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Do People Still Honour the Spirit of Contract?

Honour the Spirit of Contract

One can generally assume that both parties to a contract will endeavour to perform their obligations under the contract, whether the time for performance of their obligations has arrived or not. This assumption is because the parties have clearly evidenced their intention to be bound by the terms of the contract by signing the contract.

However, as we all know, best intentions are seldom where the story ends. Unfortunately, it is not uncommon that one party (the repudiating party) will subsequently fail to perform their obligations under the contract, thereby indicating an unwillingness to honour the spirit of the contract. Under these circumstances, the other party (the aggrieved party) may be legally entitled to terminate the contract on the grounds of repudiation.

Repudiation of Contract

‘Repudiation’ occurs when the conduct of one party evinces an unwillingness or inability to render substantial performance of the contract. It can also occur where the conduct of one party evinces an intention to be no longer bound by the contract.

The rationale for repudiation seems to be relatively straightforward. A clear indication of the absence of readiness and willingness to perform the contract will constitute repudiation. However, proving the absence of willingness or ability to perform by one party can be a challenging task.

How do you prove repudiation of contract?

The test for determining whether repudiation of the contract has occurred is an objective one. Courts will look at the alleged repudiating party’s conduct and assess whether a reasonable person, in the shoes of the other party to the contract, would fairly conclude that a repudiation of the contract has occurred. Such repudiation could either be in respect of the contract as a whole (e.g. it is clear that the repudiating party has no intention to honour the terms of the contract at all); alternatively, it could be in respect of a fundamental term of the contract (e.g. a term that goes to the heart of the contract). In some instances, repudiation of non-fundamental terms can also demonstrate an unwillingness or inability to perform the contract in accordance with the agreed terms.

Repudiation can be proved by a combination of things, such as express statements made by one party, or the conduct of one party. It can also be inferred from a combination of events demonstrating an inability to perform the obligations under the contract.

Factors to be considered

Some rules have been established by the Courts to determine whether or not a breach of contract amounts to a repudiation. For instance, with regard to instalment contracts, Courts tend to consider two issues: first, the quantitative ratio the breach bears to the contract as a whole; and second, the degree of probability that such a violation will be repeated. In other words, the Courts will examine the magnitude of breaches on a case-by-case basis.

It is worth noting the High Court’s attitude towards the determination of repudiation of the contract. In the case of Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23, a lessee was entitled to terminate a lease because the lessor failed to procure a registered or registerable lease more than ten months after the lease was signed and ignored the lessee’s repeated inquiries about the progress. In this case, although the time for providing such a lease was not a condition of the contract, the court held that the lessor’s conduct towards the lessee was “not only dilatory but also cavalier and recalcitrant”.

A recent case in the Supreme Court of Queensland affirmed the rule set in the Laurinda case. In Lien & Anor v Clontarf Residential Pty Ltd & Anor [2018] QSC 94, one of the issues in dispute was whether the misconstruction of a joint venture agreement by one party constituted a repudiation of the agreement. The relevant question before the Court was whether the insistence on an erroneous construction amounted to a fixed intention not to be bound by the contract’s provisions in the future. The court eventually concluded that the inference of a repudiation should be drawn because of the cumulative effect of a series of the breaches and asserted intentions of the repudiating party. This included the fact that the repudiating party intended to apply funds contrary to the contract terms and without notifying the other party.

Based on these two cases, it can be seen that repudiation may be evidenced by a fundamental breach of a contract or by an accumulation of conduct. It is the totality of the facts of each case that must, therefore, be considered in order to establish whether or not repudiation has occurred and whether or not the aggrieved party is entitled to terminate the contract or seek other remedies.

Sometimes the aggrieved party may feel confused about whether he or she is entitled to terminate the contract based on the other party’s breach or anticipatory breach. As we have explained, the rules are not always black and white. An aggrieved party must be careful not to refuse to perform a contract based on an erroneous interpretation of the contract. If you are confused about whether a party has repudiated the contract or not, you should seek legal advice before moving to terminate the contract.

How can we help?

If you think that the other party to your contract has shown an unwillingness or inability to perform the contract, you should seek advice from an experienced lawyer who can provide you with professional advice and help you resolve the dispute before things get worse. This could involve, for instance, determining whether it is in your best interests to accept the repudiation and terminate the contract, or alternatively, to elect to continue performance of the contract. Different considerations will apply depending on how you choose to respond to the repudiatory act in question. In some instances, a repudiating party may be able to retract the repudiation. It is therefore imperative that you act promptly to protect your legal interests adequately.

At Adams Wilson Lawyers, we are here to assist you. To find out your rights and options, please get in contact with one of our lawyers today or call us on 1300 253 203.