This is one of a series of articles in which we consider issues relevant to the interpretation of contracts. In this article we look at the rule of construction arising from the principle that a party to a contract should not be permitted to take advantage of its own wrong. While courts generally take an objective approach to determining the rights and liabilities of parties to a commercial contract by assessing what a reasonable business person would understand the language used in the contract to mean, this principle has been applied to modify what would otherwise be found to be the ordinary meaning of contractual provisions.

Typically, unrelated parties negotiate commercial contracts on an arm’s length basis. In the event of a dispute, the parties may take a different view as to what a particular provision in the contract means. However, if a court is required to ascertain that meaning it will do so by asking what a reasonable commercial party would understand the language used in the provision to mean. A court may consider events and circumstances external to the contract to identify the purpose or object of the contract, which may include the background to and context of the contract, but evidence of the parties’ statements and actions reflecting their actual intentions is inadmissible. Accordingly, while the overarching aim of contractual interpretation might be to identify what the parties intended a provision in the contract to mean, a court will focus on the language of the contract as the way of objectively identifying the meaning of the provision.

This objective approach to the determination of the rights and liabilities of parties to a contract has been modified by courts in circumstances where the natural meaning of words in a contract would enable a party to benefit from their own wrongful conduct. In these circumstances, courts have applied the principle expressed in broad language as “A man cannot be permitted to take advantage of his own wrong.”

The following discussion summarises the scope of this principle by outlining the manner in which it has been applied to the interpretation of contracts in a number of key cases by Australian and English Courts.

The NSW Court of Appeal applied the principle to confirm the limited scope of a termination provision in a contract in TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 (Channel 9 case).

The relevant facts in the Channel 9 case involved two contracts between TCN Channel 9 Pty Ltd (Channel 9) and companies associated with the television personality Mike Walsh. The first contract between Hayden Enterprises Pty Ltd (Enterprises) and Channel 9 (Enterprises Contract) related to Enterprises making Mike Walsh available as compere of the television show known as the Mike Walsh Show in 1985 and 1986. The second contract between Hayden Productions Pty Ltd (Productions) and Channel 9 (Productions Contract) related to Productions producing the Mike Walsh Show and a daytime program to be known as the Midday Show. After the agreements were entered into, Channel 9 made a decision to discontinue the Mike Walsh Show and the actions associated with this decision constituted a repudiation by Channel 9 of the Enterprises Contract. Enterprises accepted that repudiation and claimed damages. Around the same time, Channel 9 purported to unilaterally terminate the Productions Contract on the basis of clause 12 of that agreement, which gave Channel 9 the right to terminate the Productions Contract if the Enterprises Contract “comes to an end”.

Channel 9 argued that clause 12 of the Productions Contract should be interpreted to give Channel 9 the right to terminate the Productions Contract if the Enterprises Contract comes to an end in any way, including the acceptance by Enterprises of the repudiation by Channel 9. The trial judge rejected this interpretation in favour of a narrower construction which did not encompass the Enterprises Contract coming to an end as a consequence of a repudiation by Channel 9.

On appeal, the Court of Appeal (Hope JA, Meagher JA and Priestley JA) upheld this interpretation applying the rule of construction that “A man cannot be permitted to take advantage of his own wrong”, as outlined in the various English authorities reviewed by Lord Jauncey of Tullichettle in Alguhussein Establishment v Eton College [1991] 1 All ER 267 (Eton College case). The Court took the view that although the Enterprises Contract did not technically come to an end until Enterprises had accepted Channel 9’s repudiation (that is, the action of Enterprises), Channel 9’s repudiation was in reality “the cause of the agreement coming to an end”. Given those circumstances and applying the rule of construction, the Court concluded that the words “comes to an end” in clause 12 of the Productions Contract should be interpreted so as to exclude from their meaning circumstances where the substantial cause of the Enterprises Contract coming to an end was the repudiation by Channel 9.

The Channel 9 case has been cited with approval by Australian courts in a number of subsequent cases4, with the principle that “no person can take advantage of their own wrong” being characterised as “a well-established maxim”.

As noted above, the principle had been explored in detail in the Eton College case. The Eton College case involved the interpretation of a clause in an agreement by Eton College to grant a lease under which the prospective tenant agreed to use its best endeavours to complete a development on the land. The clause in question stated that “if for any reason due to the wilful default of the Tenant the development shall remain uncompleted on the 29th day of September 1983 the Lease shall forthwith be granted…”. The development had not been started by that date due to inaction on the part of the prospective tenant and Eton College treated the agreement as having been repudiated. The trial judge, Sir Nicolas Browne-Wilkinson VC (as he then was), expressed a suspicion that the word “not” was intended to have been included before the word “due” but in any event held that the prospective tenant could not rely on its own wrong to found a legal right and that this principle should be applied whatever the clear words of the contract might say. Given that the development had not been concluded due to the failure of the prospective tenant, the prospective tenant was not entitled to be granted a lease. This conclusion was upheld on appeal with Lord Jauncey expressing the view that the principle that “no man can take advantage of his own wrong” is, in general, “a rule of construction rather than an absolute rule of law and morality”.

While this principle of contractual construction is clearly demonstrated in the Channel 9 case and the Eton College case, it is worth briefly noting a few cases in which the principle has been held not to apply so as to clarify its scope.

The first of those, Cheall v Association of Professional, Executive, Clerical and Computer Staff [1983] 1 All ER 1130, is relevant for Lord Diplock’s analysis of the principle expressed as “A man cannot be permitted to take advantage of his own wrong”. However, Lord Diplock also warned that “this may be misleading if it is adopted without defining the breach of duty to which the pejorative word ‘wrong’ is intended to refer and the person to whom the duty is owed.” In that case, the trade union known as APEX had admitted Cheall as a member without first checking whether his previous union objected, as required under a code of conduct known as the Bridlington principles to which the two unions were bound. This breach by APEX of the Bridlington principles was reviewed by a disputes committee and APEX was required to expel Cheall. In challenging this expulsion, Cheall argued that APEX had committed a breach of duty in accepting him as a member of the union and could not subsequently expel him to address its own wrong. The House of Lords rejected this argument on the basis that the duty that had been breached was a duty owed by APEX to other trade unions and not to Cheall. In order to attract the principle “that a party to a contract is not permitted to take advantage of its own breach of duty, the duty must be one that is owed to the other party under the contract”.

A further qualification to the application of the principle was identified by the NSW Court of Appeal in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443. The facts of the case were complex but relevantly Tricon was the lessee of a property owned by Ruthol. Tricon had also exercised an option to buy the property and had entered into a contract for sale with Ruthol. However, Ruthol was unable to complete for a period of approximately three years due to a dispute with a previous lessee and was accordingly in breach of that contract. Tricon argued that Ruthol was precluded from recovering rent applicable to the extended period up to completion on the basis that Ruthol would be taking advantage of its own wrong. The Court of Appeal disagreed and held that while a party in breach of contract may be precluded from relying on a contractual entitlement arising from that breach, the principle does not preclude reliance on a contractual entitlement which does not arise from the breach. The obligation to pay rent arose under the lease whereas the breach of contract by Ruthol related to a separate contract, namely the contract for sale of the property.

The meaning of a provision in a commercial contract will be established by a court through an objective assessment of what a reasonable business person would have understood that provision to mean. However, as outlined in this article, the meaning determined in this way is subject to a presumption or proviso that in the absence of clear language to the contrary, the parties would not have intended a contractual provision to enable a party to take advantage of its own breach of the contract. Accordingly, in appropriate circumstances, this principle can modify what would otherwise be the ordinary meaning of the language used in a contract. While this can be characterised as a “rule of law or morality”, courts have preferred to characterise it as a rule of construction.