Implied terms – implied term of exclusive dealing – repudiation
This case is an important reminder that terms not expressly provided for in contracts may be implied, including onerous terms such as a requirement of exclusive dealing. The case also highlights the importance of ensuring that contracts are performed and terminated in accordance with their terms.
AAP Industries Pty Ltd (AAP) and Rehau Pte Ltd (Rehau) entered into a written contract dated 29 September 1999 (Contract) under which AAP was obliged to supply Rehau with plumbing articles (Articles). The Contract provided (amongst other things):
- clause I: AAP had to reserve production capacity to meet Rehau's requirements and to plan raw material necessary to ensure Rehau's deadlines were met; clause III: AAP had to maintain a minimum buffer stock of two months' free of charge;
- clause IV: any failure by AAP to meet a delivery deadline would constitute default of performance, entitling Rehau to withdraw from the Contract; and
- clause XI: the Contract was made for one year upon signing. It was extended by one year each time it was due to expire unless notice of termination was given at least three months before the date of expiry.
From 2010, there were discussions between the parties about the price of the Articles in which Rehau pointed out that it could obtain the Articles for lower prices from Europe or China.
On 6 July 2012, Rehau emailed AAP (6 July Email) asking for quotes for possible price reductions, stating 'until we come to a conclusion to this discussion, production of these articles should not continue in the interim'. Rehau continued to purchase from AAP following the 6 July Email until July 2013, at which time it stopped ordering from AAP.
On 2 June 2014, AAP sent a letter to Rehau (2 June Letter) accepting what it said was a repudiation of the Contract by Rehau, being Rehau's failure to order and purchase the Articles from AAP pursuant to the Contract.
The court found that Rehau had:
- breached an implied term of exclusive supply in the Contract; and
- repudiated the Contract and AAP had terminated by the 2 June Letter.
Implied term of exclusive dealing
Davies J found that a term was implied in the Contract that required Rehau to only order the Articles from AAP and not from any other supplier or from internal resources. The term was implied because:
- a number of express terms of the Contract would have been unnecessary if there was no term of exclusive dealing, including the obligation on AAP to reserve production capacity to meet Rehau's requirements, Rehau's right to withdraw from the Contract if AAP defaulted and the automatic extension of the Contract unless a notice of termination was given; and
- to interpret the Contract as imposing no obligation on Rehau to order from AAP despite the obligation on AAP to keep a two-month supply of the Articles would make a 'commercial nonsense' of the Contract, and no commercial purpose would then be served by the Contract.
Rehau argued that the 6 July Email was a notice of termination under clause XI of the Contract, and that termination had therefore already occurred by the time of its purported repudiation.
Davies J held that the 6 July Email:
- was not a notice of termination but a request for a temporary pause until a number of matters were resolved; and
- combined with Rehau's failure to order from AAP after 11 July 2013 amounted to a repudiation of the Contract.