Repudiation

The case concerned a commercial property in Macquarie Park, Sydney. As part of a transaction by which Oz International Investment Pty Ltd and its sole director, Mr X Yang, (the appellants) bought the property in early 2020, they and Star Moon Investments Pty Ltd (the respondent) entered into a deed of rental guarantee (the rental guarantee deed), as well as an agreement appointing the appellants as the exclusive managing agents of a property

Under the rental guarantee deed, the appellants were obliged, for a number of years, to cover the difference between the rent actually received by the respondent by leasing the property and a minimum guaranteed rental amount. However, the respondent was obliged to enter into a lease with any tenant 'recommended' by the appellants.

From the time the respondent acquired the property until August 2022, the property remained vacant. The appellants did not pay the minimum guaranteed rental amount.

In May 2021, the respondent commenced proceedings, demanding:

• payment of the minimum guaranteed rental;
• the shortfall between the actual rent received by the appellants for leasing out the property and the minimum guaranteed amount; and
• damages for breach of contract, arguing that the appellants wrongfully repudiated the agreements.

The appellants argued that the respondent was in breach of clause 3 of the rental guarantee deed because it failed to enter into a lease with a tenant the appellants had 'recommended' . The appellants claimed to have recommended a number of tenants, referring to several conversations and to emails sent between the parties.

They submitted that the respondent's failure to comply with Clause 3 was repudiatory conduct, which entitled them to terminate the deed. At first instance, the District Court found in favour of the respondent.

In the New South Wales Court of Appeal, the appellants asserted that the judge at first instance was wrong to find that:

1. They had not recommended any tenants to the respondent.
2. There had been no repudiatory conduct by the respondent entitling the appellants to terminate the deed.

The meaning of 'recommended'

President Ward (with whom Justices Davies and Hallen agreed) considered the meaning of the term 'recommended' in the context of the commercial arrangements between the parties.

In emails and letters between the parties that the appellants relied upon (among other things), the appellants identified a possible lessee, and requested the respondent to 'Please take consideration of this offer'. The respondent had replied to the effect that there were insufficient details about the lessee, and requested full details of the lease negotiations, and background checks of the proposed tenant. The appellants failed to state that they were 'recommending' the possible lessee, even when asked to do so by the respondent.

The court concluded that the appellants had not recommend any tenants to the respondent.

This was on the basis of findings that, in the natural and ordinary meaning of the word 'recommend', there was a clear distinction between finding or introducing a prospective tenant on the one hand and recommending that tenant on the other. The court held that this natural and ordinary meaning was consistent with the commercial context in which the appellants, as the exclusive managing agent of the property, were in a position 'not simply to identify or put forward potential tenants' but vet them to the extent that they could recommend them to the respondent. It made 'commercial sense' that the distinction was reflected in the wording of the deed.

On the basis of this construction of the term 'recommend', it was found that the appellants had not made any recommendations.

Repudiation

As a consequence of the finding that no recommendation had been made, the repudiation claim failed. However, the court still made some useful observations by way of obiter.

It commented upon the seriousness of finding that there had been a repudiation and provided useful guidance on the circumstances where a repudiation would be found to have taken place:

• An intention no longer to be bound by a contract can be evidenced by a refusal or inability to perform an essential term (or a substantial non-performance of an intermediate term).
• On the question of whether a term is 'essential', whether a breach can be adequately remedied by damages is a relevant consideration.
• Repudiation can be by express words, or implied from words and / or conduct.
• The court must consider all of the surrounding circumstances to determine whether the alleged defaulting party's words / conduct carried an intention to repudiate.
• A party maintaining an erroneous interpretation of a contract can, but will not always, amount to repudiatory contract. A party who holds an incorrect view of the construction of a contract but is also willing to be bound by an authoritative exposition of the correct interpretation cannot be said to have an intention to repudiate the contract.

The court found that the obligation to enter into a lease was not an essential term of the deed. A key factor was the finding that if there had been any breach of the term, it could have been adequately remedied by way of damages.

Further, the court held that even if the appellants had, as they asserted, made a recommendation, the respondent's conduct could not be considered repudiatory in all the circumstances. While it had not entered into a lease with the lessee identified by the appellants, it had otherwise consistently acknowledged the binding nature of the deed and had not evinced any intention not to be bound by it.