Forfeiture of non-proprietary interests

Equity may intervene to prevent the unconscionable exercise of a right to terminate a commercial contract. Whether equity will intervene to prevent the loss of a non-proprietary interest is controversial. Recent Victorian decisions have created greater uncertainty.

Equitable principles are available to restrict the entitlement of an innocent party to terminate a contract for breach and prohibit the unjust or unconscionable exercise of contractual or legal rights.[1] Equity may not permit the innocent party to exercise a right to terminate a contract even where the breach is material, and the innocent party is otherwise entitled to terminate the contract.[2] It is one aspect of those equitable principles which we consider, being the equitable doctrine of relief against forfeiture.[3]

Snapshot

• The doctrine of relief against forfeiture might be available to prevent the valid termination of a contract where non-proprietary rights are affected.
• Until the uncertainty is resolved, practitioners should assume the doctrine of relief against forfeiture extends to non-proprietary interests as well.
• Principles are discussed for the application of the doctrine of relief against forfeiture.

Relief against forfeiture

The issue is whether relief against forfeiture is only available where the subject matter over which relief is sought is the loss of a proprietary right.

Some authorities suggest that the doctrine of relief against forfeiture might not be so limited and might apply, for instance, to the unjust loss of a contractual licence.[4] Conversely, other authorities suggest that relief against forfeiture is only available to protect the inequitable loss of a proprietary right.[5]

Equity has long granted relief against the unjust forfeiture of proprietary rights or interests.[6] A court of equity may take this step where it is, in the circumstances, unconscionable to allow the forfeiture. The courts will take into account[7] a variety of factors in determining the question of unconscionability, including:

• whether the breach was serious or wilful
• whether the terminating party contributed to the breach
• the magnitude of the loss to the party in breach which would result from forfeiture
• the magnitude of the gain to the terminating party, in particular, whether the party will receive a windfall
• where the contract concerned relates to the sale of land, whether the purchaser has gone into possession.

Edelman J, when a member of the Federal Court of Australia,[8] asked why the doctrine of relief against forfeiture should be limited to proprietary rights. His Honour stated, first, there may be a fine distinction between relieving from forfeiture of a proprietary right and relieving from forfeiture of a non-proprietary right.[9] Second, if the conventional approach to the application of the doctrine of relief against forfeiture is applied, then the meaning of a “proprietary right” itself becomes an issue, which distracts attention from the real question by causing consideration to be focused on the nature of the entitlement which may be lost.[10] Third, relief against forfeiture has been allowed, or considered, in some cases involving termination of contracts for the purchase of land without any suggestion that such cases are beyond the scope of relief against forfeiture.[11] Fourth, at least one foundational reason for relief against forfeiture is not linked to the existence of a proprietary right, but rather acts as a restraint on the exercise of a contractual power.[12]

It is a fundamental principle of equity that a party having a legal right is not permitted to exercise that right in such a way that the exercise amounts to unconscionable conduct.[13] This principle extends to the unconscionable exercise of a right to terminate a contract for breach.[14] Therefore, it has been suggested that the court has a general power, originating in equity, to restrain any unconscionable exercise of a right to terminate a contract, whether arising by contract or by law.[15] The question is whether a property interest must be engaged to establish the basis for the operation of the doctrine of relief against forfeiture.[16]

JPA Finance v Gordon Nominees – the facts and issues

The proceeding in the Supreme Court of Victoria concerned the purported termination of a call option deed based on failure to pay “indemnity costs”. JPA Finance Pty Ltd (JPA) claimed that it had validly terminated the call option deed and sought a declaration to that effect. Gordon Nominees Pty Ltd (GNPL) denied that JPA had validly given the requisite notice required to terminate the call option deed. This was the first issue in the case at trial and at the Court of Appeal. We do not consider that issue in this paper.

Alternatively, GNPL claimed that if JPA had validly terminated the call option deed, then GNPL sought, in equity, relief against forfeiture of the option to buy back certain units the subject-matter of the deed, because GNPL had paid the disputed costs into its solicitors’ trust account. Importantly, JPA had issued a statutory demand which had not been responded to, much less set aside, and it was this fact which formed the basis for the termination based on breach (that is, an insolvency event within the meaning of the call option deed, not non-payment). It is this aspect of the case here.

At trial – Robson J

Robson J found that JPA had not validly terminated the call option deed. His Honour also held that if he was wrong in that conclusion, then GNPL was entitled to relief against forfeiture of the call option deed.[17]

Robson J decided that it would be unconscionable for JPA to be permitted to terminate the call option deed. This was because the consequence of the termination of the call option deed was not a genuine pre-estimate of the loss suffered as the result of the breach. Rather, Robson J held that the entitlement to terminate was a penalty designed to enforce compliance with the contract, and was not a genuine pre-estimate of loss. Robson J also held that an additional ground for holding relief against forfeiture was available, which was that the disputed costs had been paid into GNPL’s solicitors’ trust account and, as a result, forfeiture was an unfair windfall for a purely technical breach.

Appeal

The Victorian Supreme Court of Appeal overturned the decision of Robson J. When doing so, it considered what it described as a “threshold issue”, namely, whether equitable relief against forfeiture is available as a remedy in a case such as that before the Court.[18] The Court assumed, but did not decide, that relief against forfeiture may be available where the benefit of a contract is lost, even if that benefit is non-proprietary in nature.[19]

The Court considered the distinction between relief against penalties and against forfeiture.[20] In doing so, the Court held that what matters is that equity, when relieving against forfeiture, is concerned either with the penal consequences of non-observance of a contractual stipulation, or with the conscientiousness or otherwise of the non-defaulting party’s reliance on its legal rights in all the circumstances.[21] The Court adopted the five “subsidiary questions” relevant to the identification of unconscionable conduct in this context:

• did the conduct of the [innocent party] contribute to the [wrongdoer’s] breach?
• was the [wrongdoer’s] breach (a) trivial or slight, and (b) inadvertent and not wilful?
• what damage or other adverse consequences did the [innocent party] suffer by reason of the [wrongdoer’s] breach?
• what is the magnitude of the [wrongdoer’s] loss and the [innocent party’s] gain if the forfeiture is to stand?
• is specific performance with or without compensation an adequate safeguard for the [innocent party]?

The Court held that the following four principles[22] govern the circumstances under which equity will grant relief against forfeiture:

a) equitable relief against forfeiture may be available in two kinds of situation:

i. where there is a contractual stipulation for forfeiture which would constitute a penalty

ii. where a party is entitled at law to terminate a contract and forfeit the relevant interest but it would be unconscientious to do so

b) the Court should not intervene so as to interfere with the contractual rights of the parties merely because it thinks it would be fair or reasonable to do so because subsequent events have rendered one party’s situation more favourable

c) equity will not intervene if forfeiture has resulted simply from one party’s inadvertence, or that party’s wilful default

d) the question of unconscientious conduct may be addressed by reference to the five “subsidiary questions”.

The Court ultimately held that the default under the call option deed was caused by the conduct of GNPL. That conduct was supervening and the result of GNPL’s choice.[23] The Court also held that the termination of the call option deed was not a penalty as the conduct of GNPL was not envisaged by the parties at the time of formation of the contract. Therefore, the parties were not stipulating for a penal consequence of the breach of contract.[24] There was, therefore, no unconscientious conduct by JPA.

The Court reasoned that the right of termination did not arise because of the non-payment of legal costs. Rather, that right arose because of the unanswered statutory notice, which constituted an Insolvency Event within the meaning of the call option deed.[25] Therefore, the Court held that the case fell into the category of mere inadvertence, or wilful default, which are outside the scope of relief against forfeiture.[26]

Conclusion

The decisions of Robson J and the Court of Appeal give rise to obvious difficulties for the legal practitioner who is retained to provide advice to a client where a commercial contract involving non-proprietary rights is sought to be terminated.

Until the issue is definitively resolved, legal practitioners should prudently assume that the doctrine of relief against forfeiture will extend to those cases where the termination of a contract will not result in loss of proprietary rights. When determining whether an innocent party is entitled to terminate or whether the defaulting party is entitled to seek relief against forfeiture, practitioners therefore should apply the four principles[27] referred to by the Court of Appeal.

This piece was first published in the Law Institute of Victoria Journal. 

[1] See Kyrwood v Drinkwater [2000] NSWCA 126; Stern v McArthur (1988) 165 CLR 489; Foran v Wight (1989) 168 CLR 623; Mineralogy Pty Ltd v Sino Iron Pty Ltd [No 6] [2015] FCA 825; (2016) 329 ALR 1. See generally, Cheshire & Fifoot, Law of Contract (11th Australian edn), Lexis Nexis, 2017, at [21.16]-[21.18].
[2] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115.
[3] Generally, see Note 1 above, Cheshire & Fifoot, at [20.12] and [21.35]-[21.36].
[4] Note 3 above, at [21.36]; Chaka Holdings Pty Ltd v Sunsim Pty Ltd (1987) BPR 18,171; Milton v Proctor (1989) 4 BPR 9654.
[5] Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scraptrade) [1983] 2 AC 694; Sport International Bussum BV v Inter-footwear Ltd [1984] 1 WLR 776.
[6] Peachy v Duke of Somerset (1721) 1 Str. 447 (93 E.R. 626); Shiloh Spinners Ltd v Harding [1973] AC 691; Legione v Hately (1983) 152 CLR 406; Stern v McArthur.
[7] Note 6 above, Legione v Hately; see generally Note 3 above, at [21.35]-[21.36].
[8] Note 1 above, Mineralogy Pty Ltd v Sino Iron Pty Ltd [No 6], at [983].
[9] Note 8 above, at [984].
[10] Note 8 above, at [985].
[11] Note 8 above, at [986].
[12] Note 8 above, at [988]; see also Hampton v BHP Billiton Minerals Pty Ltd (No 2) [2012] WASC 285. The observations of Edelman J were referred to by Ward CJ in Eq in Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd (2017) 324 FLR 378.
[13] Note 6 above, Legione v Hately; cf Collin v Holden [1989] VR 510; Commonwealth v Verwayen (1990) 170 CLR 394.
[14] Note 1 above, Foran v Wight. However, see Carter, JW Carter’s Breach of Contract, LexisNexis, 2011, at [10-66].
[15] Note 6 above, Legione v Hately and Stern v McArthur; Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315.
[16] In Ayers Rock SkyShip Pty Ltd v Voyages Indigenous Tourism Australia Pty Ltd [2019] NSWSC 828, Darke J adopted the approach of Edelman J without determining the issue, and in doing so
referred to the decision in JPA Finance Pty Ltd.
[17] JPA Finance Pty Ltd v Gordon Nominees Pty Ltd [2019] VSC 171 per Robson J, at [8].
[18] JPA Finance Pty Ltd v Gordon Nominees Pty Ltd [2019] VSCA 159 per McLeish JA, at [82].
[19] Note 18 above, at [81]-[82].
[20] Note 18 above, at [78].
[21] Note 18 above, at [79].
[22] Note 18 above, at [98]-[101].
[23] Note 18 above, at [98]-[101].
[24] Note 18 above, at [106].
[25] Note 18 above, at [104].
[26] Referring to Legione v Hatley; see note 18 above, at [76].
[27] Note 18 above, at [98]-[101].

Authored by:
Glenn McGowan QC, Partner
Tomaso Di Lallo, Barrister at the Victorian Bar