N5432
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO 683 OF 2012

ROBERT KUBAK TRADING AS BISMARK REAL ESTATE
Plaintiff

V

JANT LIMITED
Defendant

AND

JANT LIMITED
Cross-claimant

V

ROBERT KUBAK TRADING AS BISMARK REAL ESTATE
Cross-defendant

Madang: Cannings J
2013: 21 June, 6, 11 September, 6 December

CONTRACTS – breach of contract – tenancy agreement – frustration as a defence to breach of contract claim – interpretation of terms of agreement – whether landlord restrained from selling land when it had leased part of it to a tenant – whether tenant's failure to pay rent a breach of contact.

The plaintiff and the defendant entered into a tenancy agreement under which the plaintiff rented nine houses on land of which the defendant was registered proprietor. On the date of commencement of the agreement the defendant could not deliver vacant possession of six of the houses due to their occupants (former employees of the defendant) refusing to leave. A supplementary agreement was entered into, giving the defendant a further five months to provide vacant possession of the six houses. However, the occupants still refused to leave, as they had ongoing grievances with the defendant due to allegedly unpaid entitlements, so the defendant commenced proceedings in the District Court, seeking orders for their eviction. The plaintiff then commenced National Court proceedings against the defendant, claiming damages and other relief for breach of contract, constituted by (a) the defendant's failure to provide vacant possession of the nine houses and (b) the defendant's conduct in entering into a contract with a third party for sale of the land on which the houses were located. The defendant filed a defence and cross-claim against the defendant, claiming damages against the plaintiff (the cross-defendant) for breach of contract constituted by the plaintiff's failure to pay rent, for an extended period, in respect of the three houses of which the defendant did provide vacant possession (and which the plaintiff allegedly sub-leased to other tenants). Three issues arose: (1) whether a cause of action in breach of contract was established by the plaintiff against the defendant, (2) whether a cause of action in breach of contract was established by the defendant against the plaintiff, (3) what orders should be made by the court?

Held:

(1)	As to the first alleged breach of contract (not giving vacant possession of all nine houses) the defendant had a good defence due to its performance of a substantial part of the contract (provision of six houses) becoming impossible. The doctrine of frustration applied as (a) there was a supervening event (the intransigence of the occupants) which (b) was not contemplated by the parties and (c) was not induced by the parties and (d) made performance of the contract impossible. As to the second alleged breach of contract (the defendant's entry into a contract with a third party for sale of the land) the defendant had a good defence as there was no express or implied term of the contract that restrained the defendant from selling the land and further at the time of issuing of the writ no such contract had been entered into by the defendant. The plaintiff therefore failed to establish a cause of action in breach of contract against the defendant.

(2)	The plaintiff, having agreed to vary the terms of the original agreement by entering into the supplementary agreement, breached the agreement by not paying rent on the three houses which were made available to it and has been in continuous breach of the agreement for a period of at least 18 months. The defendant therefore established a cause of action in breach of contract against the plaintiff (cross-defendant).

(3)	It was declared that the defendant was not in breach of contract and that the plaintiff was in breach of contract and ordered that the question of all other relief to be granted be referred to an accredited mediator for mediation in accordance with the ADR [Alternative Dispute Resolution] Rules.

Cases cited

The following cases are cited in the judgment:

Chan Consolidated Ltd v Consumer Affairs Council (2009) N3747
Jant Ltd v Umat Kell & Others (2013) N4953
Joseph Constantine SS Line v Imperial Smelting Corporation Ltd [1942] 2 All ER 165
PNG Aviation Services Pty Ltd v Karri [1995] PNGLR 103

STATEMENT OF CLAIM AND CROSS-CLAIM

This was a trial on a claim by the plaintiff of breach of contract against the defendant, and a cross-claim by the defendant (cross-claimant) of breach of contract against the plaintiff (cross-defendant).

Counsel

B Tabai, for the plaintiff/cross-defendant
W Akuani, for the defendant/cross-claimant

6th December, 2013 

1. CANNINGS J: This case is about a tenancy agreement that has not gone according to plan. The plaintiff, Robert Kubak trading as Bismark Real Estate, is the tenant. The defendant, Jant Ltd, is the landlord. It is actually two cases in one as the plaintiff is suing the defendant, claiming damages for breach of contract, and the defendant is, by a cross-claim, suing the plaintiff, claiming damages for breach of the same contract.

THE FACTS

2. The plaintiff and the defendant on 14 July 2011 entered into a written agreement under which the plaintiff agreed to rent nine houses on land of which the defendant was registered proprietor. The land is Section 128, Allotment 3, an 18-hectare area of government land on the western side of Binnen Harbour, Madang, where the defendant has for many years conducted a woodchip mill and related operations. The area of land on which the houses are located is called the Chip-mill Compound. The duration of the agreement was ten years. The plaintiff was obliged to pay total rent of K9,000.00 in respect of the nine houses at the beginning of each month commencing 1 November 2011 and carry out all normal "wear and tear maintenance". It was understood (though not expressly provided for in the agreement) that the plaintiff would sub-lease the houses to other tenants.

3. The plaintiff, upon execution of the agreement and in accordance with its terms, paid a bond of K10,500.00 to the defendant. However on the date of substantive commencement of the agreement, 1 November 2011, the defendant could not deliver vacant possession of six of the houses due to their occupants (former employees of the defendant) refusing to leave. Both the plaintiff and the defendant asked them to leave but they refused to budge. They had grievances with the defendant for alleged unpaid entitlements.

4. Faced with that difficulty, the plaintiff and the defendant on 1 November 2011 entered into a supplementary agreement under which the defendant was granted an "extension period", to March 2012, to "repossess" the six houses and the total monthly rent due by the plaintiff in respect of the three houses of which he had possession was amended.

5. The occupants were still refusing to vacate the six houses and the defendant commenced District Court proceedings against them, under the Summary Ejectment Act, seeking orders that they be ejected. But those proceedings did not succeed. The District Court on 16 December 2011 refused the application for ejectment orders. The defendant successfully appealed to the National Court which, after hearing the appeal on 9 November 2012, on 30 January 2013 ordered the occupants to leave by 28 February 2013, failing which the police were authorised to eject them by force (Jant Ltd v Umat Kell & Others (2013) N4953).

6. However, the occupants did not leave by that date as they commenced fresh proceedings, WS No 178 of 2013, in the National Court, against the defendant, claiming damages for unpaid entitlements; and the Court granted an order, staying the order of 30 January 2013 and restraining the defendant from ejecting them until determination of those proceedings (the trial of which was recently completed, with the judgment due to be delivered in January 2014).

7. In the meantime the plaintiff, on 4 July 2012, commenced the proceedings that are the subject of this judgment, against the defendant, claiming damages and other relief for breach of contract, constituted by:

(a)	the defendant's failure to provide vacant possession of the nine houses in accordance with the tenancy agreement; and

(b)	the defendant's conduct in entering into a contract with a third party for sale of the land on which the houses are located.

8. The defendant has filed a defence and cross-claim, claiming damages against the plaintiff (who thereupon became the cross-defendant) for breach of contract constituted by the plaintiff's failure to pay any rent, for an extended period, in respect of the three houses of which the defendant did provide vacant possession (and which the plaintiff allegedly sub-leased to other tenants).

ISSUES

9. Three issues arise:

(1)	has the plaintiff established a cause of action in breach of contract against the defendant?

(2)	has the defendant established a cause of action in breach of contract against the plaintiff?

(3)	what orders should the court make?

1	HAS THE PLAINTIFF ESTABLISHED A CAUSE OF ACTION IN BREACH OF CONTRACT AGAINST THE DEFENDANT?

10. As to the first alleged breach of contract (not giving vacant possession of all nine houses), I uphold the submission of Mr Akuani for the defendant that although the defendant has failed to comply with its obligations under the agreement, it has a good defence. The doctrine of frustration applies. This doctrine is part of the common law of contract, which means that it has been adopted as part of the underlying law under Section 20(1) (underlying law and pre-Independence statutes) of the Constitution and Section 3(1)(b) of the Underlying Law Act 2000. It applies here as:

(a)	there was a supervening event (the intransigence of the occupants), which
(b)	was not contemplated by the parties, and
(c)	was not induced by the parties, and
(d)	made performance of the contract impossible.

11. There are few reported PNG decisions dealing with the doctrine of frustration, but two cases in which it was held not to apply are PNG Aviation Services Pty Ltd v Karri [1995] PNGLR 103 and Chan Consolidated Ltd v Consumer Affairs Council (2009) N3747. For an analysis of the elements of frustration see the decision of the House of Lords in Joseph Constantine SS Line v Imperial Smelting Corporation Ltd [1942] 2 All ER 165, Halsbury's Laws of England, Fourth Edition, Butterworths, © 1974, Volume 9, pages 313-330 and W T Major's Law of Contract, Fourth Edition, Macdonald & Evans, © 1974, Volume 9, pages 196-203.

12. In most cases the doctrine of frustration is invoked by a party which wishes to be discharged from its obligation to perform a contract by for example giving the other parties to the contract notice of its termination. However it also operates as a defence to a claim of breach of contract and I find that it applies here as full performance of the tenancy agreement by the defendant has become impossible.

13. As to the second alleged breach of contract, the plaintiff argues that during 2012 the defendant, without notice to the plaintiff, entered into a contract of sale of Section 128, Allotment 3 to a third party and that by doing so this amounted to premature termination of the tenancy agreement and a breach of contract. The defendant concedes that it did in fact on 20 August 2012 enter into an agreement to sell all of its interests, including all improvements (such as the nine houses) in Section 128, Allotment 3 to Yandera Mining Company Ltd.

14. However, I reject the plaintiff's argument as there is no express or implied term in the tenancy agreement between the plaintiff and the defendant that restrained the defendant from selling the land. Furthermore, at the time of issuing of the writ, 4 July 2012, the agreement between the defendant and Yandera had not been entered into. There was no breach of contract.

15. The plaintiff has therefore failed to establish a cause of action in breach of contract against the defendant.

2	HAS THE DEFENDANT ESTABLISHED A CAUSE OF ACTION IN BREACH OF CONTRACT AGAINST THE PLAINTIFF?

16. The defendant's cross-claim is based on the allegation that in the period since taking occupation of the three houses, November 2011, to the date of commencement of the trial, June 2013, the plaintiff has paid no rent. The defendant claims that it is owed K15,500.00 under the supplementary agreement, which ran until March 2012, plus K3,000.00 per month since then, its total claim to the commencement of the trial being K60,500.00. The plaintiff does not deny the fact that no rent has been paid but claims that this is justified due to the continuing failure of the defendant to give vacant possession of the other six houses.

17. I have found already that the defendant has a good defence to the breach of contract claim against it: the doctrine of frustration applies. It flows from this finding that the plaintiff does not have a good defence to the breach of contract claim against him. The defendant has therefore established a cause of action in breach of contract against the plaintiff.

3	WHAT ORDERS SHOULD THE COURT MAKE?

18. This trial has been largely confined to questions of liability. Little evidence has been given regarding remedies in the event of liability being proven. The defendant has succeeded on its cross-claim but assessment of an appropriate award of debt or damages is complicated by evidence that the plaintiff paid a bond of K10,500.00 at the commencement of the agreement and also by the plaintiff's claim that K15,000.00 has been spent on maintenance of the houses. These amounts may need to be set-off against any award. Other complicating factors are that:

•	there is no evidence that the defendant has given notice of termination of the tenancy agreement to the plaintiff, which would seem to raise the presumption that the agreement is still operating;

•	there is no evidence that the tenancy agreement has been approved by the Minister for Lands and Physical Planning, which may have implications for its enforceability in light of Section 128 (approval of controlled dealings and permitted dealings) of the Land Act 1996;

•	there is no evidence that the tenancy agreement or the supplementary agreement have been duly stamped, which may have implications for their enforceability in light of Section 19 (unstamped instruments produced in evidence) of the Stamp Duties Act Chapter 117;

•	it is not clear from the evidence whether the defendant is still the registered proprietor of Section 128, Allotment 3.

19. I am therefore not in a position to make orders that would bring these proceedings to finality. The most appropriate course of action is for the court to declare the positions of the parties regarding the claims of breach of contract and to refer all remaining areas of dispute, including orders that would determine the proceedings and the costs of the proceedings, to mediation.

20. Under the ADR Rules the National Court is empowered by Rule 5(2), of its own motion, to order mediation for a resolution of any part of any proceedings provided that at the time of considering whether to order mediation it has regard to the factors prescribed by Rule 5(3). I have had regard to those matters. I consider that: (a) mediation will not result in prejudice to the rights of either party; (b) it is reasonably within the ability and power of both parties to comply with a mediation order; (c) mediation will not entail substantial work for either party; (d) the nature of the relief sought lends itself to mediation; (e) a mediation at Madang can be set up very soon and this should be convenient to both parties; (f) neither party has expressed opposition to the prospect of mediation; (g) mediation has not yet been attempted and it should be attempted at least once before consideration is given to setting down a trial; (h) neither party loses the right to have remaining areas of dispute tried in court; and (i) it is in the interests of justice to attempt mediation as a method of resolving disputes such as this. I will therefore declare the positions of the parties on the questions of liability determined by the trial and refer, by a separate mediation order, all remaining areas of dispute, including costs of the proceedings, to an accredited mediator.

ORDER

(1)	It is declared that the plaintiff/cross-defendant has failed to establish a cause of action against the defendant/cross-claimant.

(2)	It is declared that the defendant/cross-claimant has established a cause of action in breach of contract against the plaintiff/cross-defendant.

(3)	The question of appropriate orders and declarations that will determine these proceedings by addressing all remaining areas of dispute, including costs of the proceedings, shall be referred to an accredited mediator in accordance with the ADR Rules and a separate mediation order.

Judgment accordingly.
_______________________________________________________
Tabai Lawyers: Lawyers for the Plaintiff/Cross-Defendant
William Akuani Lawyers: Lawyers for the Defendant/Cross-Claimant