DEMYSTIFYING THE RIGHT OF ELECTION IN CONTRACT LAW

Date01 December 2006
Published date01 December 2006

This article is about commercial choices between two inconsistent rights, or courses of action, which are available to a party under his contract after a breach by the other contractual partner. In legal terminology the choice is known as “election” but it is often labelled as “waiver”. Invariably, it has been confused with “estoppel”. The nature and extent of knowledge required for the election to be operative, and whether there are any limits of the right to elect, are examined in Part II of the article. The different strands of opinion that are said to arise from judgments are reconciled. Problems that emerge from the use of an all embracing term “waiver” in substitution of either “election” or “estoppel” are dealt with under Part III. The author explains the misconceptions of using “waiver”, demystifies the concept of “election”, and provides guidance for commercial people to realise consciously when their election will result in intended legal consequences.

I. Introduction

1 In a looking glass world, if commercial people had a chance to look at the mirror and reflect, they would ask the questions of Alice in Wonderland: “Which way do I go, this or that? Do I mean what I mean to say?” A voice would tell them: “You have a right to elect; to find out about the method and limits of exercising your right, we send you to the law of election. But waiver may step in, saying that when you choose one situation you intentionally relinquish your right to the other.” And commercial people would ask: “What do these words mean?”

2 So we have a duty to explain. Election, in a contractual context, is about commercial choices and poses a dilemma to choose between two inconsistent rights, or courses of action, that have arisen after a breach of contract by the other contractual partner. A party exercises a choice; it does not waive nor relinquish anything. However, the meaning and interrelationship of election with similar principles tend to be confused by

lawyers and the courts. Substituting “waiver” for election or estoppel results in muddled judgments.1

3 Election is an entitlement, not an obligation,2 under the contract and it has its roots in ancient times, as early as the reign of Queen Elizabeth I, but was originally derived from the civil law.3 Lord Redesdale LC in Birmingham v Kirwan4 explained it very succinctly:

The general rule is that a person cannot accept and reject the same instrument, and this is the foundation of the law of election.

4 The principle of election was later developed in the 19th century and a clear example of its correct application, both in terms of law and semantics, is shown in Jones v Carter5 (a case concerning breach of covenants), in which Parke B stated:6

[T]he lease would be rendered invalid by some unequivocal act, indicating the intention of the lessor to avail himself of the option given to him, and notified to the lessee, after which he could no longer consider himself bound to perform the other covenants in the lease.

5 The operation of the principle arises in a variety of contractual situations.7 In the commonest incident of repudiation of contract, the

inconsistent rights are: the right to continue the contract, or to accept the conduct of the other party as terminating the contract.8 The right to terminate often arises out of an express term of the contract or is provided by law or statute. A choice made in favour of one right or course of action against the other results in irrevocable consequences which may have not been intended. Therefore the choice must be an informed one; there must, at least, be knowledge of the full facts giving rise to the breach. Whether or not there should also be knowledge of the existence of two inconsistent rights from which to choose and of their respective legal consequences is debatable. The case law is not uniform on this issue.9

6 It is, therefore, necessary to explore the possibility of reconciling decisions that appear to be conflicting, for the law must be clear to help commercial men to make their decisions with knowledge of how the law will treat their words or conduct which may amount to an irrevocable choice.

7 Furthermore, in the labyrinth of case law on election, another issue which is not clear is the use of terminology.10 The purpose of this article is three-fold:

(a) First, to ascertain the necessary conditions of election, the kind of knowledge required and cases in which there may be a fetter on the right.

(b) Second, to illustrate the terminology used by the courts in the application of the doctrine and identify the cause of the problem, which has led to confusion.

(c) Third, to conclude and recommend how the law could be clarified.

II. The necessary conditions and elements for the operation of election

8 A clear description encapsulating election, while also highlighting the problems that arise in the application of the principle, was given by the High Court of Australia in Sargent v ASL Developments Ltd,11 in which Stephen J stated:

The doctrine of election as between two inconsistent legal rights is well established but certain of its features are not without their obscurities. The doctrine only applies if the rights are inconsistent … and it is this concurrent existence of inconsistent sets of rights which explains the doctrine; because they are inconsistent neither … may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence …

For the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election …

The nature of the knowledge which an elector must possess is a matter upon which the authorities are somewhat at variance. An elector must at least know of the facts which give rise to those legal rights, as between which an election must be made; without that knowledge the doctrine of election will not be available to make irrevocable his choice of one particular right, although in appropriate circumstances an estoppel may still arise which produces that very consequence.

9 He further observed that in many instances what may pass for an application of the doctrine is, in truth, the inevitable consequence of the party’s conduct, a consequence that would follow even if no such doctrine existed. But if he chooses instead to keep the contract alive and later seeks to rely on the breach to avoid the contract, the other party may have recourse to election or, if the facts will support it, to an estoppel.

10 Such a pragmatic observation unclothes the right of election from the myth that has been created around the concept and election can be understood as providing the mechanism (by the process of a choice made) in altering either the primary obligations (eg further performance) or secondary obligations (eg damages) of the parties after a breach, provided certain preconditions are fulfilled.

A. Preconditions of election

11 The first precondition of election is that the conduct of one party to the contract is held, as a matter of law, to entitle the other to a choice between two inconsistent courses of action. Having made a choice, the next precondition is that the elector must communicate his choice to the other party, whereupon the election becomes irrevocable.

12 The elector of course cannot be held to an irrevocable choice unless he had, at least, actual knowledge of the relevant facts that constituted the breach, or the uncontractual performance, by the other party. This is well settled amongst the authorities, which will be seen next.

13 What is not uniformly settled is whether the putative elector should further know that:

(a) he has the right to elect between two inconsistent rights or courses of action; and

(b) the legal effect of his choosing for the one against the other right, or course of action.

14 A subsidiary question is whether or not an intention to elect can be presumed from the conduct of the putative elector, who does not in fact know of his right to elect.

15 A clear answer to these questions is very important because it will determine whether the test of proving election is subjective (at least partially), or objective (eg, election will be imputed on objective grounds).

B. The extent of knowledge

16 Some examples of the choices commercial people have been faced with in different situations are given to focus the mind to the level of knowledge that might be required and illustrate the aforesaid questions before they can be answered.

(a) Assuming there is a defect in the title of the vendor, would knowledge of the fact which constitutes the defect be

enough, or should the putative elector also know that he has a right to rescind in consequence of the defect?12

(b) Would an elector need to know, in addition to his knowledge of the facts giving rise to compensation under statute, that the exercise of his option to accept compensation would bar his claim for damages which he would have independently of the statute?13

(c) Should an elector know that his choice to make an application for a stay of execution of judgment would bar him from applying to set the judgment aside? His action to apply for a stay would be unequivocal, judged objectively; but without knowledge of the other right, would it amount to a conscious election?14

(d) When a putative elector knows that a breach has been committed by the other party, should he also know:

(i) whether or not the breach is going to the root of the contract?

(ii) his alternative rights of either termination or affirmation of contract?

(iii) the consequences of his election?15

(e) Should the owners of a ship, when faced with a charterer’s order to proceed to a port which might be unsafe, know that by choosing to proceed to port, such choice will have the...

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