Can you seek specific performance of a clause in a contract after termination?

01 October 2014 Topics: Litigation and dispute resolution, Insolvency and restructuring, Construction and infrastructure

In York Civil Pty Ltd v Coleman Rail Pty Ltd [2014] SASC 122 a joint venture agreement had come to an end. The parties were in dispute regarding their respective liabilities to contribute to the losses of the joint venture. One of the parties sought an order for specific performance of a clause in the contract for the appointment of an auditor.

Joint venture agreement

The joint venture agreement provided that the joint venture would continue for the term of the contract relating to the construction project (project contract).

The joint venture agreement expressly provided that when the project contract was fully completed and discharged, including the completion of all defects, liability periods, and other contractual obligations, the joint venture would also be deemed to be completed.

Clause 10.4 of the joint venture agreement required the management committee of the joint venture to have the books of the joint venture audited annually. The parties did not appoint the accountants in accordance with the joint venture agreement.

Clause 17.1 also required the parties to wind up the affairs of the joint venture as soon as practicable after the discharge or termination of the project contract. The management committee of the joint venture was to arrange or conduct a final audit.

It was expressly provided in the joint venture agreement that the provisions of the joint venture agreement would terminate upon completion or termination of the joint venture other than for indemnities or warranties and specific clauses expressly stated to survive termination of the contract.

Clause 17.1 was not a clause that was expressed to survive completion or termination. The joint venture agreement also provided that rights that had accrued prior to completion or termination would not be adversely affected.

Specific performance was sought for an audit under clause 17.1

The effect of termination of contract

Upon termination of a contract:

  • Rights and obligations that have accrued under the contract before its termination remain enforceable. This includes the right to sue for damages for breach of the contract.
  • The parties are released from all future performance of the contract.
  • Terms of the contract that are deemed to operate in the event of its breach are valid and operative. For example, arbitration clauses, limitations on liability, restraints of trade and liquidated damages clauses may be relied upon after termination unless otherwise agreed.

The decision in York

The Court held:

  • No rights had accrued under clause 17.1 prior to the termination of the contract.
  • The clause was not intended to survive termination of the joint venture agreement.
  • When a contract comes to an end, you cannot obtain specific performance of obligations that were to be performed under the contract.
  • Specific performance is not available after termination because the contractual obligations no longer exist as an obligation to perform and are replaced with an obligation to pay damages.

Further reasoning in York

The Court said that even if the joint venture agreement was still in existence, specific performance is a discretionary remedy.

The Court said that equity will not intervene to require specific performance where:

  • the obligations of the defaulting party are not sufficiently defined;
  • specific performance of only part of the contract is sought; or
  • it would be futile to require specific performance of contractual obligations.

In York the Court observed that the joint venture agreement did not specify matters critical for the performance of an audit, such as which books of account would be audited, the period or periods to which the audit would relate, the scope and purpose of the audit, the opinions required and the identity of the auditor.

The Court said that specific performance could only be ordered in relation to the whole of the contract, not merely a particular term.

Further, the Court held that it would be futile to order specific performance for an audit, as the parties had not agreed in the joint venture agreement to be bound by the result of the audit. It was also apparent that an audit would not resolve the dispute.

Comments

The analysis of the clauses in the joint venture agreement carried out by the Court highlights the need for parties negotiating a contract to consider whether it is appropriate to expressly provide that specified rights and obligations will survive termination.

It would also be prudent to include a clause in the contract that says that the specified clauses expressed to survive termination are not an exhaustive list of the rights and obligations that are intended to survive termination and that the specified clauses do not exclude any rights, remedies and obligations arising by operation of law.

In some contractual provisions, it may be appropriate to provide more detail regarding the obligations of the parties.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.

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