Veno Panicker

Managing the risks associated with ending a difficult contract

Veno Panicker, Partner, Blackstone Waterhouse Lawyers

What do I do if a party says they won’t perform a contract?

It’s a common problem across the commercial, property and projects spectrum – from a simple supply agreement, building contract or more complex acquisition of property or a business.

What are your rights if a party conducts themselves or makes statements reflecting an unwillingness or inability to substantially perform a contract?  Is it over if they say it’s over?

Such conduct is known as ‘repudiation’.  When one party’s conduct is ‘repudiatory’, an innocent party has the choice of:

  • terminating the contract; or
  • electing to continue with the contract.

The recent New South Wales Court of Appeal decision of Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd1 provides some guidance as to when conduct is repudiatory giving rise to an ability for an innocent party to terminate an agreement.

Critically, the case illustrate the difficulties in identifying:

  • what types of statements or conduct enable an innocent party to end an agreement? and
  • how does an innocent party validly ends a contract following such conduct?

Further, the case is a useful reminder to take care when responding to another party’s potentially repudiatory conduct – this is critical in order to ensure another party’s breach of contract does not become your own misguided repudiation of a contract.

How does a Court look at repudiation?

In essence the question a Court looks at when assessing whether conduct or statements are repudiatory is:

whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.’2

Sounds simple. In practice, this is a notoriously grey issue – as reflected in the Protector Glass Industries case where at trial, the Supreme Court found conduct was repudiatory, but on appeal, that same conduct was held not to be repudiatory.

So what happened?

Southern Cross Autoglass (SCA) entered into an asset sale agreement with Protector Glass Industries (PGI) in November 2008 for the purchase of the assets and goodwill of SCA’s automotive glass business.

Of note the contract provided:

  • at clause 2.2, that the SCA assets were sold “free from all charges, encumbrances, options and adverse interests of any kind”;
  • at clause 6.2(b)(i) that, on the Completion Date, SCA was obliged to deliver to PGI “possession of and title to the Business Assets free from all mortgages, charges, liens and encumbrances”; and
  • that it was a condition precedent to the sale of assets that SCA would obtain its lessor’s consent to the assignment of leased premises to PGI.

Prior to completion of the sale agreement, a liquidator which had a charge over some of SCA’s assets, the subject of the contract, wrote to PGI advising that the liquidator had a claim to those assets that SCA was attempting to sell to PGI.

PGI was understandably concerned.  How could SCA complete the sale ‘free from all charges’ in light of the liquidator’s letter?  PGI did not want to acquire assets which would involve being drawn into a law suit between the liquidator and SCA.

In the circumstances, PGI wrote to SCA and advised as follows:

(a) PGI wanted and intended to see the contract completed according to its terms;

(b) PGI emphasised that the contract required title to the assets free of any charges or other encumbrances; and

(c) PGI was willing to afford SCA a reasonable time to perform the contract – i.e. to produce the assets free of encumbrances by resolving the liquidator’s claim (PGI Letter).

SCA did not address PGI’s concerns and the parties engaged in discussions as to alternative means by which the assets could be transferred to PGI, including by way of a draft deed of termination which PGI issued to SCA and by employing two principals of SCA.

What happened in the Supreme Court?

SCA commenced an action in the Supreme Court alleging that PGI’s conduct was a repudiation of the original asset sale agreement.

SCA argued that it accepted PGI’s repudiatory conduct and sued PGI for damages for breach of the asset sale agreement based on the argument that the PGI Letter reflected an intention not to be bound by that contract.

The Supreme Court accepted these arguments by SCA and found that PGI had repudiated the contract by issuing the PGI Letter and employing the two principals of SCA.  Each of these issues were the subject of an appeal.

What did the NSW Court of Appeal do?

The Court of Appeal overturned the decision of the Supreme Court and found that SCA’s conduct was itself repudiatory in wrongfully terminating the contract.

As noted above, for conduct to be repudiatory, it must evince “an unwillingness or an inability to render substantial performance of the contract” or “an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations”.  Neither of those criteria was satisfied on a proper analysis.

It was held that PGI’s conduct, including the issue of the PGI Letter, did not manifest an intention to renounce the contract.  Rather, PGI merely put SCA on notice that if at the end of the specified period, SCA had not resolved the “legal matters” regarding ownership of the subject assets, PGI would regard itself as in a position where the subject matter for which it had bargained (and which SCA had promised to give) could not be delivered to it.

On this basis, PGI’s conduct had been prudent and appropriate.

If the Supreme Court can’t get this right…

There are a number of valuable take home lessons from the decision when faced with a party threatening non-performance of a contract:

  1. prior to entering into a contract, parties should consider the inclusion of express terms as to what terms (or breach of terms) will enable the other party to end a contract;
  2. care must be taken in how communications are expressed in the face of actual or threatened non-performance of a contract. This is so, as those communications may be used as evidence to show that you no longer intend to be bound by the terms of the contract, which may itself give the party in breach the right to terminate the contract and seek damages; and
  3. you must be ready, willing and able to perform the obligations in accordance with a contract in order to be able to terminate the contract for repudiation.

So what now?

This is not a substitute for legal advice when faced with similar issues.  The purpose of this article is to highlight the risks in managing the process of termination in the face of another party’s breach of contract.  Breaking up is hard to do – a measured but clear response to another party’s breach is critical to limiting the risk of a claim for wrongful termination of a contract.

The decision highlights the importance of getting the call on whether to end a contract correct – and the costs and consequences of getting it wrong.  If the issue is grey – and it often is – consider your options before making the decision to bring a contract to an end.  Making up may be simpler than breaking up!

1 [2015] NSWCA 16

2 Above n1 per Barrett JA at [124]