Case: Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040 ; (2001) 110 FCR 157
Outcome: cited
There is no general rule that parties having knowledge of a prior contract between different parties may not subsequently enter into a contract with fundamentally inconsistent terms (which is really the result of the "implied condition precedent" argument put by WRVM). The lack of any such rule is the inevitable consequence of the efficient breach theory of contract, which, although it has occasionally been criticised, remains the controlling theory of contract damages under Australian law: Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040 ; (2001) 110 FCR 157 at [159] . 99 To understand both the theory and its rationale, a simple hypothetical may assist. Suppose A agrees on Day 1 to sell his bicycle to B for $25 (which happens to be fair market value at the time of contract but $5 more than A himself paid) with delivery to take place on Day 10. Now suppose that on Day 5, C approaches A and offers to buy the bicycle for the above-market price of $50 on the spot (maybe he happens to have an urgent need for a bicycle for which he is willing to pay a premium). It is perfectly rational in those circumstances, and completely open under the law of contract, for A to sell the bicycle to C, breach his contract with B, pay damages, and pocket the difference, if any. Assuming there is nothing special about A's bicycle and equivalent bicycles are readily available in the market, the damages for breach are likely to be only the replacement costs (i.e. fair market value) of a like bicycle on Day 10, the date of delivery. There is of course a risk to A that the market price of bicycles will rise. Provided that the price does not rise above $45 by Day 10, however, A will make more money by breaching his contract with B and selling to C even after he pays B damages. The law encourages (or at least allows) this eventuality on the basis that everyone is better off (or at least no worse off). A makes a bigger profit, B gets a substantially identical replacement bicycle (or strictly speaking, the cost of cover), and C gets the bicycle he wanted. 100 In short, which of the contractual arrangements WRVM decided to complete (if any) was ultimately a matter for it to decide in the future in light of its own enlightened self-interest. And even if WRVM entered into the Heads of Agreement or Development Agreements on the basis of an ill-informed judgment on its part either that ultimately it could or would extricate itself from the Mews Sale Contract or that it could make a greater profit by simply breaching that contract and paying damages, it does not assist WRVM. The consequence or consequences that flowed as a result of WRVM failing to complete one or more of those arrangements was ultimately to be determined depending on the way in which the facts resolved themselves and the remedial step or steps (if any) the disappointed contracting party took against WRVM. As in the bicycle hypothetical where A runs the risk that the cost of bicycles on Day 10 may exceed $45 (i.e. he will incur a loss rather than a profit by breaching the first contract), WRVM ran the risk that it would not be able to get out of the Mews Sale Contract and Scheme at a cost that would justify breach of that agreement. That, however, is a commercial rather than a legal consideration. As such, WRVM's contention that the Heads of Agreement or the later agreements never came into effect due to the non-fulfilment of a condition precedent is rejected.