed $5,442.50, the rent due to 3 August 1977, and damages for breach of the covenants of the lease and interest. At some time after the proceedings were commenced the arrears of rent were paid. The learned trial judge gave judgment for the respondent for damages of $41,261 plus interest. Damages were assessed by having regard to the amount which the respondent would have received by way of rent during the remainder of the term and after giving credit for the amounts of rent which it was able to receive from the property during that period. The amount of the assessment is not contested. (at p625)

3. It is not now disputed that the appellants are liable under the guarantee for whatever damages are payable by the lessee to the respondent. The question for decision is whether the lessee is in the circumstances liable for damages. (at p625)

4. The primary submission made on behalf of the respondent was that since the breaches of contract committed by the lessee entitled the respondent to terminate the contract, it followed that when the respondent exercised its right to do so it became entitled to damages for loss of the benefits which performance of the contract would have conferred upon it. This submission treated the breaches of the covenant to pay rent as a breach of an essential term of the contract. In the alternative it was submitted that the conduct of the lessee revealed such an unwillingness or inability to perform the contract as to amount to a repudiation of it. (at p625)

5. This argument proceeded on the basis that the general principles of the law of contract, so far as they are relevant to the questions that arise in this case, are equally applicable to leases. A contrary view was expressed in Total Oil v. Thompson Garages (1972) 1 QB 318, at p 324 , where Lord Denning M.R. said that repudiation which is accepted does not come to an end like an ordinary contract on repudiation and acceptance, and drew an analogy with the case of frustration. The learned authors of Brooking and Chernov: Tenancy Law and Practice in Victoria, 2nd ed. (1980), at p. 197, dispute this view and cite a number of cases, from New Zealand and Canada as well as from Australia, which in their opinion support the conclusion that a lease may be determined by an acceptance of a repudiation. I need not enter upon this controversy. I am content to assume that the ordinary principles of contract law are applicable. (at p625)

6. As Lord Wright pointed out in Heyman v. Darwins Ltd. (1942) AC 356, at p 378 , repudiation is an ambiguous word and is used in various senses. We are of course concerned only with a case in which it is admitted that there was a valid and binding contract. 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 p 213 ) or shows that he intends to fufil the contract only in a manner substantially inconsistent with his obligations and not in any other way (Ross T. Smyth &Co. Ltd. v. T. D. Bailey, Son &Co. (1940) 3 All ER 60, at p 72 ; Carr v. J. A. Berriman Pty. Ltd. (1953) 89 CLR 327, at p 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 p 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 pp 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. (1962) 2 QB 26, at p 64 . 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 pp 421-422 ; Federal Commerce v. Molena Alpha (1979) AC 757, at pp 778-779 . In Honner v. Ashton (1979) 1 BPR 9478, at p 9490 , Mahoney J.A. 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. In Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale (1967) 1 AC, at p 422 , Lord Upjohn said:
"A fundamental term of a contract is a stipulation which the parties have agreed either expressly or by necessary implication or which the general law regards as a condition which goes to the root of the contract so that any breach of that term may at once and without further reference to the facts and circumstances be regarded by the innocent party as a fundamental breach . . . . "
The test accepted in Associated Newspapers Ltd. v. Bancks (1951) 83 CLR 322, at p 337 , is whether the term "is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor." The primary argument of the respondent is that cl. 3, the covenant for the payment of the rent, read in conjunction with cl. 9(a), was a fundamental or essential term and that any breach of it which resulted in rent being unpaid for fourteen days gave to the respondent the right to terminate the contract and sue for damages for the breach. (at p627)

7. It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease. However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement: see Wickman Tools v. Schuler A.G. (1974) AC 235, at p 251 . In other words, a right to forfeit a lease might arise "in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture": Campbell v. Payne and Fitzgerald (1953) 53 SR (NSW) 537, at p 539 . In the present case cl. 9(a) undoubtedly gave to the respondent a right to re-enter if rent should be unpaid for fourteen days. That right was subject to the provisions of s. 129 of the Conveyancing Act, 1919 (N.S.W.), as amended, but that Act is not material in the present case. However, the respondent's argument is that because cl. 9(a) gave a right to re-enter for any breach of cl. 3 that resulted in rent being unpaid for fourteen days, the covenant in cl. 3 as to payment, together with the provisions of cl. 9(a), became an essential term, or at least gave the respondent the same rights as are available under the general law to a party who elects to terminate a contract for repudiation or fundamental breach. (at p627)

8. In my opinion it does not follow from the fact that the contract gave the respondent the right to terminate the contract that it conferred on it the further right to recover damages as compensation for the loss it will sustain as a result of the failure of the lessee to pay the rent and observe the covenants for the rest of the term. Clause 9(a) specifies a number of circumstances in which the rights conferred by that clause will arise. The first of those circumstances - where the rent is unpaid for fourteen days - is not described by reference to any breach, although it necessarily involves a default. The second case - that in which the lessee commits or suffers to occur any breach or default in the observance of any of the covenants of the lease - does depend entirely upon the lessee causing or suffering a breach to occur. The other conditions on which re-entry is available do not necessarily involve a breach of any covenant or condition of the lease. In some cases, whether or not there has been a breach, the right of re-entry given by cl. 9(a) may become available although the circumstances would not suggest that the position of the lessor under the lease has been substantially affected or threatened. For example, a lessee, who usually makes prompt payment of the rent, may allow a small amount of rent to fall in arrears for fourteen days. He may commit a minor breach of covenant, such as an insignificant failure to paint or repair or keep the premises clean. He may make an arrangement with his creditors the effect of which will nevertheless be that he can continue to pay the rent fully and on time. In all these circumstances the lessor is given the right to re-enter. However it would require very clear words to bring about the result, which in some circumstances would be quite unjust, that whenever a lessor could exercise the right given by the clause to re-enter, he could also recover damages for the loss resulting from the failure of the lessee to carry out all the covenants of the lease - covenants which, in some cases, the lessee might have been both willing and able to perform had it not been for the re-entry. (at p628)

9. The words of cl. 9(a) afford no support to the respondent's argument. The rights which the lessee is to have if any of the circumstances mentioned in the clause exist are exhaustively defined by the clause. There are preserved to the lessor "any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event." In my opinion these words refer, distributively, to the three different sorts of circumstances in which the provisions of cl. 9(a) take effect. First there is the case in which the rent has been unpaid for fourteen days; in that case the lessor can recover the arrears of rent. The second case is that in which the lessee commits or suffers to occur any breach or default in the performance of the covenants, and in that case the remedy preserved is for breach of covenants. Thirdly, events may occur (such as liquidation and bankruptcy) which do not amount to breaches of covenants. It would appear that it is to such events, and to no other, that the words "damages as a result of any such event" refer. It is true that the word "events", where it first occurs in the clause, refers to the non payment of the rent and to the breaches of covenants as well as to the other events mentioned, but if it had this wide meaning in the phrase "any such event", the reference to "breach of covenants", at least, would be redundant. If this view of the clause is correct the only remedy of the respondent in the present case was to recover arrears of rent. (at p629)

10. However, if I am wrong, and if the words "any such event" include the non payment of rent for fourteen days, cl. 9(a) does no more than preserve any right to recover damages resulting from such non payment. The clause does not confer a right to recover damages which result from the fact that the lessee will pay no further rent during the remainder of the term. It does not refer to damages for the loss of the benefits conferred by the lease as a whole. Although cl. 9(a) deals with the situation in which the lessor may bring the lease to an end, there is nothing in its provisions to indicate any intention to give to a lessor who exercises the right to re-enter the same rights as would have been available to him if he had accepted a repudiation of the contract or had rescinded it on the ground that the lessee had committed a breach of an essential term. It would have been easy, although inequitable, to provide that in any of the circumstances mentioned in cl. 9(a) the lessor would be entitled to damages for loss of the benefits which performance of the covenants of the lease would have conferred on him in the future. However, the rights of the lessor are limited to the recovery of arrears of rent and damages for breaches and other events that occurred before re-entry. Assuming that non payment of the rent was an "event", damage caused by the fact that the lessor chose to re-enter, and thereby absolved the lessee from the obligation to pay rent during the remainder of the term, did not result from that event within the meaning of the clause on its proper construction. The main argument which was submitted on behalf of the respondent must therefore fail. (at p629)

11. In my opinion the alternative argument submitted on behalf of the respondent is also unsuccessful. It may be that cl. 9(a) excludes the rights that would ordinarily flow from an accepted repudiation of the contract. Whether or not that is so, the evidence does not reveal that the lessee committed breaches which went to the root of the contract. Counsel for the respondent relied particularly on the submission that the circumstances made it probable that the lessee would have continued to be late with its payments of the rent. We were referred to Maple Flock Co. v. Universal Furniture Products (Wembley) Ltd. (1934) 1 KB 148, at p 156 where the words of Bigham J. in Millars' Karri and Jarrah Co. (1902) v. Weddel, Turner &Co. (1908) 14 Com Cas 25, at p 29 were cited with apparent approval. Bigham J. said:
"Thus, if the breach is of such a kind, or takes place in such circumstances as reasonably to lead to the inference that similar breaches will be committed in relation to subsequent deliveries, the whole contract may there and then be regarded as repudiated and may be rescinded. If, for instance, a buyer fails to pay for one delivery in such circumstances as to lead to the inference that he will not be able to pay for subsequent deliveries . . . the other contracting party will be under no obligation to wait to see what may happen; he can at once cancel the contract and rid himself of the difficulty."
Those words however must be read as applicable to the facts of the case in relation to which they were spoken, and they cannot be understood as laying down the proposition that if one party to a contract commits any breach, however slight, and the inference is that he would probably commit similar breaches in the future, this in law amounts to repudiation: see Decro-Wall S.A. v. Marketing Ltd. (1971) 1 WLR 361, at p 369; (1971) 2 A11 ER 216, at p 223 . The evidence in the present case made it possible to infer that the lessee would have continued to find it difficult to make prompt payments of rent, but it did not show how long the difficulties of the lessee were likely to last or whether its financial position was likely to improve or to deteriorate. They did not show that the rent would not be paid - in fact, in the past, the rent had rarely been more than two months in arrears. Little evidence was given on this issue, and the learned trial judge did not make any finding of fact with regard to it; it was not necessary for him to do so, because of the effect which he attributed to cl. 9(a). It is in my opinion not possible to conclude that there was a fundamental breach of the contract which would have entitled the respondent to rescind it under the general law, and to recover damages for total breach. (at p630)

12. For these reasons in my opinion the respondent was entitled to recover the arrears of rent but was not entitled to the damages which the learned trial judge awarded. It may be that the respondent was entitled to mesne profits from 3 August 1977 until it obtained possession in October 1977, but these were not claimed. Since the arrears of rent were paid before judgment, the learned trial judge should have entered judgment for the appellants. I would therefore allow the appeal and would order that judgment in the action be given for the appellants but that the respondent should have the costs of the action up to the time when the arrears of rent were paid. (at p631)

MURPHY J. The proper finding is that the appellants did not repudiate their obligations. I agree substantially with the Chief Justice's reasons, although adhering to what I said about essential breach in D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. (1978) 138 CLR 423, at p 436 . (at p631)

2. The appeal should be allowed. (at p631)

WILSON J. This appeal raises the interesting question of the right of a lessor who, having re-entered into possession of leased premises following the lessee's default in payment of the rent, seeks damages for the loss of his bargain. (at p631)

2. The facts of the case are not in dispute. In April 1976, Twin M. Pty. Ltd. and Manhattan Investments Pty. Ltd. by a memorandum of lease ("the lease") leased premises in Milperra to Shevill Truck Sales &Service Pty. Ltd. ("the lessee"). The lease incorporated an instrument of guarantee which provided that the appellants (the defendants at first instance) guaranteed the due performance by the lessee of all the terms and conditions of the lease. The lease was for a term of three years from 7 March 1976. By a memorandum of transfer dated 13 July 1976 the property was transferred to the respondent ("the Board") and thereafter the lessee attorned tenant to the Board. The guarantee in the lease was assigned to the Board by deed dated 1 September 1977 and notice of the assignment was given to the appellants on or about 10 October 1977. (at p631)

3. It is apparent from correspondence between the Board and the lessee from December 1976 onwards that the latter was having difficulty in paying the rent punctually. In May 1977 arrangements were made to ensure that the arrears in rent were paid by the lessee. These arrangements included an undertaking by the lessee to pay $500 per week in addition to the normal monthly payments. The lessee was substantially successful in fulfilling its undertaking with respect to the arrears, but unfortunately it fell behind in meeting its accruing monthly commitments. By the beginning of August the total arrears were in excess of $5,000. On 3 August 1977 the Board issued and served a statement of claim. The effect of that statement of claim was to exercise the Board's right of re-entry, thereby forfeiting the lease. Judgment for possession was entered on 13 October 1977 and the Board obtained possession on or about 14 October 1977. The Board then attempted to find a new tenant for the property but was unsuccessful till 1 July 1978. The new annual rental was $31,386 as compared with the original annual rental of $35,655. (at p632)

4. The Board then commenced this action in the Supreme Court of New South Wales for recovery of unpaid rent from 1 June 1977 to 3 August 1977 together with a claim for damages. There is no dispute as to the arrears of rent amounting to $5,442.50 and that sum has been paid. The learned trial judge, Carmichael J., upheld the claim for damages and awarded the sum of $42,261 to the Board, together with interest of $4,085. The measure of the damages was calculated substantially on the rent the Board would have received had the lease run its full term, less the rent received from the new lessee from July 1978. A majority of the Court of Appeal (Glass and Mahoney JJ.A., Samuels J.A. dissenting) dismissed the appeal by the appellants and they now appeal to this Court. (at p632)

5. The damages were assessed on the basis that the Board had lost the benefit of the bargain entered into with the lessee. Before this Court, Mr. Hodgson for the Board relies on alternative grounds. In the first place he argues that the lessee by its conduct had shown such an inability or unwillingness to perform the contract as to amount to a repudiation of the lease, thereby entitling the Board to terminate the lease and sue for the damages claimed. Alternatively, he submits that by the terms of the lease the parties have indicated that the covenant to pay rent was an essential term of the contract, a breach of which entitled the Board to bring the contract to an end, and to obtain damages for the loss of the benefits which performance of the contract would have conferred on it. The appellants concede that, if the lessee is liable for damages, they are liable as guarantors. (at p632)

6. I turn to the Board's first alternative, that the lessee by its failure to pay the rent punctually had repudiated the agreement. Mr. Young for the appellants submits that Carmichael J. found against such a repudiation. He relies on his Honour's statement that:
"By the express provision of the contract itself (cl. 9 of the lease) the failure of the lessee to pay rent gives a right to the lessor to treat the failure to pay as a repudiation. Contrary to most cases involving the question as to whether a contract has been brought to an end by acceptance of repudiation, no question arises here as to whether the lessee by its failure to pay rent evinced an intention no longer to be bound by the contract so as to give the lessor an option to terminate the contract; . . . "
and the remark of Mahoney J.A. in the Court of Appeal that:
"The learned trial judge did not find that the lease had been repudiated: I think he found to the contrary."
The Board argues that the trial judge did not direct his mind to this point at all, and that the question was not taken up in the Court of Appeal. With respect, I do not think that Carmichael J. made any finding, one way or the other, with respect to the issue of repudiation. He found, by reference to cl. 9(a) of the lease, that the lessee's failure to pay the rent was in effect equivalent to a repudiation. (at p633)

7. At the hearing of this appeal the Board tendered, without objection, certain evidence (Ex. R) which was received by the trial judge but which was omitted from the appeal books before the Court of Appeal and this Court. The evidence is of letters and discussions between the Board and the lessee between December 1976 and July 1977, which the Board says show a complete inability to pay the rent as it became due, such conduct amounting to an implied repudiation of the lease by the lessee. (at p633)

8. This case does not call for a detailed examination of the law touching repudiation, because in my opinion the circumstances do not even approach the point at which it can be said that by its words or conduct the lessee had demonstrated that it would or could no longer perform its obligations under the contract. Repudiation of a contract is a serious matter and is not to be lightly found or inferred: Ross T. Smyth &Co., Ltd. v. T.D. Bailey, Son &Co. (1940) 3 A11 ER 60, at p 71 . In considering it, one must look to all the circumstances of the case to see whether the conduct "amounts to a renunciation, to an absolute refusal to perform the contract": Mersey Steel and Iron Co. v. Naylor, Benzon &Co. (1884) 9 App Cas 434, at p 439 . There is no question here of abandonment of possession of the property by the lessee, such as furnished the basis for the decisions in Buchanan v. Byrnes (1906) 3 CLR 704 ; Hughes v. N.L.S. Pty. Ltd. (1966) WAR 100; affd (1966) 120 CLR 583 ; Highway Properties Ltd. v. Kelly, Douglas &Co. Ltd. (1971) 17 DLR (3d) 710 . Notwithstanding the initiation of proceedings by the Board on 3 August 1977, whereby the lease was determined, the lessee continued in possession of the premises, conducting its business therefrom after that date. It did not vacate until ordered to do so by the Court on 14 October. It is true that it did not seek relief from forfeiture, as it might have done, but the Board's case of repudiation can derive no support from that fact. (at p633)

9. Furthermore, the reliance of the Board upon Ex. R is misconceived. The material reflects the difficulties experienced by the lessee in meeting its rental obligations, and the consequent anxiety and effort thereby imposed on the Board. There were many instances of late payment of rent and some cases of insufficient funds to meet cheques when presented by the Board. However, I know of no authority or of any principle of law which requires me to hold that consistently late payment of rent without more is sufficient to establish repudiation of a lease. It would indeed be a harsh doctrine. Although not directly in point, the practice in equity of viewing a proviso for re-entry as a security for the payment of rent affords an indication to the contrary: cf. Howard v. Fanshawe (1895) 2 Ch 581, at p 588 . Here there is no sufficient evidence of a refusal or inability to perform the contract. On the contrary, the evidence reveals serious and consistent effort on the part of the lessee to meet its obligations. While it did not succeed entirely, the fact remains that during the two months immediately preceding the termination of the lease the lessee paid a sum which was equivalent to more than two months' rental, thereby making some reduction in the arrears. While it requested the understanding and co-operation of the Board in meeting its financial difficulties, there is no suggestion that it sought to be relieved of its obligations altogether. For these reasons, the Board's argument based on an alleged repudiation of the lease by the lessee must fail. (at p634)

10. The main argument before this Court, as it was in the Court of Appeal, is directed to the alternative submission that cl. 9(a) of the lease allows for the Board's recovery of the damages claimed. Clause 9(a) provides as follows:-
"9. DEFAULT, TERMINATION ETC:
The Lessor and the Lessee COVENANT AND AGREE
(a) That if the rent hereby reserved or any part thereof shall be unpaid for the space of fourteen (14) days after any of the days on which the same ought to have been paid in accordance with the covenant for payment of rent herein contained (although no formal or legal demand shall have been made therefor) or if the Lessee commits or suffers to occur any breach or default in the due and punctual observance and performance of any of the covenants obligations and provisions of this lease or of any Rules made hereunder or if the Lessee be a company an order is made or a resolution is effectively passed for the winding up of the Lessee (except for the purpose of reconstruction or amalgamation with the written consent of the Lessor which consent shall not be unreasonably withheld) or if the Lessee goes into liquidation or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or stops payment of or is unable to pay its debts within the meaning of any relevant Companies Act or ordinance or if execution is levied against the Lessee and not discharged within thirty (30) days or if the Lessee (being an individual) becomes bankrupt or commits an act of bankruptcy or brings his estate within the operation of any law relating to bankrupts then and in any one or more or either of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole and to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease." (at p635)


11. With respect to the obligation to pay rent, it is sufficient to notice that by cl. 3 of the lease the lessee expressly covenanted to pay a yearly rental of $35,655, subject to increase in the final year. The rent was to be paid (in advance on the first day of each month) by equal monthly instalments amounting to one-twelfth of the annual rental. (at p635)

12. Carmichael J. decided that cl. 9 gave the Board a right to treat the failure to pay rent as a repudiation, the Board had exercised that right and therefore damages for the loss of its bargain should be awarded. (at p635)

13. The appellants concede that there was a breach of the covenant to pay rent and that, in accordance with cl. 9(a), this breach entitled the landlord to re-enter and forfeit the lease. The issue in the case will be determined by the meaning which is to be given to the phrases in cl. 9(a) which follow the right to re-enter, namely,
". . . without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event . . ." (my emphasis).
The appellants argue along the lines of the dissenting judgment of Samuels J.A. in the Court of Appeal. They submit that "any such event" must mean the event which grounded the re-entry, namely, the breach of the covenant to pay rent, and that the Board's remedy pursuant to the clause I have underlined can only be for such damages, if any, as result from the breach. The argument then proceeds on the basis that the damages which are the subject of the claim result not from the failure to pay the rent, but from the action of the Board in terminating the lease. (at p635)

14. On the other hand, the Board argues that cl. 9(a) should be construed as an express indication by the parties that every covenant, including the covenant to pay rent in the manner prescribed, is an essential term of the contract and carries the implication that any breach will not only entitle the lessor to re-enter and terminate the contract but give him a right to damages for the loss of the benefits which performance of the contract would have conferred on him. (at p636)

15. In my opinion, the Board's contention must be rejected. The covenant to pay the rent, construed in the light of cl. 9(a), fails to meet the test of essentiality. That test was stated by Jordan C.J. in Tramways Advertising Pty. Ltd. v. Luna Park (N.S.W.) Ltd. (1938) 38 SR (NSW) 632, at pp 641-642 in terms which were subsequently adopted by this Court in Associated Newspapers Ltd. v. Bancks (1951) 83 CLR 322, at p 337 . The Chief Justice said:
"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promise that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: . . . If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight."
In D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. (1978) 138 CLR 423, at p 431 in the course of a joint judgment, Stephen, Mason and Jacobs JJ. emphasized -
". . . that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances."
Clause 9(a) does not achieve the effect for which the Board contends. It does not categorize the covenant to pay rent as an essential term. On the contrary, it treats the due payment of rent in the same way as it deals with the "due and punctual observance and performance of any of the covenants obligations and provisions of this lease". Some of those covenants cover matters of comparatively minor importance such as the maintenance of the lawns or the painting of the premises. It is understandable that the parties should agree that the lessor should have a right to re-enter and forfeit the lease if the rent is not paid or the covenants not observed, but the intrinsic nature of the obligations in question lend no support to an inference of essentiality carrying in the event of default and termination a right to damages for the loss of the contract. It is one thing to be able to rid oneself of an unsatisfactory tenant; but it is quite another, requiring a clear expression of intention, to be able to hold the evicted tenant liable for whatever damages might be suffered as a result of the premature termination of the tenancy. The Board points to the express reference in the clause to "damages as a result of any such event" as indicating the extent of the remedy available to the lessor following the exercise of the power to re-enter conferred by the clause. It may be that the scope and operation of this clause is obscure, but I find it impossible to give to it the effect for which Mr. Hodgson contends. The words "such event" must refer to the non-payment of rent or breach of covenant, and the damages must bear the necessary relation to that event. Damages do not usually flow from a failure to pay money, the proper recourse being an action for the debt: see McGregor on Damages, 14th ed. (1980), pars. 844-848. (at p637)

16. It may also be noted that cl. 9(a) in terms does not confer any rights on the lessor other than the right to re-enter and bring the contract to an end. The passage which I have quoted dealing with remedies is a saving clause, designed to preserve remedies rather than create them. (at p637)

17. Again, if one has regard to the impact on the lessor of the lessee's failure to pay the rent when due (cf. Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. (1962) 2 QB 26, at pp 62-63, 69-70 ), such a consideration yields no support for a finding of essentiality. Although the lessee's failure to pay the rent promptly was a serious breach of contract which the Board should not have been obliged to tolerate indefinitely, it was aware that it might have difficulty in finding another tenant if it were to re-enter and terminate the lease. It was not bound to take that step. Substantial payments in reduction of arrears of rent were made in June and July. The Board had the added security of the guarantee. It could have sued the lessee or the guarantors for arrears of rent. Re-entry was a drastic step which the Board ought to have taken not only if it desired to be relieved of an unsatisfactory tenancy but provided it had another one to take its place. If it exercised its right of re-entry only in order to apply greater pressure on the tenant with a view to regular payments of rent in the future, it took the risk that the lessee would accept the forfeiture. That is what happened, with the result that the Board effectively terminated the lease and secured possession of premises which it could not thereafter let for a considerable time. That consequence was not the fault of the former lessee. (at p638)

18. In my opinion, therefore, the Board was not entitled to damages for the loss of the contract which it chose to bring to an end. When these proceedings were instituted, the statement of claim included a claim for arrears of rent in the sum of $5,442.50. The appellants do not contest their liability in this regard, and the arrears were paid before trial. The Board is therefore entitled to the costs of the proceedings in respect of this part of the claim. In all other respects, the appellants are entitled to the costs of the action. (at p638)

19. I would allow the appeal. (at p638)

BRENNAN J. I agree with the order proposed by the Chief Justice for the reasons which he has published. (at p638)

Orders


Appeal allowed with costs.

Order that the judgment of the Supreme Court of New South Wales (Court of Appeal) be set aside and in lieu thereof it be ordered:
(1) That the appeal to that Court be allowed with costs.
(2) That the judgment of Carmichael J. be set aside and in lieu thereof order that judgment in the action be given for the defendants.
(3) That the plaintiff have the costs of the action up to the time when the arrears of rent were paid and that the defendants have the costs of the action thereafter.