RE-EXAMINING THE RELATIONSHIP BETWEEN MUTUAL PROMISES IN CONTRACT LAW.

• Date: 01 April 2022
• Author: Dias, Nuwan

CONTENTS I Introduction II The Modern Dependency Doctrine: An Overview A The Dependency Doctrine's Categories B Comparing the Dependency Doctrine to the Conditions-Warranties Distinction C The Present State of Authorities Applying the Dependency Doctrine III The Values Served by the Dependency Doctrine A Autonomy (Freedom of Contract) 1 The Value's Claims 2 Doctrinal Instantiation B Security of Transactions 1 The Value's Claims 2 Doctrinal Instantiation C Consistency with Relational Contracting Norms 1 The Value's Claims 2 Doctrinal Instantiation D Constraining Opportunism 1 The Value's Claims 2 Doctrinal Instantiation IV The Dependency Doctrine as an Instantiation of the Autonomy Norm A Dependence as the Parties' Will B Limitations V The Security Norm as the Historical Basis of the Dependency Doctrine A Simultaneous Transactions and the Security Norm 1 Evolution of the Authorities 2 Intersection with the Security Norm B Services Contracts: Balancing the Security Norm and the Anti Opportunism Norm 1 Evolution of the Authorities 2 Intersection with the Security Norm and the Anti-Opportunism Norm VI Dependence in Contested Territory A Central Promises 1 Evolution of the Authorities 2 Intersection with the Relational Norm B Preserving the Agreed Order of Performance 1 Evolution of the Authorities 2 Intersection with the Relational Norm VII Independence as a Safety Valve against Opportunism A Evolution of the Authorities 1 Disproportionate Consequences for the Promisor 2 Largely Executed Transactions 3 Imprecise Obligations of the Promisor B Intersection with the Anti-Opportunism Norm VIII Conclusion I INTRODUCTION

One of the common responses of a contracting party ('Party X') to an allegation of contractual breach is that their counterparty ('Party Y') is also in breach, and therefore should not complain. Such a response has intuitive ethical appeal. Yet, Australian and English courts appear to ignore such protestations--Party X can terminate the contract but cannot rely on Party Y's breach to avoid performing its obligations. As Higgins J stated: 'A door must be either open or shut; a contract must either subsist or be at an end.' (1)

The dogmatism with which this view is expressed is beguiling. In truth, English and Australian courts have long recognised a doctrine of 'dependent' promises, alternatively referred to as conditions precedent (together, the 'Dependency Doctrine'), according to which a promisor's non-performance of an obligation ('Obligation Y') will relieve the promisee of a duty to perform its obligation ('Obligation X') if Obligation X is 'dependent' on Obligation Y. The promisee can therefore effectively suspend performance of Obligation X until the promisor performs Obligation Y, while keeping the contract afoot. (2)

Not each of the promisor's obligations will confer a practical right of suspension on the promisee in response to a promisor's breach. Since the 16th century, English (and subsequently Australian) courts have struggled to articulate a framework for determining when such a relationship exists. (3) Further, since the 19th century, judicial reliance on the Dependency Doctrine has declined as the (now-familiar) doctrine permitting termination inter alia for breach of a 'condition' has grown in prominence. (4) Today, the Dependency Doctrine is sporadically invoked by English and Australian courts. When it is, the combination of conflicting case law and modern disuse produces superficially disparate results. The modern uncertainty about the Dependency Doctrine was recently exposed when the New South Wales Court of Appeal, in Kay v Playup Australia Pty Ltd ('Kay), appeared to diverge from a leading commentator on the use of presumptions when applying the Dependency Doctrine. (5)

This article systematises the Dependency Doctrine authorities, focusing on those that have emerged since the right to terminate was established and, on some accounts, swept the Dependency Doctrine aside. (6) This account is both internal and external. (7) It is internal because it tracks trends in the cases, and is sensitive to the Dependency Doctrine's historical origins. However, the persistence of the Dependency Doctrine in the face of the expansion of the law of termination requires a functional account. Moreover, in the absence of secure precedent, an account of the Dependency Doctrine's structure requires an analysis of the norms it serves.

Part II provides an overview of the Dependency Doctrine and its intersection with the law of termination. To provide a satisfactory account of the Dependency Doctrine case law, Part III centres attention on the values served by the Dependency Doctrine, namely, freedom of contract, the utility in providing security to transacting parties, advancing relational contracting norms, and constraining opportunism. The article then outlines the architecture of the Dependency Doctrine in four stages. As discussed in Part IV, modern English and Australian courts have described the Dependency Doctrine as a manifestation of freedom of contract and, therefore, no more than the parties' objectively ascertainable will. However, this explanation alone is insufficient to account for the pattern of the cases. As explained in Part V, the Dependency Doctrine was first developed through early cases establishing dependent promises in the context of sale contracts involving simultaneous exchange, and further applied with modification to particular contracts involving non-simultaneous exchange, namely, employment and construction agreements. In these cases, which have become archetypes of dependent obligations, courts were not enforcing the language of the parties, but pursuing a commitment to securing the promisee's performance interest while mitigating the risk of the promisor opportunistically withholding counter-performance. (8) Part VI documents how the courts have extended the Dependency Doctrine beyond these relatively secure foundations to identify further categories of dependent promises arising either because of their connection to the core promises of the contract or because of the need to preserve the contractual order of performance. Part VII explains the final stage, in which courts that would, on the foregoing principles, classify promises as dependent have resisted doing so because of the risk that this would incentivise opportunism by promisees.

II THE MODERN DEPENDENCY DOCTRINE: AN OVERVIEW

A The Dependency Doctrine's Categories

The question posed by the Dependency Doctrine, completely expressed, is whether the defaulting promisor may enforce the contractual obligation of the promisee. (9) To answer this question, the Dependency Doctrine carves the promisee's obligations into two primary categories: dependent obligations and independent obligations. (10) If the promisee's promise is dependent on the promisor's performance, the promisor may not enforce it until the promisor tenders performance. (11) A promisee's obligation may not be dependent on all of the promisor's obligations. Accordingly, a promisee seeking relief from performing a particular obligation must establish that obligation's 'dependence' on the promisor's unperformed obligation. (12) Contrastingly, if a promise is an independent obligation, the promisee's obligation to perform it is unconditional. (13) Consequently, a promisor may enforce the promisee's independent obligations irrespective of its own non-performance. In this case, a promisee's only remedy for the promisor's breach will typically be damages or, exceptionally, specific performance. (14)

There is a further category of promises recognised by the Dependency Doctrine: interdependent obligations. (15) Obligations are interdependent where the performance of each party is dependent on the other party's readiness, wiilingness and ability to perform. (16) The utility of this third category of promises is discussed in Part V(A).

B Comparing the Dependency Doctrine to the Conditions- Warranties

Distinction

The Dependency Doctrine's categories can be contrasted with those of the doctrine regulating termination, which draws a distinction between conditions and warranties ('Conditions-Warranties Distinction'). Applying this doctrine, a promisor's breach of condition entitles the promisee to terminate the contract and claim damages. (17) Breach of warranty entitles the promisee to damages. (18)

The courts have more recently developed a further category, 'innominate terms', breach of which entitles the promisee to terminate where breach is sufficiently serious. (19) Courts have propounded various tests for determining the appropriate classification of terms under this scheme, most of which centre on the importance of the relevant term to the contract as a whole. (20) The modern cases tend to classify terms as innominate terms, thus preserving the possibility of termination for breach of a non-essential term which nonetheless has dire consequences. (21)

Between the 16th century and the first half of the 19th century, the concept of termination for breach of condition was obscured by the Dependency Doctrine. Pleading rules in England and Wales directed courts' attention to the conditionally of any obligation the subject of a suit and, consequently, the Dependency Doctrine regulated the parties' performatory relations. (22) However, commencing in the mid-19th century, relaxation of the pleading rules diminished the importance of the Dependency Doctrine at the same time as termination for breach of a condition was becoming mainstream. (23) The Conditions-Warranties Distinction's pre-eminence was established by the time of the United Kingdom's ('UK's') Sale of Goods Act 1893, (24) which adopted the then-existing categories of 'conditions' and 'warranties' (25) as alleged substitutes for the 'old term[s] ... "dependent covenant[s]" ... [and] "independent covenant[s]"'. (26)

English and Australian cases have since occasionally merged the...