In this case, the NSW Supreme Court applied the principles of repudiation in contract law, discussing what constitutes repudiatory conduct and what is required for acceptance of repudiation.

Key learnings

The Court reinforced that a party will be taken to have repudiated a contract if, by a statement or by their conduct, they communicate to the other party that they no longer intend to be bound by the terms of the contract. Parties must be careful when framing their contractual communications so that they do not indicate an intention to act in a way which is fundamentally inconsistent with the requirements of the contract, as this may be treated as a repudiation of the contract which gives the other party a right to terminate and seek damages. In particular, a notice threatening to terminate a contract in circumstances where there is in fact no termination right may be treated as a repudiation.

Case note

Southern Cross Autoglass (“SCA”) and Protector Glass Industries (“PGI”) were family businesses which sold car windscreens and related products. The parties entered into an Asset Sale Agreement under which PGI would purchase SCA’s assets and employ the two operators of SCA.

However, a number of issues arose in connection with the liquidation of one of SCA’s predecessor companies. After much correspondence, PGI wrote a letter to SCA requiring that SCA resolve the issues within a period of 30 days. If the matter was not resolved in that period, the letter indicated that PGI would “have to terminate the Asset Sale Agreement”. The Asset Sale Agreement did not in fact give SCA the right to make this demand, or to terminate the Asset Sale Agreement if the demand was not complied with. PGI also prepared a draft deed of termination, though it was never signed. After a number of months, SCA began to sell its assets to a third party.

In the NSW Supreme Court, SCA successfully claimed that it was entitled to damages for breach of the Asset Sale Agreement. The key issues were: (a) whether PGI had repudiated the Asset Sale Agreement by sending the letter or proffering the termination deed; and (b) if so, whether SCA accepted PGI’s repudiatory conduct so as to terminate the Asset Sale Agreement.

As Kunc J noted, a party will be taken to have repudiated a contract if it manifests the intention no longer to be bound by it or to fulfil it only in a manner substantially inconsistent with that party’s obligations and not in any other way. The court looks to how a reasonable person, in the position of the “innocent” party, would view the alleged repudiatory conduct.

PGI submitted that the letter was not a repudiation of the Asset Sale Agreement, but rather was simply a statement of present intention, signalling a prospective course of action. Kunc J disagreed. The reasonable recipient of the letter in the position of the plaintiffs would have known that the Asset Sale Agreement did not give PGI an entitlement to make the demand. Moreover, the letter unequivocally stated that PGI would only complete the Asset Sale Agreement if the demand made in the letter was satisfied in the notice period. This was substantially inconsistent with PGI’s obligations under the Asset Sale Agreement. Kunc J acknowledged the reference in the letter to resolving the legal matter “before we [PGI] decide whether the [Asset Sale Agreement] is capable of completion”, but stated that in context those words would be understood by the reasonable recipient as indicating that PGI did not consider itself bound by the Asset Sale Agreement – and “[a] party which says that it will choose whether or not to complete a contract by reference to non-contractual criteria is necessarily manifesting an intention that it does not regard itself as bound by that contract.”

Where a contract has been repudiated, the “innocent” party will only have a right to terminate the contract and seek damages if they have accepted the repudiation. In this case, PGI submitted that SCA had not accepted the repudiation because it had not clearly and unequivocally stated that it elected to terminate the Asset Sale Agreement. However, Kunc J held that this was not the correct test. What is required is an objective inquiry as to whether the innocent party had acted in a way which made it plain that they treated the contract as at an end. In this case, it was clear that SCA had accepted the repudiation because the two operators of SCA had started work for PGI on different employment terms to those contemplated by the Asset Sale Agreement and SCA had started to sell its assets to a third party (clearly contrary to the transaction to be carried out under the Asset Sale Agreement). These actions both only made sense if SCA no longer considered itself bound by the Asset Sale Agreement and, accordingly, amounted to an acceptance of PGI’s termination.

The decision illustrates the care that must be taken when making demands under a contract, and particularly threats of termination. PGI believed it was preserving its position while prudently discussing plans to continue its relationship with SCA if SCA couldn’t meet its obligations under the Asset Sale Agreement. However, because PCI had threatened to act in a way which was materially contrary to the Asset Sale Agreement PGI allowed SCA to treat the threat as a repudiation, to terminate the contract and to sue to recover the resulting damages.

To see the full judgment in this case, please click here.