Compensation for Loss

What are the consequences of a breach of a contract of sale of land?  Is it compensation or damages?  Is there a difference?

This is a significant question in the context of the standard contract of sale of land when dealing with the consequences of a breach of that contract by one of the parties to the contract.  General Condition 25(a) provides that a party in breach must pay to the other party “compensation for any reasonably foreseeable loss”.  This article is not concerned with calculating the quantum of any such claim, but rather determining when such a payment must be made.  Specifically, can the innocent party seek to adjust the balance payable at settlement on the basis of an entitlement to “compensation”?

It is common for a vendor to claim that the purchaser’s breach has caused the vendor to suffer significant “loss”.  Putting aside for the moment whether the loss is reasonably foreseeable and, indeed, was reasonably foreseeable as at the date of the contract, can the vendor demand that the purchaser pay those losses at settlement?  Likewise, can a purchaser who establishes loss flowing from the vendor’s breach, difficult though that may be, demand that the vendor compensates the purchaser by way of a reduction in the amount payable at settlement?

It is fair to say that many vendors, and some purchasers, do seek to adjust the amount payable at settlement by a party in breach, however the suggestion that one party may unilaterally adjust the amount payable pursuant to the contract at settlement to recover alleged loss is not supported by the contract.  The contract allows the innocent party to claim “compensation”; it does not support a claim for “damages” which is a common law remedy for breach of contract that may be pursued AFTER completion of the contract.

A right to compensation has traditionally been distinguished from a right to damages – King v Poggioli [1923] HCA 11.  Compensation is a remedy that entitles a purchaser to abate the purchase price where the vendor breaches the contract by failing to deliver the whole of the property contracted to be sold, either as a result of a defect in the physical attributes of the property or the vendor’s interest in, or title to, the property. (Voumard: The Sale of Land [7320])

General Condition 25(a) therefore creates a very limited contractual remedy for breach of contract.  It is a remedy limited to a claim by the purchaser seeking to abate the purchase price consequent upon a significant physical or legal defect in the property.  It does not justify a claim for consequential loss, although the purchaser might pursue such a claim for damages for consequential loss after settlement.  General Condition 25(a) does not support a contractual claim for “compensation” by the vendor at all, although the vendor, like the purchaser, might pursue a claim for damages for consequential loss flowing from the purchaser’s breach of contract after settlement.

General Condition 25(b) gives the vendor a contractual right to claim interest as a result of a breach of the contract and General Condition 26 sets out how that interest is to be calculated.  As interest is payable “on any money owing under this contract” this contractual right to claim interest is limited to the vendor, as only the vendor is owed money under the contract.

In summary, the purchaser’s contractual right following a breach by the vendor is to compensation pursuant to GC.25(a) and the vendor contractual right following a breach by the purchaser is to interest pursuant to GC. 25(b).  Both parties have additional common law rights for consequential losses flowing from a breach of contract, but those common law rights must be pursued after settlement and do not justify an adjustment of the amount payable at settlement.

The contractual right of the parties to a contract for the sale of land that adopts the standard General Conditions to claim an adjustment of the amount due at settlement consequent on a breach of the contract by the other party is limited as set out above.  However, a party in default faces the possibility of proceedings after settlement to recover damages for breach of contract and therefore it is sensible for the parties to seek to compromise any such claim at settlement.  Whether the breach is by the vendor or the purchaser, the innocent party should provide details of losses suffered by the innocent party as a result of the breach and which were reasonably foreseeable to the parties as at the date of the contract.  The party in default might then agree to compromise the claim on the basis that a claim for consequential loss after settlement will involve both parties in significant additional expenditure and ought to be avoided.  However, the innocent party cannot seek an adjustment of the amount payable at settlement or seek to delay settlement until the dispute is resolved.  The show must go on.