Site search
Contract law update 2022

Contract law update 2022: repudiation and termination

No end to uncertainty on what conduct is repudiatory

In our Contract Law Update for 2021, we referred to the 'considerable uncertainty in practice' that can arise in deciding whether a breach of contract gives the 'innocent' party a right to terminate. Such a breach is often called a 'repudiation of a contract'. Another form of repudiation can arise where, although there has not been a breach of contract, a party indicates that they are not going to comply with the contract or that they will only comply in a manner substantially inconsistent with their obligations. This form of repudiation is sometimes described as 'anticipatory breach'.

This form of repudiation can also generate uncertainty as to whether the proposed method of performance is 'substantially inconsistent' with the party's obligations. In particular, what happens if a party's proposed non‑compliant performance of the contract is based on an incorrect interpretation of the contract? This was considered by the Queensland Court of Appeal in Babstock Pty Ltd Anor v Laurel Star Pty Ltd Anor.1 That case ultimately turned on the proper interpretation of a particular provision in the contract. However, the court, in its judgment, confirmed the applicable principles when considering whether an 'anticipatory breach' constitutes a repudiation of a contract. In particular:

  • The court confirmed that the test for repudiation by anticipatory breach is an objective That is, in deciding whether a party has an intention no longer to be bound by the contract, or only to fulfil it in a manner substantially inconsistent with its obligations, that intention is determined objectively, rather than by reference to the actual, subjective intention of the party.2
  • The court referred to some High Court judgments to the effect that 'The Court will not readily infer from a party's insistence on a wrong construction of a contract that [the party] is unwilling to perform it according to its true construction'.3

There will, however, be cases where the incorrect interpretation of a contract does lead to a repudiation. The circumstances in which maintaining an incorrect interpretation of a contract does, or does not, repudiate the contract is currently not clear and will need to be developed in future cases. On the current state of the law, a party that 'accepts' a repudiation, based on the other party's incorrect interpretation of the contract, therefore runs the risk of itself repudiating the contract.

Some of the High Court cases relied upon by the Queensland Court of Appeal in Babstock were also referred to by the NSW Court of Appeal in Hong v Gui.4 In that case, a party was alleged to have repudiated an agreement by purporting to terminate when the other party had failed to supply a land tax certificate (as required by the contract). The court referred to:

  • DTR Nominees5, that a party insisting on an incorrect interpretation of the contract does not necessarily evince an intention not to perform the contract according to its terms; and
  • the warning of Justice Wilson in Shevill6 that 'repudiation of a contract is a serious matter and is not to be lightly found or inferred'.

The NSW Court of Appeal also confirmed that the test for determining whether a party evinces an intention not to comply with the contract is an objective, rather than a subjective, test. In either case, the court held that it was clear on the facts that the vendor did intend to comply with the contract and had not repudiated it.

The risks in terminating a contract by 'accepting' a repudiation were, once again, exemplified by a decision of the NSW Court of Appeal, in Aslan v Stepanoski.7 That case concerned a dispute as to whether a builder, in submitting a payment claim, and in light of alleged deficiencies in previous building work, repudiated the contract. The trial judge held that the builder did repudiate the contract but the NSW Court of Appeal took a different view. There have been many cases in previous Contract Law Updates where appellate courts have taken a different view from trial judges of allegedly repudiatory conduct .

Although a contract is usually terminated by the deliberate act of one party, it is also possible for contracts to be terminated by 'abandonment'. The NSW Court of Appeal in Woolworths v Gazcorp8, following its decision in Tecnidcas Reunidas SA v Andrew9, confirmed that abandonment should be understood as an inferred agreement to terminate. It is therefore a question of fact to be inferred from an objective assessment of the conduct of the parties.10 In that case, the objective assessment led to a conclusion that the contract had been abandoned.

Babstock Pty Ltd & Anor v Laurel Star Pty Ltd & Anor [2022] QCA 63

Relevance of genuine (but mistaken) interpretation of contract in determining whether contract repudiated – adopting a commercial construction having regard to legislative context.

In this case, the Queensland Court of Appeal considered an appeal from a District Court decision that the appellant, Babstock Pty Ltd, had repudiated an essential term of a contract for the sale of part of a business through an anticipatory breach.

The court held that the behaviour of the parties ahead of the sale reflected a 'cooperative approach' that did not amount to repudiation of the contract by Babstock. The court also held that, alternatively, the construction of the relevant term adopted by Babstock was correct.

This case illustrates that, even where parties have conflicting views about contractual obligations, the broader context of the parties' dealings and legal obligations will inform whether anticipatory breach occurs

Facts

Babstock agreed to sell its property letting business, which managed 148 properties, to Laurel Star Pty Ltd. As part of the sale, Babstock agreed to sell its appointments as rental agent for properties under its management to Laurel Star in a contract dated 1 December 2017.

Clause 10.1.4 of the contract appeared to require that Babstock provide Laurel Star with assignments of appointments 'duly executed by the relevant transferred Property Owner' on the settlement date. This requirement was included in the contract even though the assignment could occur under the Property Occupations Act 2014 (Qld) (the Act) without the property owner's acknowledgment.

The first settlement date was 11 May 2018. Laurel Star sent Babstock a letter on 10 May 2018, purporting to terminate the contract for breach of contract, among other reasons.

Importantly, Babstock did not intend to provide Laurel Star with assignments that had been executed by property owners. In the months before settlement, Laurel Star had been sent drafts of the notices of assignment that Babstock sent to owners that did not request their execution.

Nevertheless, evidence showed that Babstock was in a position to provide Laurel Star with at least two appointments executed by owners. The contract did not specify the number of appointments to be assigned to Laurel Star.

The primary judge held that Laurel Star had validly terminated the contract for repudiation by Babstock. Babstock was found to have anticipatorily breached clause 10.1.4 when Laurel Star terminated the contract, because it had no intention to provide Laurel Star with assignments executed by property owners on the settlement date.

Judgment

Repudiation resulting from anticipatory breach

On appeal, Justice Fraser (writing for the court) reversed the primary judge's decision that Babstock was in anticipatory breach of clause 10.1.4 and had repudiated the contract. The appeal decision on anticipatory breach was independently supported on two grounds:

  • Babstock's insistence upon an allegedly incorrect construction of clause 10.1.4 did not amount to anticipatory breach; and
  • even if Babstock was obliged to provide assignments executed by owners, it was still able to do so in a way that would meet its obligations under clause 10.1.4.

By sending draft notices of assignment to Laurel Star, Babstock made clear that it did not intend to request that owners execute the documents. After Laurel Star received those draft notices, the parties continued to cooperate in preparing correspondence with owners and otherwise taking the steps necessary to effect settlement.

Babstock's behaviour did not amount to 'persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement' because Laurel Star never insisted upon the purported requirement that owners execute the assignments. This meant there was no anticipatory breach.

Furthermore, even if Babstock was obliged to provide assignments executed by owners, Laurel Star could not show that Babstock was 'wholly and finally disabled from performing its contractual obligations' on the settlement date.

Clause 10.1.4 did not specify the number of properties that needed to be transferred to Laurel Star by the first settlement date. At that date, Babstock was still able to provide two assignments executed in this manner. In the absence of a contractual requirement to transfer a particular number of properties, this was sufficient to satisfy its obligations under clause 10.1.4.

Construction of contractual terms

Justice Fraser separately held that the proper construction of clause 10.1.4 did not require execution of the notices of assignment by property owners. This was unnecessary under the Act. In context, the requirement for due execution by owners should be read as applying to the appointment of the rental agent, not the assignment of that appointment to Laurel Star.

This construction was bolstered by the uncommercial effect of requiring execution of the notices of assignment by property owners. Requiring owners' execution of the assignments generated no commercial benefit for either Babstock or Laurel Star. Instead, the legally unnecessary requirement risked reducing the number of appointments that could be assigned to Laurel Star at settlement.

Together, the legal incoherence and uncommercial effect of the most literal construction of clause 10.1.4 justified its rejection in favour of a construction that did not require owners' execution of assignments.

Aslan v Stepanoski [2022] NSWCA 24

Whether builder's demand for progress payment and consequent suspension of work was repudiatory.

In this case, the NSW Court of Appeal considered an appeal by a builder from a finding that he had engaged in repudiatory conduct by refusing to continue to perform work under a lump sum contract due to non-payment of a progress claim, in circumstances where the builder had already been paid significantly more than the value of the work that had been completed.

The court unanimously allowed the appeal, finding that the respondents had failed to discharge their burden of proving that the builder had engaged in repudiatory conduct. The court identified error in the trial judge's analysis of the conduct, which it found was not determinative. It also rejected a restitutionary claim for mistaken overpayment on the same basis.

The decision demonstrates that a claim of repudiatory conduct involving issues of non-payment and suspension of works must be based on evidence that demonstrates conduct inconsistent with the specific terms of the contract, rather than general evidence that compares the value of work completed with amounts paid

Facts

The appellant (the builder) and the respondents (the owners) executed a lump sum contract for the construction of two residences on the owner's land in October 2014. The contract price was $1,080,000 and there was provision for this price to be paid through a series of progress claims upon the builder's completion of certain stages of the construction work.

The builder commenced works in November 2014 and continued through to September 2015, during which time he submitted progress claims and the owners paid a total of $1,067,094.28. In mid-September 2015, a number of events transpired over the course of a few days:

  • The owners made numerous complaints to the babout his management of the progress of works, poor execution of works, failure to follow approved plans and unauthorised modifications to the development consents.
  • The builder submitted his fourth progress claim for $214,000.
  • Two days later, the owners proceeded to change the locks at the site, which prevented the builder from accessing it.
  • Five days after the builder's access was removed, he emailed a 'Notice of Ceasing Building Works' to the owners, on the grounds that he no longer had access to the site and the fourth progress claim remained unpaid.

No work was done by the builder after he issued the notice. In May 2016, the owners purported to terminate the contract, on the basis that the builder's refusal to continue the works amounted to a repudiation of the contract, which the owners accepted. The owners then commenced proceedings against the builder, claiming damages for losses arising from the repudiation.

At trial, expert evidence established that the value of the work completed by the builder was $564,426.48. The trial judge found that the builder's conduct in stopping work, and failing to resume work, evinced an intention not to perform the contract in circumstances where the builder had been paid 98.8% of the contract price ($1,067,094.28) but had only completed work to the value of 52.56% of the price. It followed that the builder had no contractual entitlement to the outstanding amounts he claimed under the fourth progress claim, such that his refusal to continue work (absent payment) amounted to repudiation.

Judgment

The court considered the central issue to be whether the trial judge had adopted an appropriate analysis in reaching the finding that the builder had repudiated the contract and, similarly, whether the owners had discharged their onus of proving the builder's repudiation.

The court held that the trial judge's comparison of an expert valuation of the value of the work performed with the amount of money paid to the builder for that work, was an inappropriate way to determine whether he had a contractual entitlement to the fourth progress claim. This was because:

  • the builder's contractual entitlement did not necessarily accord with the value of the work he agreed to perform; and
  • nor did it necessarily accord with the value of the work he had in fact performed.

For those reasons, the trial judge's analysis failed to account for the possibility that the owners had agreed under the contract to pay more for the work than the actual value of the work, conceivably on the basis that:

  • the contract was simply a bad bargain from the owners' point of view; or
  • the value of the various progress claims stipulated under the contract were not directly equivalent to the value of the work performed at each stage: ie the parties may have decided to 'front-end' the payments to make earlier progress claims disproportionately high.

In order to determine whether the builder was entitled to the fourth progress claim, the court said that it would have been necessary to consider whether the provisions of the contract that governed the payment of progress claims had been complied with – in particular, whether the builder had in fact completed the stage of works specified under the contract as entitling him to make the fourth progress claim. On the basis that no attempt was made (beyond a bare comparison of amounts paid to the builder and value of work performed) to demonstrate that the builder was not contractually entitled to the fourth progress claim, the court held that the owners had failed to establish that the builder's conduct, in asserting an entitlement to payment, was repudiatory.

The owners had also succeeded at trial on a restitutionary claim, for mistaken overpayment under the contract, that was based on the same comparative analysis between value of work performed and amounts paid. The court allowed the builder's appeal of this finding for the same reasons; particularly, a restitutionary claim to remedy a mistaken overpayment could not succeed without an examination of the progress payments by direct reference to the contractual provisions that provided for those progress payments. The owners were required to establish that the payments were in disconformity with the provisions of the contract and failed to do so.

For these reasons, the court allowed the builder's appeal, set aside the orders of the trial judge and entered judgment for the builder on the owners' claims against him

Hong v Gui [2022] NSWCA 245

Is the subjective intention of a party, to comply with the contract, relevant to whether it has repudiated the contract?

In this case, the New South Wales Court of Appeal considered whether the wrongful service of a termination notice by a vendor was a repudiation of the contract for the sale of land.

The court held that, as the contract provided for such a course in the event of breach by the purchaser, the notice was not unequivocal as to an intention to repudiate. The court further held that, in all the circumstances, it was clear that the vendor was seeking to perform the contract despite not in fact being entitled to serve the notice on the purchaser. The purchaser's appeal was dismissed.

The case is significant because it reaffirms the law relating to repudiation of a contract for the sale of land. Whether a party has repudiated the contract must be determined in all the circumstances and while having regard to the totality of a party's conduct.

Facts

The parties entered into a contract for the sale of two strata properties on 26 September 2019. The date for completion was extended on several occasions, following requests by the purchaser. Before the settlement date, the vendor's solicitors wrote to the purchaser's solicitors to arrange settlement. There was no response to these communications. The purchaser missed the date for settlement. A second date for settlement was set by the vendor. The purchaser again did not complete. Having still received no response from the purchaser's solicitors, the vendor served a notice to complete. A third settlement date was fixed. When the purchaser did not complete, the vendor's solicitors served a notice to terminate.

The purchaser responded with her own notice to terminate, claiming that, as no land tax certificate had been provided, the notice to complete was invalid and that therefore the service of the notice to terminate by the vendor was a repudiation of the contract.

Judgment

The court held that:

  • it is necessary to look at a party's conduct as a whole to determine whether they have repudiated the contract. As such, the vendor's notice to terminate could not be viewed in isolation from the surrounding circumstances known to the recipient of the notice;
  • while the vendor made a factual error in not supplying the land tax certificate, in circumstances where the purchaser took no steps to identify the omission, and the vendor repeatedly sought to complete, the vendor's notice was not a repudiation; and
  • there was nothing in the vendor's conduct that suggested to the purchaser the vendor sought to walk away from the contract; rather, it was clear the vendor was relying on it.

Woolworths v Gazcorp [2022] NSWCA 19

Whether contract terms were varied by correspondence between the parties – whether a contract was terminated for frustration or abandoned.

In this case, the NSW Court of Appeal considered (a) when a contract may be varied by communications between the parties and (b) when a contract may be treated as abandoned.

The court held that the correspondence between the parties had varied the meaning of 'Landlord's Works' under their contract. Accordingly, upon the refusal of a development application for those varied 'Landlord's Works', the contract had become frustrated. In the alternative, the court held that the contract had been abandoned, as neither party had performed nor sought performance of the contract for a substantial period of time, notwithstanding their continued dealings.

The decision is an important reminder that parties should be cautious regarding the legal effect of correspondence. Even where correspondence refers to the preparation of formal documentation to reflect an agreement, the court may treat the correspondence itself as having an immediate legal effect. Additionally, parties should be aware that continued dealings between them will not necessarily foreclose the possibility of their initial agreement being taken to be abandoned.

Facts

On 20 February 2008, Woolworths Group Limited and Gazcorp Pty Ltd entered into an agreement for lease (the AFL). Under the AFL, Gazcorp would build on a site in Green Square, which would include a supermarket to be leased by Woolworths. At the time the AFL was formed, a development consent for the works had been obtained.

In late 2007 and 2008, Woolworths and Gazcorp discussed the prospect of including a Big W store at the Green Square site. A fresh development application was lodged on 2 July 2008, to reflect the inclusion of the Big W store. As a result of the discussions, the construction program was delayed. On 23 July 2008, Gazcorp sent a letter to Woolworths, requesting an extension to the date for practical completion under the AFL. On 11 September 2008, Woolworths replied to Gazcorp, agreeing to the extension, subject to Gazcorp agreeing to further variations. One of these variations was to include the revised building plans in the definition of ‘Landlord’s Works’ under the AFL. In response, Gazcorp sought an extension to the date by which all approvals relating to the development were to be obtained. Woolworths replied the following day with a letter in identical terms to the 11 September letter, except with the approval date amended as requested by Gazcorp.

In the interim period, the development application for the revised building plans was rejected (with Gazcorp’s subsequent appeal to the Land and Environment Court also being dismissed). The parties subsequently discussed alternative plans, culminating in a development application, lodged on 6 July 2012, for a development significantly different from that contemplated by the initial AFL. The development application was approved on 30 November 2012, and the parties continued to discuss proposals for the Green Square site. However, from April 2012 to 3 February 2016, no reference was made to the AFL in the correspondence between the parties.

In early 2016, the parties discussed entering into a new AFL. During these discussions, a dispute arose as to whether the initial AFL remained on foot. Gazcorp asserted that the AFL had been abandoned, while Woolworths maintained that the initial AFL remained in force. Further negotiations to revive the project proved unsuccessful and, on 15 October 2018, Gazcorp initiated proceedings in the NSW Supreme Court, seeking a declaration that the AFL had been terminated or was otherwise no longer on foot. The primary judge made that declaration, holding:

  1. that the AFL had been varied by the 12 September letter, and was subsequently discharged by frustration following the refusal of the 2008 development application: and
  2. in the alternative, the AFL was terminated by mutual abandonment no later than the beginning of 2014.

On appeal, Woolworths sought to challenge both of those findings.

Judgment

The court unanimously dismissed Woolworths' appeal. On the first ground, President Bell (with Chief Justice Bathurst and Justice Meagher agreeing) held that questions of contractual variation need not be resolved by a stringent application of the concepts of offer and acceptance. Except for one alteration, the 12 September letter was identical to the 11 September letter. Accordingly, President Bell was of the view that the 11 September letter could be treated as the counteroffer, which Gazcorp sought to modify in only one respect. His Honour noted that a representative of Woolworths communicated that this modification was accepted, with a formal letter reflecting that acceptance to follow. This communication undermined Woolworths’ claim that acceptance was to be effected through the preparation of formal documentation, rather than the 12 September letter. Additionally, President Bell noted that, in the course of its pleadings, Woolworths had accepted that the 12 September letter had varied the approval dates of the AFL. Given Woolworths had accepted that the 12 September letter was capable of varying some terms of the AFL, it could not assert that formal documentation was condition precedent to the 12 September letter having a legally binding effect. Accepting Woolworths’ argument would require attributing conflicting practical effects to the proposed drafting of formal documentation (ie that its execution was necessary to give effect to the variation of some terms of the AFL but not others). In its submissions, Woolworths had accepted that if the contract had been found to be varied by the contract ?, it was frustrated by the aforementioned refusal of the development application.

On the alternative possibility of abandonment, President Bell began by observing that abandonment will be found where it is plain from the parties’ conduct that neither intends for the contract to be further performed. His Honour noted that abandonment is a matter of fact to be inferred from an objective assessment of the conduct of the parties. The relevant question is whether the conduct of the parties, viewed objectively, manifests an intention to discharge the contract. In the case before the court, President Bell held that the following factors evinced an intention by the parties to abandon the contract:

  • despite Gazcorp’s failure to carry out the Landlord’s Works as required under the AFL, Woolworths made no attempt to enforce the AFL or perform its obligations thereunder;
  • years passed without the parties making any reference to the AFL; and
  • the parties pursued a development consent that was inconsistent with the terms of the AFL.

Therefore, the contract was held to have been abandoned and, with both its grounds failing, the appeal was dismissed.

Footnotes

  1. [2022] QCA 63.

  2. At [18].

  3. At [34], citing Justice Mason in Green v Sommerville (1979) 141 CLR 594 at 611.

  4. 2022 NSWCA 245.

  5. (1978) 138 CLR 423 at 432.

  6. Shevill v Builders Licensing Board (1982) 149 CLR 620.

  7. [2022] NSWCA 24.

  8. [2022] NSWCA 19.

  9. [2018] NSWCA 192, cited at [93] and summarised in our 2018 Contract Law Update: contdispmar19.pdf (allens.com.au)

  10. See [95].