The recent decision of Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd [2015] NSWCA 16 is significant for the New South Wales Court of Appeal’s discussion on conduct that constitutes repudiation and abandonment. Even in circumstances where there is a mutual desire to not perform a contract, care must be taken to not engage in conduct that may constitute a repudiation of that contract.

Background

The case concerned an assets sale agreement (Agreement) between Southern Cross Autoglass Pty Ltd (SCA), as vendor and Protector Glass Industries Pty Ltd (PGI), as purchaser. The subject matter of the sale and purchase were the assets and goodwill of an automotive glass business. SCA had acquired the business assets through a power of sale with Nielsen and Moller Autoglass (NMA) which gave SCA’s principal a charge over the assets.

It was a condition precedent to completion of the Agreement for SCA to obtain the lessor’s consent to assignment of the leased premises from which the business was conducted.

Shortly after execution of the Agreement, PGI received notice from the liquidators of NMA stating that SCA’s charge was liable to be set aside. PGI sent a letter to SCA asserting that the Agreement would not be completed unless it could be assured that it would not become involved in any legal proceedings by the liquidators (Letter). In the Letter, PGI expressed its willingness to see the Agreement completed, pointed to a term of the Agreement that stated that the assets were to be sold “free from all charges, encumbrances, options and adverse interests of any kind” and finally, the Letter gave SCA the opportunity to find within a reasonable time a means to resolve the legal issues concerning uncertainty over the title and ownership of SCA’s business assets.

After sending the Letter, PGI developed an alternative means to acquire SCA’s business assets, which contemplated a set of transactions different to those contained in the Agreement. Subsequently, PGI and SCA engaged in discussions to the effect that the Agreement needed to be cancelled formally in order to proceed with this alternative.

The parties continued to engage in a course of conduct which PGI asserted constituted abandonment of the Agreement. PGI sent a draft Deed of Termination to SCA; and SCA issued a circular letter to its customers stating that it had ceased business, it began selling its trading stock at discount prices and the two principals of SCA entered into employment contracts with PGI.

First instance decision

SCA brought an action against PGI in the Supreme Court of New South Wales alleging breach of contract. The issue in dispute was whether PGI’s conduct constituted repudiation and whether SCA had accepted PGI’s repudiation.

SCA argued that it lawfully terminated the Agreement on account of repudiation or anticipatory breach by PGI and that PGI was liable to it in damages for breach of contract. PGI asserted that the Agreement had been terminated or abandoned by the parties.

At first instance, the court determined all matters in dispute in favour of SCA. The court reasoned that PGI had repudiated the Agreement by sending the Letter demanding that SCA resolve its legal issues with its liquidators and also by tendering the draft Deed of Termination to SCA. Furthermore, the court held that SCA elected to terminate the Agreement by entering into the employment contracts and selling off its trading stock. Each of these conclusions was challenged on appeal.

Court of Appeal decision

On appeal, the court held that PGI had not repudiated the Agreement. Rather, the parties’ conduct amounted to abandonment of the Agreement. The damages awarded against PGI were therefore set aside.

At first instance, the court held that the Letter constituted repudiation by reasoning that the Agreement conferred upon PGI the benefit of warranties as to unencumbered title and therefore the Agreement did not give PGI any right of termination in the event of a breach of warranty. SCA argued that PGI had always been aware of the potential for challenge from the liquidators of NMA and that the warranties and indemnities had been negotiated and included against that background. PGI responded by arguing that these matters did not detract from a clause in the Agreement stating that the whole of the assets were to be sold free from charges, encumbrances, options and adverse interests of any kind. The Court of Appeal accepted PGI’s submission.

The court held that PGI’s conduct in sending the Letter would not have conveyed to a reasonable person in the position of SCA renunciation of the Agreement or a fundamental obligation under it. Rather, the Letter affirmed PGI’s commitment to the Agreement, as it pointed out in clear terms that it was insisting on its right to receive good and clear title to all assets and made it clear that it would not perform unless that right was recognised and accommodated. The court held that communication of this position could not amount to repudiation.

PGI argued that tendering the draft Deed of Termination was the very antithesis of repudiation as the deed proceeded on the clear footing that the Agreement was binding on the parties and would cease to bind them when the mutual releases for which the deed provided were given and received. The court accepted PGI’s submission that tendering the deed did not amount to repudiation as PGI had made it clear in the deed that it regarded itself as bound by the Agreement and that it would continue to be bound unless and until it was terminated. 

In addition, the court commented on the application of the principle in Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21 which provides that termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance. The court commented that despite the fact that PGI had not pleaded that it had terminated the Agreement, it was entitled to have done so on the basis of this principle given that SCA was unable to satisfy or waive the condition precedent concerning assignment of the lease. Justice Gleeson made some additional comments on the scope of the Shepherd principle, indicating that it should be treated with caution when used to justify conduct that amounts to repudiation. Gleeson J held that the principle has the potential to undermine certainty in the parties’ contractual dealings with each other as the parties have an interest in knowing what the other party is purporting to do and on what grounds in order to decide how to respond.

The Court of Appeal concluded that the Agreement had been abandoned. It referred to the closure of SCA’s business, SCA’s principals’ entry into employment contracts with PGI and the sale of trading stock evidencing an intention to abandon the Agreement.

Lessons learned

It is essential that care is taken when framing communications to contractual counter-parties in relation to non-performance as they may be taken as evidencing an intention to no longer be bound by the terms of the contract and therefore entitle another party to terminate the contract and seek damages, even where the desire to not perform may be mutual.

Furthermore, the case signifies the importance of including a contractual warranty that obliges a vendor to sell assets with clear and unencumbered title.

It also indicates that the law is unsettled on whether the scope of the Shepherd principle extends to conduct that amounts to repudiation. The implication of this is that a contract may only be taken to be repudiated if the grounds for repudiation were made clear to the other party.