Contract law update 2024: Breach and repudiation

Contract law update 2024

In 2024, appellate courts heard a number of cases in which they considered principles of breach of contract and repudiation.

The Western Australian Court of Appeal in Summit Rural (WA) Pty Limited v Lenane Holdings Pty Ltd [2024] WASCA 122 considered the approach to assessing factual causation in actions for breach of contract. In the case, Lenane Holdings alleged that the failure of Summit Royal's employee to turn off the master key in a hired heavy equipment machine was a breach of contract, and that it led to a fire that caused Lenane Holdings to suffer loss and damage. The Court of Appeal stated that the issue of factual causation should start with the application of the 'but for' test, and that a breach of contract may be a cause of loss or damage if it has made a substantial contribution, rather than being the sole or exclusive cause. In this case, the court accepted that, in relation to factual causation, Lenane Holdings had established that the employee's conduct had made a substantial contribution to the loss or damage.

The Victorian Court of Appeal in Lanshan Pty Ltd v F3 Enterprises Pty Ltd [2024] VSCA 5 considered whether a default notice was defective because the notice did not sufficiently particularise an alleged breach of a written agreement. In this case, Lanshan had purported to terminate a licence agreement on the basis that the F3 Enterprises had not remedied their default within 14 days of receiving written notice. The Court of Appeal found that Lanshan was not entitled to rely on the default notice to terminate the agreement, because a reasonable recipient in the position of F3 Enterprises would not have understood the nature of the alleged default. This decision demonstrates the need for an objective approach to determining whether a default notice provides sufficient particulars of the alleged breach such that the notice can be relied upon to terminate the contract.

In C H Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd as trustee for The Steele Investment Trust [2024] WASCA 142, the Western Australian Court of Appeal considered whether a party's written notice based on an erroneous interpretation of a contract would amount to repudiation. In that case, the various respondents' lawyers gave written notice to C H Leaman Investments of their incorrect belief that a share purchase agreement ceased to have effect because an essential condition had become incapable of being satisfied. C H Leaman Investments terminated the agreement, claiming that the notice suggested an unwillingness to perform. The court found that the respondents' letter amounted to repudiation because the wording would not have conveyed to the reasonable recipient that the respondents were open to being corrected on their incorrect interpretation.

The cases of Lanshan and Leaman, in different ways, speak to the critical nature of written communications between parties, and remind parties to be cognisant both of what the terms of the relevant agreements require, and what a reasonable person would understand those communications to mean.

Breach of contract—principles of causation

In this case, the Supreme Court of Western Australia Court of Appeal surveyed classic and more recent jurisprudence on causation in an action for breach of contract. The court affirmed that factual causation begins with application of a 'but for' test to determine whether the breach was a cause of the loss or damage. If factual causation is established, the question will then arise as to whether the defendant should be legally responsible for the alleged loss.

This case provides guidance on the approach to assessing causation in actions for breach of contract. It provides a comprehensive survey of authorities in respect of both remoteness and causation, and contains a caution regarding the need to plead comprehensively at first instance.

The respondent, Lenane Holdings Pty Ltd, contracted with the appellant, Summit Rural (WA) Pty Ltd, for the hire of a loader to be used by the appellant at its fertiliser plant. It was an express term of the contract that Summit Rural would 'turn off [the] master key every night'. The master key was a switch, or key, that when placed in the 'off' position, had the effect of isolating the loader's battery.

On 4 October 2018, a Summit Rural employee left the master key of the loader in the 'on' position. The loader subsequently caught fire and was destroyed.

Lenane issued proceedings against Summit Rural, seeking damages for breach of contract and negligence.

At first instance, the court held that the appellant's failure to turn off the master key was a breach of contract and its duty of care to the respondent. Summit Rural appealed that decision.

The key issues on appeal with respect to the breach of contract claim included:

whether the breach (being the failure to leave the master key in the off position) relevantly caused the fire and ensuing loss; and
whether the fire and the consequent damage to the loader was too remote a consequence of the breach.

Causation

The appellant contended that that trial judge had erred in concluding that Summit Rural's breach of contract was a cause of the fire, given that the master key was not installed for fire prevention purposes, and consequently the connection between the breach and the fire was not causal, but rather 'purely serendipitous'.

President Buss and Justice Lundberg (with Chief Justice Quinlan agreeing) comprehensively surveyed the authorities on causation and concluded that:

It is sufficient if a plaintiff establishes that the breach of contract was a cause of loss or damage, in the sense that it made a causal contribution to the loss or damage. It is not necessary for it to be the sole or exclusive cause.
An analysis of factual causation begins with application of a 'but for' test.
If factual causation is established, the court will then consider whether the defendant should be legally responsible for the alleged loss or damage. Determination of that question involves consideration of the purpose of an action for breach of contract, the nature and scope of the defendant's obligation that was breached, the nature of the alleged loss or damage, and the relationship between the breach and the loss or damage.

The court was satisfied that the respondent had established factual causation, and that the failure to leave the master key in the 'off' position made a material causal contribution to the occurrence of the loss or damage.

With respect to legal responsibility, the court considered that the obligation to turn the master key to the 'off' position arose in the context of a contract for hire that obliged the appellant to return the loader to the respondent at the end of the hire period. Leaving the key in the 'on' position overnight gave rise to a risk that the loader would be damaged or destroyed. Consequently, the connection between the breach of contract and the occurrence of the fire could not be properly described as 'merely serendipitous or fortuitous', and the appellant was legally responsible for the loss or damage.

Remoteness

The appellant sought to raise on appeal the question of remoteness of contractual damages. This was not in issue at the trial and was not litigated between the parties.

The court did not permit the appellant to raise this new case, as an appellant is bound by the conduct of their case at trial. Except in exceptional circumstances, a party will not be permitted to raise a new argument on appeal that was not raised in the court below, whether deliberately or by inadvertence.

The Court of Appeal, nevertheless, provided a useful summary of the key principles of remoteness and a limitation on losses recoverable in a claim for breach of contract. The concept of remoteness of damage is related to the concept of causation, but is separate and distinct, and to be considered after an analysis of causation and by reference to the principles in Hadley v Baxendale.

Default notices

In this case, the Victorian Court of Appeal considered, among other things, whether a default notice was defective because it did not sufficiently particularise an alleged breach of a written agreement.

The court held that the default notice was defective and could not be relied on to terminate the underlying written agreement.

This case is significant because it demonstrates the importance of ensuring a default notice contains sufficient particulars of the alleged breach to enable the recipient to remedy the default if it wishes and is able to.

By way of a 'Licence Agreement' , Lanshan Pty Ltd granted F3 Enterprises Pty Ltd exclusive rights to use the car parking spaces located on Lanshan's property.

The Licence Agreement stipulated that 'the Licensee shall maintain a public liability insurance policy with respect to the car parking area to a sum not less than $10 million'.

On 6 September 2019, Lanshan sent F3 Enterprises a default notice alleging a number of breaches of the Licence Agreement, including that F3 Enterprises had 'during the Licence Period, failed to maintain the requisite PL Insurance'.

The default notice stated that the licensee had repudiated the Licence Agreement, and that the repudiation was accepted. Alternatively, if the Licence Agreement was not terminated, the notice stated that in order to remedy the breach, F3 Enterprises had to provide evidence of having effected and maintained the PL insurance.

Lanshan sent a further letter to the respondent on 3 October 2019, advising that, because 14 days had elapsed since receipt of the default notice without any attempt to remedy the alleged ongoing breach, the Licence Agreement was terminated as of 20 September 2019.

At first instance, the primary judge found that Lanshan could not rely on the default notice to terminate the Licence Agreement because the default notice did not contain sufficient particulars of the alleged breach. The default notice was therefore defective.

The judge held that identifying an alleged failure to maintain 'the require PL insurance' would not adequately bring the alleged default to the attention of someone in the shoes of and with the knowledge of F3 Enterprises, as it did not provide F3 Enterprises with sufficient information to remedy the default.

The judge held that Lanshan was not entitled to rely on the default notice to terminate the Licence Agreement.

Lanshan appealed this decision.

On appeal, Lanshan submitted that:

The primary judge had erred in finding that the default notice was defective, because it did provide sufficient particularity of the breach, and therefore the judge should have held that the Licence Agreement was properly terminated; and
in any case, Lanshan could not possibly have provided further particulars of the breach in the default notice because F3 Enterprises had not provided Lanshan with a copy of its insurance policy within the period of the default notice.

The Court of Appeal rejected both submissions, dismissing the appeal. In respect of the first submission, the court reasoned that the evident purpose of cl 6 of the Licence Agreement—requiring Lanshan to serve a notice on F3 Enterprises identifying the default and its intention to terminate the licence unless the default was remedied within 14 days—was to provide sufficient notice such that F3 Enterprises might remedy the default if it was able and wanted to do so.

The court reasoned that the default notice did not comply with cl 6 because there were a wide range of possible defaults that might be encompassed by the assertion that F3 Enterprises had 'failed to maintain the requisite PL Insurance', including that:

insurance was not maintained at all during the whole period;
insurance was not maintained during part of the relevant period;
the insurance maintained was not to a sum of $10 million or more;
the insurance maintained was not 'public liability' insurance;
the insurance maintained was not 'with respect to the car parking area' because it was limited to F3 Enterprise's business activities; and
the insurance maintained did not insure the liability of Lanshan.

As such, the court agreed with the primary judge that the default notice was defective and did not provide sufficient particulars about the alleged breach, because a reasonable recipient standing in the shoes of F3 Enterprises would not have understood the nature of the alleged default.

In respect of the second submission, the court noted that the appropriate approach would have been for Lanshan to request a copy of F3 Enterprise's insurance policy prior to alleging a default entitling it to terminate.

Repudiation and erroneous interpretation of agreement

In this case, the Supreme Court of Western Australia Court of Appeal considered the circumstances in which assertion of an erroneous contractual interpretation will amount to a repudiation of the contract. The court also considered the appropriate measure of loss and damage for non-delivery of shares where the market value is incapable of being determined.

This case provides guidance on the principles of repudiation where one party purports to renounce an agreement based on an erroneous interpretation of the agreement. The case also provides insight into the appropriate measure of loss and damage for non-delivery of shares.

The appellant, C H Leaman Investments Pty Ltd, entered into a share purchase agreement (the SPA) with parties including the respondent for the purchase of the sole share in Rexwells Corporation Pty Ltd.

The SPA contained a number of conditions precedent, including that completion of the transaction was subject to and conditional upon financial assistance being approved under s260B of the Corporations Act 2001 (Cth). If that condition was not fulfilled by 30 January 2019, cl 2.7 of the SPA stipulated that the SPA would cease to have effect.

On 17 January 2019, the respondent gave notice that the financial assistance condition had become incapable of being satisfied, and pursuant to cl 2.7, the SPA ceased to have effect. The appellant wrote to the respondent, asserting that this notice constituted a repudiation of the SPA. The appellant accepted the purported repudiation and terminated the SPA.

The parties were unable to agree on an alternate SPA and the appellant commenced the proceeding. The appellant did not make any payments under the SPA, and instead sought damages for loss based on the revenue stream it would have obtained had the SPA been performed.

The primary judge, Justice Hill, found that:

the respondents were incorrect in asserting that, because the financial assistance condition had become incapable of being met, the SPA ceased to have effect on 17 January;
there was no proper basis on which the respondents could have formed a view that they were entitled to give notice before 30 January. It was necessary to give a notice that the financial assistance condition could not be satisfied. If the issue wasn't resolved or the parties hadn't agreed to an extension, the respondents should have given notice after 30 January that the SPA ceased to have effect;
the test of whether conduct is repudiatory is an objective one. The question is, having regard to the whole of the dealings between the parties, whether the alleged repudiator's conduct shows an intention to abandon the contract;
the respondents repudiated the SPA, and the appellant was entitled to accept the repudiation and terminate the agreement; and
the appellant was entitled to only nominal damages because it had not proved the market value of the Rexwells share or any alternative amount. The appellant was also ordered to pay the respondents' costs.

The appellant appealed the decision and the costs order. The respondents cross-appealed against the primary judge's adverse findings, and sought by notice of contention to uphold the result that only nominal damages be awarded.

The issues before the Court of Appeal included, relevantly:

whether, by the 17 January 2019 notice, the respondents had renounced the SPA; and
whether the appropriate measure of damages was the difference between the purchase price contained in the SPA, and the market value of the share in Rexwells.

Repudiation of the SPA

In some instances, courts have determined that a party's incorrect interpretation of a contract does not constitute repudiation. However, the court (President Buss, Justices Vaughan and Lindberg) was not satisfied that this was one of those cases. The question turns on the facts, and in particular whether the conduct evinces an intention not to be bound by the contract.

The 17 January 2019 notice incorrectly claimed that because the financial assistance condition was incapable of being met, the SPA ceased to be effective from that date (whereas in fact under cl 2.7 of the SPA, it would have ceased to have effect from 30 January).The court considered the letter and the dealings between the parties, and observed:

because cl 2.7 of the SPA was self-executing, the letter was gratuitous;
the letter was written in peremptory and emphatic terms, stating unequivocally that the SPA had come to an end; and
the letter ignored recent discussions and agreements between the parties regarding the completion date, and the financial assistance condition.

The court held that the letter did not objectively convey that the respondents were open to correction regarding their erroneous interpretation of the SPA, and that despite the erroneous construction of cl 2.7, the respondents did not convey a willingness to perform the SPA, recognise their mistake, or to accept an authoritative interpretation of the clause.

The court accepted the primary judge's finding that there was no tenable basis on which the respondents could have formed a view that they were entitled to rely on cl 2.7 prior to 30 January 2019. The court added that such a construction was 'so lacking in merit as to be patently hopeless'.

Appropriate measure of damages

The normal measure of damages for non-delivery on a sale of shares is the market price of the shares at the contractual time for delivery, minus the contract price.

The appellant contended that the primary judge had erred by treating the normal measure as a rigid rule when this case required a more flexible approach.

The court acknowledged that the normal measures of damages are no more than prima facie rules that provide useful guidance. They are not rigid rules of universal application, and can be displaced or modified.

The court accepted that the normal measure was inappropriate in this case because it presupposes an available market and market price whereby the market value may be ascertained. However, because the Rexwells share was a solitary share and not a fungible asset, there was no way of determining its market value.

The court determined that the appropriate measure of damages was the 'true' or 'real' value of the Rexwells share minus the purchase price, which would give the appellant the economic value of the performance of the SPA at the time that performance was promised. The 'true' or 'real' value of the share today was equal to the present value of the future cashflows expected to be provided by the asset over its life.

The court was satisfied that the expert evidence at trial was sufficient to assess the appellant's damages.

Breach and repudiation

The critical nature of written communications between parties

Summit Rural (WA) Pty Limited v Lenane Holdings Pty Ltd [2024] WASCA 122

Lanshan Pty Ltd v F3 Enterprises Pty Ltd [2024] VSCA 5

C H Leaman investments Pty Ltd v Tuesday Enterprises Pty Ltd as trustee for The Steele Investment Trust [2024] WASCA 142