CONTRACT LAW - THE CRITICAL DIFFERENCE

BETWEEN TERMINATION AS A RESULT OF AN EXPRESS CONTRACTUAL RIGHT AND ACCEPTING THE ACT OF REPUDIATION CAUSING TERMINATION BY THE OTHER PARTY

Terminating contracts under Australian common law is always difficult and often expensive. The best way of minimizing delays and expense is to make sure that the contract is clearly drafted and sets out all of the obligations accepted by all parties as well as the rights to bring the contract to an end.

Business people enter into an enormous variety of contracts. Ultimately, the right to terminate does not vary considerably whether the type of contract involves construction, intellectual property, supply of goods or services, import/export or purchase and sale.

Generally speaking, in relation to the termination of a contract, there are two coexisting sets of rights recognized by Australian law:

First, termination becomes possible if there is a breach of contract which is sufficiently serious in terms of magnitude or consequence to the parties or to the purpose of the contract. This type of breach is referred to as “repudiatory breach”; and
Termination caused by express contractual provision.

It is generally important for parties to contracts to realize that a right to terminate will be a mixture of express contractual rights and rights arising from common law. Common law is the traditional judge-made precedent law that is handed down by Australia’s superior courts like the High Court, Federal Court and State and Territory Supreme Courts.

A recent example is where a company in 2012 (Enterprise) appointed another company (C & S) to provide claims handling services relating to motor car insurance. The contract contained termination provisions including a right for either party to terminate on three months’ notice in writing. The contract also provided for trigger events being material breach of various clauses which, if capable of remedy, was not remedied within thirty or more days of notice to remedy being given.

By mid-2013, the relationship between Enterprise and C & S soured as a result of alleged poor service by C & S. In 2014, Enterprise purported to terminate the contract by way of letter which alleged:

Repudiatory breach by C & S which Enterprise purported to accept; and/or
The right to terminate with notice under an express term of the contract.

Legal proceedings were issued. One of the arguments raised by C & S was that a party like Enterprise could not rely on both of the bases of termination; in other words, if they were relying upon repudiatory breach, they could not rely on the same factual circumstances as constituting a material breach of a specific express contractual provision. Had this argument been successful, it would have required parties seeking to end contracts to make an important forensic decision when deciding to sue. Either the innocent party relied upon repudiatory breach or, alternatively, they relied upon material breach of an express provision. These decisions are not easy to forecast when trying to work out how to sue a guilty party in a breach of contract dispute.

Fortunately, the argument was not accepted by the Court who ruled that the contractual right to terminate was additional to the right to terminate for repudiation at common law. Obviously, however, this decision would be subject to very clear wording in a contract which did, arguably, specifically exclude the common law right to terminate the contract on the basis of the allegedly repudiatory act of any party.

What does this mean for practical advice to our business clients?

First, it must be remembered that claims for repudiatory breach frequently occur when the party that is on the receiving end of a “botched” termination turns the tables and claims that the failed termination action itself amounts to a repudiatory breach which entitles the receiving party to damages.

Secondly, when multiple “minor” breaches occur, they can potentially amount to a repudiatory breach if they occur together or sequentially.

Thirdly, as long as a repudiatory breach exists at the time of the purported termination, even if that was not the provision relied upon at the time, the right to terminate on those alternative grounds may remain a valid ground for termination.

As experienced business lawyers in Melbourne, we recommend the following practical steps to minimize contractual business risk:

Get your contracts right in the first place – contract wording always needs to be specific and clear. Ensure that your contract covers potential scenarios that may arise such as triggers for termination as a result of insolvency plus provisions for giving notice to terminate. Pay the money to get a competent lawyer to review your contracts. It will be a small investment in the avoidance of a very costly legal battle based upon a contract no one (including the court!) really understands.
Ensure the right to terminate is crystallized before taking action – a party cannot terminate a contract until the right to terminate has occurred. Normally, some events will give rise to an immediate right to terminate whilst others will require a warning notice and then only give notice to a right to terminate if the event is not rectified and persists. This is the basis upon which most building and construction contracts are drafted.
Follow the contract and get the process right – be careful to follow the process of notice of termination carefully and precisely and as set out in the contract. Do not ad lib or take shortcuts. In particular, make sure that you get the following correct: the content of the notice; the party that needs to serve the notice – for instance an agent; the name of the receiving party; the address for service; and the method of service – make sure that you are able to serve by email. Many older style contracts will still require service by registered post. Modern businesses used to email communication only will overlook this and then have a court conclude that invalid service has occurred because it was not in the form provided under the contract.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.