Sunday, November 20, 2011

The Court of Appeal on the 'Entire Contract Doctrine'

In any synallagmatic arrangement (such as a contract), it is often necessary to determine at what stage one party is entitled to call on the other to perform. Consider two common cases: (i) A enters into a contract with B which he breaches, B wishes to treat this as a repudiatory breach and avoid the contract; and (ii) A makes an advance payment to B under a contract, which is subsequently discharged for breach (whether by A or B), and A wishes to bring an action to recover the advance, rather than claim damages (if B is in breach). Although the first case belongs to the law of contract and the second to the law of unjust enrichment, the key to the solution in both appears to be a close analysis of what the parties agreed. In case (i), it was traditionally thought (and is still true) that the question is whether A’s breach was of a condition or a warranty. However, as Diplock LJ explains in his classic judgment in Hongkong Fir Shipping v Kawasaki Kisen, this tendency to focus on the classification of the term of the contract at times obscured the importance the law attaches to the impact of the event of breach, and the fact that the question is essentially whether the event of breach has deprived one party of what it was intended by them he should have as consideration for performing his obligations under the contract. In case (ii), A can bring an action in unjust enrichment to recover the advance if he can demonstrate that there was a “failure of consideration”. There is a failure of consideration if B has not “rendered” to A what the advance was paid for (see Lord Goff’s speech in Stocznia Gdanska v Latvian). For instance, suppose A paid Rs. 50,000 for a 20 day luxury cruise which is interrupted after 17 days, he cannot recover the entire sum because the “basis” of the payment was the provision of those luxury services on a continuing basis (see Baltic Shipping v Dillon).* On the other hand, suppose he paid Rs. 50,000 for a Chennai-Singapore-Sydney air ticket, he can recover the entire sum if the plane is unable to continue beyond Singapore, because the “basis” of the payment was that he would be transported from Chennai to Sydney. A more intuitive example is this: a cobbler cannot retain 50 % of the price by providing one shoe. These are examples where the agreement of the parties is that entire performance (or performance of every single obligation) is a “condition precedent” for payment or counter performance – this is sometimes known as the “entire contract” doctrine. As these examples demonstrate, the entire contract doctrine – again just a way of understanding the intention of the parties – is important not only to the law of contract, but for issues of unjust enrichment, limitation etc.
The recent decision of the Court of Appeal in Smales v Lea is a good illustration of why entire contract matters in the law of limitation. The claimant was an independent surveyor who in 1996 entered into a contract with a Mr Batram for valuing damage caused to Mr Batram’s property and making on his behalf a claim with his insurance company. Mr Smales accordingly undertook and completed the valuation work by 1998. Under the contract, Mr Smales was required to negotiate his fees with the insurance company, for the policy would cover the cost of repair as well as his fees in preparing the report. In 2001, he submitted his bill of £12,583 to the insurance company’s loss adjusters, Ellis and Buckle [“E and B”]. E and B refused to pay this bill partly because they considered it was too high but principally on the ground that Mr Smales was required to submit his claim to Mr Batram in the first instance, who would be indemnified by the insurance company. However, Mr Smales was unable to trace Mr Batram, who had moved elsewhere without leaving a forwarding address. Mr Smales also suffered from poor health and was unable to pursue the matter until 2006, when he submitted a bill of about £16,000 to Mr Batram’s executors. After further correspondence, the executors refused to pay this bill on the ground that it had been wrongly computed and was consequently too high.
Mr Smales issued a claim form in 2008 and the preliminary question was whether this claim was barred by limitation. Under section 5 of the Limitation Act, “an action founded on a simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued.” Counsel for the claimant relied on the entire contract doctrine to avoid this result, suggesting that Mr Smales’ right to be paid did not arise until he negotiated a fee with E and B, even though all the work he was to do under the contract had been completed.
The Court of Appeal, it is submitted correctly, rejected this contention. It began by observing that there is a presumption in English law that a contract for services is not an entire contract. The presumption does no more than reflect the business common sense that parties to a service contract would not normally intend that the service provider is entitled to be paid nothing even though he has performed a substantial part of the contract. This principle is well established in English law, and the Court of Appeal referred to the following observations of Lord Denning MR in Hoenig v Isaacs, one of the leading cases on the subject:
…the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition.
There was no reason to think that this was not true of Mr Smales’ contract with Mr Batram. As Jackson LJ rightly pointed out in his judgment, the argument could be tested by asking what the position would have been if Mr Smales had submitted a bill to the executors in 2001, before he had negotiated with the insurance company. While the executors could no doubt have raised a dispute over the computation of the sum due, they could not have said that Mr Smales did not have a right to be paid.

* Readers may wonder whether in this example he can recover a proportion of the advance. The answer is unclear because of the traditional insistence in English law that failure of consideration must be “total”, although there are signs (disputed by some) in recent years that this requirement is honoured more in its breach than in its observance (see for example the Privy Council in Goss v Chilcott, the Court of Appeal in Rover v Cannon [1989] 1 WLR 912 and the High Court in Giedo van der Garde v Force India Formula One Team).


Mohan Panikkar said...

The 'entire contract doctrine" is embodied in Section 39 of the Indian Contract Act, 1872. the S.39 reads:

"39. Effect of refusal of party to perform promise wholly
When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance."

Anonymous said...

Mr. Panikkar has misunderstood the "entire contract" doctrine - Section 39 as interpreted by the Courts is in line with English law and does not mandate an "entire contract" doctrine as a rule of law.