ACLA Contract Law in the Cases: The Year in...

AUSTRALIA\KGILBERT\229236443.01 – ACLA (NSW, 2014) 1

ACLA

Contract Law in the Cases: The Year in Review

Introduction

This paper examines significant decisions of the Australian courts handed down over the last year

in the following areas of contract law:

1. Incorporation of terms by reference

2. Best and reasonable endeavours

3. The taxonomy of breach: termination, material breaches and remediability

4. Termination of contracts and good faith

5. Assessing damages for breach of contract: the fundamental rule revisited

6. Direct and consequential loss: ongoing issues

1. INCORPORATION OF TERMS BY REFERENCE OR BY A COURSE OF DEALING

1.1 Background and context

The identification of contractual terms may involve the application of two distinct sets of

principles, namely, those which:

(a) determine the conditions for the incorporation of terms by reference or by a course

of dealing;

(b) determine the conditions for the implication of terms.

Incorporation is concerned with establishing the express terms of a contract while the

process of implication is concerned with the filling of gaps in an otherwise complete

contract.

This section of the paper is concerned with incorporation.

The relevant principles have developed in response to a range of scenarios as follows:

(a) a party signs a contractual document without reading its provisions or without any

understanding as to the meaning and effect of those provisions;

(b) a party enters into an oral contract the terms of which are said to be contained in

an unsigned document;

(c) a party enters into an oral contract the terms of which are said to be established by

a consistent course of dealing between the parties;


(d) a party asserts that a contract has been entered into on the basis of a set of terms

and conditions put forward by that party while the other party asserts that the

contract was entered into on the basis of terms put forward by that party.

1.2 The status of a signed document

In Toll (FGCT) Pty Ltd v Alphapharm1 the High Court having considered earlier authority

noted the significance of a signature to a contractual document at paragraphs [45] and

[46]:

It should not be overlooked that to sign a document known and intended to affect legal relations is an act

which itself ordinarily conveys a representation to a reasonable reader of the document. The representation

is that the person who signs either has read and approved the contents of the document or is willing to

take the chance of being bound by those contents, as Latham CJ put it, whatever they might be. That

representation is even stronger where the signature appears below a perfectly legible written request to

read the document before signing it.

The statements in the above authorities accord with the well-known principle stated by Scrutton LJ in

L'Estrange v F Graucob Ltd (" L'Estrange v Graucob") that "[w]hen a document containing contractual

terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is

bound, and it is wholly immaterial whether he has read the document or not." Scrutton LJ, in turn, was

repeating the substance of what had been said by Mellish LJ in Parker v South Eastern Railway Co. The

principle was applied in Foreman v Great Western Railway Co. A consignor of cattle sent them for

transportation by a railway company. They were put in the charge of a drover, who could not read. The

drover signed a contract of carriage which contained an exclusion clause. The drover's employer was held

to be bound by the clause. The Exchequer Division said that "the plaintiff who sends the [illiterate] servant

to sign the document is in no better or worse position than if he had signed it himself without reading it."

In his lecture published as "Form and Substance in Legal Reasoning: The Case of Contract", Professor

Atiyah posed, with reference to L'Estrange v Graucob, the question why signatures are, within established

limits, regarded as conclusive. He answered:

A signature is, and is widely recognized even by the general public as being a formal device, and

its value would be greatly reduced if it could not be treated as a conclusive ground of contractual

liability at least in all ordinary circumstances.

Professor Atiyah added:

However, what is, I think, less clear is what is the underlying reason of substance in this kind of

situation. The usual explanation for holding a signature to be conclusively binding is that it must

be taken to show that the party signing has agreed to the contents of the document; but another

possible explanation is that the other party can be treated as having relied upon the signature. It

thus may be a mistake to ask, as H L A Hart once asked, whether the signature is merely

conclusive evidence of agreement, or whether it is itself a criterion of agreement.

1.3 Incorporation by reference

The basis upon which an unsigned document (eg a ticket or a brochure) may be imported

into an oral contract was considered by the High Court in Oceanic Sun Line Special

Shipping Co Inc v Fay2.

The plaintiff was injured while on a cruise in the Greek Islands. The cruise ship was

owned by the defendant shipping company. The carriage contract was made in Sydney

when the plaintiff paid the travel agent. Upon payment the plaintiff received a document

described as an "exchange order" which was a printed form. It had spaces for particulars

of the intending passenger, the ship, the cruise which had been booked, fare and port

taxes paid. The "exchange order" was subsequently exchanged for a passenger ticket in

Greece. The ticket contained terms and conditions of carriage including a submission to

the exclusive jurisdiction of the Greek courts.

1 (2004) 219 CLR 165

2 (1988) 165 CLR 197


The plaintiff's wife received a brochure in Sydney before the booking was made. On the

inside of the back cover of the brochure were the words:

The attention of passengers is drawn to the General Conditions of Transportation set out in the Passage

Contract.

Under the heading "Responsibility" was a statement that:

The transportation of passengers and baggage ... is governed by the terms and conditions printed on the

Passenger Ticket Contract which may be inspected at any Sun Line office

Passenger tickets were not available in Sydney. It was also unclear whether there was a

Sun Line office in Australia.

The High Court held that the contents of the passenger ticket issued in Greece did not

form part of the contract between the plaintiff and the defendant.

Brennan J having considered previous authority including the so-called "ticket cases" said

at 228:

If a passenger signs and thereby binds himself to the terms of a contract of carriage containing a clause

exempting the carrier from liability for loss arising out of the carriage, it is immaterial that the passenger

did not trouble to discover the contents of the contract. But where an exemption clause is contained in a

ticket or other document intended by the carrier to contain the terms of carriage, yet the other party is not

in fact aware when the contract is made that an exemption clause is intended to be a term of the contract,

the carrier cannot rely on that clause unless, at the time of the contract, the carrier had done all that was

reasonably necessary to bring the exemption clause to the passenger's notice: Hood v Anchor Line

(Henderson Brothers) Ltd [1918] AC 837 at 842, 844; McCutcheon v David MacBrayne Ltd [1964] 1 WLR

125 at 129 ; [1964] 1 All ER 430 at 433; Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 at 169-70

per Lord Denning MR, and per Megaw LJ at 172-3. In differing circumstances, different steps may be

needed to bring an exemption clause to a passenger's notice, especially if the clause is an unusual one. In

the present case, the only step which the defendant took to bring the exclusive foreign jurisdiction clause

to the plaintiff's notice before the fare was paid was the note in the brochure that the conditions of carriage

were printed in the (unavailable) passenger ticket contract. In Hollingworth v Southern Ferries Ltd ("The

Eagle") [1977] 2 Lloyd's Rep 70, it was held that a mere statement in a carrier's brochure that the carrier

contracted on its conditions of carriage was not enough to make those conditions terms of a contract of

carriage subsequently made with an intending passenger who had read the brochure.

And at 229 his Honour continued:

As the contract of carriage was made when the exchange order was issued and as the exclusive jurisdiction

clause contained in cl 13 of the ticket was not then known to Dr Fay and as insufficient was done to bring

such a clause to his attention, that clause was not incorporated into the contract of carriage and could not

subsequently be incorporated by insertion in the ticket issued pursuant to the original contract. This

conclusion differs from the conclusion at which their Honours arrived in the courts below. It will not, I hope,

be thought discourteous if I refrain from analysing the differing reasons advanced by their Honours and

merely point out that the two factors which lead me to reject the application to this case of the

"conventional analysis" of the ticket cases is that the ticket in this case was issued in performance of an

antecedent contract and that, if the ticket were a mere offer, a passenger's election to decline carriage

subject to an exemption clause could be exercised only after travelling to Greece and only if the fare were

forfeited.

1.4 Incorporation by reference in employment contracts

There has been considerable discussion in the employment case law as to whether

extraneous material, that is, material other than the contract document itself has been

incorporated into a particular employment contract. An example would be a company's

redundancy policy. This was the precise question which was considered by Ross J in

Whittaker v Unisys Australia Pty Limited3. Mr Whittaker was employed by the defendant

under the terms of a letter of offer which made no specific reference to the defendants

redundancy policy. The plaintiff commenced employment with the defendant on 12 March

3 [2010] VSC 9


2002. On 10 April 2008 Mr Whittaker purported by letter to accept the repudiation of his

contract of employment by the defendant.

The plaintiff's position is summarised by Ross J in paragraphs 117 to 121:

The plaintiff relies upon the document headed “Unisys Australia Redundancy/Retrenchment Policy” (“the

Redundancy Policy”) and contends that it formed part of his contract. In his evidence the plaintiff deals

with the policy at para 13 of his witness statement (Ex A1).:

"During the course of my employment and as early as 2002 I was aware of and had reason to be

familiar with the Company’s redundancy/retrenchment policy. As part of my management role I

had cause to effect the redundancies of several positions and on each occasion severance was

paid and calculated in accordance with the Company’s redundancy/retrenchment policy."

The plaintiff contends that the question is whether, objectively, a reasonable observer would have

understood that the Redundancy Policy was promissory. It is submitted that the policy was incorporated

into the plaintiff’s contract on the same basis as a similar document was in Ajax Cooke Pty Ltd v Nugent,

and the plaintiff also relies upon Vroon BV v Fosters’ Brewing Group Ltd, MLW Technology Pty Ltd v May

and Lighting by Design (Aust) Pty Ltd v Cannington Nominees Pty Ltd.

In relation to contextual matters, the plaintiff submits that the letter of offer requires reference to the

policy in order to be understood. It is said that the letter of offer and the Redundancy Policy need to be

read together for “redundancy” under the letter of offer, to have any meaning.

In the alternative, the plaintiff contends that the contract incorporates the Redundancy Policy by reference.

In this context the plaintiff relies on Riverwood International Australia Pty Ltd v McCormick, and Goldman

Sachs J B Were Services Pty Ltd v Nikolich.

I am not persuaded that the Redundancy Policy formed part of the plaintiff’s employment contract, but

even if it did, the plaintiff is not entitled to any severance payment pursuant to the policy because such

payments are only made in situations of "retrenchment".

His Honour's conclusions are set out in paragraphs 133 to 137:

I now turn to the plaintiff’s contention that his contract incorporates the Redundancy Policy by reference.

The plaintiff points to the following matters in support of his contention:

• the letter of offer says that it sets out the “principal conditions and benefits”;

• the term “redundancy” is used in the letter but not defined and is only defined in the Redundancy

Policy. It is said that this makes clear that the letter of offer and the policy are to be read

together; and

• the policy states that an employee will be paid in lieu of notice, either on the terms set out in the

policy or under their contract of employment, whichever is the greater, up to a maximum of 52

weeks. This is said to suggest a plain intention that the policy have contractual effect.

These matters do not persuade me that the parties intended to incorporate the Redundancy Policy into the

contract.

I note at the outset that the letter of offer, while not expressed to be exhaustive of the terms of the

contract, makes no reference to the Redundancy Policy. Yet there is express reference to other policies.

Under the heading “Employment Policies” there is express reference to the Unisys Diversity Plan and to the

following policies:

• Employee Agreement Business Practices Policy;

• Employee Agreement as to Patents, Inventions and Other Creative Property Rights Regarding

Competitive Activities; and

• Internet Acceptable Use Policy.

These policy documents were included in Mr Whittaker’s “Employee Pack” and he was asked to sign them.

By way of contrast, there is no express reference to the Redundancy Policy in the letter of offer and no

evidence to suggest that a copy of the policy was provided in Mr Whittaker’s “Employee Pack”.

1.5 Incorporation by a course of dealing

The principles governing the incorporation of terms by a course of dealing were recently

considered by the Western Australia Court of Appeal La Rosa v Nudrill Pty Ltd4.

4 [2013] WASCA 16


However, before considering that decision it is appropriate to turn to the earlier case law,

both English and Australian.

The starting point is the decision of the Full Court of the Supreme Court of Victoria in D J

Hill & Co Pty Ltd v Walter H Wright Pty Ltd5.

The defendant, in accordance with an oral contract made in September 1966, carried

certain machinery for the plaintiff. The machinery was damaged in transit. The evidence

was that upon delivery of the machinery, two documents, one relating to a crane used by

the defendant in the removal and the other relating to the machinery, were signed by an

employee of the plaintiff. The latter document contained an exclusion clause. Evidence

was adduced that between February and September 1966 the defendant had carried

goods for the plaintiff on about 10 occasions and on each such occasion a document

containing conditions similar to the conditions in the document under consideration had

been signed by the plaintiff's employee on delivery of the goods. The defendants

contended that by a course of dealing the exclusion clause was incorporated in the

carriage contract which provided the defendant with a complete defence.

Winneke CJ delivering the judgment of the full court said at 753:

On the occasion of the first dealing between the appellant and the respondent in the month of February

1966 it is clear that the contract was oral, that the contract was made before the form was presented, and

moreover, that performance of the contract by the appellant was complete by that time. On that occasion

the form, in our opinion, was plainly not a contractual document between the parties.

…

On each subsequent occasion the dealing between the appellant and the respondent followed precisely the

same course as on the first occasion. The contract was made orally, the appellant performed its part of the

contract by delivering the goods, and it was only at that stage that the form was presented to the

respondent for signature. In these circumstances, disclosed by the evidence, we can see no justification for

holding that any of the subsequent contracts was in any different position from the first, or that in any of

them the form became a contractual document. It is true that by the time second and subsequent

contracts were made the respondent had knowledge of the existence of the form, but it was unaware of the

content of the terms and conditions on the back of it and regarded it, being presented when it was, as

nothing more than an acknowledgment by it of delivery of the goods. These circumstances, in our view,

afford no basis for regarding the form as a contractual document in any of the subsequent contracts or for

importing the terms and conditions endorsed thereon as terms of the subsequent contract. It is, we think,

impossible to conclude on the facts evidenced in this case that at any point of time in the earlier dealings

between the parties the form became a contractual document or was mutually treated by them as such.

There was, we think, no evidence of any course of prior dealing in which the parties mutually regarded the

terms and conditions endorsed on the back of the form as part of the contract between them.

Hill v Wright was followed by the Full Court of the Supreme Court of Western Australia in

Rinaldi & Patroni Pty Limited v Precision Mouldings Pty Ltd6. The facts were on all fours

with Hill.

An oral contract was made in November 1980 for the transportation by the defendant of

the plaintiff's 42 foot fishing boat from Perth to Melbourne. On the outskirts of Melbourne

the prime mover and trailer carrying the boat went under a bridge in the incorrect lane

where the bridge had a reduced clearance. The boat struck the underside of the bridge

and was badly damaged.

Evidence was adduced that between April 1980 and November 1980 the defendant had

carried goods for the plaintiff on 10 or perhaps 9 occasions. The practice on these

occasions was that the defendant would supply the driver with a book of "Cart Notes".

The notes were produced in triplicate. One of the notes was attached to an invoice after

completion of the carriage and sent to the plaintiff. On the face of each Cart Note were

the words "All goods are accepted subject to conditions on the reverse".

5 [1971] VR 749

6 [1986] WAR 131


One of the conditions exempted the defendant for liability for negligence.

The defendant sought to rely on the exemption clause contending that it was incorporated

by a course of dealing. Burt CJ rejected the defendant's contention noting at 135:

In argument it was conceded that there was no basis upon which the term could be implied in the contract

of carriage first entered into which on the facts would appear to be a contract entered into on 30 April 1980

— cart note 13385. The submission is that at some unspecified time thereafter, the oral agreements should

be held to have been made upon the terms of the "conditions" and it should be so held by reason of "a

course of dealing" between the parties. The proposition expressed in general terms is that if it should

appear that the parties had over a period of time been conducting business upon terms excluding liability

then it should be held that on the occasion in question they contracted upon that basis. The difficulty in

making good that proposition upon the facts of this case is evident enough. Once it is conceded that the

use of the cart notes in the way in which they were used could not sustain a finding that the contract first

entered into contained as a term cl 5 of the conditions, how does one then establish the relevant course of

business which leads to the conclusion that without the respondent being fixed with actual knowledge of

that term it is to be implied in subsequent contracts.

And in reference to Hill's case his Honour said at 138:

What is there being said is that in every case, as in the instant case, the document containing the

exemption clause was presented for signature after the contract had been performed and that it was not a

contractual document in that the respondent reasonably regarded it, being presented as it was, as being

nothing more than an acknowledgment by it of the delivery of the goods. In that respect, I think that that

case is on all fours with the present case.

The central point in both of these cases appears to be that the documents sought to be

relied upon had never been treated by the parties in their prior dealings as contractual

documents. Importantly, in each case the documents were signed after the oral contract

was made.

In La Rosa v Nudrill Pty Ltd the Western Australia Court of Appeal revisited the case law.

Although the Court did not question the correctness of the decisions in Hill or Rinaldi the

Court formulated the test for incorporation in a somewhat different way.

McLure P cited with evident approval the approach of Lord Pearce in Henry Kendall & Sons

v William Lillico & Sons Ltd7. His Lordship said at 113:

In the present case. SAPPA had regularly received more than a hundred similar contract notes from

Grimsdale in the course of dealing over three years. They knew of the existence of the conditions on the

back of the contract note. They never raised any query or objection (Havers J. [1964] 2 Lloyd's Rep. 227,

267). The court's task is to decide what each party to an alleged contract would reasonably conclude from

the utterances, writings or conduct of the other. The question, therefore, is not what SAPPA themselves

thought or knew about the matter but what they should be taken as representing to Grimsdale about it or

leading Grimsdale to believe. The only reasonable inference from the regular course of dealing over so long

a period is that SAPPA were evincing an acceptance of, and a readiness to be bound by, the printed

conditions of whose existence they were well aware although they had not troubled to read them. Thus the

general conditions became part of the oral contract.

McLure P then noted at paragraph 43:

A review of all the cases reveals that there is no single test for the incorporation of a term into a contract

based on prior dealings. However, it is clear that we are not here talking about implied terms in fact (which

must satisfy the test in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149

CLR 337 at 347) or a term implied as a matter of trade custom or usage. The question is whether an

express term is incorporated into a contract as a result of an inference arising from the prior conduct of the

parties as a whole. Moreover, it is not essential in a prior dealing case that the term in issue must have

been incorporated in a previous contract between the parties, whether by a contractual document or

otherwise. The trial judge erred in that regard.

7 [1969] 2 AC 31


And her Honour concluded at paragraphs 45 to 47:

In the ticket cases, notice of the terms is given on or around the time of entry into the relevant contract

and constructive knowledge of the content of the term(s) is sufficient: MacRobertson Miller Airline Services

v Cmr of State Taxation (WA) (1975) 133 CLR 125. Moreover, in the ticket cases the expression

"contractual document" is used to refer to the sort of document in which a reasonable person would expect

to find contractual terms. However, in the prior dealing cases it has a wider meaning to include documents

which the parties have by their conduct accepted or treated as a contractual document. Kendall falls within

this category.

Anderson J in Brambles adopted and applied Lord Pearce's test in Kendall for the incorporation of terms by

prior dealings. That test seems more appropriately adapted to the circumstances in which prior dealings

are relied on. On that test, actual knowledge of the content of the relevant term(s) may be sufficient to

justify an inference of an acceptance of, and readiness to be bound by, the conditions in the document, but

is not essential.

However, regardless of which test is applied, the facts in this case do not support an inference that the

exclusion clause was incorporated in the cartage contract as a result of the prior dealings between the

parties. I will assume for present purposes that the dealings between all the various entities can be taken

into account. The invoices were not a "contractual document" within either the narrow or wider meaning of

the expression. In each case the invoice was provided to the respondent for services already supplied

pursuant to a prior contract. The purpose of the invoices was to secure payment for those services. The

receipt of the invoices by the respondent in all the circumstances is not sufficient to justify an inference of

an acceptance by the respondent of, and readiness to be bound by, the terms on the reverse of the

invoices. Nor is it sufficient notice to the respondent of the terms on which the appellant would do business

in the future. I would dismiss this ground of appeal.

Buss JA noted at paragraph 68:

It will be a question of fact and degree whether, in a particular case, the parties, by their conduct, have

incorporated a term into their contract by a previous course of dealings. Each case turns on its own facts

and circumstances. Factors of relevance in determining whether the alleged term was incorporated include

the number of prior dealings, how recent they were, and the consistency in the prior dealings and the

dealing in question (for example, the similarity between the subject matter of the dealings and the manner

in which the dealings were entered into or concluded). This is not, of course, an exhaustive statement of

relevant factors.

And his Honour Buss JA continued at paragraph 71:

It is not an essential pre-condition to the incorporation of a term by a previous course of dealings that:

(a) any document containing the relevant term have been sent or given to the party sought to be

bound at or prior to the formation of each of the contracts (or one or more of them) constituting

the previous course of dealings; or

(b) the relevant term have been incorporated in at least one of the contracts constituting the previous

course of dealings.

With respect to the need to find that the relevant terms formed part of an earlier contract,

his Honour said at paragraph 73:

In the present case, the trial judge was of the view that the Full Court of the Supreme Court of Victoria

(Winneke CJ, Starke & Anderson JJ) in DJ Hill & Co Pty Ltd v Walter H Wright Pty Ltd [1971] VR 749, and

Burt CJ in Rinaldi & Patroni, held that a term could not be incorporated into a contract by a previous course

of dealings unless the term was contained in an earlier contract or contracts between the parties [120],

[169]. This view was, with respect, erroneous.

The significance of La Rosa is the finding by the Western Australia Court of Appeal that

incorporation of a term by a course of dealing may be established without evidence that

the term ever formed part of an earlier contract between the parties. It is not clear that

this finding correctly reflects earlier Australian case law.

1.6 Battle of the forms

Assume that party A offers to supply goods to party B. The offer is made on party A's

published terms and conditions. Party B then purports to accept the offer but the

acceptance is made subject to party B's own terms and conditions. Party A then supplies

the goods to party B. The question as to which set of terms govern has been

conventionally resolved by reliance on the traditional offer and acceptance rules relating


to contract formation. Thus B's conditional acceptance is treated as a counter offer on B's

terms which A accepts by conduct. B's terms thus prevail.

However, the process of establishing the governing terms can be complex often involving

a detailed examination of the correspondence which passed between the parties. A

valuable example of this process is to be found in the decision of the Victorian Court of

Appeal in Maxitherm Boilers Pty Ltd the Pacific Dunlop Ltd8.

In short compass the sequence of events in this case was as follows:

The plaintiff Pacific Dunlop received a quotation for a new autoclave on 25 November

1988. It was expressed to be "subject to conditions of tender attached". No such

conditions were attached.

On 22 March the defendant's representative sent to the plaintiff's representative what was

referred to at the trial as the "confirming fax". The confirming fax contained the words:

Our offer is based on our standard terms and conditions as per previous quotation V541-11-88 dated

25/11/88.

Also, on 22 March 1989 Pacific Dunlop forwarded a purchase order number to Maxitherm.

On 23 March 1989 the representatives of the parties signed a specification which

contained certain negotiated changes to an earlier specification and provided for payment

of a 25% deposit with the order.

On 29 March 1989 Pacific Dunlop prepared a purchase order which on its reverse side

contained a set of the plaintiff's standard purchasing terms.

On 31 March 1989 the defendants submitted a document to the plaintiffs containing

nothing but the Maxitherm's standard terms and conditions. That document was

accompanied by a "with compliments" slip.

On 22 March 1990 the Autoclave exploded in the course of a production trial.

Maxitherm's terms contained a limitation of liability clause.

The trial judge held that Maxitherm's terms and conditions were not part of the contract.

The trial judge was reversed on appeal. In his reasons for judgement Buchanan JA made

the following observations:

In my opinion Pacific Dunlop and Maxitherm did not reach a concluded agreement on 22 March 1989. On

that day the parties were in the course of working out the terms upon which the autoclave would be

supplied, and neither regarded the process as complete. In determining whether and when a contract is

made in the course of an ongoing series of communications, it is necessary to consider the communications

as a whole. As Earl Cairns LC said in Hussey v Horne-Payne (1879) 4 App Cas 311, at p316:

"... It is one of the first principles applicable to a case of the kind that where you have to find your

contract, or your note or memorandum of the terms of the contract in letters, you must take into

consideration the whole of the correspondence which has passed. You must not at one particular time draw

a line and say, 'We will look at the letters up to this point and find in them a contract or not, but we will

look at nothing beyond.' In order fairly to estimate what was arranged and agreed, if anything was agreed

between the parties, you must look at the whole of that which took place and passed between them."

…

The original quotation incorporated Maxitherm's standard terms. A reasonable reader of the quotation

would have concluded that Maxitherm intended to contract in accordance with certain conditions, and that

those conditions, which were not contained in the body of the quotation, could be identified. I do not think

that the failure to attach the terms would be reasonably taken to countermand the words "subject to

conditions of tender". However, even if the absence of attached terms might have been taken to mean that

8 [1998] No 4 VR 559


Maxitherm did not intend to contract according to any "conditions of tender", that impression could not

have survived the confirming fax, for that document stated in type, not print, that the offer was "... based

on our standard terms and conditions as per previous quotation ...". Accordingly, in my opinion

Maxitherm's standard terms were made terms of the contract because they formed part of the offer which

Pacific Dunlop accepted.

Once the conclusion has been reached that an express offer containing a party's standard terms has been

accepted, there is no occasion to then consider whether sufficient steps have been taken to bring the

standard terms to the attention of the other party. The ultimate question is whether the party relying upon

the standard terms can properly assume that the other party has consented to those terms.

I do not intend to convey that express acceptance of an offer which incorporates other terms by reference

necessarily connotes acceptance of all those terms. In a case where the person expressing consent has not

read the terms, his consent may be taken to be a consent to those terms which are appropriate to a

contract of the type in question. If the terms include provisions which no one would anticipate in a contract

of the type in question, it would not be appropriate to assume consent to those provisions. The basic

enquiry remains whether it is reasonable to assume that a contracting party has assented to the terms put

forward by the other party.

…

As I have said, in my opinion the inclusion of an unusual term, at least in an unsigned document, may

require its proponent to take special steps to bring it to the attention of the other party, for otherwise it

may not be reasonable to assume consent to the term. Whether special steps are required, and what those

steps must be, will depend upon the circumstances of each case. Further, I think that a term may be

unusual because it is more than ordinarily onerous. However, I do not consider that the mere fact that a

provision is onerous entitles a court applying the common law to reject it as a term unless special steps

have been taken to draw attention to it. The relevant question is whether a contracting party can be

reasonably taken to have assented to a particular term, not whether a contracting party should be subject

to an unreasonable term.

In the present case I doubt that any of Maxitherm's standard terms was so exceptional that it was

unreasonable to suppose that Pacific Dunlop was not assenting to it by expressly accepting the offer that

incorporated the terms. However, whether or not cl15 and cl16, or parts of them, required special steps to

be taken to bring them to the attention of Pacific Dunlop in order to incorporate them as terms of the

contract, the point only emerged upon appeal. It was not pleaded that cl15 and cl16 or parts of them were

not terms of the contract because they were unusual or onerous. In my view it is now too late to raise the

point, for evidence may have been led as to whether the terms were unusual in contracts of this type. A

point may not be raised for the first time on appeal when it could possibly have been met by calling

evidence at trial. Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, at p438; Water Board v Moustakas

(1988)180 CLR 491, at p497-p498.

…

2. BEST OR REASONABLE ENDEAVOURS

2.1 Australian law

Contractual obligations are frequently cast as best or reasonable endeavours. Such

obligations conventionally contemplate the taking of steps by a party to secure a

particular result or outcome. Clearly, however, the content of the obligation does not

mandate that the objective or result be actually achieved.

The fundamental difficulty in introducing these classes of obligations lies in the inherent

uncertainty as to what in a particular case is involved in the performance of the obligation.

The cases demonstrate the use of a wide variety of terms including:

best endeavours

reasonable endeavours

all reasonable endeavours

best reasonable endeavours

best efforts

reasonable efforts


The question is whether these various formulations establish a spectrum of obligations

with different levels of stringency or whether, at the end of the day, they all mean

essentially the same thing.

I turn to the observations of the courts.

In the Australian cases there has been discussion surrounding the distinction (if any)

between best and reasonable endeavours. In Cypjayne Pty Limited v Babcock & Brown

International Pty Ltd9, Bathurst CJ noted at 67:

The expression "best endeavours" and "reasonable endeavours" generally speaking have been considered

by the courts as imposing similar obligations.

In this context his Honour referred to two decisions of the High Court in which the

dichotomy has been considered.

In Transfield Proprietary Limited v Arlo International Limited10 Mason J noted at 101:

A "best endeavours" clause thus prescribes a standard of endeavour which is measured by what is

reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of

the licensee viewed in the light of the particular contract.

Subsequently in Hospital Products Limited v United States Surgical Corporation11 Mason J

noted at 91:

A best efforts clause is not an uncommon feature of a distributorship agreement. However, it is unusual to

include in the clause a provision that the promisor will use his best efforts for the common benefit for both

parties. It is a clause ordinarily inserted in a contract between parties at arms' length designed to give

protection to one party by imposing an obligation on the other to promote the sales of the first parties'

products. the extent of the obligation thereby imposed is governed by what is reasonable in the

circumstances.

It is noteworthy that Mason J referred to "best efforts" and "best endeavours" as

interchangeable concepts.

In Ozecom v Hudson Investment Group12 McDougall J set out what he considered to be

the relevant principles informing the meaning and content of a best endeavours

obligation. They are as follows:

(1) An obligation to use best endeavours to achieve an outcome is neither an

unqualified obligation to achieve that outcome nor a warranty that it will be

achieved.

(2) The content of the obligation to use "best endeavours" must be measured having

regard to the contract as a whole and to the factual context in which the best

endeavours fall to be exerted.

(3) In ascertaining whether best endeavours have been exerted, the Court should have

regard to the qualifications, abilities and responsibilities of the person obliged to

exert them.

(4) Stipulation of an obligation to use "best endeavours" necessarily carries with it an

understanding that the outcome, towards the achievement of which the best

endeavours are to be directed, may not in fact be achieved.

9 [2011] NSWCA 173

10 (1980) 144 CLR 83

11 (1984) 156 CLR 41

12 [2007] NSWSC 719


2.2 English law

In England the case law has taken a somewhat different direction. Although in Australia

the content of a "best endeavours" and a "reasonable endeavours" obligation are

relevantly indistinguishable the courts in England appear to have drawn a bright line

between the two concepts.

In Rhodia International Holdings Limited v Huntsman International LLC13 the Court noted

in relation to a submission that best and reasonable endeavours mean the same thing:

As a matter of language and business common sense, untrammelled by authority, one would surely

conclude that they did not. This is because there may be a number of reasonable courses which could be

taken in a given situation to achieve a particular aim. An obligation to use reasonable endeavours to

achieve the aim probably only requires a party to take one reasonable course, not all of them, whereas an

obligation to use best endeavours probably requires a party to take all the reasonable courses he can.

One issue which has been considered in the English cases and is worthy of serious

consideration in Australian law is the extent to which a best endeavours obligation

requires a party to sacrifice a commercial or financial interest in order to achieve the aim

or outcome contemplated. This issue was fairly recently considered by the English Court

of Appeal in Jet2.com Limited v Blackpool Airport Limited14. Moore-Bick LJ observed at 32

in the context of the facts of that case:

It was the central plank of BAL's argument before the judge that the obligation to use best endeavours did

not require it to act contrary to its own commercial interests, which, in the context of this case, amounts to

saying that BAL was not obliged to accept aircraft movements outside normal hours if that would cause it

financial loss. Some support for that conclusion can be found in the cases … but I think the judge was right

in saying that whether, and if so to what extent, a person who has undertaken to use his best endeavours

can have regard to his own financial interests will depend very much on the nature and terms of the

contract in question.

2.3 Latest case law

In Stepping Stones Child Care Centre (ACT) Pty Ltd v Early Learning Services Ltd15,

Refshauge J in the context of an obligation on parties to a sale contract to "use their

reasonable endeavours to satisfy" certain conditions precedent examined the relationship

between "best endeavours" and "reasonable endeavours". Relevantly, his Honour said:

[274] The first issue is whether ELS had used its reasonable endeavours to have the Conditions Precedent

met. I note that, unlike some such clauses, the terms used in the Symonston Contract and the Bonython

Contract were "reasonable endeavours" not "best endeavours" nor "all reasonable endeavours".

[275] In Elizabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003) at

179-81; [7.15], the author points to some authority suggesting that "reasonable endeavours" and "best

endeavours" are relevantly equivalent. I respectfully disagree. The authority cited, Overseas Buyers Ltd v

Granadex SA [1980] 2 Lloyds Rep 608 at 613, does not support this. There Mustill J said that he could see

no difference between "best endeavours" and "all that could reasonably be expected". Neither of these is

the term here; it is "reasonable endeavours" simpliciter.

[278] The UK seems to accept a difference between such terms, at least more recently. Thus, Julian Flaux

QC (sitting as a Deputy High Court Judge) said, in Rhodia International Holdings Ltd v Huntsman

International LLC [2007] 1 CLC 59, that there was such a distinction, relying on two earlier decisions which

had made the distinction, namely the decision of Rougier J in UBH (Mechanical Services) Ltd v Standard

Life Assurance Co (The Times, 13 November 1986, Queen's Bench Division, Rougier J), and of Kim Lewison

QC sitting as a Deputy High Court Judge, in Jolley v Carmel Ltd [2000] 2 EGLR 153 at 159, where his

Honour said:

Where a contract is conditional upon the grant of some permission, the courts often imply terms

about obtaining it. There is a spectrum of possible implications. The implication might be one to

use best endeavours to obtain it (see Fischer v Toumazos [1991] 2 EGLR 204), to use all

reasonable efforts to obtain it (see Hargreaves Transport v Lynch [1969] 1 WLR 215) or to use

13 [2007] EWHC 292

14 [2012] EWCA Civ 417

15 [2013] ACTSC 173


reasonable efforts to do so. The term alleged in this case [to use reasonable efforts] is at the

lowest end of the spectrum.

[281] This approach is perhaps reinforced by the statement seen from time to time, that a party obliged to

use his, her or its "best endeavours" must not use "second best endeavours" (Valentine Films Pty Ltd v

Trimex Pty Ltd [1996] FCA 124 at 21).

[282] This seems to me to accord also with logic, common sense and the plain meaning of the word chosen

by the parties.

[283] Accordingly, it seems to me that an obligation to use "reasonable endeavours" is not as onerous as

one to use "best endeavours" or "all reasonable endeavours" and I shall so proceed.

[284] An obligation to use reasonable endeavours, however, is to be assessed by the court using an

objective test: Paltara Pty Ltd v Dempster (1991) 6 WAR 85 at 89; Parland Pty Ltd v Mariposa Pty Ltd

(1995) 5 Tas R 121 at 133. It requires the parties to act to the extent that it is reasonable to do so, but not

being required to go beyond the bounds of reason: Rafferty v Madgwicks (2012) 203 FCR 1 at 42; [155];

Artifakts Design Group Ltd v N P Rigg Ltd [1993] 1 NZLR 196 at 228-9 citing Hospital Products Ltd v United

States Surgical Corporation (1984) 156 CLR 41 at 64-5 (Gibbs CJ).

[285] A party obliged to use reasonable endeavours (or even best endeavours) is not obliged to disregard

his, her or its own interests: Hospital Products Ltd v United States Surgical Corporation at 143-4. As Mason

J observed in Transfield Pty Ltd v Arlo International Ltd at 101:

A "best endeavours" clause thus prescribes a standard of endeavour which is measured by what is

reasonable in the circumstances, having regard to the nature, capacity, qualifications and

responsibilities of the licensee viewed in the light of the particular contract.

[289] Further, a party obliged to use reasonable endeavours must, in addition to acting honestly, not act

capriciously or irrationally: Jetcity Pty Ltd v Yenald Nominees Pty Ltd (Unreported, Supreme Court of WA,

Owen J, 9 April 1999) at 12-13. I would add that it would appear that such a party should also not act for

an improper purpose.

More importantly, the High Court recently examined the content of a "reasonable

endeavours" obligation in Electricity Generation Corporation T/A Verve Energy v Woodside

Energy16.

I turn to the facts.

Verve Energy, a statutory corporation was at all material times a generator and supplier

of electricity to the South West Integrated Scheme in Western Australia.

On 4 March 2004 Verve entered into a long term Gas Sale Agreement (GSA) with the

respondents as sellers. At that time the sellers and Apache Energy were the principal

suppliers of gas into the Western Australia market.

By clause 3.2 of the GSA the sellers were required to make available on any day a

prescribed volume of gas described as the Maximum Daily Quantity or MDQ. There was

also provision in the GSA for the provision of a Supplemental Maximum Daily Quantity or

SMDQ.

Relevantly, the clauses in the GSA provided as follows:

3 Supplemental Maximum Daily Quantity

(a) If in accordance with Clause 9 (Nominations) the Buyer's nomination for a Day exceeds the MDQ,

the Sellers must use reasonable endeavours to make available for delivery up to an additional

[suppressed] TJ/Day of Gas in excess of MDQ (Supplemental Maximum Daily Quantity or

SMDQ).

(b) In determining whether they are able to supply SMDQ on a Day, the Sellers may take into account

all relevant commercial, economic and operational matters and without limiting those matters, it is

acknowledged and agreed by the Buyer that nothing in paragraph (a) requires the Sellers to make

available for delivery any quantity by which a nomination for a Day exceeds MDQ where any of the

following circumstances exist in relation to that quantity:

(i) the Sellers form the reasonable view that there is insufficient capacity available

throughout the Sellers' Facilities (having regard to all existing and likely commitments of

16 [2014] HCA 7 (5 March 2014)


each Seller and each Seller's obligations regarding maintenance, replacement, safety and

integrity of the Sellers' Facilities) to make that quantity available for delivery;

(ii) The Sellers form the reasonable view that there has been insufficient notice of the

requirement for that quantity to undertake all necessary procedures to ensure that

capacity is available throughout the Sellers' Facilities to make that quantity available for

delivery; or

(iii) where the Sellers have any obligation to make available for delivery quantities of Natural

Gas to other customers, which obligations may conflict with the scheduling of delivery of

that quantity to the Buyer.

(c) The Sellers have no obligation to supply and deliver Gas on a Day in excess of their obligations set

out in Clauses 3.2 and 3.3 in respect of MDQ and SMDQ respectively.

22.7 Limitation of liability - Seller

(a) The Sellers are only liable for direct and foreseeable loss incurred by the Buyer as a result of a

Seller default excluding loss of profits. In no event will the Sellers have any liability to the Buyer

for loss of profit or anticipated profit, business interruption, loss of opportunity, indirect or

consequential loss or loss of use suffered by the Buyer or any other person (whether in contract,

tort or otherwise).

(b) …

(c) The liability of each Seller in respect of a failure to use reasonable endeavours to meet a Buyer

nomination above MDQ up to SMDQ is limited to its Proportionate Share of the amount by which

the actual costs incurred by the Buyer in obtaining alternative fuel exceed the amount equivalent

to the Gas Price, up to a maximum liability of that Seller's share of the Tranche 3 Price per GJ.

On 3 June 2008 there was a fire at Apache's Varanus Island Facility which resulted in the

cessation of gas production at that facility. The shutdown reduced gas supply to the

Western Australia market by 30 to 35%.

On 4 June 2008 the sellers refused to supply SMDQ gas to Verve except under new

contractual arrangements.

Thereafter and under protest Verve entered into a fully interruptible short term gas supply

agreement for the period 4 to 29 June 2008. Subsequently and again under protest Verve

entered into another short term agreement for the period 30 June to 29 September 2008.

In both cases the price reserved for SMDQ gas was significantly above the price in the

GSA.

It was established in evidence that the sellers had gas available for supply at all relevant

times. The sellers were simply not prepared to supply Verve Energy with SMDQ gas at

the GSA price.

Verve commenced proceedings for damages for breach of contract and also for damages

in tort for economic duress. Verve asserted:

(a) that the respondent sellers deliberately and wilfully breached their reasonable

endeavours obligation in clause 3.3(a) of the GSA; and

(b) that the short term gas supply agreements were entered into as a result of

economic duress which provided the basis of a restitutionary cause of action.

The fundamental question was whether the sellers were in breach of their "reasonable

endeavours" obligation under clause 3.3(a) in refusing to supply SMDQ gas except on the

basis of the short form agreements.

Le Miere J, the primary judge, held that the sellers were not in breach. However, his

Honour was reversed by the Western Australia Court of Appeal.


McLure P having considered the construction submissions advanced by the sellers said at

paragraphs 16, 17 and 18:

… The Sellers conceded that, if Verve's construction was upheld, they had gas available for the supply of

SMDQ to Verve in the relevant period (4 June to 29 September 2008). The inference from their

submissions was that the Sellers chose not to make SMDQ gas available to Verve in the relevant period

because of the significant market price distortion caused by the Apache incident. Demand exceeded supply

and the market price of gas skyrocketed.

These facts drove the Sellers to advance a construction of cl 3.3 which in my view is not open. The

gravamen of their construction involves three steps. First, the phrase in cl 3.3(b) that "[i]n determining

whether they are able to supply SMDQ on a Day, the Sellers may take into account all relevant commercial,

economic and operational matters" (emphasis added) is separate and distinct from, and forms no part of,

the Sellers' obligation in cl 3.3(a) to use reasonable endeavours to make SMDQ available for delivery.

Secondly, the Sellers' determination of their ability to supply is subjective and can be made at any time up

to the start of the relevant gas Day. Thirdly, in making their subjective determination the word "able" in

context permits the Sellers to decide whether or not to supply solely by reference to its best economic or

commercial interests. On this construction, the Sellers can, for example, refuse to make SMDQ available

solely because the gas price under the GSA falls below the market price and the reasonable endeavours

obligation is confined to operational matters.

The Sellers' construction is inconsistent with the natural and ordinary meaning of the text of cl 3.3. The

natural and ordinary meaning of that clause is that the Sellers must use reasonable endeavours to supply

to Verve SMDQ the subject of a nomination under cl 9, from the time of receipt thereof, the scope and

content of which (objective) obligation is informed and delineated by the more specific matters and

examples in cl 3.3(b).

The High Court reinstated the decision of the primary judge.

The plurality judgment set out a number of important observations in respect of the

content of a "reasonable endeavours" obligation. The important passages are at

paragraphs 41 to 43:

Three general observations can be made about obligations to use reasonable endeavours to achieve a

contractual object. First, an obligation expressed thus is not an absolute or unconditional obligation.

Second, the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is

reasonable in the circumstances, which can include circumstances that may affect an obligee's business.

This was explained by Mason J in Hospital Products Ltd v United States Surgical Corporation, which

concerned a sole distributor's obligation to use "best efforts" to promote the sale of a manufacturer's

products. His Honour said:

The qualification [of reasonableness] itself is aimed at situations in which there would be a conflict

between the obligation to use best efforts and the independent business interests of the

distributor and has the object of resolving those conflicts by the standard of reasonableness ... It

therefore involves a recognition that the interests of [the manufacturer] could not be paramount

in every case and that in some cases the interests of the distributor would prevail.

As Sellers J observed of a corporate obligee in Terrell v Mabie Todd & Co Ltd, an obligation to use

reasonable endeavours would not oblige the achievement of a contractual object "to the certain ruin of the

Company or to the utter disregard of the interests of the shareholders". An obligee's freedom to act in its

own business interests, in matters to which the agreement relates, is not necessarily foreclosed, or to be

sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object.

Third, some contracts containing an obligation to use or make reasonable endeavours to achieve a

contractual object contain their own internal standard of what is reasonable, by some express reference

relevant to the business interests of an obligee.

In finding that the sellers were not in breach, the plurality judgment concluded at

paragraphs 47 to 49:

Taken as a whole, cl 3.3 provides for a balancing of interests if the business interests of the parties in

respect of the supply of SMDQ do not entirely coincide, or if they conflict. What is a "reasonable" standard

of endeavours obliged by cl 3.3(a) is conditioned both by the Sellers' responsibilities to Verve in respect of

SMDQ and by the Sellers' express entitlement to take into account "relevant commercial, economic and

operational matters" when determining whether they are "able" to supply SMDQ. Compendiously, the

expression "commercial, economic and operational matters" refers to matters affecting the Sellers'

business interests. The relevant ability to supply is thus qualified, in part, by reference to the constraints

imposed by commercial and economic considerations. The non-exhaustive examples of circumstances in

which the Sellers will not breach the obligation to use reasonable endeavours to supply SMDQ, found in

cl 3.3(b)(i), (ii) and (iii), are not confined to "capacity" (or capacity constraints). The effect of cl 3.3(b) is

that the Sellers are not obliged to forgo or sacrifice their business interests when using reasonable

endeavours to make SMDQ available for delivery. Verve's submission that "able" should be construed

narrowly, so as to refer only to the Sellers' capacity to supply, fails to give full effect to the entire text of cl


3.3(b) and must be rejected. The word "able" in cl 3.3(b) relates to the Sellers' ability, having regard to

their capacity and their business interests, to supply SMDQ. This is the interpretation which should be

given to cl 3.3.

The construction which has been accepted is consistent with surrounding circumstances known to both

parties at the time of entering the GSA, which include the circumstances that the Sellers sell and supply

gas to customers and buyers in the market other than Verve, some essential services depend on gas

supply, and the prevailing market price of gas at any particular time may be greater (or less) than the

tranche 3 price in the GSA.

Understood as explained above, cl 3.3 did not oblige the Sellers to supply SMDQ to Verve notwithstanding

conflict with their own business interests. Applied to the facts, cl 3.3 did not oblige the Sellers to supply

SMDQ to Verve when the Apache incident occasioned business conditions leading to conflict between the

Sellers' business interests and Verve's interest in obtaining nominated SMDQ at the tranche 3 price.

In his dissenting judgment Gageler J said at paragraphs 60 to 62:

The Sellers' construction is one which renders the obligation to use reasonable endeavours imposed on the

Sellers by cl 3.3(a) of the GSA elusive, if not illusory, and which renders the price fixed by cl 6.1(d) of the

GSA a price which is meaningful only if and when the Sellers consider it to their commercial advantage to

accept it. The construction would, in commercial terms, eliminate the distinction carefully drawn in cl 3.3

between delivery of nominated gas in excess of MDQ up to SMDQ, in respect of which the Sellers are

subjected to an obligation by cl 3.3(a), and the delivery of gas in excess of MDQ and SMDQ, in respect of

which cl 3.3(c) makes clear that the Sellers are subjected to no obligation.

Had reasonable commercial parties in the position of the Sellers and the Buyer meant the price fixed by

cl 6.1(d) of the GSA to operate as a floor price at which the Sellers might choose to supply gas to the

Buyer up to SMDQ only if and when the Sellers considered selling at that price to be to their commercial

advantage, then it is difficult to see why, as reasonable commercial parties, they would have structured

cl 3.3 as they did. The Buyer does not overstate the position in submitting that, if the Sellers' construction

were correct, there is no apparent reason to have included cl 3.3 at all.

The better construction of cl 3.3(b) is that advanced by the Buyer and unanimously accepted in the Court

of Appeal of the Supreme Court of Western Australia. In allowing the Sellers to "take into account all

relevant commercial, economic and operational matters" in "determining whether they are able to supply

SMDQ on a [d]ay", cl 3.3(b) is directed to the ability or capacity of the Sellers to make gas nominated by

the Buyer available for delivery in the performance of their obligation under cl 3.3(a) to use reasonable

endeavours to make gas nominated by the Buyer available for delivery up to SMDQ. The reference in

cl 3.3(b) to the Sellers being "able" to supply SMDQ on a day is to objective ability or capacity in the same

way as the reference in cl 3.3(a) to "reasonable endeavours" is to objectively reasonable endeavours.

3. THE TAXONOMY OF BREACH: TERMINATION, MATERIAL BREACHES AND

REMEDIABILITY

3.1 Classes of terminating breach at common law

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd17 the High Court identified

the classes of breach of contract which, under the rules of the common law, attract an

immediate right terminate.

These classes are:

(a) a breach of an essential term otherwise referred to as a promissory condition;

(b) a serious breach of an intermediate term being an inessential terms in respect of

which it is possible to predicate major or minor breaches; and

(c) repudiation or renunciation.

In Progressive Mailing House Pty Ltd v Tabali Pty Ltd18, Mason J referred to these classes

of breach collectively as "fundamental breach of contract".

17 (2007) 233 CLR 115

18 (1985) 157 CLR 17


Subsequently the Court in Gumland Property Holdings Pty Limited v Duffy Bros Fruit

Market (Campbelltown) Pty Limited19 noted in reference to Mason J's observations:

His Honour there said that loss of bargain damages could be recovered for repudiation or "fundamental

breach". He defined "fundamental breach" to mean "breach of a condition or breach of another term or

terms which is so serious that it goes to the root of the contract". The second sense of the term

"fundamental breach" as used by Mason J corresponds with what this Court recently described as "a

sufficiently serious breach of a non-essential term".

Repudiation although giving rise to a termination right is not classed as a fundamental

breach as it possesses limited contractual significance until acceptance by the innocent

party. Essentially, repudiation is concerned with the objectively determined intention of a

contracting party with respect to future performance while fundamental breach is

concerned with non or defective performance of an obligation. Thus, in Koompahtoo the

plurality said at 135:

The term repudiation is used in different senses. First, it may refer to conduct which evinces an

unwillingness or an inability to render substantial performance of the contract. This is sometimes described

as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in

a manner substantially inconsistent with the party's obligations. It may be termed renunciation. The test is

whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other

party, renunciation either of the contract as a whole or of a fundamental obligation under it. … Secondly, it

may refer to any breach of contract which justifies termination by the other party. … There may be cases

where a failure to perform, even if not a breach of an essential term (as to which more will be said),

manifests unwillingness or inability to perform in such circumstances that the other party is entitled to

conclude that the contract will not be performed substantially according to its requirements. This

overlapping between renunciation and failure of performance may appear conceptually untidy, but

unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party

when the time for performance arrives. In contractual renunciation, actions may speak louder than words.

(emphasis added)

Repudiation does not attract a right to damages in the absence of termination of contract.

3.2 Fundamental breach and material breach

A contractual regime may provide that a termination right only accrues on a "material

breach" by a party. The meaning of this expression in the context of a termination regime

was examined by Warren J (as her Honour then was) in Forklift Engineering Australia Pty

Ltd v Power Lift (Nissan) Pty Ltd20. Her Honour said at paragraphs [68] – [70]:

A "material breach" of a contract does not appear to be a concept known to the law of contract. It is then a

question of determining the parties' intention of the use of the expression "material breach" in the

agreement. In so doing I identify the ordinary sense of the word or words used unless such application

leads to absurdity or inconsistency: see Watson and Anor v Phipps (1986) 60 ALJR 1, 3; Caledonian

Railway Co v North British Railway Co (1881) 6 App. Cas. 114, 131. Furthermore, it is to be recalled that

each of the dealership agreements was a commercial transaction. The general approach of the courts has

been to strive to give effect to commercial arrangements and expectations: see Vroon BV v Foster's

Brewing Group Ltd [1994] VicRp 53; (1994) 2 VR 32, 67-68.

The dictionary meaning of "material" is "essential" or "important": see Oxford English Dictionary. At

common law the word "material" has been attributed a meaning of "significance" in the context of a

material risk: see Rogers v Whitaker (1992) 175 CLR 749, 490. In the context of statutory construction the

word "material" has been attributed a meaning of "significance". Also, see: Duke of Westminster v Birrane

(1995) 3 All ER 416, 422-3, CA. Applying these meanings to the expression "material breach" in the

termination clause I consider the expression can be equated with the expression known to the law of

contract of "fundamental breach".

A "fundamental breach" has been held to mean a breach of a contract that goes to the very root of the

contract: see Suisse Atlantique Societe d'Arment Maritime SA v NV Rotterdamsche: Kolen Centrale (1967)

1 AC 361, 397, 421-2. Whether a breach of contract constitutes a fundamental breach will depend upon

the contract and all the facts and circumstances of the particular case: see Suisse Atlantique at 422. It is

relevant, also, to consider the consequences of the act constituting the breach: Harbutt's "Plasticine" Ltd v

Wayne Tank and Pump Co Ltd (1970) 1 QB 447. A "fundamental breach" has been described as any breach

which provides the promisee with a right to terminate performance of the contract: Suisse Atlantique,

19 (2008) 234 CLR 237

20 [2000] VSC 443


supra, at 397. It can consist of total non-performance of the contract: Suisse Atlantique at 431. It can be a

breach that deprives a party of substantially the whole benefit of the contract: see Hong Kong Fir Shipping

Co Limited v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7 ; (1962) 2 QB 26, 71; Suisse Atlantique at

397, 410. (emphasis added)

Her Honour's views as the meaning of "fundamental breach" must now be considered in

light of the observations of the High Court in Koompahtoo and Gumland Property.

The applicability of Warren J's analysis to a termination clause was recently considered by

the Victorian Court of Appeal in Androvitsaneas v Members First Broker Network Pty Ltd21.


At all relevant times Members First Broker Network Pty Ltd (Members First) operated a

mortgage banking business and was the holder of an Australian Credit Licence under the

National Consumer Credit Protection Act 2000 (Cth). Under Chapter 3 of the Act a

licensee has obligations to meet certain lending requirements.

On 4 March 2011 Members First entered into a Credit Representative Deed with

Androvitsaneas (also known as Andrews). Under the Deed Andrews was authorised to

engage in specified credit activities. His obligations under the Deed, relevantly, included:

(a) an obligation to comply with Statutory Requirements (clause 5.1(b)); and

(b) an obligation not to engage in misleading, deceptive or unconscionable conduct in

connection with credit activities (clause 5.1(k)).

The Deed also included the following termination provisions:

13.2 Termination for breach

If You breach this Deed, We may terminate this Deed (and revoke Your Letter of Authority) by

notice to You effective from the date of the notice if:

(a) the breach is capable of remedy, and You do not remedy the breach to Our reasonable

satisfaction within 14 days of Our giving You notice to do so (or such other time as

specified in the notice); or

(b) the breach is not capable of remedy or We reasonably consider the breach is a material

breach.

In April 2011, Andrews' second cousin and his wife sought a loan in respect of a proposed

purchase of a residential property. A so called "low doc application" was filled out by

Andrews and lodged by him with Bankwest. The application contained inaccurate financial

information.

Bankwest approved the loan and proceeded to settle on the relevant purchase.

In May 2011, the Operations and Compliance Manger at Members First conducted a

review of Andrews business. He identified discrepancies between the income information

that was available to him and the Bankwest application.

On 14 June 2011, Andrews authority was terminated pursuant to clause 13.2 of the Deed.

In proceedings commenced in the County Court of Victoria Andrews sought:

(a) a declaration that termination of the Deed was invalid;

(b) an injunction restraining Members First from terminating the Deed; and

21 [2013] VSCA 212


(c) damages.

As noted by the Victorian Court of Appeal at paragraph 17:

The trial judge found that Andrews' misrepresentation of income in the Bankwest application was a

material breach of the CR Deed and that the breach was incapable of remedy, because Bankwest's loan

could not be undone and Andrews' conduct was potentially unlawful.

Andrews appealed. He relied on, amongst other things, the following grounds of appeal:

Her Honour erred in:

(6) Finding that the breach of the CR Deed was not capable of remedy;

(7) Finding that the breach of the CR Deed was a material breach of the CR Deed that went to the

very root of the contract;

(8) Finding that the respondent reasonably considered the breach of the CR Deed to be a material

breach

Grounds (7) and (8) turned upon a proper construction of the second limb of

clause 13.2(b), namely, the words:

We reasonably consider the breach is a material breach

The Court concluded that in applying this provision the trial judge had to consider two

matters.

First, whether Members First actually considered or believed Andrews' breaches were

material breaches and, secondly whether facts existed that were sufficient to induce that

belief in a reasonable person.

The Court cited Warren J's analysis of the meaning of "material breach" the court noted at

paragraph 89:

We agree with her Honour that the word "material" is to be attributed the meaning of "important" and to

connote "significance". Whilst it may have been appropriate, in the context of the termination clause of the

particular contract in the Forklift case, to equate the expression "material breach" with the concept of

fundamental breach, it is not necessary to give it that meaning in the present case. Unlike the present

case, in Forklift a party was permitted to terminate the agreement upon written notice to the other party if

that other party committed "a material breach" of the agreement which was not capable of being remedied

-- an entirely objective enquiry. The condition for termination in the present case, as already observed, is

that the licensee must "reasonably consider the breach to be a material breach". In our view, at least in

those circumstances, it is not appropriate to equate the expression "material breach" with the concept

known in contract law as a fundamental breach.

The Court expressed a preference for the view that in the context of the existing

circumstances a material breach meant a breach which had a serious or substantial effect

on the benefit which Members First would otherwise have had from the transaction. The

Court then concluded at paragraph 92:

To evaluate whether a particular breach has had a serious effect on the benefit which the other party was

otherwise intended to enjoy by the breaching parties' compliance with the contract, it is necessary to

consider what the benefits were that were intended to be secured by the contract. In our view, a reading of

the CR Deed as a whole demonstrates that the obligations cast upon the credit representative were

intended to secure the representative's compliance with the applicable statutory and other standards that

would help preserve the licensee's licence. Seen in this way, any breach by the representative which could

put in jeopardy the licensee's credit licence, or expose it to criminal liability for breach of the Act, had the

potential of being of serious or substantial import to the intended benefits to the licensee of the deed.

Thus Members First sustained its entitlement to terminate under the second limb of

clause 13.2(b).

3.3 Breaches capable of remedy

It is common practice for a termination clause to incorporate a cure regime giving the

defaulting party an opportunity to remedy a breach. Importantly, the Court of Appeal of


New South Wales in Burger King Corporation v Hungry Jack's Pty Limited22 held that

failure to strictly comply with an applicable cure regime constituted repudiatory conduct.

The fundamental assumption underpinning a cure regime (although such assumption is

usually expressed in the termination clause) is that the relevant breach is "capable of

remedy".

Both the Australian and English courts have opined on the nature and character of a

remediable breach. In Members First the applicable principles were identified by the

Victorian Court of Appeal.

In explaining the nature of a "remediable breach" the Court derived assistance from the

views of Sugerman J in Batson v de Carvalho23 and the views of Lord Reid in L Schuler AG

v Wickman Machine Tool Sales Ltd24.

Batson was concerned with a tenant's breach of a covenant not to assign and whether

such breach was capable of remedy for the purposes of the provisions of section 129 of

the Conveyancing Act 1919 (NSW). In a key passage Sugerman J said at 427:

To "remedy" a breach is not to perform the impossible task of wiping it out – of producing the same

condition of affairs as if the breach had never occurred. It is to set things right for the future, and that may

be done even though they have for some period not been right, and even though that may have caused

some damage to the lessor (for which he is entitled to claim compensation under s 129(1)(c)) provided:

Rugby School (Governors) v Tannahill [1935] 1 KB 87, that the breach has not resulted in a detriment to

the premises which cannot be removed within a reasonable time. The physical analogy in the use of the

words "remedy" (and similar words, such as "cure", in other branches of the law) may be referred to, not

as an argument but to illustrate what is meant. A breach may be remedied, I think, even though the time

for doing the thing under the covenant may have passed, or the order of events stipulated for in the

covenant can no longer be observed; to hold otherwise would be to deprive s 129(1)(c) [of the

Conveyancing Act 1919] of a great deal, if not all, of its operation.

Lord Reid in Schuler said at 43-44:

It appears to me that clause 11(a)(i) is intended to apply to all material breaches of the agreement which

are capable of being remedied. The question then is what is meant in this context by the word "remedy". It

could mean obviate or nullify the effect of a breach so that any damage already done is in some way made

good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more

natural meaning. The word is commonly used in connection with diseases or ailments and they would

normally be said to be remedied if they were cured although no cure can remove the past effect or result of

the disease before the cure took place. And in general it can only be in a rare case that any remedy of

something that has gone wrong in the performance of a continuing positive obligation will, in addition to

putting it right for the future, remove or nullify damage already incurred before the remedy was applied.

To restrict the meaning of remedy to cases where all damage past and future can be put right would leave

hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of

language to say that a breach can be remedied. For example, a breach of clause 14 by disclosure of

confidential information could not be said to be remedied by a promise not to do it again.

In the context of these statements the Court noted at 69:

With respect, we agree that if the ability to remedy a breach of contract is not to be confined to erasing the

historical fact of the breach itself (an "impossible task"), then to give the concept some practical content

requires a focus on the potential for amelioration of the effects of that breach. Much will depend on the

nature of the particular obligation breached, and the consequences of that breach in any given case.

Variations of language in particular clauses might also require a different interpretation.

22 [2001] NSWCA 187

23 (1948) 48 SR (NSW) 417

24 [1973] 2 All ER 49


Usefully, the Court went on to set out the applicable principles as follows:

The capability to remedy a breach does not imply an ability to wipe out or

obliterate the fact of the breach, as if it had never occurred. Rather, it

requires the ability to put matters right for the future;

Putting things right for the future requires dealing with the effect of the

breach;

The question of whether a breach is capable of being remedied is

examined at the date of the notice; and

The breach must at least be theoretically possible to remedy, but beyond

that it is a question of whether the breach might be remedied, rather than

whether it is a certainty that it will be.

In rejecting Andrews argument that his breaches were capable of remedy, the Court said

at paragraphs 73 to 76:

Andrews' argument, in effect, focused on a theoretical ability to remedy the wrong breach. Andrews argued

before us, as he had before the trial judge, that his breaches of the CR Deed could be remedied by

Members First giving him a warning about his conduct and supervising him in the future to ensure similar

failings did not occur in other transactions. Andrews argued that, in this way, although such a remedy

would not necessarily nullify the breach, it would nevertheless put matters right for the future.

In our view this argument betrays a misconception of the nature of the breaches.

A warning, and supervision in relation to future transactions, might well be apt to remedy a perceived

general propensity to not properly verify financial information supplied by clients when preparing credit

applications. But, in our view, that is not a true characterisation of the contractual breaches with which her

Honour was concerned.

The breaches of the CR deed were specific failings to comply with statutory requirements, and the

obligation not to mislead, grounded in a particular loan application, to a particular lender, on behalf of a

particular set of clients. Those breaches were instrumental in Bankwest advancing a mortgage loan of

$360,000 to the partners. Further, those identified breaches potentially exposed Members First to criminal

liability arising out of that specific transaction. The effects of those breaches are in no way addressed,

much less remedied, by supervising Andrews in relation to different, unrelated transactions in the future.

A useful analysis of a remediability regime and its interplay with common law rights of

termination is provided by the decision of the English Court of Appeal in Force India

Formula One Team Limited v Etihad Airways PJSC25.

On 12 April 2007 the Spyker F1 Team Limited (a Formula One racing team) entered into a

sponsorship agreement (Agreement) with Etihad Airways and a developer, both entities

being based in Abu Dhabi. Under the Agreement the sponsors were to provide

US$20,000,000 spread over the years 2007, 2008 and 2009.

The Agreement dealt with, amongst other things, naming rights, livery, branding and

media statements.

Clause 21 of the Agreement dealt with Term and Termination. Clause 21.3 provided:

21.3 Termination by the Sponsors:

21.3.1 The Sponsors may terminate this Agreement with immediate effect on the giving of written notice

to SPYKER at any time on the happening of any of the following events by or in relation to the

other party:

(a) SPYKER has committed any material breach of this Agreement which, if capable of

remedy, has not been remedied within ten (10) Business days of receipt of written notice

giving particulars of the breach and requiring its remedy;

25 [2010] EWCA Civ 1051


(b) an order is made or an effective resolution is passed for the liquidation, winding up or

dissolution of SPYKER and such order or resolution is not cancelled within one month;

(c) an encumbrancer takes possession or a receiver is appointed over all or any part of the

assets or undertaking of SPYKER;

(d) SPYKER becomes insolvent, enters into a voluntary arrangement with any of its creditors

and is unable to pay its debts or admits in writing its inability to pay its debts as they fall

due; or

(e) under the provisions of Clauses 19, 5.1.3 (and 5.1.4).

On 1 September 2007 Dr Vijay Mallya, a prominent Indian entrepreneur and billionaire,

announced at a press conference in Mumbai that he had made a successful bid for Spyker.

As noted by the English Court of Appeal Dr Mallya was chairman of United Breweries

Group, one of the largest spirits companies in the world. The group also encompassed

United Breweries Limited, which had 45% of the Indian beer market including Kingfisher

Beer, and Kingfisher Airlines, India's largest airline. It is noted that since the appeal was

heard Kingfisher Airlines has become insolvent. It has not flown in Indian skies for over a

year.

Following the acquisition the relationship with the sponsors markedly deteriorated,

particularly after Dr Mallya changed the team name to Force India Formula 1, dropped the

names of the sponsors and incorporated the Kingfisher logo in the livery. Ultimately on

27 January 2008 the sponsors terminated the Agreement asserting that Force India had

repudiated the Agreement. The sponsors relied on a termination right at common law.

They argued that clause 21.3 was irrelevant as repudiation stood outside the cure regime

and, that even if that contention was unsound, the conduct of Force India amounted to a

material breach of the Agreement incapable of remedy. Accordingly there was no need to

serve a notice to remedy.

On 31 January 2008 Force India in a written reply alleged that the sponsors letter of

27 January 2008 was itself a repudiation which was accepted bringing the Agreement to

an end.

Force India commenced proceedings seeking damages for wrongful termination.

Force India was successful at first instance.

Rix LJ in delivering the principal judgment of the English Court of Appeal, having heard

detailed argument on the construction of the Agreement, made the following critical

observation at paragraph 91:

These complications are, however, beside the principal point, not even adverted to by the judge, which is

that on 1 November 2007 Force India changed its team name and abandoned the contractual Team Name

in particular by omitting the names of its main sponsors Etihad and Aldar. This was a clear, grave and

continuing breach of its contract. It was done deliberately as part of a clearly defined marketing campaign

imposed by Dr Mallya, who, from his position as chairman and CEO of OIH, Force India’s ultimate holding

company, personally directed, as though he were Force India himself, as in effect he was, every aspect of

Force India’s new campaign.

The overarching question for the Court was whether the Agreement ended as a result of

repudiation by the Sponsors or repudiation by Force India. This overarching question

required consideration of the following subsidiary questions:

(a) Was Force India's conduct repudiatory

(b) If so, did the Sponsors affirm the Agreement?

(c) Did repudiatory conduct fall within the compass of the cure regime in

clause 21.3.1?


(d) If the answer to (c) is yes, were Force India's material breaches capable of

remedy?

Without examining Rix LJ's detailed answers to the questions (a) and (b) it is sufficient to

note that the answer to (a) was "yes" and the answer to (b) was "no".

His Lordship also concluded that the clause 21.3.1 cure regime applied to repudiatory

conduct but in this context his Lordship made the following important observation at

paragraph 84:

On these facts, was Force India in repudiatory breach of the contract? I put the question in this way, since

Mr Auld's submission is that if Force India had committed an irremediable repudiatory breach, then the

sponsors were entitled to accept it under common law, irrespective of clause 21. I think that is correct.

Clause 21, upon analysis, does not apply to irremediable breach, only to a material but remediable breach.

No written notice is required of an irremediable repudiatory breach. Since no notice under clause 21.3.1(a)

was ever given calling for remedy within 10 days of a remediable breach, the sponsors cannot, and do not,

rely on that clause.

Turning, finally, to remediability his Lordship concluded that Force India's material

breaches were incapable of remedy. The factual analysis and conclusion is set out at

paragraph 108:

The judge, without citing this authority, recorded the sponsors' counsel as accepting that the authorities

"favour a practical rather than an unduly technical test". I think that is right. The judge concluded that any

breaches of clauses 4.6 or 4.7 were remediable, in the sense that Force India "could have put matters

right", either by changing the Team Name back to Etihad Aldar Spyker F1 Team and / or by reverting to

the previous livery and removing the Kingfisher logo. However, in my judgment, these were not remediable

breaches. The closest analogies are with the publication of confidential information or the publishing of

advertising matter not containing a party's name: one releases information which should be kept

confidential, the other broadcasts a product in an inappropriate way. Looking at the matter pragmatically

and not technically, I think that a proper marketing campaign is, generally speaking, all of a piece. Where

Dr Mallya and Force India had persistently marketed the team as "Force India" to the Indian market and

had publicised the car's new livery with deployment of the Kingfisher logo, and where Kingfisher was so

much associated with Dr Mallya himself and he with Force India, and where, as Dr Mallya himself said in

his interview which appeared on Force India's website on 11 October 2007, "The name is an integral part of

the team identity", which I regard as truly said, the marketing genie cannot be put back into the bottle.

The breach is irremediable. This conclusion is to my mind re-emphasised where the breach or breaches are

repeated, cumulative, continuing and repudiatory.

Rix LJ relied upon the views of Lord Reid in Schuler in relation to the meaning of the

expression capable of remedy.

The sponsors won the appeal.

4. TERMINATION AND GOOD FAITH

4.1 Termination for convenience

The decision of the Supreme Court of Victoria in Kellogg Brown & Root v Australian

Aerospace Ltd26 brings into focus the prospect of a good faith limitation applying to

general termination for convenience clauses. I turn to consider that case in some detail.

On 29 July 2005 the Commonwealth Department of Defence entered into a head contract

based on the standard Defence procurement contract with Australian Aerospace (AA) for

the supply of 12 MRH 90 helicopters (Phase 2 of Project AIR9000). A second contract for

the supply of 34 helicopters was signed in 2006. In December 2005 AA entered into a

subcontract with Kellogg Brown & Root Pty Ltd (KBR) for the provision of associated

training and support services for Phase 2 of the Project. Clause 12 of the Subcontract was

headed Dispute and Termination. Specifically, clause 12.1 laid out a dispute resolution

procedure, clause 12.2.1 provided for termination for default and, importantly,

26 [2007] VSC 200


clause 12.3 contained a termination for convenience power. Each of the clauses tracked

the corresponding provisions in the standard Defence procurement contract.

On 20 December 2006, AA gave KBR a notice under the default provisions of the

subcontract. Following the issue of the notice and KBR's written response the parties

engaged in negotiations which continued from January to April 2007. Those negotiations

focussed on AA's request that KBR's work under the subcontract be de-scoped. However,

the parties were unable to reach any agreement in this regard and on 20 March 2007 KBR

invoked the dispute resolution mechanism under the subcontract. Notwithstanding the

engagement of the dispute mechanism, the parties continued to negotiate in respect of

the proposed de-scoping. Ultimately, on 13 April 2007 AA by notice terminated the

subcontract "for convenience with immediate effect".

In an earlier email dated 2 April 2007 AA made it clear to KBR that AA intended to

exercise the termination for convenience power failing agreement on scope change and it

further indicated that the termination for convenience issue was to be regarded as outside

the dispute covered by the 20 March 2007 dispute notice.

On 20 April 2007 KBR commenced legal proceedings against AA.

KBR sought both temporary and permanent injunctions to restrain AA from acting under

or relying upon the notice terminating the contract for convenience. Additionally, KBR

sought damages and declarations that the contract continued in force, that AA perform its

obligations and that AA be compelled to participate in the dispute resolution process.

In order to obtain an interlocutory injunction it is necessary for the applicant for the

injunction to satisfy the court that:

there is a serious question to be tried; and

the balance of convenience dictates that an injunction should be granted.

KBR's principal submission was that AA's right to terminate for convenience was subject to

an implied term of good faith and fair dealing. Specifically KBR pleaded a breach of the

implied term in that the exercise of the termination for convenience power by AA was not

done in good faith but was done for the extraneous and improper purpose of ousting KBR

from the benefits of the subcontract and to seize those benefits for itself. Additionally,

KBR submitted that the termination for convenience power was exercised by AA to avoid

the risk of an adverse finding in the dispute resolution process. KBR argued that the

implied term of good faith arose either by operation of law or from use and practice in the

defence procurement industry.

In order to obtain an interlocutory injunction, KBR also needed to demonstrate that the

balance of convenience was in favour of the grant of the injunction. In this regard KBR

submitted that it would suffer significant and irreparable damage to reputation and its

business operation if the injunction were not granted. Specifically, the company's ability

to win further Defence contracts would be put in jeopardy.

The Court granted an interlocutory injunction restraining AA from exercising its right to

terminate for convenience.

The Court reviewed previous Australian case law on the duty of good faith as a limitation

on the exercise of contractual powers generally and referred, in particular, to the decision

of Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003)

128 FCR 1 supporting the existence of such a limiting duty in the exercise of a contractual

termination for convenience power. The Court also noted that, although the Victorian

Court of Appeal had in another case, involving a commercial dispute between large

corporations, rejected the existence of an overarching duty of good faith in commercial


contracts, none of the cases "concerned a termination for convenience clause, let alone

arose in the defence procurement area".

The Court then considered the significance of the defence procurement context.

Reference was made to the Defence Procurement Policy Manual V6.0, 2006 which

provided guidance on the termination for convenience clause in the standard Defence

contract. Reference was also made in this context to evidence of a solicitor who had

experience of defence procurement contracting as well as to Commercial Notes published

by the Australian Government Solicitor. Although this material simply expressed the

views of the authors and was not determinative as a matter of law, the Court concluded

that the material was "pertinent to an overall understanding of the reason for the

provision and its apprehended application, at least as far as persons on the side of the

Commonwealth is concerned".

In summary, the Court found that there was a serious question to be tried both as to the

existence of the implied term of good faith and its breach and, further, that the case for

the implied term and its breach was "well arguable". In fact AA had conceded that there

was a serious question to be tried.

The Court concluded that the potential detriment to KBR outweighed any loss that may be

caused to AA as a consequence of the grant of the injunction. The Court also concluded

that AA had not established that damages would be an adequate remedy if it should

ultimately be held that AA had wrongfully terminated the contract. Accordingly, the

balance of convenience was in favour of the grant of the injunction.

Also, a court may be reluctant to grant an injunction if it would have the practical effect of

forcing parties to continue to work together when the relationship had broken down. The

judge was not deterred by this factor, saying that the two entities were working together

on another project and that, being large and sophisticated corporations, they could handle

any personality clashes in this project.

In Oxygen 8 Communications Australia Pty Ltd v Telstra Corporation Ltd27, Flick J in the

context of an application for interlocutory relief restraining the exercise of a termination

for convenience provision noted at paragraph [43]:

The ongoing conflict between the parties arises as a consequence of the complaints received in respect to

the services provided by the Applicant. Although it may well ultimately be concluded that there is no

operative constraint upon the Respondent's reliance upon cl 16.7, reliance upon that provision as opposed

cl 16.4(f), presently gives rise at least to an argument as to a lack of good faith which cannot be

summarily rejected. To proceed under cl 16.4(f) may, of course, prove more difficult for Telstra. To

proceed under that provision, Telstra would have to establish that it "reasonably believes" the matters

thereafter set forth are established. Cl 16.7, which may ultimately be concluded to be a provision open to

Telstra, certainly provides a course free of that constraint. It remains an argument which gives rise to a

serious question to be tried.

In GEC Marconi Systems (supra) Finn J considered the scope of the United States doctrine

of constructive termination for convenience. His Honour commented that he could see no

reason in principle for precluding the application of such a doctrine in Australian law.

The most recent consideration of the scope of good faith in respect of termination for

convenience is to be found in the decision of Bergin CJ in Equity in Starlink International

Group Pty Ltd v Coles Supermarkets Australia Pty Ltd28.

27 [2009] FCA 426

28 [2011] NSWSC 1154


Starlink provided trolley collection services to Coles and Kmart. The services involved the

collection of shopping trolleys from car parks and other areas near the defendants'

shopping centres and their return to designated locations for use by the defendants'

customers. The plaintiff had been providing the services to Coles since 2005.

The agreement between the parties contained the following special conditions:

Schedule 9 — Special Conditions

1. Early termination without cause by Coles

During the Term, Coles may terminate this Agreement at any time without a reason by giving the

Service Provider 45 days written notice.

2. Early termination for non-performance

It is Coles Group’s expectation that contractors awarded a municipality of stores will perform well

on all stores. If performance is consistently poor (as per the Coles Contract Manager’s viewpoint)

at 1 or multiple stores, Coles Group may terminate all sites within a municipality.

Coles purported to exercise their termination right under SC1. The background to the

termination is set out by her Honour in paragraph 7 as follows:

An internal document prepared by Coles (Ex C) in support of the termination of the Agreement with the

plaintiff included statements that the plaintiff "ranks bottom" of all store performance and had already

been removed from 8 sites for gross failure of service and was facing removal from a further 4 sites. It

records that Coles had received allegations of improper behaviour by the plaintiff and its owner and

management on a monthly basis that ranged from "collectors being paid $5 through to death threats and

arson". It was suggested that the business was being run through "intimidation and violence". It included

the following:

The change over is requirement to retain our ethical responsibility to exploited individuals and

mitigate brand risk from our relationship with Starlink, it will come at a $1.4M increase on a PA

base of $5.6M, a 26% upwards shift.

The plaintiff challenged the termination on good faith grounds.

Bergin CJ in dismissing the challenge made the following observations:

It was submitted that throughout the life of the Agreement the dispute resolution process has worked quite

well and effectively in all but a few isolated instances. It was submitted therefore that there was no

legitimate occasion for the defendants, either in the interests of performance or in the interests of

reputation, to use a "sledgehammer to crack the nut" when the alternative of the dispute resolution

process was available. It was further submitted that the fact that the defendants had successfully

implemented a process within the Agreement to resolve previous problems as to performance, exposes its

decision not to have recourse to that contractual mechanism but rather to crack the nut with a

sledgehammer under SC 1. It was submitted that this demonstrates a lack of good faith. In addition it was

submitted that the way in which the defendants accepted the extraordinary allegations on their face

without any corroborative evidence and took no steps of any significance to ascertain whether or not the

allegations had substance also demonstrates a lack of good faith.

Mr Grieve gave an example of circumstances in which he submitted the defendants would be justified in

exercising their rights under SC 1. He submitted that if a contractor were engaged in a series of localities

that the defendants decided were no longer commercially warranted, the defendants could decide to simply

close the majority of them and terminate the Agreement under SC 1. It was submitted that another

"classic" example that might warrant the use of the SC 1 power would be if the defendants were to make a

decision that trolleys were no longer an appropriate way for groceries to be transported and brought in

some other method of transportation of groceries and the like.

Commercial contract law has developed "on the premise of achieving certainty in commerce": Esso

Australia Resources Pty Ltd v Southern Pacific Petroleum NL (recs and mgrs apptd) (admins apptd) [2005]

VSCA 228, at [3] per Warren CJ. The acceptance of the plaintiff’s submissions would result in the creation

of contractual and commercial uncertainty. The so-called "classic" example is itself riddled with uncertainty.

Would it be permissible to exercise the power if the defendants’ decision were to provide a lesser number

of trolleys combined with personal carrying services? Would it be reasonable to exercise the power if they

decided to use employees rather than contractors to provide the trolley services? It seems to me that these

examples are flawed because they focus on whether the "reason" justifies the exercise of the power when

the express power is that there is no need for any reason. The acceptance of the plaintiff’s submissions

would mean that the defendants would not be entitled to terminate under SC 1 "at any time" but perhaps

at an unspecified time so as not to result in what the plaintiff described as its "commercial suicide". That

notion is also rather uncertain. Does it mean total financial ruin or some lesser outcome in which losses

are suffered? It requires the subjective assessment of the plaintiff’s financial wherewithal at any particular

time to see whether the impact of termination on 45 days notice would cause such outcome.


The plaintiff’s case seems to be that the defendants had an obligation to approach the plaintiff to advise it

of the allegations that had been made against it and give it the opportunity to address them before

exercising the power under SC 1 to terminate the Agreement. The parties agreed that they would

approach their dispute resolution processes in good faith and on the basis that they wished to continue

their long-term commercial relationship. Although the defendants gave consideration to termination under

cl 17 of the Agreement, a decision was made on legal advice to take a different course. The defendants

decided to exercise the power to terminate on 45 days notice without a reason rather than to exercise any

of the other mechanisms to terminate on the basis of the specified grounds in the Agreement. That was

the option that the parties agreed the defendants could utilise.

The provisions of SC 1 do not mean that the termination must occur for no reason. Obviously parties will

act for some reason and sometimes for a reason that may not present to others as a good reason. The

provisions of SC 1 allow the defendants to terminate for their own reason and to keep that reason to

themselves. In the present case it appears that the defendants reached the point where their tolerance of

the repeated allegations about the plaintiff wore thin, in particular because of the diversion of their officers

having to deal with them.

These are commercial parties that have been engaged in a commercial relationship for a number of years.

SC 1 has formed part of their contractual relationship since 2005. The plaintiff was willing to enter into this

Agreement on the basis that the defendants had an entitlement to terminate it on 45 days written notice at

any time without a reason. The implication of a duty to act in good faith in exercising the right under SC 1

would be to impose a condition on the defendants inconsistently with the express term of the contract. It

would be to impose a condition on the defendants that not only must they have a reason to exercise the

right under SC 1 but also that it must be a good reason. There is no justification to imply the term as

claimed.

There is a clear difference of view among the judges as to whether good faith should

operate as a restraint on a termination for convenience power. At this point the

preponderant view is that a duty of good faith has a limiting influence on termination for

convenience. Bergin CJ takes quite a different view. All of this adds to the continuing

uncertainty as to the scope of good faith in Australian law.

4.2 Termination for Default

Two recent decisions of the New South Wales courts have raised the possibility of a good

faith challenge to the validity of termination for default or repudiation. Although the

challenges failed in both cases the fact that the courts countenance such challenges as

having a substantive basis is an unwelcome development for commercial parties.

I turn to the cases.

The first is a decision of McDougall J in AMC Commercial Cleaning (NSW) Pty Limited v

Coade29.

The case involved a "Master Franchise Agreement" (MFA) entered into on 5 March 2003

between the plaintiff (AMC NSW) as franchisee and the second defendant (AMC National)

as franchisor.

Relevantly the Agreement contained the following terms:

18.4 Information

The Master Franchisee authorises AMC to make enquires of the Master Franchisee’s suppliers,

Clients, bank and trade persons and to provide to AMC such information and copies of documents

as AMC requests in relation to the operation of the Master Franchise.

24. TERMINATION

AMC may, without prejudice to any other rights or remedies it might have, by service of notice of

termination upon the Master Franchisee, immediately terminate this Agreement upon the

occurrence of any of the following events:

…

29 [2011] NSWSC 932


24.2 Breach of Covenant

The Master Franchisee defaults in any of its obligations under this Agreement or any other

agreement between AMC or any Related Entity of AMC and fails to remedy the default after service

of a default notice on the Master Franchisee, advising of the default and remedial action required,

and providing a reasonable time (not being more than 30 days) to remedy the breach.

…

24.8 Fraudulent Operation of the Master Franchise

The Master Franchisee acts fraudulently in relation to the Franchise or the operation of the

Business, including without limitation:

(a) if the Master Franchisee understates or overstates its income or Services performed for

any week or month by five percent (5.0%) or more, unless the Master Franchisee

demonstrates that such understatement or overstatement resulted from an inadvertent

error.

(b) The Master Franchisee uses AMC’s Intellectual Property or Marks in a manner not

authorised by AMC.

(c) In the reasonable opinion of AMC, the Master Franchisee makes or has made any material

misrepresentations relating to the acquisition of the Master Franchise or engages in

conduct which reflects unfavourably on the operation and reputation of the System, the

Services or the Materials.

AMC National purported to terminate the MFA on 2 bases, namely, a breach of clause 18.4

and a breach of clause 24.8.

In respect of clause 24.8 the evidence clearly revealed that AMC NSW had been engaged

in a scheme to defraud the Commonwealth. This scheme was practised in the course of

carrying on the franchise business. McDougall J found that AMC National was entitled to

terminate on the bases asserted. However, the plaintiff franchisee argued that even if the

termination power existed it was subject to a test of good faith on the part of AMC

National which, it was argued, was not passed in the current circumstances.

In reference to this argument McDougall J made the following comments:

[123] The implied duty of good faith is part of the law of performance of contracts (see Allsop P, with

whom Ipp and Macfarlan JJA agreed, in United Group Rail Services Ltd v Rail Corporation New South Wales

(2009) 74 NSWLR 618 at [61]). It is an obligation implied in aid of performance of the express terms of

the agreement: a duty implied to ensure that the parties to a contract perform the obligations for which

they bargained. See Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 at 570 [173].

In that case, at 570 [172], the court approved what Finkelstein J had said in Garry Rogers Motors (Aust)

Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703. His Honour said, at 43, 014, that whilst an obligation

of good faith might restrain a party from exercising a contractual power capriciously, it could not restrict a

party from acting so as to promote its own legitimate interests. His Honour said (and the Court of Appeal

accepted) that if "the party exercising the power acts reasonably in all the circumstances the duty to act

fairly and in good faith will ordinarily be satisfied".

[124] In relation to cl 24.8, the clear purpose or function of the right of termination that is given if one or

other of the preconditions is triggered is to enable AMC National to protect itself from having to continue to

deal with a master franchisee that has been engaged in fraudulent or other damaging activities, and to

limit the damage to the AMC brand caused by those activities. If the right of termination is triggered, there

is no requirement for notice, nor to offer any opportunity to repent. The very nature of the power suggests

that, on the occurrence of one or other of the specified events, it may, without more, be exercised.

[125] Again, with cl 24.2, it may be observed that the right of termination arises only after the party in

breach has been given an opportunity to repent. Thus, where of necessity that opportunity has been given

and has not been availed of, it is difficult to understand why there should be some further constraint on the

exercise of the power to terminate that, in consequence, arises.

[126] Mr Alexis spent a lot of time, both in cross-examination of Mr Coade and in submissions, attacking

AMC National’s motives for terminating the MFA. In this context, it is desirable to bear in mind what Lord

Diplock said on the question of motive (admittedly, in an entirely different context) in Horrocks v Lowe

[1975] AC 135 at 150. His Lordship pointed out that it is ordinary human experience that people rarely

form their beliefs strictly by a process of logic or deduction from facts rigorously established and judiciously

assessed. On the contrary, people may be swayed by prejudice, may act on intuition, and may reach

conclusions on an inadequate evidentiary basis; they might ignore cogent material which disputes their

conclusions, and maintain them on the basis of flimsy material. Nonetheless, a conclusion reached through

that imperfect means may still be honest — that is to say, may carry with it a positive belief in its truth.

What his Lordship said related to the question of malice, for the purposes of the law of qualified privilege.

But, as Rares J said in Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 at [398], his


Lordship’s observations concern human behaviour, and may be applied equally "to the way in which people

act in contractual relationships".

[127] Rares J was speaking in the context of considering whether a contractual power of termination was

constrained by obligations of good faith. He said at [395] that contractual rights should be exercised

honestly, but recognised that the motives leading to the exercise of contractual rights may be complex:

A party to a contract is entitled to exercise contractual rights conferred on him or her honestly.

Rarely do people act from a single motive, particularly where they have been involved in a long-

term relationship with the other party or parties. In a contractual context, relationships can give

rise to a complex set of considerations which one party may apply to the other. Thus, in a contract

for the sale of goods where time is of the essence, and one party defaults in timeous performance,

the law merchant recognises that the innocent party has a right to terminate. And such rights

exist in the Sale of Goods Act 1923 (NSW) and its analogues.

[128] Thus, his Honour said at [397]:

Courts must be cautious in characterising or giving undue weight to particular aspects of or

incidents in [a long-term contractual] relationship when arriving at a decision that some action has

been taken otherwise that in good faith.

[129] I do not find that AMC National, through Mr Coade, acted unreasonably or capriciously in deciding to

terminate the MFA. There had been conflict between AMC NSW and AMC National for some time. The

relationship between them had broken down irretrievably. In respect of the issues litigated in the 2009

proceedings, AMC NSW was substantially vindicated. But it does not follow that, when AMC NSW breached

a term of the MFA and otherwise acted in a way that gave rise to a right of termination, AMC National was

not able to rely on those matters to terminate the MFA.

[130] Mr Alexis submitted that AMC National’s exercise of the right of termination was in some way part of

the process of divesting itself of its master franchise agreements, through the arrangements with master

franchisees and AMC 2 that I have described earlier. I am prepared to accept that this was one of AMC

National’s motives. But it does not follow either that it was an improper motive (ie, for present purposes,

capricious or ulterior). Nor does it follow that it was the sole motive.

[132] In those circumstances, viewed objectively, I conclude that it was reasonable for AMC National to

terminate as it did when the opportunity arose for the reasons that it did.

The second case is the decision of the New South Wales Court of Appeal in Cordon

Investments Pty Ltd v Lesdor Properties Pty Ltd30.

Cordon and Lesdor entered into a joint venture to develop a property owned by Lesdor.

Cordon was a commercial builder. Under the joint venture arrangement Cordon was to

obtain a facility from the National Australia Bank to carry out the relevant building work.

Cordon was required to carry out the work at its own cost and the work was to be

completed in accordance with the plans and specifications as defined. Further, under the

arrangements Cordon was to construct 27 residential units together with commercial

premises and upon completion was to be allocated 25 units for sale on its own account.

Relevantly, the joint venture agreement contained the following provisions:

13.3 Notwithstanding the preceding provisions of this clause, Lesdor shall execute any plan of

subdivision, the Strata Plan any accompanying instruments and such Contract, Contracts, Transfer

or Transfers for the conveyance of the title of the residual lots to such persons or corporation as

Cordon shall nominate and shall deliver such plans, instruments and such Contract, Contracts,

Transfer or Transfers to Cordon forthwith upon request.

15. Cordon shall at its own expense use its best endeavours to have the Strata Plan approved by the

Council and registered at LPINSW as expeditiously as possible following completion of the Building

Works and Lesdor shall do all such things as shall be reasonably required of it to give effect to

this."

Disputes arose between the parties concerning the progress of the work. Lesdor refused

to sign the strata plan despite requests from Cordon. Lesdor took the point that it had no

obligation to sign and deliver the Strata Plan until Cordon achieved a defect free

completion of all of the works in accordance with the plans and specifications.

Conversely, Cordon argued that it was sufficient that they achieved "practical completion"

30 [2012] NSWCA 184


and, further, it was understood by the parties that a defect free completion was not a

prerequisite for execution of the strata plan by Lesdor.

Lesdor terminated on the basis of alleged repudiatory conduct by Cordon.

Cordon submitted that the exercise of any termination right by Lesdor was constrained by

considerations of good faith. In particular, Cordon argued that Lesdor acted in breach of

an implied duty of good faith in the following respects:

(a) Lesdor refused to identify the work or works it maintained were defective or incomplete prior to

serving its notice of termination.

(b) Lesdor insisted on defect free completion before executing and delivering the Strata Plans which

was beyond the terms of the Joint Venture Agreement (as varied).

(c) Lesdor unreasonably refused to execute and deliver the Strata Plan in circumstances where it had

taken the benefit of the works to which it was entitled under the Joint Venture Agreement (as

varied).

(d) Lesdor intermeddled and interfered with Cordon's contractual relations with the NAB.

Bathust CJ (Macfarlan and Meagher JJA agreeing) noted:

[144] Lesdor did not dispute that it was appropriate to imply into the Agreement an obligation that the

parties would act in good faith towards each other. That is consistent with the approach adopted in a

number of decisions of this Court: Renard Constructions (ME) Pty Limited v Minister for Public Works

(1992) 26 NSWLR 234; Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187; (2001)

69 NSWLR 558 at [186]; Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 at 369; United Group

Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; (2009) 74 NSWLR 618 at [58]- [61];

Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service [2010] NSWCA

268 at [11]- [12], [146]-[147]. However, these decisions have emphasised that the obligation does not

require a party to act in the interests of the other party or subordinate its own legitimate interests to those

of the other party, although it does require it to have due regard to the rights and interests of the other

party. The necessity for the implication of such terms in commercial contracts has not been universally

accepted: Service Station Association Pty Limited v Berg Bennett & Associates Pty Limited [1993] FCA 445;

(1993) 45 FCR 84 at 91-98; Royal Botanic Gardens & Domain Trust v South Sydney City Council [2002]

HCA 5; (2002) 240 CLR 45 at [88], [155]. However, it is not necessary to discuss the matter further in the

present case.

[145] The content of the obligation has commonly been held to embrace three related matters:

1 An obligation on the parties to co-operate to achieve the contractual objectives.

2 Compliance with honest standards of conduct.

3 Compliance with standards of conduct that are reasonable having regard to the interests of the

parties.

A F Mason "Contract, Good Faith and Equitable Standards in Fair Dealing" (2000) 116 LQR 66 at 69; Alcatel

Australia Limited v Scarcella supra at 367; Burger King Corporation v Hungry Jacks Pty Limited supra at

[171]; Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service supra at

[12]; [146].

[146] Notwithstanding the existence of the implied term, I have difficulty in seeing that an insistence on a

contractual obligation being complied with when that obligation is a pre-condition to counter performance

could of itself amount to a breach of an obligation of good faith. An implied obligation of good faith could

not extend to imposing obligations on the parties that were, in effect, inconsistent with the terms of the

Agreement: Vodafone Pacific Limited v Mobile Innovations Ltd [2004] NSWCA 59 at [194], [208].

[147] In the present case, Barrett J had clearly stated, albeit in an interlocutory judgment, that there was

no obligation on Lesdor to deliver up the Strata Plan until completion of the Building Works and had refused

Cordon an order for specific performance requiring its execution: see [2006] NSWSC 481. In that context,

it does not seem to me that Lesdor's insistence on a judicially determined contractual right could amount to

a breach of the implied obligation.

[151] The final breach of the implied obligation pleaded in the Second Further Amended Statement of

Claim is that Lesdor interfered and intermeddled with Cordon's contractual relationship with the NAB. On

appeal this was not relied on as a separate ground but in support of an allegation that at some time in

2006, Lesdor embarked on a strategy to deprive Cordon of the Residual Lots and keep them for itself.

Insistence on defect free completion and interference with the NAB facility was said to form part of the

strategy.

[152] The trial judge did not deal with this submission holding that it did not fall within the pleadings

(judgment [207]). However, there was no suggestion made by Lesdor that the case would have been

conducted differently had the allegation been put in that way. In those circumstances, it is appropriate to

deal with it.


[153] If the allegation was made good, it would be open to conclude that Lesdor exercised its power of

termination for a collateral or extrinsic purpose and otherwise than in good faith: see Vodafone Pacific Ltd v

Mobile Innovations Ltd supra at [211]-[215], or for that matter engaged in conduct capable of being set

aside in equity as unconscionable or unconscientious: see Godfrey Constructions Ltd v Kanangra Park Pty

Limited [1972] HCA 36; (1972) 128 CLR 529 at 549: Pierce Bell Sales Pty Limited v Frazer [1973] HCA 13;

(1973) 130 CLR 575 at 587.

Both of these cases demonstrate the willingness of the courts in New South Wales to

consider good faith as a possible constraint on termination for default. Indeed, in Cordon

the Court of Appeal conducted a thorough investigation of the background facts and

circumstances including the conduct of the parties before reaching a conclusion as to

whether Lesdor's termination was effective. Even in the face of clear repudiatory conduct

by Cordon the question of good faith was still in the picture.

4.3 Good Faith and Notices to Remedy

The extent to which remedy notices comprising part of a termination process must satisfy

a good faith test was recently considered by the New South Wales Supreme Court in NSW

Rifle Association Inc v The Commonwealth of Australia31.

On 15 March 2000 the Commonwealth granted by contract a licence to the Association to

use the rifle range at Malabar in Sydney for the activities of its members. The relevant

provisions of the licence were as follows:

2.1 Licence

The Owner grants to the User during the Term:

(a) an exclusive licence to use the Licensed Area in accordance with this document;

(b a non-exclusive licence for the User and the User’s Agents to use the Licensed Range;

(c) a non-exclusive licence for the User and the User’s Agents to use the Caravan Park; and

(d) an exclusive licence to use the Buildings,

for the uses described in clause 5.

Term

(a) The period commencing on the Commencing Date and ending on the Termination Date

(b) Commencing Date: 1 June 1999

(c) Terminating Date:

The later of:

(i) 30 June 2001; or

(ii) the date being 14 days after the Owner gives to the User a Relocation Notice.

Relocation Notice means a notice by the Owner to the User to the effect that the Holsworthy Range (or a

comparable range nominated by the Owner) is available for the User’s use.

6.2 Condition of improvements

The User must at all times at its own expense:

(a) keep in a good and safe state of repair:

(i) the Buildings; and

(ii) the target platforms, the target mechanisms and the target butts on the Fullbore

Classification Range and the Service Classification range; and

(b) comply with the Environmental Management Plan and Fire Safety Management Plan.

10. DEFAULT AND TERMINATION

10.1 Default

The User is in default if:

31 [2012] NSWSC 818


(a) (non-payment) it does not pay the Licence Fee or any other money payable under this

document within fourteen days of the due date, after written demand by the Owner;

(b) (breach) the Owner gives the User a notice asking the User to remedy any breach of this

document and the User does not remedy the breach within fourteen days or such longer

time as is specified in the notice;

(c) …

(d) …

(e) …

(f) …

10.2 Owner’s rights on default

If the User is in default the Owner may:

(a) rectify the default, and the User must immediately reimburse the Owner for the cost of

the rectification; or

(b) terminate this document by written notice and also exercise any other legal right.

The Commonwealth served three Remedy Notices on the Association as follows:

(a) on 25 January 2012 asserting that the NSWRA was in breach of its obligations

under clause 6.2(a)(i). The notice stated that the breaches were required to be

remedied within 14 days of the date of the notice.

(b) on 2 April 2012 a notice dated 29 March 2012 alleging that the NSWRA was in

breach of its obligations under clause 6.2(b). The alleged breaches were required

to be remedied by 19 April 2012.

(c) on 9 May 2012 a notice dated 7 May 2012 alleging that NSWRA was in breach of

clause 6.2(b) in that it had failed to comply with the Fire Safety Management Plan.

As noted by White J the Commonwealth admitted that it would not have been possible for

the NSWRA to carry out all the work required by each remedy notice within the times

specified. Further, the Commonwealth had made no complaint about NSWRA's

compliance with clause 6.2 of the licence.

The NSWRA filed a statement of claim challenging the validity of the second and third

notices, the Commonwealth having withdrawn the first.

The primary judge summarised the essence of NSWRA's case at paragraph 46 as follows:

The NSWRA’s principal contention was that the Commonwealth was under a duty to act reasonably and in

good faith in the exercise of its power under cl 10.1(b) to specify a time for the remedying of the alleged

breaches. It submitted that in requiring the alleged breaches to be remedied in 14 or 16 days the

Commonwealth did not act reasonably and in good faith. It also submitted that the remedy notices were

issued as part of a political campaign to evict the Rifle Association from the range, in order to satisfy a

political promise made by Mr Garrett, in circumstances where the Commonwealth was unwilling to fund the

Rifle Association’s relocation to a suitable alternative location. It submitted that the Commonwealth was

not in truth concerned about the state of the Buildings, as evidenced by the fact that the two reports

concerning the state of the Buildings dated December 2007 which accompanied the First Remedy Notice of

25 January 2012 had not been provided to the Rifle Association prior to the service of that notice. It

submitted that specification of a period of 14, 16 or 17 days to comply with the notices was unreasonable.

It relied on the Commonwealth’s admission that the notices could not have been complied with within the

times specified.

His Honour concluded that the Commonwealth was bound by an implied term to act

reasonably and in good faith in issuing the remedy notices.

Under the rubric of "term implied by construction" his Honour noted at paragraph 126:

As a matter of construction, the parties provided that the Commonwealth could only terminate the licence

if the NSWRA were in default (as defined), and in the case of a breach not falling under cl 10.1(a), (c) or

(d), only after giving notice asking the breach to be remedied. The purpose of cl 10.1(b) is to give the

NSWRA the opportunity to remedy the breach. The time for remedying the breach can be either 14 days or


such longer period as may be specified. The power to fix a longer time to remedy a breach is conferred for

the purpose of allowing the breach to be remedied. As a matter of construction, the notice must be given

for the purpose of allowing the NSWRA to remedy a breach and the power to fix a longer time than 14 days

for the breach to be remedied must be exercised having regard to the same purpose. That implies (as a

matter of construction) that the power under cl 10.1(b) be exercised reasonably. In the present

circumstances, if the power to give the notice or to fix a time were exercised unreasonably, it would

indicate that the power was not being exercised for a proper purpose.

Under the rubric of "ad hoc implication of term" his Honour noted at paragraphs 133 to

137:

Thus, I reject the Commonwealth’s submission that the fact that there has been a delay in the issuing of a

remedy notice is of no consequence. The Commonwealth relies on cl 12.4(a) which provides that a delay in

exercising a power or a right of a party does not preclude any other or further exercise of the power or

right, and does not operate as a waiver. But that does not mean that the delay is of no consequence. Many

of the alleged breaches on the basis of which the Commonwealth contends it is entitled to terminate the

licence have existed since a reasonable time expired after 15 March 2000 for the Buildings to be put into

good and safe repair, or for the Environmental Management Plan, and the Fire Safety Management Plan to

be complied with. On any view, the time for doing many of the things the Commonwealth says should have

been done was in 2000 or 2001, or 2002 at the latest. Many of the alleged defects are identified in reports

received by the Commonwealth in December 2007, but not provided to the NSWRA until service of the first

Remedy Notice in January 2012.

The Commonwealth says that these are irrelevant considerations because under cl 10.1(b) it was entitled

to require a breach to be remedied within 14 days. It says it was not under any obligation to act

reasonably and in good faith in requiring a breach to be remedied within 14 days, even if it were under

such an obligation if it specified a longer time for the remedying of the breach. But that is not so. The

Commonwealth is required to act reasonably and in good faith in deciding whether or not to require the

breach to be remedied within 14 days or whether it should give a longer time for the breach to be

remedied, and it is required to act reasonably and in good faith in fixing such a longer time.

The Commonwealth submitted that under cl 10.1(b) its discretion to issue a remedy notice was "absolute".

There is nothing in the licence deed that so provides (compare Vodafone Pacific Ltd v Mobile

Innovations Ltd at [195] and [197]).

The fact that cl 10 provides detailed terms as to the circumstances in which the licensee will be taken to be

in default does not exclude the implication that the Commonwealth act in good faith and reasonably in

giving notice under cl 10.1(b) requesting a breach to be remedied. In Central Exchange Ltd v Anaconda

Nickel Ltd, Steytler J said (at [64]) that:

[64] One thing that is clear, however, is that principles of good faith "do not block use of terms

that actually appear in the contract".(Kham & Nate’s Shoes No 2 Inc v First Bank of Whiting

(1990) 908 F 2d 1351, at 1357, referred to in Burger King, above, para 173). In Burger King, the

Court (ibid) also referred with apparent approval to the following extract from the judgment of the

Court in Metropolitan Life Insurance Co v RJR Nabisco Inc (1989) 716 F Supp 1504 at 1507:

In other words, the implied covenant will only aid and further the explicit terms of the agreement

and will never impose an obligation "which would be inconsistent with other terms of the

contractual relationship". … Viewed another way, the implied covenant of good faith is breached

only when one party seeks to prevent the contract's performance or to withhold its benefits. … As

a result, it thus ensures that parties to a contract perform the substantive, bargained for terms of

their agreement.

As Perram J observed in Oliver v Commonwealth Bank of Australia [2011] FCA 1440 (at [29]–[32]) it is not

the law that a duty of good faith and reasonableness cannot be breached by the exercise of an express and

detailed contractual power. In the present case there is nothing inconsistent with the express provisions of

cl 10.1 if the Commonwealth is required to exercise its powers under that clause in good faith and

reasonably. The implication merely helps elucidate how the express contractual power is to be exercised, in

the same way as it did in Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187 ; (2001) 69

NSWLR 588 when applied to detailed contractual provisions concerning termination for breach.

The Court declared that the remedy notices were invalid and granted an injunction

restraining the Commonwealth from terminating the licence and excluding the Association

and its members from using the Rifle Range.

It is noteworthy that the Commonwealth also relied upon the doctrine of executive

necessity to support its termination of the licence. This was rejected by the Court in the

course of a detailed analysis of the scope of that doctrine.


5. ASSESSING DAMAGES FOR BREACH OF CONTRACT: THE FUNDAMENTAL RULE

REVISITED

5.1 Introductory

The High Court in Clark v Macourt32 revisited the law of contractual damages, specifically,

the so called "ruling principle" stated by Parke B in Robinson v Harman33.

Before examining this decision in detail it is necessary to set out some essential

background principles.

5.2 Contractual damages are compensatory

In Robinson v Harman Parke B said:

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is,

so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract

had been performed.

In Haines v Bendall34 the High Court restated the principle as follows at page 63:

The settled principle governing the assessment of compensatory damages, whether in actions of tort or

contract, is that the injured party should receive compensation in a sum which, so far as money can do,

will put that party in the same position as he or she would have been in if the contract had been performed

or the tort had not been committed: Butler v Egg and Egg Pulp Marketing Board; Todorovic v Waller;

Redding v. Lee; Johnson v Perez; M.B.P. (S.A.) Pty Ltd. v Gogic; Livingstone v Rawyards Coal Co.; British

Transport Commission v Gourley. Compensation is the cardinal concept. It is the "one principle that is

absolutely firm, and which must control all else": Skelton v Collins, per Windeyer J. Cognate with this

concept is the rule, described by Lord Reid in Parry v Cleaver, as universal, that a plaintiff cannot recover

more than he or she has lost.

This "ruling principle" has been consistently applied in the Australian appellate courts.

However, it must be read in the light of the decision of the High Court in Tabcorp Holdings

Ltd v Bowen Investments Pty Ltd35. Importantly, the plurality said at paragraph 13:

Oliver J was correct to say in Radford v De Froberville that the words "the same situation, with the respect

to damages, as if the contract had been performed" do not mean "as good a financial position as if the

contract had been performed" (emphasis added). In some circumstances putting the innocent party into

"the same situation … as if the contract had been performed" will coincide with placing the party into the

same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of

damages is the difference in value between the contract goods and the goods supplied. But as

Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect

the financial consequences of a notional transaction whereby the buyer sells the defective goods on the

market and purchases the contract goods. The buyer is thus placed in the "same situation … as if the

contract had been performed", with the loss being the difference in market value. However, in cases where

the contract is not for the sale of marketable commodities, selling the defective item and purchasing an

item corresponding with the contract is not possible. In such cases, diminution in value damages will not

restore the innocent party to the "same situation … as if the contract had been performed".

5.3 Mitigation and compensating advantage

A claimant may take steps to address the consequences of a breach of contract even

though a failure to take such steps would not be regarded as a failure to mitigate. If the

taking of such steps results in financial gain to the claimant, the contract breaker may

require that such financial gain be brought to account in the assessment of damages. In

32 [2013] HCA 65 (18 December 2013)

33 (1848) 1 Exch 850

34 (1991) 172 CLR 60

35 [2009] HCA 8


Macourt v Clark36, the New South Wales Court of Appeal cited with evident approval the

following statement in McGregor on Damage37 at [7-006]:

[W]here the claimant does take steps to mitigate the loss to him consequent upon the defendant's wrong

and these steps are successful, the defendant is entitled to the benefit accruing from the claimant’s action

and is liable only for the loss as lessened; this is so even though the claimant would not have been

debarred under the first rule from recovering the whole loss, which would have accrued in the absence of

his successful mitigating steps, by reason of these steps not being ones which were required of him under

the first rule. In addition, where the loss has been mitigated other than by steps taken by the claimant

subsequent to the wrong, the claimant can again recover only for the loss as lessened, provided that the

benefit gained is not to be regarded as collateral. Put shortly, the claimant cannot recover for avoided loss.

As to whether a benefit is "collateral" Giles JA in Ruthol Pty Ltd v Tricon (Australia) Pty

Ltd38 at paragraph [48]:

References to indirect or collateral benefits are not helpful when faced with novel circumstances, and a test

of "arising out of the act of mitigation" is itself not easy of application. In Hussain v New Taplow Paper Mills

Ltd (1988) 1 AC 514, which was concerned with payments to an injured employee under a workplace

health insurance scheme, Lord Bridge referred (at 528) to the difficulty of articulating a single guiding rule

to distinguish receipts by a plaintiff which are to be taken into account in mitigation of damage from those

which are not, and to the common law treating the matter "as one depending on justice, reasonableness

and public policy". I venture to repeat what I said in Tyco Australia Pty Ltd v Optus Network Pty Ltd [2004]

NSWCA 433 at [253], that "collateral" —

… combines notions of causal significance and judgmental attribution of responsibility in law

(positive or negative) for benefits and burdens consequent upon mitigating conduct. In Naumann

v Ford (1985) 2 EGLR 70 at 74 it was asked "whether any benefit to the plaintiff could be said to

relate sufficiently closely to a particular head of damage as to be appropriate to be set off against

it", and in Johns v Prunell (1960) VR 208 at 211 it was said that the law "endeavoured to form a

kind of moral judgment as to whether it is fair and reasonable that the defendant should have the

advantage of something which has accrued to the plaintiff, by way of recoupment, or other

benefit, as a result of the defendant's infringement of the plaintiff's rights".

And in Clark v Macourt (supra) Hayne J said at paragraph 17:

For present purposes, "mitigation" can be seen as embracing two separate ideas. First, a plaintiff cannot

recover damages for a loss which he or she ought to have avoided, and second, a plaintiff cannot recover

damages for a loss which he or she did avoid.

The Court of Appeal's analysis, and the respondent's argument in this Court, both depended upon engaging

the second of these propositions. In this Court, the respondent submitted, correctly, that it is a proposition

recognised in the speech of Viscount Haldane LC in British Westinghouse Electric and Manufacturing Co Ltd

v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689-690.

5.4 Clark v Macourt considered

The appellant and respondent were medical practitioners. Each conducted an assisted

reproductive technology practice (known as an ART practice). The appellant, Dr Clark,

conducted her practice under the business name "Fertility First" and the respondent,

Dr Macourt, conducted his practice under the business name "St George Fertility Centre".

By a deed entered into in 2002 St George sold to the appellant what were described in

clause 1a as "the Assets" which were defined to include Sperm which was in turn defined

to mean all frozen donor sperm. Under clause 2a the purchase price was calculated as

follows:

In respect of each of the calendar years 2002, 2003 and 2004,15% of the amount by which the purchaser's

gross fee income exceeds 105%, 110% and 115% respectively of the fee income of the purchaser for the

calendar year 2001.

36 [2012] NSWCA 367

37 18th ed (2009)

38 [2005] NSWCA 443


The purchase price payable under the contract in accordance with the formula was

$386,950.91.

The donor sperm for use in an ART practice is stored in thin "straws" about 3mm to 5mm

wide. One of the Assets referred to in the deed was 3,513 straws of donor sperm. In

August 2005 the straws became unusable as a result of breaches of warranty by the

respondent seller. At that time Dr Clark had used some 504 of the straws leaving 3,009

to be discarded. As a result of evidence before the primary judge, his Honour held that

Dr Clark could have expected to use at least 2,500 straws had they been warranty

compliant.

In September 2005 Dr Clark began purchasing replacement sperm from Xytex

Corporation in the United States. This was the sole source of contractually compliant

sperm. At the time of trial in September 2011 Dr Clark had purchased 1,546 replacement

straws of Xytex sperm.

In assessing damages for breach of contract the primary judge concluded that the

appropriate measure to be applied was the difference between a "hypothetical sale" of

1,996 of the unusable straws and the amount Dr Clark would have paid in a "hypothetical

purchase" of the Xytex sperm in 2002 (being the date of breach). His Honour considered

that the best evidence of what that hypothetical purchase would have cost was the first

purchase by Dr Clark in September 2005 of straws of Xytex sperm for a total cost of $511

per straw. His Honour then extrapolated that figure to 1,996 straws resulting in an

amount of $1,020,252. As noted by Gageler J in the High Court:

Dr Macourt, for his part, points to the remarkable prospect of being saddled, if the primary judge's

measure were to be upheld, with an obligation to pay Dr Clark $1,020,252.70 in damages as a

consequence of the company in effect failing to deliver one asset of a business which the company ended

up selling to Dr Clark for a total price of only $386,950.91. But Dr Macourt does not seek to attach any

particular legal significance to the disparity between those two figures.

The contest in the case turned on the significance of the finding that Dr Clark charged her

patients the acquisition and transport costs of the Xytex sperm from the United States.

She had not previously charged her patients for the acquisition of the St George sperm

which she had utilised up to August 2005. Dr Macourt argued that Dr Clark suffered no

compensable loss, having recouped her costs from her own patients.

The primary judge classified the 2002 deed as a contract for the sale of goods. In

response to Dr Macourt's submission that Dr Clark suffered no loss his Honour noted:

[21] The simple answer to that proposition is that Dr Clark paid twice for the use of sperm and

recovery of the cost of acquisition and storage of the sperm purchased from Xytex still left her out

of pocket for the amount paid under the deed. (emphasis added)

Tobias AJA in delivering the principal judgment of the Court of Appeal referred to

Dr Clark's submission with respect to the onus on Dr Macourt. His Honour noted:

[95] Thus, in summary, it was submitted that to discharge their onus St George and Dr Macourt had to

establish that the breach conferred on Dr Clark a benefit that Dr Clark could not have gained if the

Deed had been performed. In other words, they had to prove that Dr Clark would have been

unable to charge her patients in respect of hypothetically compliant St George sperm, or else to

prove that any such charge she could have made would have left her in an inferior position

compared with that in which she was in fact in to a proved extent

His Honour continued.

[125] From the foregoing it followed, so it was submitted, that St George and Dr Macourt had not

demonstrated that Dr Clark's prima facie damages were diminished or mitigated by the receipt of

payments from her patients for the supply of Xytex sperm. This was because it was not established that

receipts of that magnitude could not have been received by Dr Clark in respect of hypothetically compliant

St George sperm.

[127] In my view, it cannot be gainsaid that Dr Clark took steps to mitigate her loss and that those steps

met with a high degree of success. St George's breach of contract made it necessary for her to acquire


sperm from an alternative source. She did so at a cost to her. That cost represented the prima facie loss

she suffered as a result of St George's breach, subject to the effects of such mitigation as she achieved or

ought to have achieved. She in fact achieved mitigation to what was, in practical terms, the maximum

extent allowed by the legal and ethical constraints under which she operated and which both parties

necessarily had in contemplation as being operative in the particular circumstances.

[128] The true measure of Dr Clark's damages thus consisted of two elements. The first related to the cost

of the replacement sperm sourced from Xytex before the date for assessment of damages. The second

concerned the residue of the "lost" 1996 St George straws over and above those in fact replaced by Xytex

sperm up to the date of trial.

[129] In respect of the loss of each straw of replacement sperm actually sourced from Xytex before that

date, the sum (if any) representing that part of the overall cost of acquisition of that straw not recouped

from a patient would be the chief component of Dr Clark's loss. To each such separate sum would be added

appropriate interest from the date of acquisition from Xytex to the date of assessment of damages.

[130] In respect of the residue of the "lost" 1996 straws over and above those in fact replaced by Xytex

sperm up to the date of trial, the appropriate course would have been to assume that Dr Clark would

continue to source straws of donor sperm from Xytex at a cost consistent with that which had prevailed

since August 2005, and that she would continue to recoup from patients the same proportion of that cost

as she had done in the past. Her damages would then be calculated as the aggregate of the discounted

present value of the un-recouped balances (if any) of that cost as at the date of their assessment.

The High Court allowed Dr Macourt's appeal and reinstated the judgment of the primary

judge.

Keane J formed part of the plurality together with Hayne, Crennan and Bell JJ. Gageler J

in dissent dismissed the appeal.

Dr Macourt's key contentions were summarised by Keane J at paragraph 91:

St George and the respondent contended that the date for assessment of damages should have been the

date of trial. They argued that any loss suffered by the appellant was suffered during the period between

completion of the contract and trial, and during that period the purchaser recovered the cost of acquisition,

transport and storage of sperm by charging those costs to patients. On that approach, the appellant had

suffered no loss by the date of trial. The primary judge rejected that contention, applying "the general rule

of common law ... that damages are assessed at the time of breach of contract or when the cause of action

arises".

And at paragraph 98 his Honour summarised Dr Clark's principal submission:

The appellant's challenge to the decision of the Court of Appeal may be stated succinctly. St George's

breach of contract meant that the value of the sperm straws as assets acquired by the appellant under the

Deed was less than it would have been if St George's promises had been kept. The appellant suffered that

loss of value at the date of completion of the acquisition of the assets.

There was a sharp difference of view between Keane J and Gageler J as to the way in

which Dr Clark formulated her claim. Thus, Gageler J said at paragraph 63:

Dr Clark has at no stage suggested that her loss is to be identified as the difference between the value of

the business she acquired and the value of the business for which she contracted, and at an early stage

abandoned a claim that a component of her loss was consequential loss of profits in the conduct of her

business. She has at every stage sought substantial, not merely nominal, damages.

On the other hand, Keane J said at paragraphs 101 to 103:

The respondent contended that the appellant's claim was not for the value of the sperm to which she was

entitled, but for the costs and expenses associated with the "procurement of replacement sperm". The

respondent said that these costs and expenses were incurred subsequent to the date of breach and,

accordingly, should have been assessed at the date of trial.

The forensic advantage to the respondent of framing the appellant's claim in this way was that it opened

the way for the argument, accepted by the Court of Appeal, that the appellant recouped from her dealings

with her patients the costs and expenses incurred by her in procuring replacement sperm, so that she

suffered no loss by reason of St George's breach of contract.

The respondent's contention under this heading should be rejected. The appellant was entitled to frame her

claim in the manner most advantageous to her, and to have that claim determined. The nature of the

appellant's claim was made clear in para 13(a) of the appellant's reply in the Supreme Court. Her claim for

damages was for an award which:


gives her the benefit of her bargain under the Deed by giving her, so far as money is capable of

doing so, something equivalent to the value of the worthless Sperm delivered to her, as opposed

to damages to compensate her specifically for her outlay to Xytex (the amount actually paid and

payable to Xytex being no more than evidence of an appropriate measure of damages).

The core question for the Court was whether Dr Clark's damages should be assessed on a

difference in value basis or on a cost basis.

Keane J set out the applicable principle at paragraph 106:

The principle according to which damages for breach of contract are awarded is that the damages should

put the promisee in the same situation with respect to damages, so far as money can do it, as it would

have been in had the broken promise been performed. The appellant was entitled to claim this measure,

rather than a measure based, either on the difference between what she paid for the sperm straws and

what they were worth, or on the expense "of undoing the harm which [her] reliance on the defendant's

promise has caused [her]".

His Honour then referred to the "ruling principle" adopted by the Court in Tabcorp

Holdings.

The critical passages in his Honour's reasons for judgment are set out at paragraphs 128

and 129:

To say that in the conduct of the appellant's practice she was able to recover the cost to her of the Xytex

sperm incurred in the course of her practice after acquiring the assets is to fail to address the claim which

the appellant actually made. The loss for which the appellant claimed compensation occurred at the

completion of the Deed, at which time the assets which she acquired were not as valuable as they would

have been had St George's performance measured up to its warranties. One may make this point, without

dwelling impermissibly on "circumstances peculiar to the plaintiff", by observing that, at the completion of

the Deed, if the appellant had been minded to on-sell her business (enhanced by the acquisition of the

assets from St George) the value of that business would have been substantially less because much of the

stock in trade could not have been profitably deployed by the purchaser. That the appellant was not, in

fact, in the market to sell her business or its assets including its stock in trade is beside the point, which

point is that the appellant's post-acquisition assets were less valuable than should have been the case.

The point that the appellant had suffered a real loss in terms of the benefit of her bargain at the date of

completion of the acquisition of the assets may be made another way. The appellant may have been able

to charge fees for her services in the conduct of her practice which were within the market range but

returned her a greater profit because she was not obliged to incur the extra cost of replacement sperm.

Whether or not she chose to realise the value of compliant St George sperm in this way was a matter for

her. Whether or not she would have been disposed to take such a course was not explored in evidence at

trial; but that is not a deficit in her claim. She was entitled to claim the measure of damages under the

ruling principle without going into such matters. It would be an unprecedented application of the rule in

Hadley v Baxendale to confine the measure of a purchaser's damages by reference to the likely effects of

the particular decisions of the purchaser as to how she might choose commercially to exploit the assets

acquired from a seller. The point is that one cannot say that the appellant's loss was confined to the

expense that she had to incur (but was able to recoup from patients) in acquiring 1,996 straws of sperm

from an alternative supplier as and when she needed those straws for the treatment of patients.

Keane J derived support for his conclusion from a line of English Court of Appeal decisions

dealing with sale of goods and the prima facie rule set out in section 53(3) of the Sale of

Goods Act 1979 (corresponding to section 54(3) of the Sale of Goods Act 1923 (NSW)).

Specifically, his Honour referred to the decision in Slater v Hoyle & Smith Ltd39 in which

Warrington LJ said at 18:

The purchaser here has received inferior goods of smaller value than those he ought to have received. He

has lost the difference in the two values, and it seems to me immaterial that by some good fortune, with

which the [sellers] have nothing to do, he has been able to recoup himself what he paid for the goods.

Relevantly, Keane J noted at paragraph 134:

The observations of Warrington LJ apply with equal force to the present case. The value of the St George

sperm lay not in what it might bring in a market for sperm as a commodity, but, as the Deed

contemplated, as stock of a business. And as stock of the business they were distinctly inferior.

39 [1920] 2 KB 11


Hayne J said at paragraph 22:

Showing that the appellant had charged, or could charge, third parties (her patients) the amount she had

paid to acquire replacement sperm from Xytex was irrelevant to deciding what was the value of what the

vendor should have, but had not, supplied. If the contract had been performed according to its terms, the

appellant would have had a stock of sperm having the warranted qualities which she could use as she

chose. She could have stored it, given it away or used it in her practice. In particular, she could have used

it in her practice and charged her patients nothing for its supply. But because the vendor breached the

contract, the appellant could put herself in the position she should have been in (if the contract had been

performed) only by buying replacement sperm from Xytex. Whatever transactions she then chose to make

with her patients are irrelevant to determining the value of what should have been, but was not, provided

under the contract.

Gageler J in dismissing the appeal noted at paragraph 67:

To measure a buyer's damages as the difference, as at the date of delivery, between what the buyer would

have obtained in a hypothetical sale of contractually non-compliant goods delivered and what the buyer

would have paid in a hypothetical purchase to obtain delivery of contractually compliant goods from

another seller is ordinarily appropriate in the standard category of case where a seller fails to deliver

marketable goods to a buyer in compliance with a contractual warranty. That is because the measure

ordinarily gives to the buyer the monetary equivalent of the value to the buyer of the performance of the

contract by the seller. The value to the buyer of having ownership of, and control over, contractually

compliant goods that can be bought and sold in a market as at the time of delivery ordinarily equates to

the market value of those goods at that date. The market value of goods is not ordinarily dependent on

circumstances peculiar to an individual seller or individual buyer. Accordingly, it ordinarily makes no

difference why the buyer chose to purchase the goods or whether the buyer could be expected actually to

realise the monetary equivalent of that value by re-selling or otherwise disposing of the goods.

And his Honour concluded at paragraph 70:

The value to Dr Clark of the company delivering frozen sperm in 2002 in compliance with the contract

could not, in those circumstances, be equated with the value to a buyer of having dominion over

contractually compliant goods of a nature which would be available to be re-sold by the buyer in a market

at the time of delivery. The value to Dr Clark of the company delivering contractually compliant frozen

sperm lay rather in Dr Clark gaining control over a stock of frozen sperm which she could then use for the

treatment of her patients in the normal course of her practice. That is to say, if she had been able to take

possession from the company of contractually compliant frozen sperm, Dr Clark would have had the benefit

of being relieved of the need thereafter to source sperm from somewhere else as and when she needed

sperm to treat her patients.

Two issues arise in connection with the decision of the plurality.

First, Keane J's reference to Slater v Hoyle & Smith Ltd does not take account of the

critical comments of the later decision of the English Court of Appeal in Bence Graphics

International Ltd v Fasson UK Ltd40. Auld LJ in referring to section 53(3) of the English

Sale of Goods Act said:

As to section 53 (3) there is, in my view, a danger of giving it a primacy in the code of section 53 that it

does not deserve. The starting point in a claim for breach of warranty of quality is not to determine

whether one or other party has "displaced" the prima facie test in that subsection. The starting point is the

Hadley v Baxendale principle …

In my view, the time has come for Slater's case to be reconsidered at least in the context of claims by a

buyer for damages for breach of warranty where he has successfully sold on the subject matter of the

contract in its original or modified form without claims from his buyers.

It is noteworthy that Crennan and Bell JJ in their joint reasons made a footnote reference

to Bence Graphics but did not engage in any analysis on the case.

Secondly, the plurality do not make any comment on a line of English and Australian

cases which make the point that the "date of breach" rule is not an inflexible principle.

Thus, McCall JA in McCrohon v Harith41 having considered the decision of the House of

40 [1998] QB 87

41 [2010] NSWCA 67


Lords in Golden Strait Corporation v Nippon Yusen Kubishika Kaischa42 observed at

paragraph 59:

Accordingly, Lord Scott rejected (at [32]) the owners' contention, describing it as attributing "to the

assessment of damages at the date of breach rule an inflexibility which is inconsistent both with principle

and with the authorities". While his Lordship accepted the date of breach rule usually put the victim of a

breach of contract in the same position, so far as money could do it, as if the contract had been performed

(the "compensatory principle"), his Lordship did not accept that that was universally so. In his view

(at [38]) the owners' argument offended the compensatory principle, because they were seeking

compensation exceeding the value of the contractual benefits of which they were deprived. This was

because their case required "the assessor to speculate about what might happen over the period

17 December 2001 to 6 December 2005 regarding the occurrence of a cl 33 event and to shut his eyes to

the actual happening of a cl 33 event in March 2003".

6. DIRECT AND CONSEQUENTIAL LOSS: ONGOING ISSUES

6.1 Background

It is common to limit indemnities to direct loss and to exclude consequential loss.

Similarly, in exclusion clauses it is also common to exclude liability for consequential loss.

The following is a typical example of the drafting of such a limitation:

Party A shall indemnify Party B on demand against any direct loss (excluding consequential loss), cost or

expense arising out of or in connection with any failure by Party A to observe or perform any of its

obligations under this agreement. 43

Considerable care needs to be exercised in the drafting of such an indemnity. The

draftsperson should have a clear understanding of precisely what losses are to be included

within the indemnity and, conversely, what losses are to be excluded. The first step is to

understand the meaning in law of the expressions "direct loss" and "consequential loss".

In a sense all loss flowing from a breach is consequential and therefore the use of the

term consequential in this context is not particularly helpful. It is patently clear that the

exclusion of consequential loss is not intended to operate as an exclusion of all loss

flowing from a breach otherwise the inclusion of direct loss would be meaningless.

6.2 Hadley v Baxendale and consequential loss

Historically, both English and Australian authorities characterised "direct loss" as any loss

flowing from a breach of contract which would have been within the first limb of the rule

in Hadley v Baxendale, that is, loss flowing naturally from the breach. Accordingly, in a

commercial contract loss of profit, loss of revenue or loss of opportunity may (depending

on the circumstances) constitute direct rather than consequential losses. Conversely, a

consequential loss is a loss which though causally connected to the breach is a loss which

would be in the contemplation of the party in breach by reason of knowledge of special

circumstances.

In the English Court of Appeal decision in Watford Electronics Ltd v Sanderson CFL

Limited44 the following exclusion clause was considered by the court:

7.3 Neither the Company nor the Customer shall be liable to the other for any claims for indirect or

consequential losses whether arising from negligence or otherwise. In no event shall the

Company's liability under the Contract exceed the price paid by the Customer through the

Company for the Equipment connected with any claim.

42 [2007] 2 AC 353

43 This example is intended to highlight issues with the drafting of the clause and is not being put forward as a recommended

clause.

44 [2001] EWCA 317


In commenting on that clause the Court of Appeal noted:

The purpose of the first sentence of the clause is (at the least) to exclude contractual claims for indirect

and consequential losses; that is to say, exclude liability in contract for losses which could be recovered

only under the second limb of the rule in Hadley v Baxendale. Those are losses which do not result "directly

and naturally" from the breach; but which, nevertheless, bear or must reasonably be supposed to have

been in the contemplation of both parties at the time when the Contract was made.

The significance of this basis for distinguishing between direct and consequential loss is

demonstrated by the decision in Hotel Services Ltd v Hilton International Hotels (UK)

Ltd45. This is another decision of the English Court of Appeal.

Hilton purchased from Hotel Services Ltd (HSL) a device for installation in their various

hotels which was intended to ensure the honest use of minibars by hotel guests.

The procurement contract contained the following section:

SECTION 14: LIABILITY

(1) The Company [HSL] will not in any circumstances be liable for any indirect or consequential loss,

damage or liability arising from any defect in or failure of the System or any part thereof or the

performance of this Agreement or any breach hereof by the Company or its employees.

(2) …

(3) …

Unfortunately the device was a failure and Hilton ultimately removed all of them from

their hotels and sought damages for breach of contract. In particular, Hilton claimed loss

of profit on the minibars. HSL sought to rely on the exclusion clause arguing that in the

circumstances the claimed loss of profit constituted indirect or consequential loss thereby

exonerating them from liability. In finding in favour of Hilton Sedley LJ noted as follows:

We prefer therefore to decide this case, much as the Victoria Laundry case was decided, on the direct

ground that if equipment rented out for selling drinks without defalcations turns out to be unusable and

possibly dangerous, it requires no special mutually known fact to establish the immediacy both of the

consequent cost of putting it where it can do no harm and – if when in use it was showing a direct profit –

of the consequent loss of profit. Such losses are not embraced by the exclusion clause, read in its

documentary and commercial context.

In other words, loss of profit was a direct rather than a consequential loss as it fell within

the first limb of Hadley v Baxendale.

6.3 Consequential loss in the Victorian Court of Appeal: the Peerless decision

However, the characterisation of consequential loss as loss recoverable under the second

limb of Hadley v Baxendale must now be reassessed in light of the recent Victorian Court

of Appeal decision in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd46.

In that case the respondent Peerless purchased from the appellant Environmental

Systems a piece of equipment described as an RTO which was intended to eliminate the

odorous emissions produced by Peerless' business which involved organic recycling and

the production of technical fats. In its proposal Environmental Systems stressed the

energy saving involved in the use of the RTO compared to the continued use of an

afterburner which Peerless had utilised for a number of years.

45 [2000] 1 All ER (Comm) 750

46 (2008) 19 VR 358


The contract described by Nettle JA as having "the hallmarks of having been cobbled

together from a combination of boilerplate clauses and … the provision of limited

performance guarantees" contained the following clause:

8.9 Liquidated Damages and/or Consequential Loss

As a matter of policy, Environmental Systems does not accept liquidated damages or consequential

loss.

Commissioning of the RTO commenced in October 1998 but without success. It was

finally shut down in July or August 2001 when Peerless reverted to use of the afterburner.

Peerless claimed damages for breach of contract and compensation for contravention of

section 52 of the Trade Practices Act.

In its contract claim Peerless sought recovery in respect of 4 categories of loss:

(a) the cost of purchasing, installing and commissioning the RTO, attempting to make

the RTO functional and repairing the existing afterburner;

(b) the cost to Peerless of its employees involved in attempting to make the RTO

functional;

(c) the cost of dismantling and disposing of the RTO; and

(d) additional energy costs incurred by Peerless as a consequence of the RTO not being

functional.

The primary judge acceded to Peerless' claim for losses under (b) and (d).

However, the Victorian Court of Appeal rejected the claims under (b) and (d) on the basis

that the losses were consequential losses within the terms of the exclusion clause. In so

finding the Court rejected the dichotomy of direct and consequential loss based on the

first and second limbs of Hadley v Baxendale as hitherto followed by the English Court of

Appeal.

Nettle JA (Ashley and Dodds-Streeton JJA concurring) noted at paragraph 87:

In point of principle, however, the English authority appears to be flawed. As was pointed out in earlier

editions of McGregor on Damages, the true distinction is between 'normal loss', which is loss that every

plaintiff in a like situation will suffer, and 'consequential losses', which are anything beyond the normal

measure, such as profits lost or expenses incurred through breach.

And later at paragraph 93 his Honour noted:

In my view, ordinary reasonable business persons would naturally conceive of 'consequential loss' in

contract as everything beyond the normal measure of damages, such as profits lost or expenses incurred

through breach.

The distinction was explained in the context of the provisions of the Sale of Goods

legislation dealing with the measure of damages on non-delivery by a seller and non-

acceptance by a buyer.

The distinction between the so called normal measure and consequential loss does not

correspond with the distinction between the first and second limbs of Hadley v Baxendale.

Accordingly, some forms of consequential loss may fall within the first limb such as lost

profits.

Also, a direct loss in the sense of a loss falling within the first limb may be a consequential

loss in the taxonomy adopted by the Victorian Court of Appeal.


It is noteworthy that in dealing with the classification adopted in McGregor on Damages

Sedley LJ in Hotel Services observed at page 753:

If consequential losses include profits lost or expenses incurred through breach, it is unsurprising that such

loss may come within the first rule in Hadley v Baxendale. What we find more problematical than the

conclusion is the premise that such losses cannot be normal losses in the author's own sense of losses

which every plaintiff in a like situation will suffer.

In Peerless, the Court of Appeal held that the respondent's claims for the cost of labour

incurred in attempting to make the RTO operable and the extra costs for gas constituted

consequential loss. However, the cost of purchasing, installing and commissioning was

allowed.

The correctness of the Peerless decision was recently considered by the Supreme Court of

South Australia in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7)47.

The case involved a "Turnkey Refurbishment Contract for Refurbishment of the Playford B

Power Station" entered into between a partnership which traded under the name Flinders

Power Partnership and Alstom. Alstom, as head contractor, entered into an electrical,

control and instrumentation (EC&I) subcontract with Yokogawa. Article 3 of the

Subcontract provided:

Notwithstanding any other Article of this Electrical and C & I Contract the Subcontractor shall not be liable

for any indirect, economic or consequential loss whatsoever.

Despite extensive provisions in the Subcontract dealing with delay and liquidated

damages including a provision that liquidated damages were to be Alstom's sole remedy

for delay, Alstom sought to argue on a proper construction of the Subcontract that it was

still entitled to seek general damages for breach of contract in relation to delay. It was in

that context that the Supreme Court considered the applicability of the Peerless decision.

Bleby J starts off by noting Alstom's submission that:

The exclusion of indirect or consequential loss is restricted to damages falling within the second limb of

Hadley v Baxendale, being arising by reason of some special or unusual circumstances and being for losses

"as may reasonably supposed to have been in contemplation of both parties, at the time they made the

contract, as the probable result of the breach by it", as opposed to damages falling under the first limb,

being "such as may fairly and reasonably be considered either arising naturally, ie, according to the usual

course of things, from such breach of contract itself". Alstom submits that its claim for damages relates to

losses which flow naturally from the alleged breach of the EC&I contract YDRML. The claim therefore arises

only under the first limb of Hadley v Baxendale in respect of which the exclusion insofar as it relies on

indirect or consequential loss, has no effect.

After a rather unconvincing analysis of English authority on the point, Bleby J concludes:

Not only do I respectfully prefer the reasoning of the Victorian Court of Appeal to that of the English

authorities, but as a matter of precedent I regard as a more persuasive authority.

Bleby J also considered the meaning of the expression "economic loss" as used in

Article 3. Although "Economic Loss" was defined in Article 2.5, "economic loss" (lower

case) in Article 3 was different. His Honour concluded:

That means that the expression "economic … loss" must be given its ordinary meaning. That is extremely

wide. In tort it includes any financial loss not consequential upon loss of or damage to property in which

the plaintiff has a proprietary or possessory interest or consequential upon personal injury to the plaintiff.

It is difficult to conceive how any of the claims by Alstom could be for other than economic loss sustained

by Alstom.

47 (2012) SASC 49


The decision in Peerless was noted with apparent approval by the Supreme Court of New

South Wales in Waterbrook at Yowie Bay Pty Ltd v Allianz48. However, the Supreme Court

did not analyse the Peerless decision for its correctness.

6.4 Consequential loss: a new approach

The ongoing controversy as to the legal meaning of "consequential" or "indirect loss" and

the status of the Peerless decision was revisited by the Supreme Court of Western

Australia in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2 )49.


In October 1994 SECWA (the predecessor to Regional Power Corporation) entered into a

Power Purchase Agreement (PPA) with Pacific Hydro Pty Ltd (Pacific Hydro) for the

construction and then the supply of electricity from the Ord Hydro Power Station. The

trial judge described the structure of the PPA at paragraph 77:

On its express terms, the PPA is clearly a long term commercial relationship. The PPA's performance

regime envisaged the defendants initially financing, then constructing a hydro-electric power station at

Lake Argyle, on the basis that once built, it would operate and supply energy to the plaintiff from the Power

Station over a long period. That "BOO" project was to be implemented in phases. The first phase dealt with

construction of the power station. The second phase was the operation of the Power Station and correlative

supply of its electricity to the plaintiff for eventual use in the Kimberley region of Western Australia.

Clause 26.1 of the PPA read:

Neither the Project Entity nor SECWA shall be liable to the other party in contract, tort, warranty, strict

liability, or any other legal theory for any indirect, consequential, incidental, punitive or exemplary

damages or loss of profits.

On 27 August 2006 the Power Station suffered an outage. This led to flooding which in

turn resulted in the Power Station becoming inoperative for two months. The evidence

was that following the outage the emergency generator failed to start which meant that

the pumping system installed to prevent flooding did not operate. Had the emergency

generator been functional the flooding would not have occurred.

Regional Power claimed damages for breach of contract. They claimed the following

categories of cost:

(a) costs for installing replacement generators;

(b) costs for airfares, wages and accommodation of employees;

(c) cost of hire for cranes to mobilise and demobilise the Kununurra Power Station;

and

(d) cost for diesel fuel to run replacement generators.

The substance of the defendant's defence was summarised by the trial judge (Kenneth

Martin J) at paragraphs 74 to 76:

Invoking Environmental Systems and a possible new classification touchstone of the "normal measure of

damages", Mr Howard SC for the defendants submitted ordinary reasonable parties in the position of

parties to the PPA, would surely have viewed the plaintiff's monetary outlays incurred in 2006 in obtaining

replacement electricity (by hired generators fuelled by diesel to run at the Kununurra Power Station) as

falling outside a range of any "normal measure of damages". Hence, the plaintiff's claimed economic

damages are caught by and barred by operation of cl 26.1 of the PPA. The amounts claimed are, it is

48 [2008] NSWSC 14451

49 [2013] WASC 356


argued by the defendants, properly characterised being either "indirect" damages or loss, or

"consequential" damages or loss.

In effect then, the defendants contend that the normal, direct and immediate consequence of the

defendants' PPA supply breach is merely the plaintiff does not have the levels of electricity supplied to it

from the Power Station that the plaintiff was otherwise to take and pay for under the PPA's supply

arrangements. The supply breach result may leave the plaintiff in a position of being unable to on-sell

electricity. It may then, as a result, lose the profit in these lost sales. Further, the defendants say the

plaintiff may not be in a position to meet the local demands of its retail customers in the Kimberley region

as a result of the defendants' PPA supply breach (para 75 of the defendants' submissions). Again the

defendants argue that direct breach consequence is only a loss of profit for the plaintiff, arising from any

PPA supply breaches of this kind. [I note, of course, that losses of profit under the PPA are of a genre loss

or damage expressly addressed and excluded under PPA cl 26.1, in any event.]

The defendants say, in the end, the economic outlays of the plaintiff (towards hiring alternate generators

or purchasing the diesel fuel needed to run them) to generate replacement electricity, must correctly be

characterised as an "indirect" or "consequential" loss or damage. Hence, the result is that such economic

losses are expressly excluded under cl 26.1.

His Honour went on to compare the approach of the English Court of Appeal with the

approach of the Victorian Court of Appeal regarding the expression "consequential loss".

In an important passage in his reasons for judgment his Honour said at paragraph 96:

To reject the rigid construction approach towards the term "consequential loss" predicated upon a

conceptual inappropriateness of invoking the Hadley v Baxendale dichotomy as to remoteness of loss, only

then to replace that approach by a rigid touchstone of the "normal measure of damages" and which always

automatically eliminates profits lost and expenses incurred, would pose equivalent conceptual difficulties.

Accordingly, I doubt whether the [93] observations in Environmental Systems were intended to carry any

general applicability towards establishing a rigid new construction principle for limitation clauses going

much beyond the presenting circumstances of that case.

In rejecting the defendant's contention that the only direct loss flowing from the supply

breach was loss of profits his Honour observed at paragraphs 105 and 106:

Profits lost after a supply breach towards the hypothetical electricity commodity trader wrongly not

supplied with its promised level of the commodity are one thing. The hypothetical commodity trader may

not then be in a position to on-trade the commodity at a profit. But the PPA scenario of breach by failure to

supply SECWA manifests as a more complex breach situation. SECWA is demonstrably known under the

PPA to carry statutory obligations where it is "required" (as is accepted under para 19 of the agreed

statement of facts) to supply this essential commodity to its customers.

Here, the sophisticated commercial PPA entities, assessed objectively, surely can be taken to have likely

appreciated that if the defendants' hydro-electric power station failed to operate as promised, thereby not

generating a supply of electricity to SECWA sufficient to enable it to meet its own supply requirements to

Kimberley customers, that fall-back or replacement steps by SECWA to secure some level of replacement

energy for its customers, would follow. So much was, in effect, agreed between the parties (see para 19 of

the agreed statement of facts as quoted at [13]). There was a well understood requirement by the parties

to the PPA for SECWA to continue to supply its Kimberley customers with electricity.

Key conclusions are contained in paragraphs 112 to 114:

For present circumstances, SECWA's replacement energy expenditures for hired diesel generators, diesel

fuel, labour to run the generators and associated expenses, on my assessment, are properly viewed as

direct losses. They are not an indirect loss (or damages) when assessed in this bespoken context of a long

term supply relationship under PPA's supply arrangements to an entity carrying its own local community

electricity supply obligations.

Equally, I do not assess the 2006 expenditures of SECWA as being "consequential". At its widest, the word

"consequential" might always be read as being somehow responsive to something, and thereby

encapsulating almost every economic outlay, following upon a breach (see again, Ryan J in GEC Authority

Australia Ltd v City of Sunshine (55) cited above). But that is not a sensible meaning to attribute to the

word "consequential" when used within cl 26.1, in overall context. Having assessed the economic outlays

as direct, that leads to a correlative conclusion that the expenditure amounts are also not to be viewed as

being consequential.

In the end, the character of the economic losses or damages claimed here by the plaintiff are properly

assessed as direct in nature. There is a relationship within cl 26.1 as between the deployed words "indirect"

and "consequential". The chosen terminology in its overall consequence needs to be assessed rationally, in

a context of limitation and in the PPA, as a whole. As I assess the relevant claimed loss of the plaintiff as

direct, equally I do not assess it as being a consequential loss.

It is understood that the defendant's have appealed to Western Australia Court of Appeal.


Regional Power discloses a completely new approach for ascertaining the meaning of the

expression "indirect or consequential loss" in the context of a limitation clause. The

Supreme Court eschews any rigid or inflexible rule of construction based either on the two

limbs of Hadley v Baxendale or on a concept of "normal measure of loss" advanced in

Peerless. Regrettably the decision leaves Australian law in a continuing state of

uncertainty in respect of a matter of critical importance in the drafting of liability clauses.

It thus becomes all the more important for parties to address the deficiency by

appropriate drafting.

6.5 Drafting examples

(a) "Consequential Loss" means any loss recoverable at law (other than loss arising

in the usual course of things) which is:

(a) consequential upon other loss;

(b) a loss of opportunity or goodwill;

(c) a loss of profits;

(d) a loss of anticipated savings or business;

(e) loss of value of any equipment;

and any costs or expenses in connection with the foregoing.

(b) Consequential loss means any:

(a) indirect or consequential loss;

(b) loss of use;

(c) loss of product or production;

(d) delayed, postponed, interrupted or deferred production;

(e) inability to produce, delivery or process;

(f) loss of profit, revenue or anticipated revenue;

(g) loss of bargain, contract, expectation or opportunity;

(h) punitive or exemplary damages,

in each case arising from or in connection with the performance of the Contract and

whether or not foreseeable at the time of entering into the Contract.

Jeffrey Goldberger

Telephone: +61 2 6234 4083

Email: [email protected]

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