WHEN DOES CONDUCT ALLOW A PARTY TO TERMINATE A CONTRACT?

24/09/2008

We were recently asked to advise in relation to the interpretation of an employment agreement. 

 

Our client Anne signed an employment agreement under which she agreed to accept a certain level of base pay for the first six months of her employment.  After the first six months she agreed that she would accept a lower level of base pay but her pay would be supplemented by commissions earned.

 

Despite the employment agreement, her employer subsequently told her that he wanted to maintain her current level of base pay and he was not going to pay her the agreed lower level of base pay supplemented by commissions.

 

Anne wanted to know whether her employer had repudiated his obligations under the agreement which would allow her to terminate her employment agreement.

 

Repudiation is defined as “a promisor’s absence of readiness or willingness to perform which gives rise to a right to terminate”.  That is, a party must by his or her actions show that he or she is not ready or willing to perform the terms of the agreement.

 

While it was arguable that the employer’s unilateral decision to pay Anne at a certain level of base pay for a further period of time (contrary to what was provided for in the agreement) showed an absence of readiness or willingness to perform the existing terms of the agreement, because Anne was actually receiving more than she otherwise would, there was some doubt that her employer’s actions amounted to repudiation in the legal sense.

 

On the other hand, the employer’s decision prevented Anne taking advantage of the commission scheme and to that extent resulted in a potential loss that could ground an argument for repudiation.

 

If a Court found that the employer’s actions were sufficient to repudiate his obligations under the agreement, then Anne could accept the employer’s repudiation by terminating the agreement and discharging both parties from their obligations to perform the agreement.

 

But it was not clear whether the employer’s actions amounted to a clear repudiation of the agreement and Anne was not prepared to take the risk.

 

For further information in relation to the law of termination and repudiation, contact Townsends Business & Corporate Lawyers on (02) 8296 6222.