Your buyer has defaulted on their purchase agreement…

No big deal, right?  Simply accept the breach, terminate the agreement and sue for damages.  It’s not that simple, read on…

Perhaps but what is the situation when the seller is subject to a further agreement, contingent on the buyer’s performance of the original agreement?  What happens when the buyer’s default or breach affects the seller’s ability to perform the upstream agreement?  Who is liable, and to what extent?

Precision in drafting contracts

The importance of precision in drafting contractual documents relating to the sale and purchase of land cannot be understated.  The potential problem was highlighted in a recent case in the District Court of Western Australia.[1]  The judgment in Downing confirms the importance of disclosing contingent transactions or obligations to a potential buyer at the outset of negotiations to ensure that the buyer is made aware of, and accepts any potential liabilities that may flow-on from a breach of the agreement.

What does your buyer need to know when making their offer

In Downing, the seller sought to recover additional interest paid to its mortgagee from the settlement date (i.e. the date of the buyer’s default) until the date the property was subsequently sold to a third party.

In that case the seller’s claim for consequential damages was held to be ‘too remote’ for liability to attach to the buyer.

The Court determined that the buyer did not know of the existence of the mortgage, much less that the seller required the proceeds of the sale to discharge that mortgage.  Accordingly, the seller’s attempt to recover the damages was unsuccessful.

Known amongst lawyers as ‘the second limb in Hadley and Baxendale’, the rule has been around since at least the mid-nineteenth century.[2]  There are two parts to the rule; the first is whether the defendant knew, or ought to have known, that the type of loss claimed (i.e. indirect consequential loss) would be the probable result of the breach.  However, mere knowledge on the part of the defendant by itself is not enough to guarantee success in a claim for consequential loss. The defendant must have also promised to bear that loss.  While that promise can be oral, or even implied, a well-drafted sale and purchase agreement wins, hands down, every time.

Who needs a crystal ball?

The second part to the rule is that the type of loss was within the contemplation of both parties at the time the agreement was made.  This requires an almost crystal ball type of foresight as the lawyer drafting the agreement needs to consider all the potential losses that may result from a breach of the agreement at any time during the life of the agreement.  This is particularly important when one considers that a vast number of mortgages have a term of around 25 to 30 years!

The importance of legal advice where you have special conditions

This recent case is a timely reminder of the importance of obtaining legal advice prior to drafting sale and purchase agreements, especially where special conditions may be required to deal with consequential loss.  Working closely with a lawyer during the negotiation and drafting process will ensure that the client’s individual needs are considered and any special conditions are appropriately tailored or ‘bespoke’ to those needs.  This may also help to prevent unnecessary and costly litigation or potential professional negligence claims against the seller’s agent(s).  One size definitely does not fit all when it comes to commercial contracts.