■ C ON TRACT LAW
TERMINATING
CONTRACTS
at common law
By ROSS FOREMAN
Guidance on when and how a contract can be
terminated at common law has been provided
by a recent High Court decision.
Ross Foreman is a barrister
at Sixth Floor Selborne/
Wentworth Chambers.
D
ETERMINING WHETHER YOUR
client is entitled to terminate a contract is often
a difficult question, the
answer to which can have
important consequences.
If your client is entitled to terminate
their contract, and does so, the contract
will come to an end and your client will
have the right to sue for damages.1 However, if your client purports to terminate
the contract when they are not entitled
to do so, the other party may have the
right to terminate the contract and sue for
damages.2
The High Court has provided guidance on the circumstances in which a contract can be terminated at common law in
its recent decision in Koompahtoo Local
Aboriginal Land Council v Sanpine Pty
Limited.3
Background
In Koompahtoo v Sanpine, the appellant/defendant (Koompahtoo) and the
respondent/plaintiff (Sanpine) entered
into a joint venture agreement in respect
54 L AW SOCIETY JOURNAL
of a land development4 (the agreement).
Koompahtoo contributed the land to the
joint venture; Sanpine contributed its management and financial expertise.5
The development was not a success: it
never proceeded even to the initial stage
of obtaining rezoning of the land to permit residential development.6 An administrator of Koompahtoo was appointed who,
in due course, purported to terminate the
agreement.
Sanpine commenced proceedings in
the NSW Supreme Court seeking a declaration that the termination was invalid
and that the agreement was still on foot7.
Campbell J held that the agreement had
been validly terminated.8 By majority, the
NSW Court of Appeal allowed Sanpine’s
appeal.9 The High Court held that Campbell J’s conclusion was correct and that the
agreement had been validly terminated.
when a bill needed to be paid, and paid at
least one substantial amount to the wife
of one of Sanpine’s controllers which was
never satisfactorily explained;12 and
❑ its obligation to maintain proper books.
For example, there were no separate sets
of accounts relating to the joint venture;
no ledger, journal or cashbook. There was
only one set of draft financial statements
prepared and they “were not only manifestly inadequate, they were wrong”.13
As the majority14 in the High Court
explained, on proper analysis Campbell
J had concluded that Koompahtoo’s termination was valid because of sufficiently
serious breaches of intermediate terms.15
The majority in the High Court agreed
with this conclusion,16 and in doing so
explicitly endorsed the doctrine of intermediate terms (which was originally articulated by Diplock LJ in Hongkong Fir
Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 17). The High Court had previously referred to the doctrine with evident
approval18 and assumed it to be correct.19
However, before Koompahtoo v Sanpine
the doctrine had never formed part of the
ratio of a High Court decision.20
The breaches
Campbell J found that Sanpine had
breached three obligations under the
agreement:10
❑ its obligation to produce and maintain documents. For example, Sanpine
failed to prepare a development program,
a cost and revenue budget, or monthly
reports;11
❑ its obligation to bank and spend money appropriately. For example, Sanpine
deposited money into its account rather
than the joint venture account, only transferred money to the joint venture account
The right to terminate at common law
In endorsing the doctrine of intermediate terms, the High Court confirmed that
there are generally three circumstances
in which a party can terminate a contract
at common law:
1. Where the other party has repudiated
the contract. The High Court appears to
prefer the expression ‘renunciation’ to
‘repudiation’.21
2. Where the other party has breached an
essential term of the contract (generally
referred to as a ‘condition’). This is to be
contrasted with a breach of a non-essenMarch 2008
Can my client terminate a contract at common law?
Is the right to terminate at
common law excluded?
yes
Limited to express
termination
provisions
no
Termination at
common law
Is there
repudiation/
renunciation?
Is there a breach of an
essential term/condition?
Is there a serious
breach of an
intermediate term?
Are there any restrictions
on the right to terminate at
common law?
tial term (generally referred to as a ‘warranty’), which gives to a right to damages
only.
3. Where there has been a sufficiently
serious breach of an intermediate term.
The right to terminate a contract at
common law may be excluded by agreement between the parties (most relevantly by the inclusion of express termination provisions). In certain circumstances
a contract may contain a complete statement of the circumstances in which it can
be brought to an end.22
Campbell J rejected an argument to
this effect at first instance in Koompahtoo
v Sanpine, and the argument was not
pressed in the High Court.23 In rejecting
this argument, his Honour24 applied Concut Pty Ltd v Worrell25 where Gleeson CJ,
Gaudron and Gummow JJ referred to:
“ ‘the familiar principle of construction
that clear words are needed to rebut the
presumption that a contracting party does
not intend to abandon any remedies for
breach of the contract arising by operation
of law’.26 Thus, an express provision for
termination for breach in certain circumstances may be regarded as designed to
augment rather than to restrict or remove
the rights at common law which a party
otherwise would have had on breach.”27
If the right to terminate has not been
excluded, when does it arise? That is,
when can party terminate at common law
for repudiation, breach of condition, or
serious breach of an intermediate term?
Renunciation/repudiation
According to Gleeson CJ, Gummow,
Heydon and Crennan JJ,28 “[Repudiation]
may refer to conduct which evinces an
unwillingness or an inability to render substantial performance of the contract. This
March 2008
is sometimes described as conduct of a
party which evinces 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.29 It may be
termed renunciation.30 The test 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.”31
As their Honours noted, in that case
they were not concerned with the issues
involved where the alleged repudiation
takes the form of asserting an erroneous
interpretation of the contract,32 nor were
they concerned with questions of inability
as distinct from unwillingness.
Essential terms/conditions
The majority referred with apparent
approval to the often quoted passage from
the judgment of Jordan CJ in Tramways
Advertising Pty Ltd v Luna Park (NSW)
Ltd,33 part of which is that: “The question
whether a term in a contract is a condition or a warranty, i.e. an essential or a
non-essential promise, depends upon the
intention of the parties as appearing in
or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as
a whole, or from some particular term or
terms, that the promise is of such importance to the promisee that he would not
have entered into the contract unless he
had been assured of a strict or a substantial performance of the promise, as the
case may be, and that this ought to have
been apparent to the promisor.”
Gleeson CJ, Gummow, Heydon and
Crennan JJ stated: “What Jordan CJ said as
to substantial performance, and substan-
tial breach, is now to be read in the light of
later developments in the law. What is of
immediate significance is his reference to
the question he was addressing as one of
construction of the contract. It is the common intention of the parties, expressed in
the language of their contract, understood
in the context of the relationship established by that contract and (in a case such
as the present) the commercial purpose it
served, that determines whether a term is
‘essential’, so that any breach will justify
termination.” 34
Intermediate terms
The majority noted that there are some
contractual terms in respect of which:
❑ although it is not possible to say, as a
matter of construction of the contract, that
any breach will entitle the other party to
terminate;
❑ some breaches may be serious enough
to entitle the other party to terminate.35
In relation to these intermediate terms,
the innocent party will be entitled to terminate when the breach goes to the “root of
the contract”.36 This “conclusory description ... takes account of the nature of the
contract and the relationship it creates, the
nature of the term, the kind and degree of
the breach, and the consequences of the
breach for the other party”.37
A breach that goes to the root of the
contract will deprive the innocent party of
a substantial part of the benefit to which
they are entitled under the contract.38 The
adequacy of damages may be a material
factor in this regard (because if there is
no right to terminate, the innocent party’s
only remedy is likely to be damages).39
However, the majority emphasised that
whether or not a breach goes to the root
of the contract is to be determined primarily upon a construction of the contract.40
Gleeson CJ, Gummow, Heydon and Crennan JJ said that: “A judgment as to the seriousness of the breach, and the adequacy
of damages as a remedy, is made after considering the benefit to which the injured
party is entitled under the contract”.41
When applying these principles, their
Honours said: “The focus of attention
should be the contract, and the nature
and seriousness of the breaches. There
being, at this stage, no concern with waiver, estoppel, variation or forbearance, the
intention that is relevant is the common
intention of the parties, at the time of the
contract, as to the importance of the relevant terms and as to the consequences of
failure to comply with those terms. This is
a question of construction of the contract
to be decided in the light of its commercial purpose and the business relationship
it established.”42
After an extensive analysis of the agreement and the commercial context in which
it arose, the majority concluded:43 “ ... the
breaches of Sanpine were in a number of
respects gross, and their consequences
were serious. Once again, the experience
L AW SOCIETY JOURNAL 55
■ TERMINATING A CONTRACT
of the administrator following his appointment, and the unsuccessful attempts at the
hearing before Campbell J to explain the
use of all the funds borrowed on the security of Koompahtoo’s land, demonstrate
that the breaches found by Campbell J,
and in particular the breaches of [the
clause which obliged Sanpine to maintain
proper books ‘so as to permit the affairs
of the joint venture to be duly assessed’],
went to the root of the contract. As a
that the termination was invalid and the
agreement was still on foot, Campbell J
accepted (and the High Court apparently
agreed) that Koompahtoo (the defendant)
carried the onus of establishing the right
to terminate.46
Second, the party seeking to establish
that it had the right to terminate will generally be able to rely on grounds of termination other than those communicated to
the other party, at least where the terminating party was not aware of the other
grounds at the time of termination.47
“The majority emphasised that whether or not a breach
does go to the root of the contract is to be determined
primarily upon a construction of the contract.”
matter of construction of the contract, it
ought to be accepted that breaches of that
order deprived Koompahtoo of a substantial part of the benefit for which it contracted. Such breaches justified termination. On that ground, we would uphold the
decision of the primary judge.”
Restrictions on the right to terminate
As indicated above, by the time the matter reached the High Court the issues
of waiver, estoppel, variation or forbearance were no longer live. However, when
advising in connection with a proposed
termination, it is important to be mindful of matters of this kind. As Seddon and
Ellinghaus have explained, a party may be
prevented from exercising a right to terminate because of its conduct and/or the
circumstances before, at the time of, or
after breach. For example, the ability to
terminate may be restricted:44
“❑ where the terminating party was not
ready and willing to perform;
❑ where performance was prevented or
dispensed with by the terminating party;
❑ where the terminating party has elected to affirm the contract, waived the
right to terminate, or is estopped from
terminating;
❑ where the termination would breached
implied obligations of cooperation or good
faith;
❑ where termination is unconscionable in
equity;
❑ where termination would cause an
unjust forfeiture of property;
❑ where termination is unconscionable
conduct under legislation.”45
Two points for litigation
If litigation arises as a result of a disputed contractual termination, two further
points should be kept in mind.
First, the terminating party may carry the onus of establishing that the termination was valid, even if they are the
defendant. For example, where Sanpine as plaintiff had sought declarations
56 L AW SOCIETY JOURNAL
Conclusion
When determining whether or not a client is entitled to terminate a contract at
common law, the following steps should
be taken:
❑ consider whether common law termination rights have been excluded (for
example, by the inclusion of express termination provisions). The general presumption is that common law rights have
been preserved;
❑ identify the conduct of the other party
that is said to justify termination;
❑ where that conduct is said to constitute renunciation, apply the relevant test
(namely, 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);
❑ where that conduct consists of breach
of a term of the contract, (in addition to
considering renunciation) construe the
contract to determine whether the term
is a condition, warranty, or an intermediate term. This will involve identifying the
common intention of the parties (as determined objectively from their contract) and
applying the test of essentiality (namely,
whether the innocent party would have
entered into the contract unless he or
she was assured of performance of the
obligation);
❑ where a the term is intermediate, consider whether the breach goes to the root
of the contract and deprives the innocent
party of a substantial part of the benefit
for which it contracted;
❑ if a right to terminate prima facie exists,
consider whether any relevant circumstance restricts that right.
❑
ENDNOTES
1. See McDonald v Dennys Lascelles Ltd (1933) 48
CLR 457 at 476-7.
2. See, for example, Commonwealth of Australia v
Amman Aviation Pty Ltd (1991) 174 CLR 64 at 74.
Cf Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at [102].
3. (2007) 241 ALR 88; [2007] HCA 61 (13 December 2007).
4. [2007] HCA 61 at [2].
5. Ibid at [68].
6. Ibid at [3], [6].
7. Ibid at [3].
8. Sanpine Pty Ltd v Koompahtoo Land Council
[2005] NSWSC 365.
9. Sanpine Pty Ltd v Koompahtoo Land Council
[2006] NSWCA 291.
10. [2007] HCA 61 at [26], [28].
11. Ibid at [29].
12. Ibid at [35].
13. Ibid at [38].
14. Gleeson CJ, Gummow, Heydon and Crennan JJ.
15. See [2007] HCA 61 at [5], [58]-[59].
16. Ibid at [53].
17. [1962] 2 QB 26.
18. See Ankar Pty Ltd v National Westminster
Finance (Australia) Ltd (1987) 162 CLR 549 at
562.
19. See, for example, Shevill Builders Licensing
Board (1982) 149 CLR 620 at 626; Progressive Mailing House v Tabali Pty Ltd (1985) 157 CLR 1 at
31.
20. [2007] HCA 61 at [51].
21. Ibid at [44].
22. See Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 75, 77, and 96.
23. [2007] HCA 61 at [17].
24. Sanpine v Koompahtoo Local Aboriginal Land
Council [2005] NSWSC 365 at [203]-[204].
25. (2000) 176 ALR 693 at [23]; [2000] HCA 64.
26. Stocznia Gdanska SA v Latvian Shipping Co
[1998] 1 WLR 574 at 585 ; [1998] 1 All ER 883 at
893; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717.
27. Holland v Wiltshire (1954) 90 CLR 409 at 415–
16; Taylor v Raglan Developments Pty Ltd [1981] 2
NSWLR 117 at 135.
28. [2007] HCA 61 at [44]
29. Laurinda Pty Ltd v Capalaba Park Shopping
Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623
at 634 per Mason CJ.
30. Heyman v Darwins Ltd [1942] AC 356 at 397.
31. Laurinda Pty Ltd v Capalaba Park Shopping
Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623
at 659.
32. As to which, see, for example, DTR Nominees
Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
at 431–432; Perpetual Trustee Co Ltd v Meriton
Property Management Pty Ltd [2006] NSWCA 75
at [48] ff, Pacific Brands Sport & Leisure Pty Ltd v
Underworks Pty Ltd (2006) 149 FCR 395 at [102].
33. (1938) 38 SR (NSW) 632 at 641-642; see [2007]
HCA 61 at [47]-[48].
34. [2007] HCA 61 at [48].
35. Ibid at [49], [54].
36. Ibid at [49], [54].
37. Ibid at [54].
38. Ibid at [55], [71].
39. Ibid at [54].
40. Ibid at [55].
41. Ibid at [55].
42. Ibid at [68].
43. Ibid at [71].
44. See Seddon and Ellinghaus, Chesire and Fifoot’s
Law of Contract, (9th Aust ed, 2007) at [21.25]
(internal cross-references omitted).
45. It is beyond the scope of this article to deal with
the restrictions on a right to terminate. This topic is dealt with in Seddon and Ellinghaus, Chesire
and Fifoot’s Law of Contract, (9th Aust ed, 2007)
at [21.25] – [21.37]; and Carter, Peden and Tolhurst, Contract Law in Australia (5th ed, 2007),
chapter 31.
46. [2007] HCA 61 at [26]. See further Sanpine Pty
Ltd v Koompahtoo Land Council [2005] NSWSC
365 at [170]-[186].
47. See Shepherd v Felt Textiles of Australia (1931)
45 CLR 359 at 377-8; Concut Pty Ltd v Worrell
(2000) 176 ALR 693 at [29]; Seddon and Ellinghaus, Chesire and Fifoot’s Law of Contract, (9th
❑
Aust ed, 2007) at [21.24].
March 2008