Papua New Guinea Law Reports - 1992
[1992] PNGLR 40
SC421
PAPUA NEW GUINEA
[SUPREME COURT OF JUSTICE]
THE CONGREGATION OF THE BROTHERS OF SACRED HEART INC.
V
DIRECTOR OF CHILD WELFARE 
AND
THE STATE
Waigani
Woods Hinchliffe Doherty JJ
27 January 1992
26 February 1992
CONTRACT - Unilateral abrogation - Conditions and warranties - When party deprived of benefits of the contract - Contract for care of juvenile offenders.
DECLARATION - Interpretation of agreement.
Facts
An agreement was entered into in 1989 between the appellants and State, through the Minister of Finance, for the former to manage the Hohola Remand Centre and Lae Detention Centre on behalf of the latter in consideration of quarterly payments. The agreement, although defective in form, was accepted by the parties as binding. During the latter part of 1990 the State refused to pay the amount determined for the 4th quarter because the appellant had failed to file a comprehensive record of all expenditures for the 3rd quarter of 1990. The appellant then closed down the centre in December 1990. The centre remained closed until June 1991 when the State and the appellants reached an agreement, and then it was reopened.
The appellant brought proceedings to recover the amount withheld at the end of 1990 and sought declarations relating to the interpretation and further operation of the agreement. 
The trial judge held that the funds for the 4th quarter of 1990 were justly withheld because of failure of the appellants to provide a progress report on the juveniles and a comprehensive record of quarterly expenditure. The appellant then sought leave to appeal against this ruling.
Issues
1.       Whether the provision of a quarterly report was a condition precedent to quarterly payment.
2.       The circumstances when breach of the term of an agreement by one party justifies breach by the other or unilateral abrogation of the contract.
Held
1.       There is nothing expressed or implied in the agreement which makes the presentation of an account a condition precedent to the quarterly payment being made.
2.       The failure of the appellant to submit records of expenditure was not such a breach to deprive the State of the benefit of the agreement and justify its repudiation.
Cases Cited
Hong Kong Fir Shipping Co Ltd v Kawasaki K.K. Ltd [1962] 1 All ER 474.
Counsel
P Steele and J Kil, for the appellant.
J Puringi and C Warokra, for the respondents.
26 February 1992
WOODS HINCHLIFFE DOHERTY JJ:  This is an appeal from the judgment of the National Court given on 22 July 1991, except for that part of the judgment in which the learned trial judge held in effect that K20,900 of the amount of K38,880 claimed by the appellant was not payable by the second respondent to the appellant. 
As certain matters appealed from involve questions of fact, leave is sought for this appeal; and it was agreed that the application for leave be argued at the same time as the substantive appeal.
The background of this matter is that the appellant has been involved with the running of institutions for juvenile offenders in Papua New Guinea, and the first respondent is the person responsible under the Child Welfare Act for the care of juveniles. The appellant has also been operating a remand centre in Port Moresby for the care and custody of juveniles held on remand pending appearance before court. A substantial property is owned by the State outside Lae, and the Director of Child Welfare and the State wished to arrange for its operation as a juvenile institution.
In 1989 the State, through the Minister for Finance, entered into an agreement with the appellant for the management by the appellant of the Hohola Remand Centre and the property at Lae (to be called the Lae Detention Centre). A copy of this agreement appears at pages 36 to 43 of the Appeal Book. Whilst it would appear that this agreement has not been properly signed, (there are no witnesses to the signatures; it has not been stamped as required under the Stamp Duties Act), the parties have accepted the agreement as the agreement between them and to which they are bound. They are seeking a determination of their rights and responsibilities as set out in that agreement. It can further be noted that under the Government Contracts Act the agreement is within the power of the Minister, as the total for the three years of the agreement is under the K300,000 limit set by that Act, on the powers of the Minister.
Following the signing of that agreement in August 1989, the Brothers ran the Lae Detention Centre and the State paid the amounts as agreed. The amount was stated as a yearly amount but it was paid quarterly as the government's quarterly appropriations were made. During the latter part of 1990 the State refused to pay the amount determined for the 4th quarter. The Secretary for Home Affairs and Youth stated that the appellant had failed to file any comprehensive record of all expenditures for the 3rd quarter of 1990 and, therefore, the Department for Home Affairs and Youth had withheld the allocation of K17,900, being the 4th quarter allocation. Not having received the above amount, which was required for the proper running of the centre and care of the juveniles detained therein during the fourth quarter, the Brothers were forced to close the centre in December 1990 and deliver all the wards to officers of the Director. The centre remained closed until June 1991, when the State and the Brothers reached some agreement and the centre was re-opened.
The Brothers have taken these proceedings to recover the amount withheld at the end of 1990 and to seek declarations relating to the further operation of the agreement. The evidence presented to the National Court was, in effect, as stated above. The Brothers basically relied upon the terms of the agreement, and no objection was taken to the Court interpreting the agreement as it appears in the Appeal Book.
The State's evidence comprised a number of affidavits. There was an affidavit by Thaddy Ambing that appears to merely relate to events in and after February 1991, which included a timetable for the takeover of the institutions by the department itself.
The affidavit by Belden Sevua, who was the Secretary of the Department of Home Affairs and Youth, refers to money being allocated for the purposes of the agreement and to certain amounts being withheld.
Augustus Wagambio, who is described as the principal co-ordinator for courts and institutions, agrees with the terms of the agreement and with the provision of funds for the carrying out of the agreement. He seems to suggest that the agreement required detailed progress reports on State wards and young persons placed under the custody of the Brothers. However, there is no such requirement in the agreement. He then makes reference to the obligations and responsibilities of the Secretary of the department under the Public Finances (Management) Act which, whilst of interest, has no real bearing on the agreement as far as the Brothers are concerned. He then makes reference to requests for reports detailing expenditure of funds. He also makes reference to a Welfare Inspection Report dated 15 January 1990 of Kathy Guise, a welfare officer. The general import of that report, which is quite a constructive report, seems to be that the department should be reconsidering the role of juvenile institutions in the care and rehabilitation of juvenile offenders. Whether Mr Wagambio is using that report as a reason in support of the withholding of the funds is not clear.
The Director of Child Welfare deposed that he had not withheld any monies. In view of the fact that other officers seemed to agree that a sum of K17,980 was withheld over and above the shortfall in the appropriation of a further K20,000, this seems to be a contradictory statement which was never clarified in the evidence or by the judge.
His Honour referred to all the affidavits filed and then, without any analysis of the evidence, including the agreement itself, came straight to the conclusion:
"On the material before me I am satisfied that the second Defendant was justified in withholding the funds for the 4th quarter because of the actions of the plaintiff. I consider that in 1990 the plaintiff was in breach of the agreement when it did not provide progress reports to the defendants on the juveniles and when it failed to provide comprehensive records of expenditure for each quarter more specifically for the 3rd and 4th quarters of 1990."
There are clearly initial errors here. Firstly, nowhere in the agreement is there any reference to progress reports. The closest requirement in the agreement is in clause 7, which states: 
"The Brothers undertake to submit the names and numbers of wards to the Director, Child Welfare, every month."
There is no evidence of compliance or non-compliance with this requirement of clause 7.
Clause 8 refers to the payment of funds by the State to the Brothers. It says:
"The State undertakes to provide this sum in quarterly allotments, payable as soon as reasonably possible at the beginning of each quarter."
It then goes on to list what these funds are to be used for. Clause 11 refers to all funds being properly disbursed and accounted for, and there is a requirement for the Brothers to return to the State a comprehensive record of all expenditure at the conclusion of each quarter.
There is nothing in the above clauses which make the accounts a condition before payment is to be made. Rather, the agreement clearly recognises what these funds are for, namely the accommodation and care of wards and remandees, and such funds must be paid at or soon after the beginning of each quarter to ensure such accommodation and care is given.
His Honour the trial judge made no analysis of the agreement in the light of the statements made in the affidavits.
His Honour then made a reference to the Public Finances (Management) Act and seems to imply that the Act gave the second respondent authority to withhold the funds. However the sections of the Act he refers to say no such thing. They merely refer to the responsibilities and duties on, accounting officers in the public service. If a government official is disbursing funds that have been appropriated to a non-government entity or person, then that disbursement must be covered by some agreement or some special legislation, as that other person does not come under the Act. And in this case we have a special agreement between the Brothers and the Minister for Finance.
At this stage it is necessary to consider what this agreement is. It is an agreement to care for wards of the State and juveniles, the State providing the land and buildings and the Brothers providing the care. It is subject to government appropriation of funds. Whilst the agreement may not have been the ideal one in the circumstances - and the Director and his staff do suggest that, such criticism can be of no concern to this Court at this stage. Funds were appropriated and under the agreement were necessary for the care and accommodation of the wards and remandees, so was it open to one party to the agreement to unilaterally abrogate the agreement because of what it saw as a breach of the agreement? Was there any fundamental breach such that the whole purpose and intent of the agreement had failed? There was no evidence of a fundamental breach in the care of the wards and juveniles. The only evidence on that line was the report of Kathy Guise which, as already indicated, was a constructive report calling for review of the whole area of care of wards and juvenile offenders. So the only other area of fault was the failure to submit records of expenditure for the 3rd quarter so that the 4th quarter's funds were withheld. But as already indicated, the appropriation of the funds and their use in clause 7 did not depend on the records of expenditure being submitted.
This raises a question that has dogged the courts for many years. As Lord Justice Diplock of the Court of Appeal said in Hong Kong Fir Shipping Co Ltd v Kawasaki K.K.Ltd [1962] 1 All ER 474 at 485:
"The problem: in what event will a party to a contract be relieved of his undertaking to do what he has agreed to do but has not yet done? has exercised English courts for centuries."
He later goes on to say that:
"Such a question cannot be simply answered by treating all contract undertakings as falling into one of two categories: 'conditions' the breach of which gives rise to an event which relieves a party not in default of further performance of his obligations, and 'warranties' the breach of which does not give rise to such an event."
His Honour suggests that there are many contractual obligations of a more complex character which cannot be categorised as being "conditions" or "warranties". He then says at page 497:
"Of such undertakings, all that can be predicated is that some breaches will, and others will not, give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend on the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a 'condition' or a 'warranty'."
Whilst the Court of Appeal in that case was looking at a charter party contract which could be far removed from a contract for the care and accommodation of juveniles, we feel that the principles as stated by Lord Justice Diplock could be applied here. His Honour concluded with the principle: 
"What the learned judge had to do in the present case, as in any other case where one party to a contract relies on a breach by the other party as giving him a right to elect to rescind the contract, was to look at the events which had occurred as a result of the breach at the time at which the charterers purported to rescind the charter party, and to decide whether the occurrence of those events deprived the charterers of substantially the whole benefit which it was the intention of the parties as expressed in the charter party that the charterers should obtain from the further performance of their own contractual undertakings."
Applying that principle to the case before us now, has the failure by the Brothers to submit records of the expenditure of funds substantially deprived the State of the benefit of the agreement? Of course not. The Brothers were still looking after the wards and remandees, providing care and accommodation. The report of Kathy Guise in no way suggests that the Brothers were not doing that. His Honour the trial judge clearly erred in not considering the purpose and intent of the agreement and whether such purpose and intent was being fulfilled.
We find there was no breach such that the State was deprived of the benefit of the agreement or which allowed the State to unilaterally abrogate the agreement. Instead, what happened was that the failure by the State to provide the funds which had been legally appropriated for the purpose of the agreement meant that the Brothers could no longer provide the care and accommodation required and they were forced to deliver the wards and juveniles held at the Lae Centre back to the Director.
We, therefore, find that the trial judge erred. We grant leave to appeal and we uphold the appeal and:
1.       Declare that the second respondent is in breach of the agreement executed on 24 August 1989 by withholding the balance of the money allotted and payable under the agreement to the Brothers.
2.       Order that the first and second respondents release to the appellant the sum of K17,980 payable pursuant to the said agreement for the year 1990.
3.       Order that the first and second respondents release to the appellant the funds appropriated to the agreement for the quarters that have been performed to date.
Lawyer for the appellant: Steeles.
Lawyer for the respondent: State Solicitor.