The courts use a test of “essentiality” to decide whether a term is to be interpreted as a “condition.” This test was famously explained by Jordan CJ in the case of Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd.
Given below are the case details:
|Case name & citation: Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632;  HCA 66; (1938) 61 CLR 286|
|The concerned court: High Court of Australia|
|Decided on: 23 December 1938|
|Area of law: Termination of contract for breach of a condition|
Facts of the case – Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd
A contract was entered whereby Tramways Advertising agreed to display advertising boards on their trams for Luna Park (an amusement park). The agreement was made for three seasons. It was clearly provided that the advertising boards shall be displayed on the trams for at least 8 hours per day throughout every season.
Luna Park found out that the ads were not on display for 8 hours per day and they, therefore, terminated the contract for breach of a condition. Tramways Advertising argued that “8 hours” referred to an average time and that the agreement was to display the ads for an average period of 8 hours. They sued for their payment against which Luna Park counter-sued and argued that there was a breach of contract and that it was terminated.
The issue that arose, in this case, was – whether or not the requirement to display ads for a minimum of 8 hours a day was an essential term of the contract. Could the failure to do so result in the termination of the contract?
Judgment of the Court in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd
Latham CJ gave the judgment.
The High Court held that according to the natural meaning of the words, the requirement was that the ads should be on display for at least 8 hours a day and not an average time. Moreover, this term was so essential to the very nature of the contract that its non-performance could be viewed by the affected party as a substantial failure to perform the contract at all. Hence, since Tramways Advertising had breached this condition (essential term), thus, Luna Park was entitled to terminate the contract. It not only entitled Luna Park to claim damages but also to refuse to perform any of the obligations resting upon them.
However, despite an automatic right to damages, Luna Park was unable to prove to the court the extent of their loss. Hence, they were awarded nominal damages.
The test of essentiality
Jordan CJ explained the test of essentiality as under:
“The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor . . . If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.”
Although the above test was laid down by Jordan CJ in NSW Supreme Court, the case then went to the High Court and Latham CJ expressed the test even more succinctly.
“It [the guarantee] was a term of the contract which went so directly to the substance of the contract or was so essential to its very nature that its non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all.”
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