In this case, the Queensland Court of Appeal considered the principles of repudiation of a contract, distinguishing situations in which a party’s conduct may demonstrate an intention to still be bound by the contract despite the fact that they are not able to meet their obligations, from those where continued failure to meet a contractual obligation will amount to repudiation.

Key learnings

This case shows that the continued failure by a party to meet a contractual payment obligation may amount to repudiation of the agreement, giving rise to loss of bargain damages. However, non-payment by itself may not amount to repudiation. If the party obligated to make payment is making a serious and consistent effort to meet its obligations, the Court is likely to find that it still intends to be bound by the contract even if in the circumstances it is not able to meet its obligations. The case also reaffirms the position that a party to a contract can display an intention to not perform the contract without breaching an essential term.

Case note

Background

Mr Byrt controlled Macair Pty Ltd (“Macair”), which operated a regional airline in Queensland. Macair (as lessee) entered into a lease and a sublease for two aircraft with the Respondent, Aero South Pacific Pty Ltd (“ASP”). Mr Byrt guaranteed Macair’s performance of those leases. For the purpose of this note, it is the lease for the aircraft referred to in the judgment as “UYH” that is relevant.

Macair got into financial difficulties and failed to meet the lease payments on either aircraft. Macair was eventually placed into administration and then receivership. ASP repossessed UYH, which terminated the lease (a termination notice issued after the repossession was held to be of no effect).

One of the questions both at trial and in the Court of Appeal was whether the agreement had been terminated by ASP for Macair’s repudiation of the contract by non-payment of rent, or ASP had itself repudiated the agreement by repossessing the aircraft.

Repudiation

Mr Byrt relied on the High Court decision in Shevill v Builders Licensing Board (1982) 149 CLR 620 to advance his case that Macair’s non-payment of rent was not a repudiation of the contract, but rather ASP had repudiated the contract by repossessing UYH. In Shevill, the lessee of a business property was constantly late with its rent payments and at times its rent cheques were dishonoured. Although the lessee was clearly in financial difficulty, Wilson J observed at 634 that it was making a “serious and consistent effort … to meet its obligations”.

All members of the Court in Shevill held that the lessee had not repudiated the contract as it had not evinced an intention to no longer be bound by it, but rather, while wishing to fulfil it, was unable to do so. Although the contract gave the lessor the right to terminate and re-enter the premises for non-payment of rent (which the lessor unsuccessfully submitted made non-payment of rent an essential term of the contract), that alone did not mean that there had been a breach giving a right to damages. Under the contract, the lessor’s rights were limited to recovering the arrears in rent.

In the present case, the learned trial judge distinguished Shevill on the ground that in Shevill the contract was terminated pursuant to an express contractual term in circumstances which would not have entitled the lessor to terminate at common law. By contrast, in this case Fryberg J held that Macair’s continued failure to pay rent amounted to repudiation by it of the lease and as such, as the innocent party, ASP was entitled to terminate at common law, which it did by its repossession of the aircraft. Unlike Shevill, ASP did not have an express contractual right to repossess the aircraft upon Macair’s failure to make payment. Accordingly, if ASP did not have a common law right to terminate the agreement, repossession of the aircraft may have been found to be a repudiation of the agreement by ASP.

This decision was upheld in the Court of Appeal. Holmes JA held that the learned trial judge “correctly distinguished Shevill and properly inferred that Macair had evinced an intention not to meet its obligations under the lease…”.

The Court also observed that although it was found in the first instance that payment of rent was not an essential term of the contract, “[a] party to a contract can make it clear that he does not intend to perform it without breaching an essential term”. For example, if a party had always complied with all essential terms, it could still repudiate the contract by refusing to meet its contractual obligations going forward.

Based on Macair’s repudiation of the lease, the Court determined that ASP was entitled to loss of bargain damages for the rent foregone over the balance of the five year term of the lease, which amounted to $2,448,600. This was significantly more than the arrears of rent ($325,919.30 for UYH), which would have been ASP’s only remedy had the Court determined that Macair had not repudiated the lease.

Conclusion

It is clear from this case that failure to meet a contractual payment obligation will not in and of itself amount to repudiation of the agreement. The question must be determined based on the conduct of the party obligated to make payment. In the context of leases, before re-taking possession of property for non-payment, lessors should consider whether the lessee is making a serious effort to meet its obligations. If a lessor re-takes possession of property in circumstances where the lessee is attempting to meet its obligations, the lessor could be found to have repudiated the contract. Lessees should ensure some effort is made to reduce arrears in rent to avoid a situation where they are found to have repudiated the lease and are liable for loss of bargain damages.

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