When conduct overrides contractual formalities
Clients are often surprised by the fact that contracts may be modified by an oral agreement (or by conduct), even if the contract contains a clause stating that it may only be amended by a written agreement signed by the parties. As noted by the Queensland Court of Appeal in Stephenson v Dental Corporation Pty Ltd [2025] QCA 212, this approach differs from that in the UK. The court in that case also confirmed that a 'no oral modification clause' may nevertheless be relevant in determining whether the parties in fact intended to amend the contract.
Stephenson concerned the application of this principle to the termination of a contract. The court held that the conduct of the parties (including conversations and emails) evidenced an agreement to terminate a contract, notwithstanding a clause requiring any modification to the agreement to be in writing signed by each party.
One consequence of the termination of a contract is that a party will often lose the ability to exercise rights under it. That was the case in Sui v Jiang (No 2),1 where a party failed to exercise a contractual right to choose between three different scenarios before a contract was terminated. In the course of its reasoning, the court considered the difference between an obligation to elect between options and the ability (but not obligation) to exercise an option (this case being an example of the latter).
We have discussed in previous contract law updates the different means by which a contract can be 'repudiated'.2 One form of repudiation arises if a party objectively indicates that it is no longer able to perform the contract. In that situation, the other party may 'accept' the repudiation, and bring the contract to an end, if it can show that it was ready, willing and able to perform the contract. These principles were confirmed by the Victorian Court of Appeal in Thousand Hills Property Pty Ltd v LBA Capital Pty Ltd,3 which took a different view from the trial judge on whether a party's conduct objectively indicated an inability to perform the contract.
Stephenson v Dental Corporation Pty Ltd [2025] QCA 212
Termination of agreement other than in writing
In this case, the Queensland Court of Appeal held that informal communications could amount to an agreement to terminate a contract.
This case provides guidance on the relevance of the parties' communications and conduct in determining whether an agreement has been validly terminated.
The appellants, Dr Stephenson and his corporate vehicle, sold his dental practice to the respondent in 2008 under an acquisition agreement, and entered a services agreement with the respondent to act as 'practice principal'.
Under the services agreement, Dr Stephenson was required to manage the dental practice and provide dental services to the respondent. His remuneration was tied to revenue and performance targets, and the respondent was entitled to a clawback of certain amounts if the minimum annual cash flow was not met.
By 2013, none of the targets had been met and Dr Stephenson was significantly in debt under the clawback arrangement, and his health declined. On 23 April 2013, the respondent proposed by email that Stephenson relinquish his role as practice principal, but continue to work in the practice as an associate dentist. The same day, Dr Stephenson responded 'no problem', and asked questions about wrapping up issues to do with his management and asking about an employment contract.
From 1 May 2013, Dr Duff became practice principal, and Dr Stephenson worked as an associate until June 2013, before being hospitalised on 1 July 2013.
On 2 September 2013, the respondent purported to terminate the services agreement, asserting that Dr Stephenson had repudiated it by failing to perform any work under that agreement since 28 June 2013. The appellants sued for damages, alleging that the respondent had breached the services agreement by this purported termination.
The primary judge found that there was an agreement between the parties to terminate or abandon the services agreement by 1 May 2013, and that (if it had been necessary to decide) the appellants would have been found to have repudiated the agreement. The appellants appealed the decision.
The key issues before the Court of Appeal were:
- whether, by 1 May 2013, the parties agreed to abandon or terminate the services agreement; and
- if not, whether the appellants repudiated the services agreement.
Abandonment or termination of the services agreement
Justice Doyle (with whom Justices Hall and Crow agreed) upheld the primary judge's finding that the parties reached an agreement by 1 May 2013 to terminate the services agreement.
The Court of Appeal outlined the following general principles regarding an agreement to terminate a contract:
- A contract may be varied or terminated by agreement not itself in writing, even if the contract expressly provides otherwise, though the presence of a 'no oral modification' clause may provide important context in considering whether the parties objectively intended to vary or terminate the agreement.
- Discharge by agreement, like any mutual agreement, is assessed objectively in all the circumstances.
- Evidence of post-contractual conduct is only admissible if it objectively reveals the parties had reached a bargain and intended to be legally bound.
- The proper approach is to consider the relevant communications and conduct, and what they would have conveyed to a reasonable person in the parties' position, in all the circumstances.
- The subjective intention of the parties is irrelevant to the construction of the contract and intention to be legally bound—if conduct is relied on as revealing the objective intention to be legally bound, that is determinative of the 'true' state of the parties' minds. Evidence of their state of mind or intention is irrelevant.
The court acknowledged the practical difficulty in applying these principles, and observed that parties often rely on emails and letters as conduct, which irrelevantly only relates to the parties' state of mind.
It was satisfied that the objective facts supported the primary judge's finding, including because Dr Stephenson supported the respondent's proposal, gave evidence that Dr Duff was the practice principal from 1 May 2013 and worked for two months as an associate dentist under Dr Duff's direction. Further, by him relinquishing his role as practice principal, the services agreement effectively became redundant.
Repudiation
The appellants argued that the primary judge was wrong to conclude that, if the services agreement was not terminated on 1 May 2013, Dr Stephenson had repudiated it, entitling the respondent to terminate it on 2 September 2013.
The court applied the test for repudiation set out by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 at 135-6 [44], and found that Dr Stephenson had not repudiated the agreement, as a medical inability to practise for two to three months in a five-year control was not a substantial incapacity.
Thousand Hills Pty Ltd v LBA Capital Party Ltd [2025] VSCA 115
Repudiatory conduct—whether email constituted renunciation of contract
The Supreme Court of Victoria considered whether an email from LBA Capital Pty (the Purchaser) to Thousand Hills Property Pty Ltd (the Developer), in which the Purchaser stated it was unable to complete a contract due to financial difficulties, constituted repudiation of that contract. The court held that the words of the email plainly communicated a withdrawal from the contract by the authoring party, without any relevant qualification, and therefore constituted repudiation.
This case demonstrates that the court will determine whether a contract has been repudiated based on the plain, objective meaning of communications, rather than subjective intent or surrounding negotiations.
In July 2019, Thousand Hills Property Pty Ltd and LBA Capital Pty entered into a contract for the off-the-plan sale of 14 apartments to be constructed as a part of a new apartment building in Burwood, Victoria. The contract included the apartment plans but also required that the apartments be built in compliance with specific National Disability Insurance Scheme (NDIS) standards and envisaged that the apartment plans would be modified to ensure compliance with them.
After entering into the contract, the parties were unable to agree on the redesign of the apartments. By August 2020, they had reached an impasse and development ceased. However, they continued to discuss possible ways forward, which included identifying possible alternative development ventures to 'substitute' the Burwood apartments under the contract.
On 7 October 2020, the Purchaser sent an email to the developer, which:
- stated that the Purchaser was in the process of winding down and would not be able to continue with the contract; and
- suggested that the parties 'rescind the contracts' and reach an agreement on how the deposit moneys be used to settle the matter.
Some discussions continued between the parties about possible alternative development ventures following that email. However, in March 2021, the Developer notified the Purchaser that it considered the 7 October email constituted repudiation of the contract and accepted that purported repudiation. The Purchaser denied it had repudiated the contract, on the basis that:
- regardless of the purchaser's position, correspondence from the Developer, including before and after the 7 October email, showed that the Developer was unwilling to complete or incapable of completing the contract; and
- the Developer continued to act as if the contract remained in force after the 7 October email, particularly by continuing to engage in discussions about possible substitute development ventures.
At first instance, Justice Gorton found that the 7 October email did not constitute a repudiation of the contract. The Developer appealed that decision.
The Court of Appeal held that:
- the plain meaning of the 7 October email was that the Purchaser was unable to continue operating due to financial difficulties and would therefore be unable to complete the contract; and
- a reasonable person in the position of the Developer would understand that email to be a repudiation of the contract.
While there were subsequent communications between the parties about possible substitute ventures, no agreement was ever reached before the contract was repudiated, and the Purchaser never withdrew its repudiation.
Further, the court held that the Developer's willingness or capacity to complete the contract was not relevant, as the Purchaser did not assert that it could or would comply with the contract if the Developer would do so, in the 7 October email or subsequently. Rather, the Purchaser's language in the 7 October email was unambiguous in communicating that it was unable to complete the contract, and so constituted repudiation.
Footnotes
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[2025] NSWCA 86.
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[2025] VSCA 115.