Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd
[2015] NSWCA 16
•16 February 2015
|
New South Wales |
Case Name: | Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd |
Medium Neutral Citation: | [2015] NSWCA 16 |
Hearing Date(s): | 17, 18 November 2014 |
Decision Date: | 16 February 2015 |
Before: | Meagher JA at [1]; Barrett JA at [23]; Gleeson JA at [111] |
Decision: | Direct that the parties attempt to agree the calculation of interest on the two judgment sums referred to in the Court's reasons and do within 14 days file either agreed short minutes of orders giving effect to this Court's decision or the competing versions for which they respectively contend together with short written submissions in support. |
Catchwords: | CONTRACTS – discharge, breach and defences to action for breach – repudiation and non-performance – what amounts to repudiation – anticipatory breach – whether particular conduct of the purchaser under a contract for the sale and purchase of a business was repudiatory – held that it was not – availability of a justification that was in fact not relied on was irrelevant to the issue of repudiation – whether, if there were repudiation, the vendor had accepted it – held that it had not – CONTRACTS – discharge by agreement – whether the parties abandoned their contract – held that they did. |
Cases Cited: | ACN 096 278 483 Pty Ltd (as trustee of the Williams Family Trust) v Vercorp Pty Ltd [2011] QCA 189 |
Category: | Principal judgment |
Parties: | Protector Glass Industries Pty Ltd (Appellant) |
Representation: | Counsel: |
File Number(s): | CA 2014/104115 |
Decision under appeal: | |
Court or Tribunal: | Supreme Court of New South Wales |
Jurisdiction: | Equity Division |
Citation: | [2014] NSWSC 261 |
Date of Decision: | 13 March 2014 |
Before: | Kunc J |
File Number(s): | SC 2009/289128 |
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Court or Tribunal: | Supreme Court of New South Wales |
Jurisdiction: | Equity Division |
Medium Neutral Citation: | [2014] NSWSC 261 |
Date of Decision: | 13 March 2014 |
Before: | Kunc J |
File Number(s): | SC 2009/289128 |
JUDGMENT
MEAGHER JA: This appeal should be allowed and the other orders proposed by Barrett JA should be made. What follows assumes a familiarity with the facts and issues as discussed in Barrett JA’s reasons for judgment and adopts the abbreviations used in those reasons.
The principal question is whether the primary judge erred in concluding that the respondent, SCA, lawfully terminated its assets sale agreement with the appellant, PGI, on account of the latter’s repudiation or anticipatory breach. The primary judge held that PGI had engaged in such conduct by sending its letter dated 23 January 2009 and by proffering a proposed termination deed to SCA on 3 March 2009. His Honour also held that SCA elected to terminate and did terminate the sale agreement by its conduct in entering into the March Employment Contracts on 3 March 2009 and in selling off its trading stock after that date. Each of those conclusions is challenged on appeal.
For the reasons Barrett JA gives, I agree that there was no relevant repudiatory conduct or anticipatory breach of PGI which entitled SCA to terminate the assets sale agreement on or after 3 March 2009. That conclusion is sufficient to dispose of the appeal and justify the orders proposed.
Assuming, contrary to that conclusion, that PGI’s conduct was repudiatory, or an anticipatory breach, it was argued that at the relevant time PGI was nevertheless entitled to terminate the assets sale agreement under clause 4.4 because the condition precedent as to the obtaining of consent to the assignment of the lease had not been satisfied or waived. It was submitted that justified PGI’s refusal to complete, even though at the time it was not relied upon by PGI as doing so. It was said to follow that SCA did not have “any basis for the claim [to rescind] based on repudiatory or anticipatory breach”. The argument did not indicate whether that was so because the conduct could not have been repudiatory or because in such circumstances SCA was not entitled to rescind.
In support of this argument, reference was made to Shepherd v Felt and Textiles of Australia Limited [1931] HCA 21; 45 CLR 359 and, in particular, to the statement of Dixon J at 377-378 which is extracted by Barrett JA at [78].
In Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 262, Mason CJ (with whose reasons Deane, Dawson and Toohey JJ agreed) described the general proposition for which Shepherd stands as authority in the following terms:
“… that a termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance. This Court applied the principle of Shepherd v Felt & Textiles to a case of anticipatory breach arising from the vendor's inability to complete a contract for the sale of conditional leases: Rawson v Hobbs. And subsequently the Court treated the principle as capable of having application to anticipatory breach arising from repudiation and renunciation: D.T.R. Nominees Pty Ltd v Mona Homes Pty Ltd.”
In D.T.R. Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 reference also is made in the judgment of Stephen, Mason and Jacobs JJ at 433 to a further principle that may prevent a party who has purported to terminate an executory contract from supporting that termination by reference to the other party’s repudiation, whether by way of anticipatory breach or incapacity.
That principle is that a party “in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper construction”. It is more fully discussed in the judgments of Mason CJ and Brennan J in Foran v Wight [1989] HCA 51; 168 CLR 385, esp at 404-408 and 424-425. At 406-407, Mason CJ observed:
“In my opinion it is not possible to read the judgment of Dixon CJ in Rawson v Hobbs as stating that readiness and willingness is material only to the assessment of damages. The propositions stated by his Honour are of a more fundamental character, deriving, as they do, from the traditional concept of readiness and willingness as a material element in the existence of the plaintiff's cause of action. Nor do I think that it is possible to regard his Honour's remarks as having no application to the entitlement of a party to terminate a contract for breach. A party who is disabled from suing for damages because he is not ready and willing to perform in the sense discussed above cannot exercise a right to treat himself as discharged from the contract on the ground that the other party is in breach of an essential term or is otherwise in fundamental breach of the contract.”
The sense in which readiness and willingness is relevant in this context was described by Dixon CJ in Rawson v Hobbs [1961] HCA 72; 107 CLR 466 at 481 as involving “nothing but a substantial incapacity or definite resolve or decision against doing in the future what the contract requires”. In Foran v Wight at 424-425, Brennan J noted that readiness and willingness “imports capacity to perform as well as disposition to perform” and that it is to be ascertained at the time of rescission and on the assumption that the other party was then ready and willing to perform.
The principle for which Shepherd stands does not assist PGI because, unlike the position of the purchaser in Rawson v Hobbs and the appellant vendor in D.T.R. Nominees, by its relevant conduct (sending its letter of 23 January 2009 or proffering the proposed termination deed in early March 2009), PGI did not purport to rescind or terminate the assets sale agreement.
The further principle, assuming PGI’s conduct had been repudiatory, would have applied to prevent SCA from rescinding the agreement if at the time of rescission it was not ready and willing to perform. Whether that was so directs attention to SCA’s essential obligations under the agreement.
On completion of the assets sale agreement SCA was obliged to deliver to PGI possession of and title to the Business Assets as well as SCA’s copy of its lease of the premises at Peakhurst from which its business was conducted (clause 6.2(b)). The Business Assets as defined included SCA’s “rights under” that lease (clause 1.1). By clause 4.1(c), completion was made subject to the parties obtaining the consent of the lessor of those premises to the assignment of SCA’s lease. That condition precedent was for the sole benefit of PGI (clause 4.2), and therefore could be waived by it.
Clause 4.3 required that each party use reasonable endeavours to procure satisfaction of that condition precedent “by the due date”. The agreement did not specify what the “due date” was. In the absence of any such provision, this sub-clause was to be construed as requiring endeavours directed to satisfying the condition precedent within a reasonable time. Clause 4.4 provided that if the condition precedent was not satisfied or waived by PGI within such a period, either party could terminate by notice to the other. All notices given under the agreement had to be in writing (clause 26).
As matters stood in early March 2009, at the time it is said that the assets sale agreement was rescinded for repudiation, SCA was not in a position to assign any leasehold interest in the Peakhurst premises to PGI or to procure the lessor’s consent to the assignment of such an interest because it was not at any time the lessee of those premises. Nor was it in a position to deliver to PGI a copy of that lease or any document required to assign it.
Thus, in early March 2009, SCA was not in a position to complete the agreement in accordance with its terms. That incapacity, the existence of which the primary judge was prepared to accept, meant that SCA was not ready and willing to perform one of its essential obligations.
However, before the primary judge and in this Court, PGI did not squarely rely upon or plead that absence of capacity (as distinct from an inability to convey good title because of the claim by NMA’s liquidators) as disentitling SCA from rescinding the agreement for repudiatory breach.
As Barrett JA’s reasons explain, PGI also relied upon the fact that the absence of any lease meant that the condition precedent could never be fulfilled so that PGI would never have been obliged to complete. Whilst that was the position, in the absence of any express reference by PGI to that as being a basis for its refusal to complete, it could not prevent its other conduct from being held to be repudiatory. Nor could the fact that the condition precedent could not have been satisfied affect SCA’s entitlement to rescind for repudiatory breach unless (as was in fact the case but was not pleaded or relied upon) the position also was that SCA was not ready and willing to perform its essential obligations under the agreement. It remained relevant, however, to whether SCA could recover damages for loss of the benefit of the assets sale agreement, assuming it was entitled to and did rescind the agreement.
In that event any award of damages to SCA was to be assessed on the basis of the likely position of the parties had PGI not repudiated. In that assessment it would have been necessary to consider whether the contractual rights claimed to have been lost were capable by the terms of the contract of being rendered less valuable or valueless: Maradelanto Compania Naviera SA v Bergbau-Handel GmbH; The Mihalis Angelos [1971] 1 QB 64; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 151-156; Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] HCA 10; 234 CLR 237 at [89]. In undertaking that exercise, subject to the actual facts suggesting otherwise, the natural inference to be drawn was that PGI as contract breaker would have acted in the way most beneficial to it.
For the reasons given by Barrett JA at [82] if SCA had been entitled to damages for loss of the benefit of the agreement, those damages would have been nominal only because they were to be assessed on the basis that PGI would have exercised its right under clause 4.4 to terminate the agreement before completion.
The remaining issue is whether, assuming SCA was entitled to terminate the agreement for repudiatory conduct, it effectively did so by its conduct in entering into the March Employment Contracts and selling its trading stock after 3 March 2009.
In my view, it did not. That conduct was part of a sequence of conduct which commenced with discussions concerning Option 2, included the sending of its circular to customers of 20 February 2009 and concluded with the entry into those employment contracts and the sale of the trading stock. Whilst the latter conduct was inconsistent with any intention of SCA to continue with the assets sale agreement, it was not consistent only with its having made an election to terminate the agreement unilaterally for repudiation or anticipatory breach. That conduct was equally, indeed more, consistent with the parties agreeing, or sharing an intention consensually, to discharge their agreement and pursue Option 2 which involved the entry into new employment agreements and the sale by SCA of its stock (see Barrett JA at [96]).
It follows that I agree with Barrett JA’s conclusion at [99] that the parties, by consensus, abandoned their earlier agreement. I also agree with his conclusion that SCA’s conduct on and after 3 March 2009 was inconsistent with any intention to adhere to the assets sale agreement. However, the primary judge was wrong to conclude that, by that conduct, SCA sufficiently manifested an election unilaterally to treat the assets sale agreement as at an end for reason of PGI’s repudiatory conduct.
BARRETT JA: This case concerns an assets sale agreement made in November 2008 between the first respondent, Southern Cross Autoglass Pty Ltd (“SCA”), as vendor and the appellant, Protector Glass Industries Pty Ltd (“PGI”), as purchaser. The subject matter of the sale and purchase was the assets and goodwill of an automotive glass business. The second respondent (“Mrs Rankine”) and the third respondent (“Mr Rankine”), the principals of SCA, became parties to the agreement as “covenantors”.
The sale agreement was never completed by transfer of the subject matter to the purchaser (PGI). SCA maintained that it lawfully terminated the agreement on account of repudiation or anticipatory breach by PGI (which repudiation SCA accepted) and that PGI became liable to it in damages for breach of contract accordingly. PGI’s contention was that the assets sale agreement was terminated or abandoned by agreement of the parties and that SCA was estopped from asserting that SCA had terminated the agreement by accepting PGI’s repudiation.
These claims, together with associated claims by Mr Rankine and Mrs Rankine in relation to employment contracts, became the subject of proceedings brought by SCA, Mr Rankine and Mrs Rankine against PGI in the Equity Division of the Supreme Court. After a hearing that occupied eleven days, Kunc J determined all matters in contention in favour of the plaintiffs: Southern Cross Autoglass Pty Ltd v Protector Glass Industries Pty Ltd [2014] NSWSC 261.
PGI appealed. The questions arising from the grounds of appeal are:
(a)whether PGI repudiated the assets sale agreement (or committed an anticipatory breach entitling SCA to terminate) by sending a particular letter dated 23 January 2009;
(b)whether PGI repudiated the agreement by proffering a proposed termination deed on 3 March 2009;
(c)if, in either of those ways, PGI evinced an intention not to be bound by the assets sale agreement but to terminate it, whether PGI was entitled to terminate because SCA was unable to give good title to the relevant assets;
(d)alternatively, whether PGI was entitled to terminate by reason of impossibility of fulfilment of a particular condition precedent;
(e)alternatively, whether SCA accepted PGI’s repudiation of the assets sale agreement and thereby terminated it, or whether the agreement was terminated by agreement or mutual abandonment;
(f)whether SCA was ready, willing and able to perform its obligations under the assets sale agreement so as to be entitled to terminate, in circumstances where the fulfilment of the condition precedent was impossible;
(g)alternatively, whether, if SCA was entitled to terminate, it was entitled to substantial damages in circumstances where the condition precedent could not be fulfilled.
Facts
A form of assets sale agreement was emailed by Mr Lindell of PGI to Mr Rankine and Mrs Rankine on 15 November 2008, together with two letters from PGI, one to Mr Rankine and Mrs Rankine. Each letter set out terms upon which the addressee would be employed by PGI and invited acceptance of the offer of employment it conveyed. Mr Lindell asked that Mr Rankine and Mrs Rankine print out the attachments to the email for use as originals, arrange execution and send the signed documents to him.
That request was complied with on 16 November 2008. Mr Rankine signed the assets sale agreement on behalf of SCA. Mr Rankine and Mrs Rankine signed the agreement as “covenantors”. In addition, each of Mr Rankine and Mrs Rankine signed the form of acceptance endorsed on the offer of employment. All the documents were then sent to PGI. It is accepted by all concerned that contracts were thereby formed.
The employment contracts thus created were referred to by the primary judge as “the November Employment Contracts”.
Three events were specified as conditions precedent to completion under the assets sale agreement: first, obtaining of clearance from the Australian Competition and Consumer Commission; second, Mr Rankine, Mrs Rankine and Catherine Kiernan (“Key Employees”) signing employment contracts with PGI on terms satisfactory to it; and, third, the grant of lessor’s consent to assignment by SCA of a lease on terms satisfactory to PGI. The “Completion Date” was defined as the day ten business days after satisfaction of the conditions precedent.
The first of the conditions precedent was satisfied on 19 December 2008. The second condition, as it related to employment of Mr Rankine and Mrs Rankine, was satisfied by their entering into the November Employment Contracts at the time the assets sale agreement itself was made. An issue to which it will be necessary to return arises in relation to the condition precedent concerning lessor’s consent.
Clause 2.2 of the assets sale agreement stated that the assets were sold “free from all charges, encumbrances, options and adverse interests of any kind”; and clause 6.2(b)(i) stated that, on the Completion Date, SCA was obliged to deliver to PGI “possession of and title to the Business Assets free from all mortgages, charges, liens and encumbrances”.
A little more than a month after the assets sale agreement was entered into, PGI received a letter from the liquidators of Nielsen and Moller Autoglass (NSW) Pty Ltd (“NMA”). The letter was dated 24 December 2008 and put PGI on notice of a claim that SCA, having acquired its assets and business through exercise by Mr Rankine of a power of sale he had as chargee under a charge given by NMA which the liquidators maintained was liable to be set aside, held that property on trust for NMA.
In early January 2009, PGI sent Mr Rankine a copy of the liquidators’ 24 December 2008 letter together with a covering letter expressing concern. PGI’s covering letter read in part as follows:
“We believe this truly is a matter for you to sort out with your lawyers but at the same time it has an impact on our combined efforts. As you may recall, the main thing for PGI has been that we would in no way become involved or implicated in this legal matter. Thus, it would be the position of PGI at the moment that we cannot move forward with the deal until this legal matter is resolved or we receive full assurance that we will not be drawn into legal actions between Southern Cross, Nielsen & Moller and any other third party. What is the latest status and when and how can PGI be assured they cannot be drawn into this conflict?”
It seems that PGI had some prior knowledge of the matter raised by the liquidators of NMA but had previously been under the impression that it did not present any serious obstacle.
There was no response by SCA to PGI’s letter. On 23 January 2009, PGI sent SCA a further letter that should be set out in full:
“This is a formal letter to inform you personally and Southern Cross Autoglass Pty Ltd ("Southern Cross") that as a result of recent evidence in terms of the legal matter which you have going on and its potential impact on the business assets of Southern Cross, Protector-Glass Industries Pty Ltd ('PGI') has no other choice than to issue you with a notice period to try to resolve the legal matter before we decide whether the Asset Sale Agreement is capable of completion.
The basis for this decision is legal as the evidence our lawyers have been able to gather indicates a level of uncertainty over the title and ownership of Southern Cross' assets and in particular the inventory. Effectively, PGI believes it is caught in the middle because on one hand your lawyers are saying that everything is alright whilst on the other hand, court documents express uncertainty about the validity of the Fixed and Floating Charge. Further, no details have been provided to us to explain the transactions under which the Fixed and Floating Charge was used to convey the assets from Nielsen & Moller to Southern Cross. Thus, there are serious concerns that PGI may eventually face litigation after proceeding with the deal as PGI has no certainty over ownership of the assets.
All of the above means that currently there is no other choice except to provide a notice period of thirty (30) days from the date of this letter during which you need to resolve the legal matter that is causing uncertainty over the fact that Southern Cross does not seem to have an unqualified right to sell its assets to PGI. This is the legal advice we have received and we must stand by it. This is based on the stance that PGI has clearly stated from the outset that if there was any hint of us being drawn into the legal matter, we would not be able to proceed with our commercial arrangement.
We have been advised that the best ways for you to resolve the legal matter within the notice period would be either:
(a) Obtaining a declaration of a Court that Southern Cross has good title to the business assets it is planning to sell to PGI as stated in the Asset Sale Agreement; or
(b) Conclude a 3-way deal between you, PGI and the Special Purpose Liquidator. This 3-way deal would involve all parties getting together prior to any deal being completed between us and ensuring that the legal matter is settled. This could be achieved by getting a release from the Special Purpose Liquidator that you and PGI would not face litigation in the future as Southern Cross has obtained what PGI deems unqualified ownership of its business assets.
If either one of the above is obtained within the notice period, PGI would then be happy to proceed with the Asset Sale Agreement because PGI still views that a potential business opportunity exists. Hopefully you understand and feel the same way that any potential business opportunity should not be hindered by a legal matter which could paralyse both parties if we join together without the assurance that you and PGI have been released from any further litigation. PGI views that such a scenario can only be achieved once you have settled your legal matter. We hope the prospect of a good business opportunity will now drive you to settle all of the legal matters as appropriate so that we can create value for you and PGI in the future.
Naturally, in the mean time PGI is ready to fully co-operate with you so that the business assets will be saved for mutual benefit. As you know, currently we have in place a temporary arrangement to support specified aspects of the Southern Cross business, which includes inventory. However, PGI believes that if at the end of the thirty (30) days your legal matter has not been resolved, we will need to review the support arrangements with you.
Further, if at the end of the notice period you have been unable to resolve the legal matter and PGI is still unclear over the ownership of the Southern Cross business assets, we will have to terminate the Asset Sale Agreement. This is based on the fact that you have been unable to provide to PGI evidence that Southern Cross has good title to the business assets.
This has not been an easy decision and we have considered many different solutions before taking this course of action. Crucially though, the communication that has been directly aimed at PGI has reduced our confidence in the fact that we would not be drawn into your legal matter. Thus, this left us with the only option of issuing this letter. We hope that you can resolve the legal matter within the notice period.”
The primary judge referred to subsequent discussions within the PGI camp and to a meeting of 18 February 2009 attended by Mr Rankine, Mrs Rankine and representatives of PGI. His Honour accepted as an accurate summary of proceedings at that meeting the following prepared by one of the PGI representatives:
“Internal draft only
Niko, Greg
Here are my minutes from yesterdays meeting with G&K R, I was pleased with the spirit of the meeting and Ari could not find fault in their sincerity.
Minutes of meeting 18/2/09 GR, KR, AV, AS Arndell Park NSW.
Asko scheduled a meeting with GR&KR (SCA) to discuss the details of 'option B' presuming that no acceptable assurances are forthcoming regarding the asset sale agreement.
G&K R are passionate to continue servicing "their customer base" as employees of PGI in the region of "NSW". They are also extremely hellbent on 'taking the bitch down', and will continue to pursue their legal rights until they do so. Their estimate was twelve to fourteen months of legal action.
It was agreed that Peakhurst will cease trading on 1/3/09 and that the Rankines will never go into business again. They made an offer to give us a fridge, lounge, table and chairs ... anything we needed for Arndell Park as they will not be needing them anymore. I have suggested that we will be there on Saturday with our truck, as we need many items they no longer have use for.
SCA have approx: 6000 units of non PGI stock on hand and I suggested that we may assist Geoff in finding non PGI/SCA customers for that stock i.e., Dave Spiteri, John Wilson, Economy Bob .... in order to not disturb any potential sales from Arndell P.
Will we continue to supply product until 1/5/09 for SCA to liquidate stock in prepackaged box lots? AV said yes, only if sales are to non PGI/SCA customer base.
Kathy will commence employment with PGI 23/2/09 and we must determine a suitable vehicle for her before then as she cannot drive a manual (apparently).
Karin would start 1/3/09 and drive the Falcon ute ?, as we agreed that MERCEDES company cars are inappropriate at our new branch.
$50K per annum, etag, fleet card and phone. Not interested in % bonus.
Geoff would potentially start 1/5/09 @ $65k +++ after stock liquidation that does not impact detrimentally to PGI sales, on a performance incentive (% of nett profit) as agreed with Aarne.
A pricing meeting has been scheduled for 7.30am Monday 23 to determine if the new PGI pricing is accepted / rejected by the SCA group, GR, KR, KK, i.e., do they want a job.
AV and SW will visit Jennings and Campsie on Friday to initiate new pricing, product and delivery terms and commitments.”
The “bitch” referred to here is the person upon whose application special purpose liquidators of NMA were appointed to investigate and pursue claims to the general effect that transfer of NMA’s assets and business to SCA by Mr Rankine as chargee was liable to be set aside. The special purpose liquidators later replaced the incumbent liquidator as liquidators. The estimate of 12 to 14 months of legal action related to steps to clarify and confirm SCA’s title to the assets and business in the face of the claims made by the liquidators of NMA.
For the balance of January and into February 2009, PGI personnel had discussions and exchanged correspondence among themselves about the way forward. They came to concentrate on the development of “Option 2”, that is, a transaction or set of transactions different from that contemplated by the existing assets sale agreement. The focus was upon securing for PGI the services of key personnel (Mr Rankine, Mrs Rankine and Ms Kiernan) and, in that way, obtaining the benefit of existing customer contacts. Stock in trade was apparently not of great importance to PGI, since “Option 2”, as it developed, envisaged assistance by PGI to SCA to liquidate its stock in ways that would not conflict with PGI sales activities. Mr Rankine and Mrs Rankine were, at times, involved in discussions relevant to the development of “Option 2”. There are, in the documentary evidence, references to discussion with them about the terms of employment contracts and future roles as employees of PGI to service “their customer base”. This indicates a possibility that the November Employment Contracts might be superseded. There are also references to Mr Rankine having told a PGI representative that SCA would cease trading on 28 February 2009 and that SCA staff had been informed accordingly.
Mr Rankine and Mrs Rankine sent to SCA’s customers a circular letter dated 20 February 2009 in the following terms:
“TO ALL OUR VALUED CUSTOMERS ....
Unfortunately the time has come that we can no longer sustain our position within the wholesale market.
Due to circumstances beyond our control we are now in a position that we can no longer keep trading.
We have put all we can into the fight to keep Southern Cross Autoglass in the wholesale market.
But unfortunately we have not been able to see our way clear of the obstacles that have been put in our way.
Our service to you will continue in the same way you have always been used to.
As from MONDAY 23/February/2009 Kathy will take up a position with PROTECTOR AUTOGLASS INDUSTRIES.
Following Kathy will be Geoff and Karin the following week MONDAY 2nd/MARCH 2009.
Our phone lines will be diverting to Protector Autoglass's new branch at Arndell Park
The Arndell Park branch is well equipped with stock and consumables.
Please be assured we will keep all deliveries and service levels the same.
Our Customers have always been our first priority and will remain so.
We have truly appreciated your loyalty and continued support and friendship throughout what have been extremely stressful and trying times for us all.
We hope that you will all stay with us in our new venture as we all move forward into the future, and what we hope will bring better times for all of us.
Once again a big THANKYOU to all of you for supporting us in the Market
Fondest Regards
Geoff and Karin Rankine”
Despite having thus informed its customer base on 20 February 2009 that it had ceased business, SCA took the stance with PGI that the agreement for the sale of the business continued in force. In fact, on 23 February 2009, SCA’s solicitor wrote to PGI’s solicitor referring to the possibility of specific performance proceedings.
SCA’s solicitor’s letter prompted an immediate inquiry by Mr Lindell of PGI to Mr Rankine. Mr Lindell asked what the solicitor’s letter was “alluding to given that it was our understanding that we were looking to move on from this deal and are well advanced with Option 2 as you have been discussing in detail with Asko”.
Mr Rankine spoke to Mr Lindell on 25 February 2009. Mr Rankine said that he considered “that Option 2 is the way forward” but also made it clear that he had legal advice that SCA could hold PGI to the assets sale agreement. That produced within PGI a decision that there needed to be a formal cancellation of the agreement “to ensure there are no further complications in the future”.
On 27 February 2009, Mr Lindell emailed to Mr Rankine a draft “Deed of Termination of Agreement”, saying:
“As discussed on the phone earlier, please find attached a document in relation to cancelling the Asset Sale Agreement as part of going ahead with the plans you have discussed in detail with Asko.
Hopefully you can review this with Farshad and let me know if any questions [sic]. It is fairly straightforward.”
The central provisions of the draft deed were:
“2. TERMINATION OF EMPLOYMENT
2.1 The parties agree that the Asset Sale Agreement is terminated with effect from the date of this document.
2.2 The parties acknowledge that termination of the Asset Sale Agreement discharges all liabilities and obligations of the parties in relation to the Asset Sale Agreement.
3. EMPLOYMENT
3.1 The parties acknowledge that PGI intends to enter into employment agreements with Karin and Geoffrey.”
On 2 March 2009, Mr Rankine told Mr Lindell that he would be happy to sign the deed if PGI gave him a letter stating why PGI wished to cancel the assets sale agreement. In internal PGI correspondence, Mr Lindell surmised that such a letter was required by SCA in support of a claim that SCA might seek to make against NMA for loss of the bargain with PGI. PGI personnel thereafter drafted such a letter which was submitted to Mr Rankine and SCA’s solicitor for comment.
In the events that happened, neither a letter of this kind nor the deed of termination was ever signed. On 3 March 2009, however, Mr Rankine signed a new employment contract with PGI and initialled Mrs Rankine’s new employment contract, indicating that she would herself sign in due course. It is apparently not in dispute that PGI and Mrs Rankine became bound by that employment contract. The judge referred to these new employment contracts as “the March Employment Contracts”. Their terms differed from those of the November Employment Contracts.
After 3 March 2009, Mr Rankine began selling off SCA’s trading stock at discount prices to third parties. PGI personnel knew that this was happening. Both Mr Rankine and Mrs Rankine commenced employment under the new contracts with PGI. In each case, however, the employment was short lived. PGI terminated Mrs Rankine’s employment on 28 April 2009 and Mr Rankine’s on 25 May 2009 alleging, in each case, misconduct justifying immediate dismissal.
The 23 January 2009 letter
The primary judge held that PGI, by sending the 23 January 2009 letter to SCA, repudiated the assets sale agreement. His Honour was of the opinion that, on an objective analysis, a reasonable recipient in the position of SCA would have been aware that the assets sale agreement gave PGI no right to make the demand conveyed by the letter, that the possibility of some third party claim to stock in trade after completion was expressly dealt with by a provision of the agreement (clause 9.1), that PGI had the benefit of warranties contained in the agreement including as to unencumbered title and that the agreement did not give PGI any right of termination in the event of a breach of warranty.
His Honour also noted that the 24 December 2008 letter from the liquidators of NMA did not threaten immediate action against anyone and, in particular, did not say that any claim would be made against PGI if it completed the purchase under the assets sale agreement.
The judge’s conclusion was stated in these terms (at [137]):
“The Court is well satisfied that a reasonable person in the position of the plaintiffs would view the 23 January Letter as manifesting an intention on the part of PGI to fulfil the ASA [ie, assets sale agreement] only in a manner substantially inconsistent with ASA's obligations and not in any other way. This is because the reasonable recipient would read the 23 January Letter against the background of the statement in PGI's 5 January 2009 letter that it was ‘the position of PGI at the moment that we cannot move forward with the deal until this legal matter is resolved or we receive full assurance that we will not be drawn into legal actions between Southern Cross, Nielsen & Moller and any other third party’. The 23 January Letter, by making its demands and specifying a notice period, formalises the position set out in the 5 January 2009 letter. The 23 January letter makes it clear (‘If either one of the above is obtained within the notice period, PGI would then be happy to proceed with the [ASA] ... if at the end of the notice period you have been unable to resolve the legal matter ... we will have to terminate the [ASA]’) that PGI would only complete the ASA if it were satisfied that the ‘legal matter’ had been resolved.”
His Honour also attached significance to the reference in PGI’s 23 January 2009 letter to resolving “the legal matter before we decide whether the [agreement] is capable of completion” (emphasis added). This, he said, manifested an intention not to be bound by the agreement as it stood.
PGI challenges the proposition (accepted by the primary judge) that it had no right to demand what it demanded by the 23 January 2009 letter, that is, that the “legal matter” be resolved by SCA within a period fixed by PGI, failing which PGI would be free to withdraw from the contract. PGI points to a provision stating that the assets were sold “free from all charges, encumbrances, options and adverse interests of any kind”. Thus, it is argued, the existence of any “adverse interest” meant that SCA was unable to provide that for which the contract stipulated; and a statement that PGI would not complete unless the “adverse interest” was removed was not inconsistent with the contract. Furthermore, PGI says, it makes no difference that warranty claims could be made after completion if any third party claim to stock was then forthcoming.
SCA makes several responses. First, it says that the matter was not argued at trial. PGI, however, draws attention to part of the submissions at trial where it is covered. Second, SCA says that PGI’s submission is at odds with part of its defence; however, PGI points to another part of the defence that is consistent with it.
More substantially, SCA accepts that it assumed an obligation to give good title to the subject matter of the sale and says that PGI was always aware of the potential for challenge from the liquidators of NMA; and the clause 9 warranties and related warranties and indemnities were negotiated and included against that background. PGI’s response is that these matters are separate from and do not detract from the clause 2.2 statement that the whole of the assets is sold free from charges, encumbrances, options and adverse interests of any kind.
PGI’s submission must be accepted. The contractual obligation of SCA (made explicit by clauses 2.2 and 6.2(b)(i)) was an obligation to transfer and deliver on completion assets that were not affected by adverse interests of any kind. PGI had a corresponding contractual right. The parties’ contract reflected the basic expectation referred to by Lord Kenyon in Hartley v Pehall (1820) Peake 178; 170 ER 121:
“When a man buys any commodity he expects to have a clear indisputable title, and not such a one as may be questionable, at least, in a Court of Law. No man is obliged to buy a lawsuit.”
SCA says that this principle, even if applicable, can be employed only in a suit for specific performance. There is no sound basis for that contention. The principle is equally applicable where the purchaser seeks rescission: Williams v Scott [1900] AC 499. There is no reason why it should be confined in any particular way.
The liquidators of NMA maintained that SCA (and anyone else having an interest supposedly derived from Mr Rankine’s purported exercise of his power as chargee of the assets of NMA) held all former assets of NMA on trust for NMA. If a transfer to PGI were effected by way of purported completion of the assets sale agreement, PGI would thereby be placed in a position where the claims of NMA as beneficial owner became maintainable not only against PGI personally but also in the form of proprietary claims to the subject matter of the sale in the hands of PGI. Given the unmistakeable tenor of the letter of 24 December 2008 sent by NMA’s liquidators to PGI, any compulsion upon PGI to complete the sale agreement would have been, in a very real sense, compulsion to buy a lawsuit. It was that compulsion that was, by the parties’ bargain, denied through the superior and antecedent contractual obligation of SCA to sell and convey free from adverse interests.
The question whether PGI, by sending the letter of 23 January 2009, repudiated the assets sale agreement is to be answered by deciding whether its conduct was of the quality referred to by Gleeson CJ, Gummow, Heydon and Crennan JJ in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; 233 CLR 115 at [44], that is, whether the conduct evinced “an unwillingness or an inability to render substantial performance of the contract” or “an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party's obligations”. Such conduct may, it was said, be termed “renunciation”. The test is “whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it”.
PGI’s conduct was not of this quality. Its letter drew attention to the need for SCA “to resolve the legal matter that is causing uncertainty over the fact that Southern Cross does not seem to have an unqualified right to sell its assets to PGI”. The statement in the letter’s penultimate paragraph that PGI would “have to terminate the Asset Sale Agreement” did not manifest an intention to renounce the contract. Rather, it put SCA on notice that if at the end of the specified period, SCA had not resolved the “legal matter” regarding ownership of the subject assets, PGI would regard itself as in a position where the subject matter for which it had bargained (and which SCA had promised to give) could not be delivered to it. Taken as a whole, the letter evinced a desire and an intention to see the contract completed according to its terms – emphasising, however, that those terms contemplated the giving of clear and unclouded title by SCA and that it was for SCA to find within a reasonable time means of achieving this in the face of the clearly flagged claims by the liquidators of NMA.
The primary judge proceeded on the footing that PGI, by requiring resolution of “the legal matter” before completion, showed an intention of performing only on a basis different from that provided for in the agreement. According to that view of matters, introduction of a requirement that “the legal matter” be resolved involved a stipulation not already within the contract. The judge noted that clause 9.1 dealt with the possibility of adverse claims by third parties. That clause is as follows:
“If, after Completion, the Stock (or any portion of the Stock, or any proceeds from the sale of the Stock) becomes subject to a Claim of any nature by a third party, the Purchaser may deduct the quantum of the Claim (Stock Claim) from the value of the remaining instalments of the Purchase Price (Remaining Instalments).”
Clause 9.1 was in no sense an answer to PGI’s legitimate concern. It dealt only with trading stock and was of use only if any claim arose while instalments of purchase price remained unpaid. The foreshadowed claim by NMA concerned all assets (including goodwill) and, fundamentally, the ability of PGI to carry on business in succession to SCA.
The correct characterisation, in my view, is that PGI, by the 23 January 2009 letter, affirmed its commitment to the contract, pointed out in clear terms that it was insisting on its right to receive good and clear title to all assets and made it clear that it would not perform unless that right were recognised and accommodated. Communication of that position by PGI to SCA was not repudiatory conduct.
Tendering of the draft deed of termination
The primary judge held (at [144]) that tendering of the draft deed of termination by PGI on 27 February 2009 “would and can only have been understood by a reasonable recipient of the Termination Deed in the position of the plaintiffs as manifesting an intention on the part of PGI not to be bound by” the assets sale agreement. His Honour also said:
“Such a conclusion must almost necessarily follow in any case where a party is the moving party and proffering a deed to terminate an agreement. If the deed is accepted by the other party then no question of the acceptance of the offeror's repudiation arises because the agreement is terminated by consent.”
PGI contends that the proffering of the draft deed was the very antithesis of repudiation. The draft proceeded on the clear footing that the assets sale agreement was binding on the parties and would cease to bind them when the mutual releases for which the draft provided were given and received. Far from communicating any unilateral intention not to be bound, proffering of the draft showed an intention that both parties would continue to be bound until they agreed otherwise. By submitting the draft, PGI invited SCA to treat on that footing.
SCA says that that submission ignores much of the surrounding circumstances. It goes on to refer to a number of statements concerning the 23 January 2009 letter and the development of “Option 2”.
It may readily be accepted that the question is to be addressed in a particular factual context. The status and future of the assets sale agreement had been the subject of discussions between the parties’ representatives before the draft deed of termination was submitted. PGI, for its part, had concentrated on the development of “Option 2” after receipt of the letter of 24 December 2008 from the liquidators of NMA. Mr Rankine had become involved in those discussions and, on 20 February 2009, he and Mrs Rankine sent the circular to SCA customers informing them that SCA “could no longer keep trading” and that, on specified dates in the following month, its personnel would take up positions with PGI, with SCA phone lines being diverted to PGI’s new branch which was “well equipped with stock and consumables”.
It was as “Option 2” developed and after the circular to customers had been sent by SCA on 20 February 2009 that SCA’s solicitor wrote to PGI on 23 February 2009 foreshadowing the possibility of proceedings for specific performance of the assets sales agreement.
As the judge found, the circular to SCA customers came as a considerable surprise to PGI. The assets sale agreement required SCA to continue to manage the business as a going concern up to and including the completion date. The actions and attitude communicated by the circular were quite inconsistent with this.
By the time the draft deed of termination was prepared, both parties had views about the ultimate form of their future co-existence. In each case, the view differed from the regime provided for in the assets sale agreement. PGI, however, recognised that achievement of any other form of co-existence, at a legal level, depended upon the termination of the assets sale agreement. By tendering the draft deed of termination, PGI made it clear that it regarded itself as bound by the assets sale agreement and that it would continue to be bound unless and until it was terminated.
There was no room for a finding that tendering of the draft was repudiating conduct on the part of PGI.
Did SCA accept any repudiation?
Let it be assumed that, contrary to the opinions I have expressed, PGI repudiated the assets sale agreement either by communicating to SCA the content of the 23 January 2009 letter or by tendering to SCA the draft deed of termination.
On either such assumption, there is a question whether SCA accepted PGI’s repudiation so as to terminate the assets sale agreement. It is to that question that I now turn,
PGI places emphasis on clause 4.1(c) of the assets sale agreement. That clause was as follows:
“Completion of this Agreement is subject to and conditional upon .. the parties obtaining the consent of the Lessor to assign the Lease on terms satisfactory to the Purchaser.”
The agreement contained relevant definitions as follows:
“‘Lease’ means the Vendor’s lease of the Business Premises.
‘Lessor’ means the lessor of the Business Premises.”
The “Business Premises” were defined by means of a particular street address at Peakhurst. The “Vendor”, of course, was SCA.
PGI emphasises that SCA was not, at the date of contract or at any other time, the lessee of the premises at the Peakhurst address. NMA was the tenant of such premises. It follows, says PGI, that there was never any lease within the definition of “Lease” and that it was impossible for anyone to obtain consent to assignment of a non-existent subject matter. As a consequence (and whatever time stipulation may have been relevant to satisfaction of the condition precedent), the time for completion could never arrive and, if either of the actions of PGI relied upon by SCA as repudiatory was of that character, there was not in truth any repudiation because the contract could never bind either party to complete.
The argument advanced by PGI is said to be based on the decision of the High Court in Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; 45 CLR 359 and, in particular, the observation of Dixon J that a party to a contract who refuses further to observe its stipulations can rely on a breach of conditions committed beforehand by the other party as absolving him from the contract; and that the terminating party, by stating a wrong reason for his refusal, does not deprive himself of a justification which in fact exists. Dixon J also said (at 377-378):
“But the rule is of general application in the discharge of contract by breach, and enables a party to any simple contract who fails or refuses further to observe its stipulations to rely upon a breach of conditions, committed before he so failed or so refused, by the opposite party to the contract as operating to absolve him from the contract as from the time of such breach of condition whether he was aware of it or not when he himself failed or refused to perform the stipulations of the contract. ‘It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not’ (per Greer J, Taylor v Oakes Roncoroni & Co (1922) 127 LT at 269; see, too, per Lord Sumner in British and Beningtons Ltd v North Western Cachar Tea Co [1923] AC 48 at 71 and per Starke J in Henry Dean & Sons (Sydney) Ltd v P O'Day Pty Ltd [1927] HCA 20; 39 CLR 330 at 359).”
PGI also relies on the following statement of principle by Mason CJ in Foran v Wight [1989] HCA 51; 168 CLR 385 at 406:
“[A] party who refuses to perform a contract can justify his action by pointing to grounds that justify his refusal even if at the time of refusal he was unaware of the existence of those grounds.”
The primary judge was content to work on the basis that the condition precedent concerning the lease could not be fulfilled. He was satisfied, however, that PGI would not have insisted on satisfaction of the condition and would have completed even though the lease was not assigned. The lease was, in reality, a monthly tenancy. On the view the judge took, a new lease of premises at Arndell Park taken by PGI in January 2009 was “at the heart of the commercial arrangements embodied” in the assets sale agreement and the November Employment Contracts. His Honour found that PGI’s plan was to close the Peakhurst premises after some period of transition and that PGI personnel had accepted in cross-examination that the assets sale agreement would have gone ahead even if the Peakhurst premises had not been available.
In this Court, PGI emphasised that the evidence of PGI witnesses in cross-examination on the importance of the Peakhurst lease to PGI was led on the basis of assumptions about other surrounding circumstances – in substance, assumptions that PGI would obtain everything to which it was entitled under the assets sale agreement except a lease of the Peakhurst premises. PGI submitted that, for the answers given in cross-examination to be meaningful, the questions should have been premised on the true state of affairs, namely, that there was substantial doubt about the ability of SCA to give good title to the assets in accordance with the assets sale agreement, that there were prospects of litigation against PGI (including proprietary claims to the SCA assets) at the suit of the NMA liquidators if completion took place and that PGI had good commercial reasons to wish to be rid of those unsettling uncertainties and to find a mutually acceptable “Option 2”.
There is merit in that submission. After 24 December 2008, PGI was on notice that completion of the assets sale agreement would, in all probability, cause it to buy a lawsuit. Its prime objective was to avoid that consequence by finding some alternative way of securing the services of Mr Rankine and Mrs Rankine. Had PGI been presented with an opportunity of retreating from the assets sale agreement because of non-satisfaction of what was, in abstract terms, a condition precedent of relative unimportance in its own right, the likelihood is that PGI would have seized that opportunity.
Impossibility of fulfilment of the condition precedent concerning the lease (because no such lease existed) would have justified refusal by PGI to complete had PGI raised and relied on that impossibility. As Meagher JA points out, however, PGI did not, in its pleaded case or otherwise, allege any such reliance. The existence of a justification that was neither appreciated nor actuating did not deprive PGI’s otherwise repudiatory conduct of its repudiatory quality.
I turn now to another question that, in the light of my main conclusions, is also academic, that is, whether, if SCA had been entitled to terminate on account of repudiation by PGI, it did so be accepting the repudiation.
The primary judge answered that question in the affirmative. SCA had, in his Honour’s view, made it unequivocally clear to PGI that it treated the agreement as at an end. Two matters were seen as warranting that conclusion: first, the actions of Mr Rankine and Mrs Rankine in entering into the March Employment Contracts on 3 March 2009 and, second, the selling off of SCA’s trading stock at discount prices after 3 March 2009.
The terms of the March Employment Contracts were inconsistent with those of the November Employment Contracts. Action to commit Mr Rankine and Mrs Rankine to the March Employment Contracts followed PGI’s indication that it would provide SCA with a letter which, according to Mr Lindell’s assessment, SCA was likely to use in support of a claim that SCA might seek to make against NMA. SCA was, in PGI’s assessment, laying the ground for a claim that action of NMA had caused it to lose the benefit of the assets sale agreement.
The judge made a number of findings about events on 2 March 2009. Particularly pertinent is a finding that Mr Rankine telephoned Mr Lindell on that day and said that he had spoken with his solicitor and that “they” (no doubt SCA, Mr Rankine and Mrs Rankine) would be “happy to sign the deed [ie, the deed of termination] provided that PGI issues a letter stating why we [PGI] wish to cancel the agreement”. Later in the day, Mr Lindell emailed Mr Rankine (with a copy to SCA’s solicitor) a draft of a letter of the kind requested. The next day, the March Employment Contracts came into being and Mr Rankine indicated that he would have to consult his lawyer before signing the deed of termination.
The primary judge made a review of the evidence concerning proposed commitment to the deed of termination by SCA. His conclusion was that Mr Rankine had said, in the course of a meeting with PGI personnel on 3 March 2009, that he would consult his lawyer before signing the deed and that he made an unsuccessful attempt to contact his lawyer by telephone in the course of the meeting. His Honour also found that Mr Rankine had given no indication that the deed would be executed at any particular time or within any particular period.
These findings formed the basis of the judge’s conclusion that, at the time of the acts said to constitute acceptance of PGI’s repudiation, SCA regarded the assets sale agreement as a continuing and unfulfilled contract.
PGI submitted in this Court that that analysis paid insufficient attention to (and was inconsistent with) the judge’s findings, first, that Mr Rankine had made it clear on 2 March 2009 that SCA was “happy to sign” the deed of termination subject to receipt of the requested letter from PGI; and, second, that PGI had immediately confirmed that the requested letter would be given and provided a suggested draft. Against that background, PGI submitted, Mr Rankine’s later statement that he needed to speak to his lawyer before signing the deed of termination was concerned only with process or procedure as distinct from the substance of the relationship. This is consistent with the evidence of the two PGI people who were present at the 3 March 2009 meeting. They testified that Mr Rankine’s statement that he needed to speak to his lawyer was accompanied by an indication that the executed deed would (or should) be forthcoming “by Friday” or “in the next two days” or “in the next few days”.
That submission should be accepted. By the time Mr Rankine committed himself and Mrs Rankine to the March Employment Contracts on 3 March 2009 (and a fortiori by the time SCA began to sell off its trading stock after 3 March 2009), SCA was content to see the assets sale agreement go by the board. In his conversation with the two PGI representatives, Mr Rankine did not quarrel with the proposition that the purpose to be achieved by the draft deed – formally putting an end to the assets sale agreement – was one to which SCA was committed and that was acceptable to it. He merely wanted to speak to his lawyer, no doubt either to ensure that the draft deed would in truth simply achieve that purpose or to check that the draft letter would serve the purpose that the lawyer had in mind for it. SCA’s attitude, as evidenced by the statements of Mr Rankine, was that the agreement was no longer binding, as a matter of commercial substance, even though the legal step of documenting the parties’ mutual releases was still required as a formal matter, which step would be taken by SCA within a short period.
That attitude on the part of SCA was demonstrated in a stark way at an earlier time. SCA’s circular of 20 February 2009 to its customers stated that SCA could “no longer keep trading” and that “the fight to keep Southern Cross Autoglass in the wholesale market” had been lost; also that “our service to you” would continue following a move by Mr Rankine, Mrs Rankine and Ms Kiernan to PGI at that company’s “new branch at Arndell Park”. SCA thereby made plain its abandonment of its business. It said quite clearly that it had vacated “the wholesale market”, thereby giving up the very subject matter that it had contracted to sell and assure to PGI and rendering itself unable to deliver that which it had contracted to give.
Assuming (contrary to my conclusions stated earlier) that PGI repudiated the assets sale agreement in one of the ways alleged by SCA, the relevant question becomes whether SCA’s subsequent conduct manifested an intention of SCA to treat the repudiation as discharging it from further performance. In answering that question in the affirmative, the primary judge referred totwo particular matters – the actions of Mr Rankine and Mrs Rankine in entering into the March Employment Contracts on 3 March 2009 and the selling off of SCA’s trading stock at discount prices after 3 March 2009. It may readily be accepted that those actions were inconsistent with any intention of SCA to adhere to the assets sale agreement (and any intention of the individuals to adhere to the November Employment Contracts). It may also be accepted that SCA’s intention no longer to adhere to the assets sale agreement was demonstrated by the sending of the 20 February 2009 circular to customers.
As Meagher JA points out, however, manifesting by SCA of an intention not to continue with the assets sale agreement does not lead to a conclusion that it had elected to terminate the agreement on account of repudiation or anticipatory breach. The intention was made clear in a context where the parties had pursued negotiations towards effectuation of “Option 2”; and it was obviously related to that possibility. The factual circumstances canvassed in this discussion of the acceptance question – a discussion that proceeds on a basis at odds with my conclusion that there was no repudiation – has relevance also to the question whether the parties abandoned their contracts. That question arises squarely if there was no repudiation.
Agreed termination or abandonment?
PGI submitted at trial (and also submits on appeal) that several factors combined to warrant a finding that the parties to the assets sale agreement had, by their subsequent conduct, evidenced an agreement to terminate it or a shared intention that it should be abandoned. Those factors were:
(a)the closure of the premises from which SCA operated;
(b)the sale of SCA’s trading stock to third parties;
(c)commitment by Mr Rankine and Mrs Rankine to the March Employment Contracts.
Consistently with what I have already said, I am of the opinion that PGI’s submission must be accepted. SCA, Mr Rankine and Mrs Rankine, had obviously decided by 20 February 2009 that there would be no transfer of the business assets of SCA to PGI and no employment of the two individuals by PGI on the terms of the November Employment Contracts that had been entered into consistently with the assets sale agreement. They manifested that decision and attitude by the customer circular of 20 February 2009 and the conversation of 2 March 2009. They then acted accordingly by entering into the March Employment Contracts on 3 March 2009 and proceeding to sell off the SCA stock for the account of SCA alone. Mr Rankine and Mrs Rankine had obviously come to the realisation that some form of “Option 2” was inevitable and were pursuing that alternative.
PGI’s manifested intention corresponded with that of SCA, Mr Rankine and Mrs Rankine. PGI also entered into the March Employment Contracts, thereby showing that it no longer saw as relevant the November Employment Contracts or the assets sale agreement in furtherance of which they had been made.
The nature of the inquiry to be made when it is alleged that the parties to a contract have abandoned that contract has recently been discussed in Fazio v Fazio [2012] WASCA 72 and Cedar Meats (Aust) Pty Ltd v Five Star Lamb Pty Ltd [2014] VSCA 32. In the former case, Murphy JA said at [74]:
"The abandonment of a contract, in the sense of the mutual release of future obligations, being an inferred agreement, does not depend upon the subjective intention of the parties, but upon whether their conduct (both acts and omissions) viewed objectively manifests an intention to discharge the contract: Summers v The Commonwealth [1918] HCA 33; 25 CLR 144, 151 - 152; Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279 [2], [40], [57]; DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; 138 CLR 423; Marminta Pty Ltd v French [2003] QCA 541 [21] - [22]."
According to the objective assessment thus required, the parties to the assets sale agreement and the November Employment Contracts abandoned those contracts, in the sense that each made it clear to the others that it regarded itself and those others as released. All showed themselves to be content with (and to adopt) a situation in which none of them was any longer bound by the contracts of November 2008 and their rights and obligations were as if those contracts had not been made. Instead, Mr and Mrs Rankine chose to close down the SCA business and to have SCA sell off its trading stock for its own account, while PGI willingly acquiesced in that course of conduct by SCA. Also, the parties showed themselves to be content with a situation in which Mr Rankine and Mrs Rankine became employees of PGI under the March Employment Contracts instead of the November Employment Contracts.
Conclusion on the principal issues
PGI has, in my opinion, succeeded in establishing that it did not, in either of the ways alleged against it, repudiate or renounce or commit anticipatory breach of the assets sale agreement. It has shown that, because of the impossibility of fulfilment of the condition precedent concerning the lease and because it was not “obliged to buy a lawsuit”, it never became subject to any immediate duty to complete the assets sale agreement. Furthermore, SCA itself acted in disregard of the assets sale agreement from 20 February 2009 and the correct assessment of the objectively manifested circumstances is that the parties, by consensus, abandoned the agreement and became free from it.
As to the principal matters in contention concerning the assets sale agreement, therefore, the appeal should be allowed and the award of damages against PGI should be set aside.
It remains to deal with two other matters.
The employment contracts
The primary judge awarded Mr Rankine and Mrs Rankine damages for breach of the November Employment Contracts on the basis that those contracts, like the assets sale agreement, had been repudiated or renounced by PGI. The rationale for that decision was the same as that which applied to the assets sale agreement itself.
As stated above, the conclusion that the assets sale agreement was abandoned by its parties applies also to the November Employment Contracts. The award of damages for breach of the November Employment Contracts must therefore be set aside.
There were claims by Mr Rankine and Mrs Rankine in the alternative that PGI had breached the March Employment Contracts by dismissing them as it did. The judge did not decide those claims but observed that, had it been necessary to do so, he would have held that there had been breach by PGI. In this Court, PGI did not dispute this. Moreover, it accepted that damages for such breaches should be as Mr Rankine and Mrs Rankine submitted before the primary judge, that is, $44,271 for Mr Rankine and $49,574 for Mrs Rankine, plus interest in each case.
Judgments should be awarded in these sums, with the parties attempting to agree interest in the first instance.
The restitution claim
It was unnecessary for the primary judge to decide a restitution claim brought by SCA based on the proposition that PGI had been unjustly enriched because, in the events that happened, it obtained, without payment, intangible assets of SCA – in particular, the “customer base” and goodwill. SCA says that if, as in my judgment should be the case, its contract-based claims are unsuccessful, it should nevertheless have judgment on the restitution claim. SCA filed a notice of contention seeking that relief.
In the course of submissions, however, counsel for SCA acknowledged that, because of the way in which the primary judge dealt with the other matters before him, factual findings sufficient and necessary to allow a fully informed assessment of the restitution case had not been made, with the result that, if the appeal were allowed, that aspect of the plaintiffs’ claims at first instance would appropriately be remitted to the primary judge. That is the course that should be taken.
Disposition
In my opinion, the appeal should be allowed and the orders made by the primary judge on 21 March 2014 should be set aside. In lieu, there should be judgment for the second plaintiff (Mrs Rankine) for $49,574 plus interest, judgment for the third plaintiff (Mr Rankine) for $44,271 plus interest, an order that the restitution or unjust enrichment claim in prayer 3 of the second further amended statement of claim filed on 3 June 2013 be remitted to the primary judge for determination and an order that the question of costs at first instance also be remitted so that the primary judge may determine that question in the light of both the outcome in this Court and his Honour’s decision on the restitution or unjust enrichment claim. Finally, there should be an order that the respondents pay the appellant’s costs of the appeal.
Because of the need to calculate interest and for the parties to have an opportunity to attempt to agree the calculation, I propose that the Court direct that the parties attempt to agree the calculation of interest on the two judgment sums referred to in the Court’s reasons and do within 14 days file either agreed short minutes of orders giving effect to this Court’s decision or the competing versions for which they respectively contend together with short written submissions in support.
GLEESON JA: I agree with the orders proposed by Barrett JA and with his Honour’s reasons, and add the following remarks in relation to one aspect of the matter.
These comments concern the argument sought to be relied upon by the appellant purchaser (PGI) on appeal, but not raised below, that PGI’s conduct (if a repudiation or anticipatory breach) was justified by the impossibility of fulfilment of the condition precedent to the asset sale agreement. It was implicit in that argument that the principle in Shepherd v Felt and Textiles of Australia Ltd (Shepherd) [1931] 4 HCA 21; 45 CLR 359 at 377-378 extends to justifying action other than the discharge or termination of the contract. That is, the principle is said to extend to justifying other contractual acts outside of discharge or termination, and also other conduct such as a refusal to perform which amounts to a repudiation.
The Shepherd principle as encapsulated in the statement of Dixon J (at 377-378) is set out in the reasons of Barrett JA at [78] above. Although what was said by Dixon J is expressed in terms that are referrable to discharge of contract on breach, later statements by his Honour may be taken to indicate that his Honour’s view of the scope of the principle did not expressly so confine it. This point is well made by McPherson J (Macrossan CJ and Derrington J agreeing) in Minion v Graystone Pty Ltd [1990] 1 Qd R 157 at 164 by reference to the statements of Dixon J in Commonwealth Homes & Investment Co Ltd v MacKellar [1939] HCA 34; 63 CLR 351 at 378 and 380; and in Williams v Frayne [1937] HCA 16; 58 CLR 710 at 733.
In Minion v Graystone Pty Ltd the relevant action later sought to be justified on other grounds, involved the exercise of a contractual right (step-in rights to take the works out of the control of a subcontractor so as to complete the works) but there was no formal termination of the agreement. McPherson J held (at 164) that the authorities support the broad principle that an “action taken must be capable of being justified at law, but that the grounds of justification, although they may have existed, need not have been known or relied upon at the time the action was taken”.
A similarly broad view of the scope of the principle has been expressed in this Court by Allsop P (Macfarlan JA agreeing) in Downer EDI Ltd v Gillies [2012] NSWCA 333; 92 ACSR 373 at [131], who described the Shepherd principle as encapsulating:
[o]ne well-known feature of the common law is that a contracting party who gives a reason for a contractual position being taken (such as termination) does not by the giving of that reason (which may be wrong) deprive itself of a justification which existed, whether known of or not at the time.
His Honour continued at [132]:
The principle enunciated in Shepherd often operates when a contractual act sought to be justified cannot be so justified on the ground contemporaneously relied upon, but can be so justified on a ground then existing but not known about [citations omitted].
This is not to suggest that a more extensive application of the Shepherd principle is without limits. For example, this Court held, obiter, in Burger King Corp v Hungry Jacks’ Pty Ltd [2001] NSWCA 187 at [362] – [363] (Sheller, Beazley and Stein JJA) that the Shepherd principle did not apply to a case where a party had purported to exercise a discretion to take certain action under a contract (to disapprove the opening of new franchise sites) upon a basis which was not factually available but later sought to justify the disapproval on the basis of other facts, because this was fundamentally different to a case where a party had terminated for breach on a basis found to be unavailable, in circumstances where there were available grounds for termination. Moreover, Burger King’s conduct in disapproving new sites was itself a breach of the implied term of co-operation which was found to be a term of the contract in that case.
It is to be noted that the High Court has cited Shepherd as authority for the somewhat limited terms used in Shepherd’s case and also as an illustration of the wider doctrine later expounded by Dixon J, without adverting to whether Shepherd’s case is simply an illustration of a wider principle. Thus in Sunbird Plaza Pty Ltd v Maloney (Sunbird Plaza) [1988] HCA 11; 166 CLR 245 at 262, Mason CJ described Shepherd as authority for the general proposition that:
a termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time and even though the ground actually relied on is found to be without substance
whereas subsequently in Foran v Wight [1989] HCA 51; 168 CLR 385 at 406, his Honour cited Shepherd as authority for the proposition that:
a party who refuses to perform a contract can justify his action by pointing to grounds that justify his refusal even it at the time of refusal he was unaware of the existence of those grounds.
Notwithstanding the width of the principle in the passage from Foran v Wight at 406 extracted above, each of the cases cited by Mason CJ in support of the proposition involved a contracting party who had terminated a contract for breach by the other party on a basis found to be unavailable and had later sought to justify the termination on a valid ground. The wide proposition expressed by Mason CJ which uses the language “refusal to perform”, seems to be based upon a statement of Greer J in Taylor v Oakes, Roncoroni & Co (Taylor) (1922) 127 LT 267 at 269 which was cited with approval by Dixon J in Shepherd at 378. It would appear from the report in Taylor at 269 that the general principle stated by Greer J covered the taking of a contractual position (such as a refusal to perform) short of termination of the contract by the party taking that position.
Having regard to the way in which the case was pleaded and argued at trial, the scope of the Shepherd principle did not squarely arise on appeal.
At trial, the appellant, PGI, sought to rely on the impossibility of fulfilment of the condition precedent relating to the transfer of the lease of certain premises from SCA to PGI in three ways: first as part of the material facts leading to the conclusion that the parties had either abandoned or terminated by agreement the asset sale agreement (and the November Employment Contracts); the next related to PGI’s estoppel case (which may be ignored as it was not pursued on appeal); and finally the non-satisfaction of the condition precedent was relied upon as an answer to SCA’s claim for damages.
PGI accepted at trial (and on appeal) that it had not purported to terminate the asset sale agreement. Thus there was no occasion for PGI to contend that a termination of the asset sale agreement may be justified by a reference to non-fulfilment of the condition precedent, even though it was not relied on at the time: Sunbird Plaza at 262; ACN 096 278 483 Pty Ltd (as trustee of the Williams Family Trust) v Vercorp Pty Ltd [2011] QCA 189 at [65].
Nor as a matter of pleading or otherwise did PGI assert that its conduct (assuming that it constituted a repudiation or anticipatory beach) could be justified on the ground of impossibility of fulfilment of the condition precedent. If PGI had done so, then it would have been necessary to consider the point raised by Gaudron J in Sunbird Plaza at 279. This is that there is an apparent tension between the principle in Shepherd and the principle that “an ‘innocent’ party may rely on an anticipatory breach to bring his contractual obligations to an end”: Sunbird Plaza at 279 (Gaudron J) citing DTR Nominees Pty Ltd v Mona Homes Pty Ltd (DTR Nominees) [1978] HCA 12; 138 CLR 423 at 433. Gaudron J continued at 279;
the tension appears to arise because giving notice of termination based on a wrong ground may amount to repudiation or an absence of readiness or willingness to perform the terms of the contract, thus depriving the notifying party of its “innocent” status.
Nonetheless her Honour also observed (at 279) that not every notice based on a wrong ground has this effect, and referred to the analysis of Dixon J in Rawson v Hobbs [1961] HCA 72; 107 CLR 466 at 481, for how this tension is to be resolved.
My tentative view is that the scope of the Shepherd principle is not confined to supporting as justifiable a contractual act of discharge or termination of a contract, and extends to other contractual acts. However, it does not necessarily follow that the wider doctrine expounded by Dixon J applies to conduct which amounts to a repudiation of the contract, short of the repudiating party also terminating the contract. This is because repudiation gives the other party the “right” to elect to either affirm the contract, or accept the repudiation and terminate the contract.
In circumstances such as the present, the preferable approach may be to analyse the problem by reference to whether the contracting party whose conduct amounts to a repudiation or anticipatory breach (here, it is assumed PGI) may call in aid the further principle described in DTR Nominees at 433, that a party (here SCA) “in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper interpretation”. However, for the reasons given by Meagher JA at [16], PGI did not squarely rely upon or plead that absence of capacity as disentitling SCA from rescinding the asset sale agreement for repudiation by PGI. Thus it is unnecessary to express a concluded view on the application of the Shepherd principle in the circumstances of the present case.
It is sufficient to observe that in considering whether the Shepherd principle has wider application to justifying conduct which amounts to a repudiation, there is a conflict between two interests. The party who refuses to perform has an interest in being able to rely on any ground which in law gave rise to an entitlement to do so, even if not known to or identified by that party at the time of refusing to perform. The other party has an interest in knowing what the party is purporting to do and on what grounds in order to decide how to respond.
The Shepherd principle reflects a general preference for the interests of the terminating party (or on the wider view, the party who exercises some other contractual right) over those of the party against whom there was in law a right to terminate the contract (or to exercise some other contractual right). Application of the Shepherd principle in the context of conduct which amounts to a repudiation, may be seen as undermining certainty in the parties’ contractual dealings with each other. It may also be inconsistent with the principle that repudiation by a contracting party gives the other party “the right to believe that the contract would not be performed according to its true construction”: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; 61 CLR 286 at 304. Whether the Shepherd principle extends to justification of conduct which amounts to a repudiation, short of the repudiating party also terminating the contract, should await consideration in an appropriate case.
There is one further point to be mentioned. Assuming, contrary to the primary conclusions of Barrett JA (with which I agree), repudiation or anticipatory breach by PGI and that PGI could not justify its conduct by reference to the principle in Shepherd, then on the issue of damages consequent upon SCA’s (assumed) acceptance of PGI’s (assumed) repudiation, I also agree with the reasons of Meagher JA at [18]-[19].
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Amendments
16 February 2015 - Para 1
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