Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd - [2005] FCAFC 49

FEDERAL COURT OF AUSTRALIA
Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49
CORPORATIONS – CONTRACTS - administration - deed of company arrangement – proof of debt - breach of contract – right to terminate for breach – whether structure of contractual arrangements such as to disentitle innocent party from terminating for serious breach of contract – repudiation and serious breach of contract discussed.
Corporations Act 2001 (Cth) ss 553, 1321
Amann Australia Pty Ltd v The Commonwealth of Australia (1990) 22 FCR 527 referred to
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 cited
Bentsen v Taylor [1893] 2 QB 274 cited
Bowes v Chaleyer (1923) 32 CLR 159 cited
Bridge v Campbell Discount Co Ltd [1962] AC 600 referred to
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 cited
Concut Pty Ltd v Worrell (2000) 75 ALJR 312 cited
Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 cited
Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 cited
Foran v Wight (1989) 168 CLR 385 cited
Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524 cited
Holland v Wiltshire (1954) 90 CLR 409 discussed
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 cited
Honner v Ashton (1979) 1 BPR 9478 discussed
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 discussed
In re Asphaltic Wood Pavement Co (Lee & Chapman’s case) (1885) LR 30 Ch D 216 discussed
Larratt v Bankers & Traders’ Insurance Co (1941) 41 SR 215 cited
Legione v Hateley (1983) 152 CLR 406 referred to
Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434 cited
Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213 cited
Panoutsos v Raymond Hadley Corporation of New York [1917] 2 KB 473 cited
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 referred to
Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 discussed
Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 cited
Rawson v Hobbs (1961) 107 CLR 466 referred to
Ross T Smyth & Co Ltd v T D Baily Son & Co [1940] 3 All ER 60 cited
Sargent v ASL Developments Ltd (1974) 131 CLR 634 referred to
Shevill v The Builders Licensing Board (1982) 149 CLR 620 referred to
Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 cited
Suisse Atlantique Societe D’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 referred to
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 cited
United Australia Ltd v Barclays Bank Ltd [1941] AC 1 cited
Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003 cited
Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 cited
IN THE MATTER OF NATIONAL EXPRESS GROUP AUSTRALIA (SWANSTON TRAMS) PTY LTD (RECEIVER AND MANAGER APPOINTED) SUBJECT TO A DEED OF COMPANY ARRANGEMENT) SIMON ALEXANDER WALLACE SMITH & ANOR v THIESS INFRACO (SWANSTON) PTY LTD
V 1145 of 2004
FRENCH, WEINBERG & ALLSOP JJ
30 MARCH 2005
MELBOURNE AND SYDNEY BY VIDEOLINK

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

SIMON ALEXANDER WALLACE-SMITH
FIRST APPELLANT

PETER GEORGE YATES
SECOND APPELLANT

AND:

THIESS INFRACO (SWANSTON) PTY LTD
RESPONDENT

JUDGES:

FRENCH, WEINBERG & ALLSOP JJ

DATE OF ORDER:

30 MARCH 2005

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:
1.        The appeal be dismissed.
2.        The appellants pay the respondent’s costs of the appeal.
Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

SIMON ALEXANDER WALLACE-SMITH
FIRST APPELLANT

PETER GEORGE YATES
SECOND APPELLANT

AND:

THIESS INFRACO (SWANSTON) PTY LTD
RESPONDENT

JUDGES:

FRENCH, WEINBERG & ALLSOP JJ

DATE:

30 MARCH 2005

PLACE:

MELBOURNE

REASONS FOR JUDGMENT
FRENCH J
Introduction

The privatisation of the public transport system of trams and trains in Victoria in 1999 was effected by an elaborate array of contracts between the Government of Victoria, the companies which undertook to operate the system and those who agreed to provide maintenance and other support services. It was an important element of those contractual arrangements that the Government retained the power to direct parties to some of the contracts to continue to provide the agreed services notwithstanding that there may have been breach entitling them to terminate those contracts and withdraw their services. These provisions allowed the Government to ensure continuity in the provision of important public facilities notwithstanding that one or other of the private parties may have failed to meet its contractual obligations.
In 1999, members of the National Express Group of Companies were granted franchises to operate tram and train systems in Melbourne. As it turned out their projections had been optimistic and their operations were not financially viable. Their UK-based parent company decided in 2002 to cease supporting them financially.
One of the companies, which was operating Melbourne Trams, National Express Group Australia (Swanston Trams) Pty Ltd (NX Swanston) ceased to meet its obligations to pay an important infrastructure maintenance provider, Thiess Infraco (Swanston) Pty Ltd (Thiess Swanston). These payments were due to be made in respect of the maintenance of the tram system and pursuant to an agreement with Thiess Swanston known as the Swanston Infrastructure Maintenance Agreement (IMA). Thiess Swanston, which had also entered into an agreement (the Direct Agreement) directly with the Director of Public Transport (the Director), gave notices of default to both NX Swanston and the Director. The Director appointed receivers to NX Swanston under securities it held over that company. Subsequently, voluntary administrators were appointed and, in July 2003, a Deed of Company Arrangement was entered into by the company and its creditors.
Pursuant to the Direct Agreement, Thiess Swanston was required by the Director, on 24 December 2002, to continue to meet its obligations under the IMA upon the basis that the receivers would step into the shoes of NX Swanston. Thiess Swanston was paid for its services by the receivers from that time. In September 2003, Thiess Swanston, NX Swanston, the Director and the receivers entered into a Settlement Deed extending the operation of the IMA pending entry into a new agreement upon which the old IMA would terminate. Such termination was expressly stated to be for a breach by NX Swanston of the original IMA. No new agreement was made pursuant to the Settlement Deed. In September 2003, Thiess Swanston lodged a proof of debt under the Deed of Company Arrangement. $6,860,909 of the proof related to unpaid progress claims from November and December 2002. The balance of $20,623,499 related to loss of profits. The latter component of the claim was lodged as a contingent claim under the Deed of Company Arrangement. The relevant contingency was termination of the IMA for breach by NX Swanston and associated with that breach a right to claim damages for loss of bargain. At the time that the claim was lodged, because of restrictions, imposed by the IMA, upon the right to terminate it, that contingency had not occurred.
On 17 April 2004, an agreement, called a Transfer Agreement, was made under which the assets and employees used by Thiess Swanston to provide infrastructure maintenance services were transferred to another company, MetroLink Victoria Pty Ltd (MetroLink), and the original IMA terminated. Termination was stated to be for breaches by NX Swanston of the original IMA.
On 1 April 2004, the administrators of the Deed of Company Arrangement rejected Thiess Swanston’s claim for loss of profits on the basis that it had no contractual right to terminate the IMA upon the appointment of the receivers and managers on 22 December 2002. Accordingly, it was said to have no claim for loss of profits under the Deed.
On 7 September 2004, after hearing an application by Thiess Swanston challenging the administrators’ decision, Finkelstein J made an order that they admit the proof in full but subject to valuation. The administrators have appealed against his Honour’s decision.
In substance the administrators assert that the right to terminate the IMA was extinguished by the provisions of that agreement and related contractual documents. Alternatively it is put that the right to terminate the IMA for breach by NX Swanston was effectively lost by its affirmation under the terms of the Settlement Deed and later the Transfer Agreement of April 2004. A further alternative argument is that the IMA was terminated consensually by the Transfer Agreement and that such termination did not constitute acceptance of a repudiation of the IMA. The right to terminate having been either extinguished, lost or abandoned, the contingency upon which the claim for loss of profits depended, namely termination for breach by Thiess Swanston, never arose.
For the reasons which I have set out below, in my opinion these contentions, reflected in the various grounds of appeal, are not made out. The appeal should be dismissed.
Factual and Procedural Background
In 1999, the Victorian Government undertook the privatisation of its public trains and trams transport system. The National Express Group of Companies was a bidder for franchises to operate those parts of the system known as Bayside Trains, Swanston Trams and Yarra Trams. The Group’s holding company is National Express Group PLC, a British publicly listed corporation.
In anticipation of the grant of franchises National Express Group (Australia) Pty Ltd entered into an Infrastructure Maintenance Agreement (IMA) with Thiess Contractors Pty Ltd (Thiess Contractors). That agreement was dated 14 May 1999. It provided that, in the event that the National Express Group was awarded the franchises the IMA would record the terms and conditions upon which Thiess Contractors would provide infrastructure maintenance services.
The National Express Group was awarded the franchise. Franchise Agreements were made with respect to the train system and the two tram networks. In relation to Swanston Trams a Franchise Agreement was made on 25 June 1999 between the Director and NX Australia (Swanston Trams) Pty Ltd (NX Swanston). The recitals to the agreement recorded that the Director and NX Swanston had entered into an Infrastructure Lease for the lease of ‘tram infrastructure’ to NX Swanston for the ‘franchise period’ which was a term of 12 years (recital A). NX Swanston had agreed ‘to operate tramway passenger services on that tram infrastructure on the terms of this agreement’ (recital B). NX Swanston and the Infrastructure Maintenance Service Provider, defined relevantly as a subsidiary of Thiess Contractors, would enter into an Infrastructure Maintenance Service Agreement for the maintenance of the tram infrastructure (recital D). The franchise agreement also required that the Infrastructure Maintenance Service Provider enter into a separate agreement with the Director which was to be designated a ‘Franchise Entity Direct Agreement’ (recital C). The term ‘Franchise Entity’ covered not only the Infrastructure Maintenance Service Provider but also other service providers under the Franchise Agreements.
The term of the Franchise Agreement was 12 years (cl 4.2) subject to a right on the part of the Director unilaterally to extend the agreement for a period of up to six months. Clause 18 of the Franchise Agreement dealt with its termination. It defined various ‘termination events’ which were expressed largely in terms of breaches by the franchisee but extended to breaches by Franchisee Entities of the obligations under contracts to which they were party. One of the termination events defined in cl 18 was the valid termination of a Transaction Document (cl 18.1(2)), ie, in effect, any of the various contractual documents established under the franchise system (cl 1.1). Clause 18.2 provided for termination of the Franchise Agreement by the Director on written notice to the franchisee, NX Swanston. Clause 18.3 provided:
‘Notwithstanding any rule of law or equity to the contrary, this agreement may not be terminated except as provided in clause 18.2.’
Upon the execution of the Franchise Agreement, the IMA of 14 May 1999 was novated by a Deed of Novation dated 23 July 1999. That Deed reconstituted the IMA as two agreements, with identical terms, one relating to the Swanston tram network and the other relating to the Bayside train system. Under the Deed in its application to the Swanston tram network, the parties to the IMA became NX Swanston and Thiess Swanston. National Express Group Australia (Bayside Trains) Pty Ltd (NX Bayside) and Thiess Infraco (Bayside) Pty Ltd (Thiess Bayside) became the parties to the agreement in its application to the Bayside train network.
The Deed of Novation provided that, from its Effective Date, NX Swanston had rights against and owed obligations to Thiess Swanston in connection with the IMA and vice versa as if each were a party to it in place of NX Australia and Thiess Contractors respectively (cl 3.1(a)). Events of default under the former composite IMA were separated out so that events of default relevant to the IMA-Bayside did not constitute events of default for the purposes of the IMA-Swanston (Schedule 1 cl 10).
The term of the IMA was three years (cl 4.1 and definition of ‘Term’ in cl 1.1). The term could be extended at the discretion of NX Swanston for up to three successive periods of three years allowing for a maximum total period of 12 years. The agreement contained provisions relating to its termination and that of ‘Key Contracts’. Key Contracts were defined in the IMA by reference to their definition in the Franchise Agreement. That definition included:
‘Any agreement or arrangement for the provision of Rolling Stock or Infrastructure maintenance services.’ (Franchise Agreement cl 1.1 Schedule 16 Pt 1 Item 5)
The Franchise Agreement required NX Swanston to procure that Thiess Swanston would not, except as permitted by its terms, ‘avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of ... a Key Contract’ (cl 23.5(a)(i)). The agreement provided that a franchise entity, for which read Thiess Swanston, could terminate a Key Contract, for which read the IMA, if the Director were reasonably satisfied that it was ‘... no longer necessary for the Franchise Entity to have the benefit of the Key Contract’; or ‘that Franchise Entity has made adequate alternative arrangements for the continued operation of the Franchise Business’ (cl 23.5(b)). If a franchise entity were to terminate a Key Contract ‘ ... in breach of this Agreement’ (sic) then the Franchisee was required to procure the Franchise Entity, at the request of the Director, to enter into an agreement immediately following that request with each counter party to the Key Contract in the terms set out in the relevant Direct Agreement (cl 23.5(c)).
As required of NX Swanston by cl 23 of the Franchise Agreement, the IMA between NX Swanston and Thiess Swanston contained limitations on termination in cl 24. Thiess Swanston acknowledged that the IMA was a Key Contract and agreed to cooperate in the implementation of a Direct Agreement with the Director (cl 24.2(c)). Of importance in this case is cl 24.4 of the IMA which provided:
‘24.4 Termination of Key Contracts
(a)Thiess must not, except as permitted by paragraph (b):
(i)avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of;
(ii)suspend the performance of any of its obligations under; or
(iii)do or permit anything that would enable or give grounds to another party to do anything referred to in sub-paragraph (i) or (ii) in relation to,
this Agreement.
(b)Thiess may terminate a Key Contract if the Director is reasonably satisfied that:
(i)it is no longer necessary [for]Thiess to have the benefit of the Key Contract; or
(ii)Thiess has made adequate alternative arrangements for the continued operation of the Franchise Business.
(c)If Thiess terminates a Key Contract in breach of this Agreement, Thiess must, at the request of the Director, enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement.’
The language of cl 18.3 of the Swanston Franchise Agreement, which set the termination provisions for that agreement expressly against ‘any rule of law or equity to the contrary’, was not replicated in the IMA.
Clause 34.1 of the IMA set out a dispute resolution process and provided for termination by NX Swanston if an ‘Event of Default’ occurred. The definition of ‘Event of Default’ in cl 34.1(a) applied to defaults by either party including non-payment of amounts due (cl 34.1(a)(i)) and Insolvency Events (cl 34.1(a)(iv)). The definition included defaults defined by reference to Thiess Swanston only (cl 34.1(b)). The processes of giving notice of default, referral to dispute resolution, the provision of time for remedying defaults and the rights of termination were all formulated on the assumption of a default by Thiess Swanston. Despite the bilateral aspects of the definition no provision was made in cl 34 conferring any rights on Thiess Swanston in the event of a default by NX Swanston. The right of NX Swanston to terminate for default by Thiess Swanston was set out at cl 34.6.
Under cl 36, if a Force Majeure event continued for more than 30 business days the party not affected by it could terminate the agreement on 14 days’ notice. Force Majeure events were defined in cl 1.1 but none of those definitions is relevant for present purposes.
Under cl 11(c)(ii) of the IMA Thiess Swanston agreed, and undertook to NX Swanston, to enter into a Direct Agreement with the Director. That clause provided:
‘Thiess agrees to:
...
(ii)execute and provide to the Franchisee upon request the Franchise Entity Direct Agreement and the Franchisee Deed of Charge, and Thiess undertakes to the Franchisee to comply with the requirements of each of those deeds;’
In discharge of that obligation Thiess Swanston entered into the Direct Agreement on 26 July 1999. Its object was to ensure, inter alia, that Thiess Swanston would be contractually obligated to the Government of Victoria in relation to the provision of infrastructure maintenance services under its IMA with NX Swanston.
The Direct Agreement contained a provision limiting the rights of Thiess Swanston to terminate or suspend performance of its obligations under the IMA. Under cl 5.1, absent default, Thiess Swanston could only terminate or suspend the performance of its obligations in accordance with the terms of the IMA if it had given the Director not less than six months prior notice. It could not, without the consent of the Director, terminate or suspend its performance during the last 12 months of the term of the IMA or any extension of it. Clause 5.2 dealt with termination or suspension for default. Thiess Swanston could only terminate or suspend the ‘performance of its obligations’ under the IMA for default if it had given a notice to the Director and to NX Swanston setting out the default (cl 5.2(a)(i)) and if either of the following conditions was satisfied:
‘A.if the Default is capable of remedy, the Default has not been remedied within 30 days of the date on which the Default Notice is given to the Director and the Franchisee or such longer period as is allowed for remedy of the Default under the Contract; or
B.if the Default is not capable of remedy, all of the obligations of the Franchisee under the Contract do not commence and continue to be performed within 30 days of the date on which the Default Notice is given to the Director and the Franchisee or such longer period as is allowed under the Contract.’
Termination of the performance of obligations under the IMA for default was prohibited under certain circumstances. By cl 5.2(b) it was provided:
‘The Franchise Entity may not terminate, or suspend the performance of its obligations under, the Contract as a result of a Default if:
(i)the Director has notified the Franchise Entity that he or she is entitled to exercise his or her step-in right under the Franchise Agreement or the Security has become enforceable; and
(ii)an Enforcing Party is performing all of the Franchisee’s obligations under the Contract.’
The term ‘Enforcing Party’ was defined in cl 1.1 as:
‘... the Director, or any receiver, receiver and manager, agent, attorney or nominee appointed or acting under the Security or the Franchise Agreement.’
The prohibition in cl 5.2 bears the construction that it related to the performance of the obligations of Thiess Swanston under the IMA and not to termination of the agreement itself. Clause 24.4(a)(i) of the IMA on the other hand was directed to termination of ‘this agreement’. Clause 24.4(b) was directed to termination of ‘a Key Contract’. This distinction in language suggests that cl 5.2 of the Direct Agreement was concerned to impose an obligation on Thiess Swanston to continue to provide maintenance services. That obligation derived its force from the Direct Agreement and did not depend upon the continuing existence of the IMA.

Clause 5.3 provided for ‘Cure Rights’ whereby an Enforcing Party on becoming aware of the default could take steps to remedy or procure the remedy of the default or commence and continue to perform the obligations of the franchisee under the contract. The termination and suspension provisions contained in the Franchise Agreement, the IMA and the Direct Agreement may be seen as part of a scheme to ensure that the Victorian Government was in a position to maintain the continuity of public transport services uninterrupted by purely contractual events. The relationship between the qualifications upon the right to terminate recognised by the Direct Agreement and those imposed by the IMA was a matter of debate on the hearing of this appeal.
There were other agreements made by NX Swanston relevant to the operation of the Swanston tram franchise. A Fleet Maintenance Agreement (New Rolling Stock) dated 31 March 2000 was made between NX Swanston and Siemrail (Vic) Trams Pty Ltd. Both parties could terminate the agreement in certain circumstances (cl 28.1). A Manufacture and Supply Agreement (Swanston Trams) dated 31 March 2000 was made between NX Swanston, Siemens Ltd and GATX Rail (SW-1) Pty Ltd. Siemens could terminate this agreement under certain circumstances (cl 25.1 and 25.8).
The members of the National Express Group commenced operating train and tram services in Victoria under their respective franchise agreements. Thiess Swanston provided maintenance services as required and was paid for those services in accordance with the terms of the IMA until December 2002. On 3 December 2002, the company sent its November progress payment claim dated 1 December 2002 to NX Swanston in the amount of $3,989,731 (excluding GST) pursuant to the provisions of the IMA (cls 10.2(a) and 10.2(b)). Payment was due on 17 December 2002 (cl 10.3(a)).
As it turned out the National Express companies were unable to operate profitably. On 16 December 2002, the National Express Group PLC, the British parent company for the Group, gave formal notice to the Victorian Government that it would stop providing funds to enable its ‘train and tram subsidiaries to meet their liabilities as and when they fell due with effect from December 2002’. On the same day, the Minister for Transport announced that the NX franchisees would surrender their franchises with effect from 23 December 2002.
Thiess Bayside, in reference to its own situation and that of Thiess Swanston, wrote to the National Express Group on 17 December 2002 referring to the announcement that parent company funding to the National Express subsidiaries would cease and seeking clarification of the position as it had received no notice to that effect itself. The National Express Group replied to Thiess Swanston and Thiess Bayside the same day that it was in negotiation with the Victorian Government for an orderly handover of the franchise businesses once funding ceased.
The amount of $3,989,731 due to Thiess Swanston on 17 December 2002 was not paid. On 19 December 2002, Mr Don Johnson, a director of Thiess Swanston, sent a letter to the Director and to the Chief Operating Officer of the National Express Group by way of ‘Default Notice pursuant to clause 5.2 of the Direct Agreement specifying that a Default under the IMA has occurred’. The letter referred to the press release from National Express Group PLC. It referred also to the confirmation by NX Swanston that it was not in a position to advise Thiess Swanston whether it would pay amounts that were due and that would become due to it under the IMA. Thiess Swanston was owed the sum of $3.989 million under the IMA in respect of its November progress payment claim which was due and payable on 17 December 2002. The default specified was:
‘The failure by National Express Group Australia (Swanston Trams) Pty Ltd, in breach of the IMA, to pay the sum of $3.989m currently due and payable to Thiess Infraco.’
The notice was served on the Director on 20 December 2002.
On 22 December 2002, acting under securities granted by NX Swanston, the Director appointed receivers and managers over its assets. Thiess Swanston sent a second default notice dated 23 December 2002 to the Director and to the Chief Operating Officer of NX Swanston in the following terms:
‘This is a Default Notice under the Direct Agreement.
The Default is the appointment of a receiver and manager to National Express (Swanston Trams) which we were advised by the receiver occurred on 22 December 2002. The appointment of a receiver and manager constitutes an Event of Default and an Insolvency Event under the Infrastructure Maintenance Agreement.’
On 23 December 2002, Simon Alexander Wallace-Smith and Robert William Whitton were appointed, pursuant to s 436A of the Corporations Act 2001 (Cth), as joint and several voluntary administrators of the companies in the National Express Group including NX Swanston.
On 24 December 2002, the Director sent a letter to Thiess Swanston stating that, pursuant to the Direct Agreement, it was not entitled to terminate or suspend its obligations under the IMA. A notice, pursuant to cls 3(b) and 5.2(b) of the Direct Agreement was attached to the letter:
‘I give notice that:
(a)The Security (as that term is defined in the Direct Agreement) given by NX Australia (Swanston Trams) Pty Ltd ACN 087 494 997 (“the Franchisee”) in favour of the Director of Public Transport, became enforceable on 22 December 2002; and
(b)An Enforcing Party (as that term is defined in the Direct Agreement) is performing all of the Franchisee’s obligations under the Contract (as that term is defined in the Direct Agreement).’
The ‘Enforcing Party’ comprised the receivers appointed by the Director. As appears below, Thiess Swanston continued to provide maintenance services as required by the IMA until 18 April 2004 when the work was transferred to another company. It was paid for its services by the receivers who were by statute personally liable to make those payments (s 419 Corporations Act).
On 24 December 2002, Thiess Swanston lodged a further progress claim dated 1 January 2003 with NX Swanston in the amount of $7,682,838.22 excluding GST due on 14 January 2003. The balance said to be due, including the unpaid claim, was $11,314,569.89. With GST it was $12,446,026.88. On 30 December 2002, the receivers disclaimed liability for outstanding debts incurred by NX Swanston and NX Bayside before their appointment. They suggested any claims be referred to the administrators. The progress claim dated 1 January was due for payment on 14 January 2003 pursuant to cl 10.3(a) of the IMA. It was not paid and Thiess Swanston sent the Director and NX Swanston a third default notice dated 22 January 2003 pursuant to cl 5.2 of the Swanston Direct Agreement. This notice claimed a sum due of $3.691 million pursuant to the progress payment claim for December 2002. The amount stated appears to have been in error. On the same day Thiess Swanston sent a letter to the Director seeking ‘immediate clarification from the Director as to whether the Enforcing Party will perform this obligation ...’. The company expressly reserved its right to terminate the IMA.
On 23 June 2003, the creditors of each of the affected companies in the National Express Group resolved that the companies execute a Deed of Company Arrangement in accordance with a proposal put to the creditors. On 26 June 2003, Robert Whitton resigned as a voluntary administrator. On 1 July 2003, the appellants were appointed, by order of Finkelstein J, as administrators of the Deed of Company Arrangement, pursuant to s 447 of the Corporations Act. The Deed itself was executed on or about 14 July 2003 by NX Swanston, NX Bayside, other companies in the National Express Group, the Director, each of the Receivers and Managers and the appellants as the administrators. Under the terms of the Deed the Director and the National Express Group PLC contributed a total of $30 million to the Available Property. This was to be established as a fund for the unsecured creditors of the companies covered by the Deed.
The Deed of Company Arrangement provided for the Franchisee companies (including NX Swanston) to be released from all claims against them upon receipt of the contributions from the National Express Group and from the Director (cl 9.1). Creditors with claims were thereupon entitled to make equivalent claims against the amounts contributed (the Available Property) and to prove for them (cl 9.5). Clause 14 provided for the making of claims and the preparation by the administrators of an Admitted List.
The kinds of matters which could be the subject of Claim and therefore an Equivalent Claim against the Available Property appears from the definition of ‘Claim’ in cl 1.1 of the Deed:
‘Claim means a debt payable by, or claim against, a Franchise Company (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim arising on or before the Appointment Date but does not include a claim against a Franchise Company for Employee Entitlements.’
Clause 14.2 of the Deed applied to the proof of Equivalent Claims the provisions of Subdivisions A, B, C and E of Div 6 of Pt 5.6 of the Corporations Act (other than ss 553(1A) and 554F) and regulations 5.6.39 to 5.6.44 and 5.6.46 to 5.6.57 of the Corporations Regulations 2001 with appropriate modifications.
On 9 September 2003, the Director, NX Swanston, NX Bayside, Thiess Swanston and Thiess Bayside and the receivers entered into a Settlement Deed. The recitals of the Settlement Deed referred to the making of the IMAs, the Direct Agreement and the appointment of the receivers and managers. It recited that the parties had agreed to settle their differences on issues arising out of the receivership on the terms set out in the Deed.
The Settlement Deed extended the term of the Swanston IMA on and from the date of the Deed. These parties were required to negotiate in good faith an agreement to replace and supersede the original IMA. The Deed provided in cl 2.2(c):
‘If [Thiess Swanston] and NX Swanston do not enter into the New Swanston IMA on or before 31 December 2003, [Thiess Swanston] and NX Swanston will continue to be bound by the Original Swanston IMA.’
Thiess Swanston acknowledged and agreed that until the new Swanston IMA was entered into, it and NX Swanston would ‘... continue to be bound by the Original Swanston IMA’ (cl 2.2(d)(i)). The Original Swanston IMA would terminate on commencement of the New Swanston IMA (cl 2.2(d)(iii)). The New Swanston IMA would terminate on the date that the receivers ceased to carry out the business of NX Swanston unless certain events occurred (cl 2.2(d)(iv)). This clause differed from the equivalent provision of the Settlement Deed for the Bayside train system. Under that provision the New Bayside IMA or the Original Bayside IMA, as the case might be, would terminate on the date that the receivers ceased to operate the business of NX Bayside (cl 2.1(c)(iv)).
It was agreed under the Deed of Settlement that the termination of the Original Swanston IMA pursuant to cl 2.2(d) would be for ‘breaches by NX Swanston of the Original Swanston IMA which occurred before 22 December 2002’ (cl 2.2(e)). This was no doubt intended to avoid any suggestion that Thiess Swanston was permanently waiving its right to terminate or electing to affirm the IMA. The Director consented to the termination and replacement of the Original Swanston IMA (cl 2.2(f)) and did so pursuant to cl 4.1(b) of the Direct Agreement and cl 2.4 of the Swanston Franchise Agreement.
Thiess Swanston covenanted in favour of the Director and NX Swanston that it would ‘not seek to terminate the Original Swanston IMA or the New Swanston IMA by reason of an Insolvency Event occurring in relation to NX Swanston (cl 2.2(g))’. ‘Insolvency Event’ was defined in the Deed and included the stopping or suspension or threat to stop or suspend payment of all or a class of debts.
On or about 17 April 2004, the assets and employees utilised by Thiess Swanston to provide infrastructure maintenance services were transferred to MetroLink under the terms of the M>Tram Transfer Agreement (Infrastructure Maintenance) (Transfer Agreement) to which the Director was a party. M>Tram was the designation given in the Transfer Agreement to NX Swanston. The Transfer Agreement provided for the IMA to terminate on commencement of a new Franchise Agreement dated 19 February 2004 between the Director and MetroLink. The termination was stated to be for breaches by NX Swanston of the IMA which had occurred before 22 December 2002 (cl 2(a)).
Clause 2 of the Transfer Agreement was in the following terms:
‘2. EXISTING INFRASTRUCTURE MAINTENANCE AGREEMENT
M>Tram and the Transferor acknowledge and agree that:
(a)the Existing Infrastructure Maintenance Agreement will terminate on commencement of the Franchise Agreement for breaches by M>Tram of the Existing Infrastructure Maintenance Agreement which occurred before 22 December 2002;
(b)until the Completion Date each is bound by and must continue to perform its obligations under the Existing Infrastructure Maintenance Agreement (including in relation to the payment of claims for work performed up to the Completion Date) in accordance with the terms of that agreement; and
(c)notwithstanding termination of the Existing Infrastructure Maintenance Agreement and without limiting the Settlement Deed, the Transferor and M>Tram will continue to perform their respective obligations in relation to work performed up to the Completion Date in accordance with the terms of that agreement.’
Clause 6.1 of the Transfer Agreement required that, from the date of execution of the document until completion of the sale and purchase of assets Thiess Swanston would ‘carry on the business in the usual way’ (cl 6.1(a)) and would not ‘vary or terminate any contract relating to the Business ...’ (cl 6.1(i)).
On 1 September 2003, Thiess Swanston lodged a proof of debt with the appellants claiming $27,484,408. This amount was said to be owing to the company by NX Swanston as at 23 December 2002. The particulars of the claim included the following:

‘Consideration (state how the debt arose)

Amount

November and December 2002 Progress Claims
UNPAID.   $ 6,860.909

Loss of Profit from balance of term. $19,138,605

Agency works – loss of profit.
$ 1,388,352

Early return of lease vehicles.
$     28,294

Termination of subcontractors/novation costs $    68,248’

By a letter dated 8 December 2003 the appellants admitted the unpaid progress claim totalling $6,860,909. They said that the claim of $20,623,499 for loss of profits did not constitute a claim as defined under the Deed of Company Arrangement. A claim under the Deed had to be ‘“a debt or claim arising on or before the Appointment Date”, the appointment date being 23 December 2002.’ There had been no contractual breach between the parties as at that date. A claim in relation to a breach of contract had not arisen as at 23 December 2002. The appellants did not immediately reject the claim but suggested that Thiess Swanston seek its own legal advice. Correspondence ensued. On 1 August 2004, the appellants finally advised of the disallowance of the claim for loss of profits. They gave Thiess Swanston a notice of Partial Rejection of Formal Proof of Debt or Claim pursuant to reg 5.6.54(1) of the Corporations Regulations.
The grounds for the rejection of Thiess Swanston’s claim for loss of profits as set out in the notice were as follows:
‘2.The Infrastructure Maintenance Agreement (“Agreement”) between yourselves and National Express Group Australia (Swanston Trams) Pty Ltd (“NEGA”) did not confer on you a contractual right to terminate the Agreement upon the appointment of the Receivers and Managers to NEGA on 22 December 2002. Accordingly, you have no claim for loss of profits under the Deed.’
Thiess Swanston instituted proceedings in this Court against the appellants seeking an order that they admit the loss of profits component of its claim. The application was brought under ss 447A and 447E of the Corporations Act and regulation 5.6.54 of the Corporations Regulations. It was heard by Finkelstein J on 4 August 2004. On 7 September 2004, his Honour made an order that the appellants admit in full, but subject to valuation, Thiess Swanston’s proof of debt lodged on 1 September 2003. He also ordered that the appellants pay Thiess Swanston’s costs of the application.
On 16 September 2004, the appellants filed a notice of appeal against his Honour’s decision.
The Reasons for Decision of the Primary Judge
His Honour set out in his reasons the history of the events outlined above.
In considering the applicable principles his Honour began by observing that Thiess Swanston was only entitled to maintain its claim for loss of profits if, at 23 December 2002, it had a ‘contingent’ debt or claim against NX Swanston. The Deed, in using that term, (no doubt his Honour was here referring to the definition of ‘Claim’), intended to pick up the meaning of ‘contingent debt’ or ‘contingent claim’ in the insolvency provisions of the Corporations Act. The relevant provision had its genesis in bankruptcy law. It was to bankruptcy law in relation to contingent claims that his Honour turned.
His Honour reviewed case law and textbook writings on the topic of contingent debts in bankruptcy and corporate insolvency. He concluded that a claimable debt would arise when, by reason of a company’s insolvency, it became impossible for it to perform a contract. This was so notwithstanding that a formal breach of the contract had not occurred at the time of the winding up order – In re Asphaltic Wood Pavement Co (Lee & Chapman’s case) (1885) LR 30 Ch D 216 at 224.
His Honour found in any event that, as at 23 December 2003, NX Swanston was in breach of the IMA as it had failed to pay the claim due on 17 December 2002. Ordinarily this would have entitled Thiess Swanston to terminate the agreement. Moreover, NX Swanston had repudiated the IMA in the sense that it informed the Victorian Government and Thiess Swanston that it was no longer able to perform its obligations.
The learned trial judge rejected the proposition that because the IMA remained in force until 2004, Thiess Swanston should be taken to have elected not to discharge it. Thiess Swanston was not entitled to terminate it without the consent of the Director, which consent was not forthcoming until the Transfer Agreement. Thiess Swanston had no power to elect to terminate. To that point it ‘had no power but to go on with the IMA’ (at [20]).
His Honour referred to the usual rule that when a contract is terminated for breach the contracting parties are discharged from their obligations to perform the contract in the future but accrued rights including any claims for damages are unaffected. The administrators contended that, because the IMA was terminated by agreement, accrued rights, including any loss of bargain damages, were lost. His Honour accepted that an action in damages could be bargained away. But that would require something in the nature of an accord and satisfaction. His Honour, however, took the view that there was no accord and satisfaction which extinguished Thiess Swanston’s cause of action against NX Swanston.
The Grounds of Appeal
There are nine grounds of appeal.
‘1.The Court erred in finding that the Infrastructure Maintenance Agreement (“Swanston IMA”) conferred a right upon Thiess Infraco (Swanston) Pty Ltd (“Thiess Swanston”) to terminate or accept a repudiation of the Swanston IMA.
2.The Court erred in not finding that any termination of the Swanston IMA by Thiess Swanston prior to the “relevant date” of 23 December 2002 would not have been a termination for breach of the Swanston IMA, but a termination in breach of the Swanston IMA, and thus did not entitle Thiess Swanston to claim damages for loss of profits.
3.The Court erred in not finding that the effect of the Swanston IMA, and clauses 11(c)(iii), 24.2 and 34 in particular, was to prohibit Thiess Swanston from terminating the Swanston IMA for breach, or accepting a repudiation of the Swanston IMA.
4.The Court erred in finding that Thiess Swanston had not elected to continue with or affirm the Swanston IMA.
5.The Court erred in finding that the Swanston IMA could be terminated with the consent of the Director of Public Transport (“the Director”).
6.The Court erred in finding that Thiess Swanston had a right to terminate the Swanston IMA, which right was held in suspense waiting the Director’s consent.
7.The Court erred in finding that it was necessary to show something in the nature of an accord and satisfaction before it could be established that an action in damages had been bargained away.
8.The Court erred in not finding that the basis upon which the Swanston IMA was in fact terminated was inconsistent with Thiess Swanston having accepted any repudiation by National Express Group Australia (Swanston Trams) Pty Ltd (“NX Swanston”) of the Swanston IMA.
9.The Court erred in finding that on the proper construction of the Swanston IMA, Thiess Swanston had a contingent debt or claim against NX Swanston as at the relevant date.’
Limitations on the Exercise and Consequences of Common Law Rights of Termination

A contract is terminated when the parties to it are discharged from the future performance of their contractual obligations. Rights and obligations accrued at the time of termination may continue. Termination may occur by agreement, by frustration of the contract or by the exercise of a right to terminate. The right to terminate a contract arises at common law where a party breaches a term of the contract which is one of its ‘conditions’ or ‘essential’ terms.
The test of whether a condition is essential is:
‘… whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor.’
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642 (Jordan CJ) approved in Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 337.
When a party to a contract announces, before the time for its performance of an essential term of the contract, that it will not perform it the innocent party is entitled to treat that as an anticipatory breach which constitutes a repudiation of the contract and gives rise to a right to terminate it by rescission – Foran v Wight (1989) 168 CLR 385 at 416 (Brennan J), see also 395 (Mason CJ) and 441 (Dawson J). Serious or multiple breaches of terms which are not construed as conditions or essential may also give rise to the right to terminate. Where one party repudiates its obligations under the contract or delays in performance the other party may terminate.
The concept of anticipatory breach overlaps with that of repudiation whereby a party renounces its liabilities under the contract and indicates an intention no longer to be bound by it or only to fulfil it in a manner which is substantially inconsistent with its obligations. In that event the innocent party may accept the repudiation, discharging itself from further performance and sue for damages. The word ‘rescission’ is used to describe a termination in those circumstances albeit it is not rescission ab initio but preserves accrued rights and obligations – Shevill v The Builders Licensing Board (1982) 149 CLR 620 at 625-626 (Gibbs CJ, Murphy and Brennan JJ agreeing).
Subject to limiting cases discussed below, the common law rights of termination may be supplemented or displaced, in whole or in part, by a term of the contract itself or by statute – see generally J Carter, ‘Termination in the Law of Contract’ in Furmston (ed) The Law of Contract, Butterworths, 2^nd Edition (2003) 1317-1318.
The effect of a contractual provision relating to termination on the common law rights of termination is a matter of construction. The existence of such provisions in a contract does not necessarily evince an intention to provide exhaustively for the circumstances in which it may be terminated. Rawson v Hobbs (1961) 107 CLR 466 was a case in which a contractual ‘annulment’ provision coexisted with common law rights of termination – at 480 (Dixon CJ), 491 (Windeyer J). Amann Australia Pty Ltd v The Commonwealth of Australia (1990) 22 FCR 527 was an example of partial displacement of common law rights of termination. In that case the termination provision of a contract for the supply of aerial coastal surveillance services to the Commonwealth, was held to be exhaustive of common law rights other than the right to terminate for anticipatory breach – 532 (Davies J), 544 (Sheppard J) and 555 (Burchett J). In Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, the Court held that ordinary principles of contract law including those relating to termination or repudiation apply to leases. Mason J, with whose reasons Wilson and Deane JJ expressly agreed in their separate judgments, said (at 30):
‘If it be accepted that the principles of contract law apply to leases, it is not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of such common law rights as may otherwise be appropriate. It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine for repudiation or fundamental breach.’
Progressive Mailing is also authority for the proposition that the recoverability of damages for loss of bargain in the event of repudiation or breach of an essential term is not conditioned upon common law discharge for breach although it is a necessary condition that the defendant can no longer be required to perform the contract in specie:
‘This essential foundation may be established by a common law rescission of the contract by the innocent party or by a termination of the contract in the exercise of a contractual power so to do. In either event, assuming repudiation or fundamental breach by the defendant, he could no longer be required to perform the contract and is liable for damages for loss of bargain. The well-recognised distinction between common law rescission and termination pursuant to a contractual power supplies no reason in principle why such damages are recoverable by the innocent party in one case and not in the other, provided of course that the exercise of the power is consequent upon a breach or default by the defendant which would attract an award of such damages.’ (at 31 (Mason J))
His Honour went on to reject the proposition that termination of a contract in the exercise of a contractual power could establish an affirmation of the contract debarring the innocent party from suing for damages for breach on the ground of repudiation or fundamental breach (31).
The principle that termination of a contract is a necessary condition for recovery of loss or bargain damages was restated in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260-261 (Mason CJ, Deane, Dawson and Toohey JJ agreeing). The contrary view suggested by Barwick CJ in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 450 was disapproved.
The characterisation, by the House of Lords, of the right to sue for loss of bargain damages as a ‘secondary obligation’ arising upon termination of the contract is consistent with the approach taken in Progressive Mailing and Sunbird Plaza - Photo Production Ltd v Securicor Ltd [1980] AC 827 at 845 (Lord Wilberforce) and 849 (Lord Diplock) – cited in Sunbird Plaza at 261 (Mason CJ).
It may be accepted as a general proposition that the right of parties to a contract to terminate the contract for breach can be defined exhaustively by the terms of the contract itself. In the limiting case of a refusal by one party to perform its part of the contract at all, that is a global repudiation of its contractual obligations, a question may arise whether the other party can be barred by a term of the contract from accepting that repudiation and treating itself as discharged. The concept may be thought of as raising the contractual analogue of the Zen question – what is the sound of one hand clapping? Where there are two parties to a contract and one declares its intention no longer to perform its obligations under the contract it may be difficult to discern any sensible basis upon which a restriction on termination, which depends for its existence on the very contract that has been repudiated, is to be construed if enforceable at all. Questions of validity for want of mutuality can arise as in the case of ‘termination for convenience’ clauses in government contracts – N.Seddon, Government Contracts Federal State and Local, 3rd Edition, Federation Press (2004) at 5.5. See also KK Puri, Australian Government Contracts: Law and Practice (1978) CCH at par 1505.
Clauses restricting or barring termination are to be construed ‘... according to [their] natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity’ – Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510. That formulation is subsumed in the principles generally applicable to the construction of contractual terms and conditions – Codelfa Construction Pty Ltd v Rail Authority of NSW (1982) 149 CLR 337 at 350; Pacific Carriers Ltd v BNP Paribas (2004) 208 ALR 213 at 221 [22]. As appears from the latter case the genesis of the transaction, and the background, context and market in which the parties are operating may all be considered in ascertaining ‘the commercial purpose of the contract’.
In identifying the intention of clauses dealing with termination for breach of a contract it is necessary to keep in mind that ‘clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of contract arising by operation of law’ – Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574 at 585, cited with approval in Concut v Worrell (2000) 75 ALJR 312 at 317 – [23] (Gleeson CJ, Caudron and Gummow JJ). In the Concut decision their Honours went on to say:
‘Thus an express provision for termination for breach in certain circumstances may be regarded as designed to augment rather than to restrict or remove the rights at common law which a party otherwise would have had on breach.’
The construction of clauses limiting rights of termination, like that of exemption clauses of which they may be seen as a subset, should avoid absurdity which would defeat the main purpose of the contract – Darlington Futures at 510 citing H & E Van Der Sterren v Cibernetics (Holdings) Pty Ltd (1970) 44 ALJR 157 at 158 (Walsh J, Barwick CJ and Kitto J agreeing) and Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon(Aust) Pty Ltd (1978) 139 CLR 231 at 238 (Barwick CJ). In the latter case Barwick CJ cited Suisse Atlantique Societe D’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 for the proposal that (at 238-239):
‘Whilst exemption clauses ... should be construed strictly, they are of course enforceable according to their terms unless their application according to those terms should lead to an absurdity or defeat the main object of the contract or, for some other reason, justify the cutting down of their scope.’
Lord Wilberforce in Suisse Atlantique considered the possibility of limiting cases which would fall outside the scope of any exemption clause (at 432):
‘One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exception clause to a particular kind of breach.’
Subject to that class of case it was ‘a question of contractual intention’ whether a particular breach was covered. The more radical the breach, the clearer must be the language of an exemption clause to cover it. The so called ‘four corners’ rule referred to in relation to the bailment of goods may perhaps be seen as a particular application of the general proposition in Lord Wilberforce’s judgment – see Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 at 377 (Windeyer J). It is questionable whether the proposition that an exemption clause will not apply to the limiting case posited by Lord Wilberforce is a rule of law. Lord Wilberforce did not make a definitive statement to that effect. Rather the difficulty of identifying any sensible operation for an exemption clause in such a case flows from the attempt to apply ordinary constructional principles to an extreme situation.
The proposition that a right to terminate may be barred without being extinguished is not novel. A party to a contract with a right to terminate that contract for breach at common law may be estopped from so doing by its conduct and the estoppel removed by later notice – Bentsen v Taylor [1893] 2 QB 274 at 283 (Bowen LJ); Panoutsos v Raymond Hadley Corporation of New York [1917] 2 KB 473 at 479. In Legione v Hateley (1983) 152 CLR 406 at 439, Mason and Deane JJ said:
‘If what is said or done amounts to a clear and unequivocal representation that the particular right will not be asserted for a period of at least x days, a representation to that effect can be relied on to found an estoppel.’
An estoppel against the exercise of a right to terminate for a time does not carry the consequence of extinguishment of the right of termination which is associated with an election to affirm the contract. A party may contract to waive or defer the exercise of its termination rights for a time without extinguishing them. In such a case the effect of the second contract upon the first is a matter of construction – Concut v Worrell at 316 [19] citing Commissioner of Taxation v Sara Lee Household and Bodycare (Australia) Pty Ltd (2000) 74 ALJR 1094 at 1098 – [22]. Similarly, it would seem that a party may contract to defer a right of contractual termination without thereby abandoning any claim for loss of bargain damages that may arise because, for example, of an hiatus between the original contract and that which effects the continuation of obligations under it or replaces them with a set of like obligations to different parties.
Despite the constructional difficulties in the way of applying a clause limiting rights of termination as against a party who refuses or is unable to perform a contract at all, a prohibition against ceasing to perform contractual services following termination may be made effective by way of a second contract with a third party. There is no reason in principle why a party to one contract may not bind itself under a second contract to continue to perform services required under the first even though the counterparty to the first has repudiated its obligations and the innocent party has terminated as against the defaulter. While the first contract might be terminated by the innocent party as against the counterparty, the innocent party is obliged under the second contract to continue to do what it would have had to do under the first contract were it still in place. The terms and conditions including consideration for the continuing performance of those obligations would derive from the second contract. In such a case the existence of the second contract would not deprive the innocent party of the right to terminate as against the defaulting counterparty and to sue for loss of bargain damages to the extent that they were not offset by benefits received under the second contract. The second contract would give rise to a fresh obligation owed to the third party to do whatever it is that would have to be done to perform obligations under the first contract.
An alternative model which would maintain the first contract in force would use a provision in a second contract barring or limiting the exercise by the innocent party of its rights to termination under the first contract and thus holding the innocent party to the performance of its obligations under that contract. The consideration, including payment for so doing would be provided for in the second contract. The substantive practical difference between the two theoretical mechanisms lies in the availability of the remedy of termination to the innocent party against the repudiating party in the first contract.
As has already been noted, cl 5.2 of the Direct Agreement prohibited Thiess Swanston from terminating or suspending ‘the performance of its obligations’ under the IMA where a step-in notice had been given by the Director. It in effect required Thiess Swanston to continue to do all of the things it was required to do under the IMA on the basis that a specified Enforcing Party, in this case the receivers, was ‘performing all of the Franchisee’s obligations under the Contract’. The clause was not drawn so as to prevent termination of the contract with NX Swanston. Rather it was directed to require continuity of maintenance services from Thiess Swanston. That was achieved by the assumption, under the Direct Agreement, of obligations to continue providing the services required to be provided under the IMA. The receivers were not parties to the Direct Agreement. The obligation assumed by Thiess Swanston under that agreement was owed to the Director.
On the basis of the preceding analysis it seems that it was the first of the two models set out in the preceding general discussion that was adopted in this case. The relevant second contract was the Direct Agreement. The third party was the Director. An alternative construction would read cl 5.2 as extending to prohibit termination of the IMA. On that construction the second model would be applicable. In the event, the choice of construction of cl 5.2 and the model applicable to the Direct Agreement does not affect the outcome of the case for it does not alter the time at which the IMA was formally terminated. That was done under the terms of the Transfer Agreement.
Appeal Ground 1 – Whether Thiess Swanston had a right to terminate the IMA for breach.
Clause 24.4(a) of the Swanston IMA provides that Thiess Swanston must not ‘except as permitted by par (b) ... avoid, release, surrender, terminate, rescind, discharge (other than by way of performance) or accept the repudiation of ... this Agreement’.
The acts to which par (a) applies include acts which can be done consensually or in the exercise of common law rights. Paragraphs (a) and (b) can be read in two ways. One construction would see common law rights of termination extinguished so that all that is left is what amounts to a discretion on the part of the Director to release Thiess Swanston from its agreement. Another construction would see the common law rights not extinguished but exercisable only upon the fulfilment of the conditions defined in cl 24.4(b). That is to say, before Thiess Swanston could terminate for cause, the Director must be reasonably satisfied that ‘... it is no longer necessary [for] Thiess to have the benefit of the [IMA] ...’ and that Thiess Swanston has made ‘adequate alternative arrangements...’.
Only the word ‘termination’ is used in cl 24.4(b) to refer to permitted action. As Lord Radcliffe said in Bridge v Campbell Discount Co Ltd [1962] AC 600 at 620:
‘“Terminate” is an ambiguous word, since it may refer to a termination by a right under an agreement or by a condition incorporated in it or by deliberate breach by one party amounting to a repudiation of the whole contract.’
The word is generic and wide enough to encompass rescission, discharge and acceptance of repudiation. At common law each of these constitutes the termination of the contract. Termination may also occur by agreement involving release or surrender of contractual rights – see generally J Carter, ‘Termination in the Law of Contract’ (op cit) at 1317. All of these mechanisms for termination are left intact by cl 24.4(a) but conditional upon the satisfaction of the requirements in cl 24.4(b). This approach to construction accords with the language of the clause and least disturbs existing common law rights. It is also consistent with its contractual purpose of maintaining continuity in the provision of public transport services. That purpose is not undermined by a construction of the contract which would defer or condition, rather than extinguish, common law rights of termination. The fact that ‘termination’ appears in cl 24.4(a) as one of a number of terms relating to the cessation of a contract, does not mandate its narrow construction in cl 24.4(b) as referring only to consensual termination. The words ‘release’ and ‘surrender’ in cl 24.4(a) are capable of reference to consensual termination. The generic construction of ‘termination’ being open under cl 24.4(b) and having a non-extinguishing operation in respect of common law rights of termination it should be adopted rather than a construction which would have an extinguishing effect.

The preceding construction of cl 24 is not affected by cl 34 of the IMA. That clause specifies a process whereby NX Swanston could terminate the IMA for default by Thiess Swanston. It contains no mechanism for termination by Thiess Swanston. That does not support its characterisation as a code for termination. A provision which does not in terms deal with termination by one party can hardly be characterised as a code on the subject. So to do, in this case, would be inconsistent with the existence of cl 24 and its regulation of termination by right or by agreement on the part of Thiess Swanston.
The view which I have formed of the construction of cl 24 is consistent with cl 5 of the Direct Agreement which works on the assumption that there is a right in Thiess Swanston to terminate for breach by NX Swanston, albeit the right may be practically confined by the conditions upon its exercise. The provisions of cl 5.2(b) of the Direct Agreement which bar termination or suspension of performance where the Director exercises the step-in option, assume the existence of a right to terminate otherwise exercisable, albeit upon the conditions set out in cl 24.4(b). The obligation on Thiess Swanston to obey the constraints imposed by cl 5.2(b) is imported into the IMA by cl 11(c)(ii) of that agreement. It should be stated here that the fact that the IMA and the Direct Agreement came out of generic moulds which were intended to apply to a variety of contractual arrangements relating to the privatisation of tram and train services in Victoria, does not alter the proper approach to their construction by reference to their particular contents.
The learned primary judge was, in my opinion, correct to hold as he did that Thiess Swanston could terminate the IMA and that cl 24.4 ‘limited the circumstances’ on which it could do so [2]. His Honour also rejected the contention that cl 34 was a code and that only NX Swanston could terminate the agreement in case of default. This was, as his Honour held, ‘... an untenable proposition as reference to cl 24, which expressly contemplates termination by Thiess, shows...’ [2].
It was submitted for the appellants that ‘no provision of the Swanston IMA conferred upon Thiess Swanston a contractual right to terminate on the ground of event of default, breach or other circumstance which might give rise to a claim for the purposes of the Deed of Company Arrangement’. Put that way, the submission begs the question whether, and to what extent, the agreement affected common law rights of termination. It was a matter for the appellants to persuade the Court that the common law rights of termination (encompassing discharge, rescission and acceptance of repudiation) were extinguished by the IMA. This has not been established.
In so far as the appellants’ submissions suggested that cl 24.4(b) applied to consensual termination only, they are not accepted. The mode of termination regulated by cl 24.4(b) covers all of the modes contemplated by cl 24.4(a).
The first ground of appeal fails.
Appeal Ground 2 – Whether the Court erred in not finding a termination of the IMA would have breached the IMA.
In the second ground of appeal it is contended that the learned primary judge should have found that any termination of the Swanston IMA by Thiess Swanston prior to 23 December 2002 would have breached the Swanston IMA ‘... and thus did not entitle Thiess Swanston to claim damages for loss of profits’.
Had Thiess Swanston purported to terminate the Swanston IMA prior to 23 December 2002 without the Director first being reasonably satisfied of the matters referred to in cl 24.4(b), that termination would have constituted a breach of cl 24.4(a). It is questionable however what, if any, remedy would have been available at the suit of NX Swanston.
As at 23 December 2002, Thiess Swanston had sent to the Director two default notices under cl 5.2 of the Direct Agreement. The first was sent on 19 December and the second on 22 December. A termination of the IMA as at 23 December 2002 would have breached cl 5.2 of the Direct Agreement.
The conclusion that the exercise by Thiess Swanston of its common law termination rights prior to 23 December 2002 would have breached the IMA does not lead to the conclusion reflected in appeal ground 2 that it is thereby not entitled to claim damages for loss of profits. That proposition necessarily rests on the premise that cl 24 extinguishes termination rights rather than conditions their exercise. As the conclusion advanced in appeal ground 2 is not supportable, that ground also fails.
Appeal Ground 3 – Whether the Court erred in not holding that Thiess Swanston was prohibited from terminating the IMA for breach.
This appeal ground relied upon cls 11(c)(ii), 24.2 and 34 of the IMA for the proposition that Thiess Swanston was prohibited from terminating the IMA for breach or from accepting a repudiation of it.
Clause 11(c)(ii) of the IMA required that Thiess Swanston enter into a Direct Agreement with the Director. Although NX Swanston was not a party to the Direct Agreement, Thiess Swanston covenanted with NX Swanston in cl 11(c)(ii) of the IMA to comply with the requirements of the Direct Agreement. That agreement provided for the issue of default notices, for a minimum time to elapse following such issue and for the Director to exercise step-in rights via the IMA receivers in relation to the role of NX Swanston under the IMA. In the latter event, Thiess Swanston had to continue to perform the services required under the IMA. On the preferred construction of cl 5.2, referred to earlier in these reasons, this obligation did not amount to a bar on the termination of the IMA contract. The prohibition created by cl 5.2 derived its force from the Direct Agreement and related to the continued performance of services due by Thiess Swanston under the IMA rather than to the continuation of the IMA itself. Even if this construction be wrong and the prohibition created by cl 5.2 went to the termination of the IMA, it was a prohibition enforceable at the suit of the Director in relation to the exercise of rights arising vis a vis Thiess Swanston and NX Swanston under the IMA. It was not a prohibition which would necessarily remain in force for the balance of the term of the contract. It did not and could not operate to extinguish the right to terminate the IMA. The terms of cl 24 conditioned the right of termination on the Director’s reasonable satisfaction but did not prohibit its exercise.
The clauses of the IMA relied upon in appeal ground 3 do not, for the reasons previously discussed, effect a global prohibition in respect of the exercise of termination rights. Nor do they extinguish those rights. Appeal ground 3 fails.
Appeal Ground 4 – Whether Thiess Swanston elected to affirm the Swanston IMA.
A party to a contract whose counterparty has acted in such a way as to give rise at common law to a right to terminate the contract may have to choose between exercising the right of termination and affirming the contract. This is a choice between inconsistent rights said to constitute an ‘election’ to proceed one way or the other. Importantly, a party who elects to exercise one right inconsistent with another cannot, in the ordinary course, resile from that election and choose to exercise the other right:
‘… if a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act of showing that he has chosen the one he cannot pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose.’
United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30.
The essential elements of an election were stated by Stephen J in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 648:
‘Election as between inconsistent contractual rights does not call for any conscious choice as between two sets of rights, it being enough that there should be intentional and unequivocal conduct together with knowledge of the facts giving rise to the legal rights.’
It is not necessary for election that there be a consciously ‘choosing’ mind. McTiernan ACJ agreed with Stephen J. Neither Stephen J nor Mason J was of the view that it was necessary for the electing party to be aware of the existence of the legal right to choose as long as the party was aware of the facts giving the right to rescind the contract. Mason J said (at 658):
‘If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected.’
The question in the present case is upon what basis could it be said that Thiess Swanston elected to affirm the IMA. Against the learned primary judge’s finding that Thiess Swanston’s right to terminate for breach or repudiation was ‘held in suspense’ the appellants argued that Thiess Swanston had continued to perform the Swanston IMA until April 2004. They relied upon its agreement in the Settlement Deed and again in the Transfer Agreement to continue with the Swanston IMA. The appellants argued that Thiess Swanston thereby affirmed the Swanston IMA rather than treated it as discharged by reason of any alleged repudiation by NX Swanston.
Counsel for Thiess Swanston pointed out that when the administrators were appointed on 23 December 2002, Thiess Swanston had unequivocally expressed its intention to terminate the IMA for default by NX Swanston. It served notices of default in accordance with cl 5.2 of the Direct Agreement. The defaults were never remedied. Thiess Swanston took the first and at that time, the only step, open to it to set in train the process of termination for default which process is said to have culminated with the Transfer Agreement. It was submitted that the Director’s reasonable satisfaction, required by cl 24.4(b) of the Swanston IMA, was to be inferred from his execution of the Transfer Agreement. He could not have executed it unless so satisfied. That was because the Transfer Agreement provided for a new franchisee to take over NX Swanston’s role and a new contractor to take over Thiess Swanston’s role – circumstances contemplated by cl 24.4(b) of the IMA and cl 5.2(b) of the Direct Agreement. They were the circumstances necessary to keep the public transport system running.
Thiess Swanston was obligated to NX Swanston by reason of cl 11(c)(ii) of the IMA, read with cl 5.2(b) of the Direct Agreement, not to terminate the performance of its services while the Director exercised the step-in right. The continued performance of infrastructure maintenance services by Thiess Swanston up until 18 April 2004 did not involve any choice between a right to terminate and right to affirm. On the view which I have taken of the preferable construction of cl 5.2, it did not prevent Thiess Swanston from terminating the IMA provided that the company continued to deliver the maintenance services as required by the Direct Agreement following the exercise by the Director of his step-in right. However Thiess Swanston’s right to terminate the IMA continued to be deferred by operation of cl 24.4 of the IMA. There was no affirmation of the IMA by reason of Thiess Swanston’s continuing performance of the services for which the IMA provided.
The Settlement Deed made on 9 September 2003 provided for a new Swanston IMA to replace the original IMA which would terminate upon the commencement of the new agreement. The Deed of Settlement foreshadowed a termination of the IMA as between NX Swanston and Thiess Swanston. That never occurred. In any event the Deed expressly reserved the characterisation of the termination of the original IMA as a termination for breach. That position was again reserved in the Transfer Agreement.
It cannot be said in the circumstances that the conduct of Thiess Swanston up until and including its execution of the Transfer Agreement involved any unequivocal communication of a choice to affirm the IMA. On the contrary, Thiess Swanston reserved its position at all times, its right to terminate being constrained by the conditions upon its exercise imposed by the agreements which it had entered into. Ground 4 therefore also fails.
Appeal Ground 5 – Whether termination with consent was possible.
Appeal ground 5 asserts error on the part of the learned primary judge in finding that the Swanston IMA could be terminated with the consent of the Director.
The relevant passages in his Honour’s judgment appear at [2] and [20]. At [2], in describing the provisions of the IMA his Honour said of Thiess Swanston’s right to elect to terminate the contract for breach:
‘It had no power to make an election in the sense that it could not terminate the IMA. That right was held in suspense waiting the director’s consent, unless, of course, before that consent was given, Thiess chose to go on with the IMA come what may regardless of the prior breach.’
At [20] his Honour said:
‘As I have pointed out Thiess was not entitled to terminate the contract for breach or repudiation without the consent of the Director, and it did not obtain that consent until it entered into the transfer agreement; the Director’s consent is to be inferred by his execution of the transfer agreement.’
The IMA does not in terms speak of the prior ‘consent’ of the Director as a condition of the right to terminate. Rather it speaks of the Director’s ‘reasonable satisfaction’ about certain things (cl 24.2(b)). It may be seen that by his use of the term ‘consent’ his Honour referred to the requirements set out in cl 24.2(b) and, perhaps by extension, to the requirements of cl 5.2 in so far as the Director might decide against having receivers step into the shoes of the franchisee under the IMA.
There was no error in his Honour’s statement which was consistent with the proposition that the exercise of termination rights was conditioned in the IMA by reference to the Director’s ‘reasonable satisfaction’.
Appeal Ground 6 – A right in suspense.
Appeal ground 6 takes issue with his Honour’s finding that the right to terminate the IMA ‘was held in suspense’. This was a metaphor reflecting the proposition that the rights of termination were not extinguished by the terms of the agreement which deferred the exercise of those rights to the satisfaction of the conditions stipulated by the agreement as necessary to its exercise. It might be at some point that the ‘suspended’ right, by effluxion of time without satisfaction of the conditions for its exercise and by reason of changing circumstances, might be taken to have no practical significance. It might in such a case for all intents and purposes be regarded as extinguished. This does not mean that his Honour’s use of the metaphor reflected legal error. Ground 6 also fails.
Appeal Ground 7 – Whether accord and satisfaction was necessary to bargaining away of the damages claim
The learned primary judge considered at [21] the contention by the administrators that the Swanston IMA was terminated by agreement and that any accrued rights, which would ordinarily include loss of bargain damages were lost. His Honour accepted that an action in damages may be bargained away but that it was necessary to show something in the nature of an accord and satisfaction. His Honour referred to McDermott v Black (1940) 63 CLR 161 and the following passage from the judgment of Dixon J (at 183-184):
‘An agreement not to sue upon particular allegations might give a defendant a good equitable plea, but at common law it would be necessary for him to show that it amounted to an accord and satisfaction discharging the cause of action or else that it gave rise to an estoppel.
The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.’
It might otherwise be put that a cause of action, like any other right may to all intents and purposes be ‘lost’ or ‘bargained away by agreement or its enjoyment barred temporarily or permanently by an estoppel. It may be the subject of a contractual release supported by consideration. It may be the subject of a contractual promise not to enforce it, again supported by consideration or perhaps a promise to pursue it only upon the occurrence of certain events. His Honour’s observations were directed to the administrator’s submission that the IMA and any accrued right to loss of bargain damages had been terminated by agreement. In substance he found there was no agreement to that effect. He said (at [21]):
‘Here there was no accord, expressed or implied. There is, therefore, no need to inquire into its satisfaction.’
His Honour’s statement of principle, in the circumstances of the case, was unexceptionable. That leaves open however, the critical question whether in truth any cause of action for loss of bargain damages had been extinguished by agreement.
Appeal Ground 8 – Whether the termination of the Swanston IMA under the Transfer Agreement was termination for breach
The appellants submitted that the basis upon which the Swanston IMA was in fact terminated was inconsistent with Thiess Swanston having ever purported to accept any repudiation of the contract by NX Swanston. Clause 2 of the Transfer Agreement achieved termination by mutual assent of Thiess Swanston and NX Swanston not by any unilateral acceptance by Thiess Swanston of repudiation.
The question that arises is whether, by the Transfer Agreement, Thiess Swanston effected a consensual termination which was unable to be characterised as a termination on account of NX Swanston’s breach of contract. As appears earlier in these reasons the right to terminate for breach was not extinguished by the restrictions placed upon its exercise under cl 24 of the IMA. Nor, if cl 5.2 were construed as a restriction upon termination of the agreement, was the right to terminate extinguished by that restriction. A question arises whether the right to terminate could only be exercised upon the reasonable satisfaction of the Director under cl 24.4.
The Director’s reasonable satisfaction, required under cl 24.4, was a condition upon the right of termination for breach which could not be enforced by the Director under the IMA as the Director was not a party to that agreement. It might be that any failure by NX Swanston to resist a termination for breach, other than upon the Director’s reasonable satisfaction of the matters in cl 24.4(b), could be actionable at the instance of the Director as a breach of cl 23.5 of the Franchise Agreement although the remedies which would be available in such an action are not clear.

This view is supported, it seems to me, by an appreciation of the balance of the rights and obligations of the respondent in the cognate agreements. The Direct Agreement recognised in cl 5.2 a capacity in the respondent to terminate the “Contract” (defined in the Direct Agreement as the IMA) for the default of the Franchisee (defined in the Direct Agreement as the Company). This is put to one side by the appellants as “boiler-plate drafting”. To an extent this may, perhaps, be so. Under cl 2(a) of the Direct Agreement the respondent undertook to the Director the obligations in cl 23.5 of the Franchise Agreement. So, as between the Director and the respondent, the respondent agreed not to do anything in cl 23.5(a) of the Franchise Agreement, unless permitted by cl 23.5(b). The respondent agreed (with the Company) that it could only terminate in circumstances set out in cl 24.4(b) and (with the Director via cl 2(a) of the Direct Agreement that it could only terminate in circumstances set out in cl 23.5(b) of the Franchise Agreement. So, insofar as cll 4.1 and 5.2 of the Direct Agreement purport to give a wider capacity to the respondent to act that through cll 24.4 or 23.5, some resolution of cll 2(a) and 23.5 with cll 4.1 and 5.2 would need to be undertaken. That resolution need not be undertaken to resolve this dispute. For present purposes, it is enough to understand that cl 5.2 of the Direct Agreement recognised a right of termination in the respondent for Default by the Company. Clause 23.5(b) of the Franchise Agreement as adopted by cl 2(a) of the Direct Agreement, and as owed to the Director, and the identical cl 24.4(b) owed to the Company under the IMA, restricted the capacity of the respondent to terminate by conditioning it upon the Director’s state of satisfaction. Clause 5.2 of the Direct Agreement also laid down a regime for notifying the complaint (by notification to the Director and the Company) and identified further (and different) circumstances in which any right of the respondent to terminate was not to be operative: cl 5.2(b). Clause 11(c)(ii) of the IMA made those further restrictions in cl 5.2(b) binding on the respondent in favour of the Company under the IMA.
There is no doubt that as at 23 December 2002 the Company had breached the provisions of the IMA for timely payment of sums due under the IMA. Time had been agreed to be of the essence in the IMA. This breach of a contractually agreed essential term of the IMA gave rise (subject otherwise to the terms of the IMA) to an entitlement at general law to terminate the IMA. Also, there is no doubt that by 23 December 2002 the Company had, through the actions of those that controlled it, repudiated its obligations under the IMA.
The respondent was bound, however, to comply with the constraints in the Direct Agreement and in the IMA in dealing with these circumstances. This duty was owed to the Director under the Direct Agreement and to the Company under the IMA, which also by cl 11(c)(ii) picked up the obligations in the Direct Agreement.
Clause 5.2(a) of the Direct Agreement (incorporated as it was into the IMA) only permitted termination “as a result of a Default in accordance with the terms of the Contract [the IMA]”. The word “Default” had a very wide meaning in the Direct Agreement. It is not to be seen as linked to the notion of termination for an event of default under cl 34 of the IMA, limited as that was to the Company. The two limbs of the definition of “Default” in the Direct Agreement are amply sufficient to encompass the Company’s breach and repudiatory conduct here. The words “in accordance with the terms of the Contract [the IMA]” in cl 5.2(a) may, because of the width otherwise of the definition of “Default”, be read flexibly to be wider than referring merely to the exercise of rights of termination pursuant to contract (under cl 34 of the IMA).
Alternatively, cl 5.2 of the Direct Agreement might be seen as “boiler-plate drafting” and the words “in accordance with the terms of the Contract [the IMA]” in cl 5.2(a) restrict the type or range of Default (otherwise widely defined) upon which the respondent could rely in terminating the IMA to such defaults as the IMA identified as the basis for contractual termination. There are no such defaults: see cl 34 of the IMA. Therefore, on this construction, the compliance by the respondent with cl 5.2 of the Direct Agreement in favour of the Company (by cl 11(c)(ii) of the IMA) would have the respondent unable to terminate because it had no right to terminate for a Default “in accordance with the terms of the Contract [the IMA]”, notwithstanding the wide definition of “Default” in the Direct Agreement.
I prefer the former construction. I do not see the phraseology in cl 5.2(a) affecting the width intended in cl 24.4(a) and (b) of the IMA (and cognate clauses) of the word “terminate” (and the other words in cl 24.4(a)). Once one gives the word “terminate” in cl 24.4(a) and (b) a meaning to encompass termination at general law for serious breach or upon an acceptance of a repudiation, I do not see the words of cl 5.2(a) of the Direct Agreement by the use of the phrase “in accordance with the terms of the Contract [the IMA]” as cutting down that width and elevating cl 34 of the IMA to a code. This is especially so given that the word “Default” in the Direct Agreement is defined so widely in reach and is defined as specifically related to “the Contract” – the IMA.
The requirement of notice under cl 5.2 of the Direct Agreement provides the opportunity for the Director to step in and take over the operation of the Franchise Business. Thus, the continued existence of the general law right of termination in the respondent for serious breaches, or repudiation, of the IMA by the Company, controlled and regulated by the procedure in cl 5.2 can be seen to underpin and reinforce the continuity of the services to the public. The respondent’s possession of a right to give a Notice of Default for such serious breaches or repudiatory conduct in connection with the IMA enabled the Director to be apprised of those circumstances and to understand whether it was appropriate to step in under cl 17.1(a)(i)(B)(4) of the Franchise Agreement. It accords with the business-like and smooth running of the transport system for contracting parties such as the respondent to be able, in a way controlled or regulated by the Director in the public interest, contractually to complain about breaches of essential terms or going to the root of the contract or of repudiatory conduct by the Company under the IMA so that the Director is able to take steps of his or her own in the public interest under the terms of the Franchise Agreement or related Transaction Documents including the security documents to deal with the Company.
Thus, I reject the primary submission of the appellants that the proper construction of the IMA in the context of the cognate agreements was that the respondent was only entitled to terminate the IMA (as recognised by cl 24.4(b)) by consensual arrangement. The terms of cl 24.4(b) of the IMA recognised, in my view, the general law entitlement of the respondent (if circumstances otherwise gave rise to it) to terminate the IMA for breach of an essential term or consequent upon, or as, the manifestation of the acceptance of the repudiation.
Therefore, with a qualifying comment, I would reject grounds 1, 2 and 3 of the Notice of Appeal. The qualifying comment that I would make is in relation to ground 1. To the extent that the primary judge’s reasons may be seen to express a view that the IMA conferred a right of termination (contractually) upon the respondent, his Honour would have erred. I do not, however, so read his reasons. I read the primary judge as having viewed cl 24.4(b) of the IMA as recognising the general law right of termination.

Understanding the events following 22 December 2002 in the light of the proper construction of cll 24 and 34 of the IMA and cll 4 and 5 of the Direct Agreement

Undoubtedly, the Company, by its failure to pay the November progress claim timeously, was in breach of an essential term of the IMA; and, by the intentions publicly expressed by and on behalf of the Company, it evinced an intention not to be bound by the IMA according to its terms.
From 19 December 2002, employing the procedure designated by cl 5.2(a) of the Direct Agreement, the respondent served notices of the breaches that occurred. The first Notice of Default, dated 19 December 2002 ([233] above), described the “event or circumstance which would entitle the [respondent] to … treat [the Contract viz the IMA] as repudiated” (see limb (b) of the definition of “Default” in the Direct Agreement). However, the notice did not specify such as the Default. The Default was identified as the failure to pay the $3.989 million timeously. No submission was put as to any inadequacy in the notice in this, or in any other respect.
Of course, the respondent was not entitled to terminate the IMA at this point: cl 5.2 modified its common law right by requiring a procedure to be undertaken. This procedure was undertaken. The cl 5.2 notices were issued and time was thereby provided which enabled the Director to consider his position.
On 24 December 2002, the Director exercised his right to give a notice contemplated by cl 5.2(b) of the Direct Agreement. (See the notice at [234] above.) It is necessary to recognise what the effect of cl 5.2(b) and the notice was. Clause 5.2(b) of the Direct Agreement (made applicable to the IMA by cl 11(c)(ii) of the IMA) denied the respondent the power to exercise any entitlement at general law to end the IMA if, first, the Director notified the respondent that he or she was exercising a step in right (cl 5.2(b)(i)), and, secondly, an Enforcing Party (which term included the receivers and managers) was performing all of the Company’s obligations under the IMA (cl 5.2(b)(ii)). The second requirement did not depend on the contents of the notice asserting it to be the fact (as occurred here), but on the fact of that occurring.
A notice sufficient for cl 5.2(b)(i) was given.
The parties were agreed on appeal that the receivers and managers performed all of the Franchisee’s (the Company’s) obligations under the Contract (the IMA) for the purposes of cl 5.2(b)(ii) of the Direct Agreement after 3 pm on 22 December 2002 until they ceased to have possession of the assets.
Thus, so long as cl 5.2(b)(ii) of the Direct Agreement was satisfied, the respondent was, by cl 5.2 of the Direct Agreement (adopted as an obligation to the Company by cl 11(c)(ii) of the IMA) not entitled to exercise any right under general law to terminate the IMA based on the conduct up to 23 December 2002, or after that date to the extent that such a right might otherwise have arisen.
Further, to the extent that some change of circumstance would lead to the conclusion that cl 5.2(b)(ii) of the Direct Agreement was not satisfied, it would still be necessary, before the respondent could exercise its common law right of termination, for the Director to be reasonably satisfied of the matters in sub cll 24.4(b)(i) and (ii) of the IMA.
The asserted affirmation or election – the Settlement Agreement
The Settlement Agreement (to which the respondent was a party) contained provisions to the effect that the IMA was extended, that until the coming into effect of the “New Swanston IMA” the respondent would continue to be bound by the IMA as extended, that the IMA would terminate on the commencement of the “New Swanston IMA” and that if no New Swanston IMA came into effect the respondent and the Company would continue to be bound by the IMA: see sub cll 2.2 (a), (c) and (d) of the Settlement Agreement. These matters were agreed subject to the assertion or qualification in cl 2.2(e) that the termination of the IMA on the commencement of the New Swanston IMA would “be for breaches by [the respondent] of the [IMA] which occurred before 22 December 2002.”
The Notice of Appeal and the submissions of the appellants did not seek to distinguish between the notions of affirmation and election. It is sufficient to deal with the arguments on principles of election. The true nature of election is the making of a choice in the face of two mutually exclusive courses of action: Spencer Bower and Turner The Law Relating to Estoppel by Representation (3^rd Ed, 1977) p 313 cited by Deane J, Toohey J, Gaudron J and McHugh J in Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26, 41. As their Honours said on the following page (p 42) in Immer, when the asserted election is the continuing on of an agreement in circumstances where a right to terminate or rescind has arisen the relevant choice is not whether to go on with the contract or not, but whether to abandon the right to terminate or rescind or not. After referring to passages from the judgments of Kitto J and Mason J in Tropical Traders Ltd v Goonan (1964) 111 CLR 41, 55 and Sargent v ASL Developments Ltd (1974) 131 CLR 634, 656, respectively, their Honours said that a right to rescind will not necessarily be lost by election or affirmation if the relevant party acts on the basis that the contract remains on foot. Likewise Brennan J at 30 said that the act amounting to the election must be unequivocal and an act may be consistent with the continuance of the contract, but also consistent with the reservation of the right to terminate.
Given the continuing satisfaction of cl 5.2(b)(ii) of the Direct Agreement, made relevant to the IMA by cl 11(c)(ii) of the IMA, the respondent had no entitlement to take the step of termination. Also, the respondent was only able to terminate the IMA when the Director was reasonably satisfied of the matters in cl 24.4(b)(i) and (ii). Further, the terms of cl 2.2(e) might be seen to be an express reservation of the entitlement to terminate at some point.
On the other hand, even accepting that the respondent’s power to terminate had not crystallised at the date of the Settlement Agreement (whether because of one or both of cl 5.2(b) of the Direct Agreement (read with cl 11(c)(ii) of the IMA) and cl 24.4(b) of the IMA) the Settlement Agreement may be seen as more than merely continuing to perform obligations under the IMA. It involved an extension of the IMA. It provided for the entry into a new agreement between the parties and upon that event occurring the IMA was to cease to have effect. If a New Swanston IMA had come into effect, the IMA would have ended, not because of any act of general law termination on the basis of the matters referred to in cl 2.2(e), but because of the operation of the Settlement Agreement itself. However, a New Swanston IMA did not come into effect.
The Director’s consent in cl 2.2(f) of the Settlement Agreement was expressed to be pursuant to cl 4.1(b) of the Direct Agreement and cl 23.5 of the Franchise Agreement. It was not expressed by reference to cl 24.4 of the IMA. Also, it was conditional on the replacement of the Direct Agreement and deed of charge as contemplated by cl 2.4 with new agreements involving the respondent. Such consent by the Director was not the satisfaction envisaged by cl 24.4(b). Clause 24.4(b)(i) involved a satisfaction that it was no longer necessary (implicitly necessary in the public interest being protected by the Director) for the respondent to have the benefit of “the Key Contract”. The phrase “Key Contract” picked up the definition in the Franchise Agreement which picked up paragraph 5 in Schedule 16 to the Franchise Agreement:
Any agreement or arrangement for the provision of … Infrastructure maintenance services.
The Settlement Agreement anticipated the respondent continuing to provide such services under an agreement that fell with this definition.
Clause 24.4(b)(ii) of the IMA involved a satisfaction about alternative arrangements for the continued operation of the Franchise Business. This involved, implicitly, in my view, arrangements alternative to those which involved the respondent. Under the Settlement Agreement the respondent continued to be involved. There was thus no satisfaction of the Director for the purposes of cl 24.4(b)(ii).
Notwithstanding what might be described as the tension between the provisions of the Settlement Agreement and the exercise of, or the existence of, a suspended right of termination, it must be recalled that for the reasons that I have explained the respondent was not in a position to exercise any such right. It in fact had no present entitlement to terminate. Such an entitlement might never arise. There were circumstances that had occurred in the past which would give it an entitlement to terminate the contract to which it was bound if certain other events occurred. For there to be an election the respondent must be seen to make a choice inconsistent with the maintenance of the potential springing into existence of that right. I do not think that the entry into the Settlement Agreement was such a choice. Though the IMA was extended, the terms of the arrangement, including in particular cl 2.2(e), can be seen to reserve the respondent’s position concerning the Company’s conduct before 22 December 2002. If a New Swanston IMA were to be entered the choice might need to be confronted. It is unnecessary to examine that circumstance as it did not arise.
The asserted affirmation or election - the M>Tram Agreement
The M>Tram Agreement provided for the precise contemporaneous occurrence of the following events:
(a)the termination of the IMA,
(b)the commencement of the new franchise agreement between the Director and MetroLink,
(c)the giving of title to the assets and effective possession and operational control of the assets, and
(d)the commencement of employment by Metrolink of employees of the respondent should they take up the offer.
It is important to appreciate that in cl 2(a) of the M>Tram Agreement the Company and the respondent mutually agreed to end the IMA on the commencement of the new franchise arrangement. The evidence disclosed that Completion as defined under the M>Tram Agreement was at 3 am on 18 April 2004. The evidence also disclosed that the receivers ceased to have possession of the assets and operate the business of the Company at the same time, 3 am on 18 April 2004.
The parties were agreed on the appeal that up to 3 am on 18 April 2004 (that is, up to the time of the termination of the IMA by the terms of the M>Tram Agreement) the receivers were performing all of the Company’s obligations under the IMA for the purposes of cl 5.2(b)(ii) of the Direct Agreement. Thus, at no point prior to the ending of the IMA by the operation of the M>Tram Agreement did the respondent have an entitlement to terminate the IMA by exercise of any general law right of termination.
The IMA came to an end, not because the respondent exercised an antecedently existing general law right to terminate. Such a right, presently exercisable, did not antecedently exist given the terms of cl 5.2(b)(ii) of the Direct Agreement and the performance by the receivers of the obligations under the IMA. Rather, the IMA came to an end by force of an agreement (the M>Tram Agreement) of the parties to the IMA that the IMA should end at the time identified in the M>Tram Agreement. No cause of the termination of the IMA was identified other than the M>Tram Agreement. It was said on behalf of the respondent that the relevant parties to the M>Tram Agreement (the Company and the respondent) agreed that the IMA would terminate at the appointed time “for breaches of the [IMA] which occurred before 22 December 2002”: see cl 2(a) of the M>Tram Agreement. This aspect of the contractual agreement between the Company and the respondent in the M>Tram Agreement was not, however, the exercise of a general law right of termination or rescission. It was an agreement to treat the ending of the IMA as an ending for breach of the IMA. That may have given the Company a right to sue under this contract (that is, the M>Tram Agreement), but it did not change the immutable realities that the respondent, at no time, purported to exercise its general law right to end the IMA and that the respondent did not have the right to do so prior to the ending of the IMA, because of the continued satisfaction of cl 5.2(b)(ii) of the Direct Agreement (adopted, as it was, into the IMA) by the receivers, up to the end of the IMA. The instant the disentitling effect of cl 5.2(b)(ii) might be seen to have been removed, the IMA was at an end perforce the agreement between the Company and the respondent. Indeed, the removal of the disentitling effect of cl 5.2(b)(ii) was only caused by the ending of the IMA. Thus, as the appellants submitted, the terms of this aspect of the M>Tram Agreement do not bind the appellants by forcing on them the consequences of an act (acceptance of repudiatory conduct) which did not happen.

The above demonstrates that the entry into, and effectuation of, the M>Tram Agreement was inconsistent with the continued existence of the potential future use of a right at common law to terminate the IMA. The entry into, and effectuation of the M>Tram Agreement can be seen as an act of election (as asserted in ground 4 of the Notice of Appeal) or as the IMA in fact being terminated by a mechanism different from, and inconsistent with, an ending of the IMA by the exercise of a general law right to terminate or rescind the IMA (as asserted in ground 8 of the Notice of Appeal). In this respect, I accept the submissions of the appellants.
Once it is recognised that the IMA ceased to exist by mutual agreement and not by the act of acceptance of repudiatory conduct, the contingent right became devoid of content, since the agreement, in respect of which the right existed (suspended hitherto by cl 5.2(b)(ii)), has been ended by agreement. In order to overcome this the respondent must, as the appellants submit, treat cl 2(a) of the M>Tram Agreement as something that it was not – the ending of the IMA by the acceptance of repudiatory conduct.
The above analysis does not involve an acceptance of the proposition that the relevant satisfactions of the Director contemplated by cl 24.4(b) were not manifested by the circumstances surrounding the M>Tram Agreement. The Director was a party to the M>Tram Agreement. The consent implicit in that participation must be seen to be to the respondent no longer providing the infrastructure maintenance services under the extended IMA and to MetroLink thereafter providing such services in the operation of the Franchise Business to be taken over by MetroLink.
The appellants assert that the Director’s consent to the new arrangements did not meet the description of the requirements of cl 24.4(b)(i) and (ii) of the IMA. It is hard to understand why it did not. Clause 24.4(b) of the IMA did not call for any particular manifestation of satisfaction. It calls for a state of satisfaction in respect of two matters. It seems to me that implicit within the Director’s participation as a party to the M>Tram Agreement was the satisfaction by him that circumstances described in sub cll 24.4(b)(i) and (ii) of the IMA existed.
Viewing the matter in the way I do, notions of accord and satisfaction are irrelevant. The fact is that the Company and the respondent agreed to terminate the IMA. They agreed to terminate it for breach by the Company committed prior to 22 December 2002. That may mean that the Company has agreed to put itself in a contractual position based on that hypothesis. It does not, however, mean that the IMA was ended by the exercise of a general law right of termination. The right to terminate never emerged from the disentitling bonds of cl 5.2(b)(ii) before the IMA was ended. The general law right to terminate was never exercised. The operative mechanism of ending the bilateral contractual arrangement, being the IMA, was the contractual arrangement being the M>Tram Agreement.
The legal position of the parties in the events that have happened
Thus, the position of the parties as at 23 December 2002 was that the Company had committed a breach of an essential term of the IMA and had evinced an intention not to be bound by the IMA according to its terms. Subject to the IMA, the respondent would from those circumstances have had a general law entitlement to terminate the IMA. The balance of the terms of the IMA prevented that right being exercised, or disentitled the respondent from exercising it, whilst and unless certain circumstances existed (cl 5.2(b) of the Direct Agreement made relevant by cll 11(c)(ii) and 24.4(b) of the IMA).
Plainly those circumstances might arise. Therefore, there is no doubt, it seems to me, that there was a contingent claim, and not merely an expectancy as at 23 December 2002: Lam Soon at 41-44. It is unnecessary to deal with the questions whether the primary judge’s distillation of what the Full Court said in Lam Soon was accurate for all purposes and whether Lam Soon was, in any respect, wrong.
Whilst there was a contingent claim as at 23 December 2002, for the reasons I have expressed, after 3 am on 18 April 2004, the capacity to terminate the IMA became devoid of both content and value because the IMA otherwise ended by agreement of the parties.
Thus, at 1 September 2003, the respondent had a contingent claim, though on 18 April 2004 (at least after 3 am on that day) the claim no longer existed. It might be said only to have had its value affected, but that is too limited a view. The contingent claim was founded on the possibility that circumstances would come to pass allowing the respondent to terminate the IMA on the grounds which came into existence prior to 22 December 2004. After 3 am on 18 April 2004, that possibility no longer existed. The claim thereafter had no foundation. It could be seen no longer to exist, and not merely to have no value.
The application was made to the Court before 18 April 2004. The application was disposed of by the primary judge after 18 April 2004. His Honour directed that the proof be admitted in full. That was not an order or declaration that as at 22 December 2002 or as at the date of the lodgement of the proof the respondent had a contingent claim. Rather it was a direction that the appellants admit the respondent’s contingent claim as part of their then current obligations under the DOCA.
For the reasons I have expressed, as at 7 September 2004, the contingent claim no longer existed. Thus, it should not have been directed, at that time, to have been admitted.
The parties were in substantive dispute as to the current position. Whilst it may be that an essential step in the analysis of that was the assessment of whether a contingent claim existed as at 22 December 2002, the parties were not fighting about a matter of historical interest, but about present entitlement. The orders should reflect that reality.
Orders
For the above reasons the orders that I would make are:
(a)The appeal be allowed.
(b)The direction and order made by the Court on 7 September 2004 be set aside.
(c)In lieu thereof it be ordered that:
(i)the application be dismissed; and
(ii)the plaintiff pay the defendants’ costs.
(d)The respondent pay the appellants’ costs of the appeal.

I certify that the preceding one hundred and ninety two (192) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate:
Dated: 30 March 2005

Counsel for the Appellants:

A C Archibald QC with P D Crutchfield

Solicitor for the Appellants:

Clayton Utz

Counsel for the Respondent:

J W K Burnside QC with E W Woodward

Solicitor for the Respondent:

Hunt & Hunt

Date of Hearing:

15 November 2004

Date of Judgment:

30 March 2005

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

BETWEEN:	SIMON ALEXANDER WALLACE-SMITH FIRST APPELLANT PETER GEORGE YATES SECOND APPELLANT
AND:	THIESS INFRACO (SWANSTON) PTY LTD RESPONDENT
JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE OF ORDER:	30 MARCH 2005
WHERE MADE:	MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE:	30 MARCH 2005
PLACE:	MELBOURNE

‘Consideration (state how the debt arose)	Amount
November and December 2002 Progress Claims UNPAID.	$ 6,860.909
Loss of Profit from balance of term.	$19,138,605
Agency works – loss of profit.	$ 1,388,352
Early return of lease vehicles.	$ 28,294
Termination of subcontractors/novation costs	$ 68,248’

Counsel for the Appellants:	A C Archibald QC with P D Crutchfield
Solicitor for the Appellants:	Clayton Utz
Counsel for the Respondent:	J W K Burnside QC with E W Woodward
Solicitor for the Respondent:	Hunt & Hunt
Date of Hearing:	15 November 2004
Date of Judgment:	30 March 2005