18/08/2008

Just how bad does a breach of contract have to be before the innocent party can terminate the contract?
 
In the decision of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited, the High Court considered the ability of a party to a contract to terminate the contract as a result of the other party’s breach of a non-essential term.
In this case, the Koompahtoo Local Aboriginal Land Council (KLALC) and a private development company entered into a  joint venture agreement for the rezoning and development of land owned by KLALC near Morisset.  The estimated value of the land was $30 – 100 million dollars.
 
The joint venture failed miserably.  KLALC appointed an administrator who discovered that the private development company had failed to keep proper books of account and financial records.  Ultimately, the administrator terminated the contract on the basis that the private development company had, by its conduct, repudiated the joint venture agreement.
 
The private development company commenced proceedings seeking damages for what it alleged to be KLALC’s unlawful termination of the contract.
 
When the matter came before the High Court, the Court considered the law of termination and repudiation.
 
The Court discussed the difference between essential and non-essential terms of a contract and circumstances which may give rise to an ability to terminate a contract on the basis of a party’s breach of an “intermediate term”.
 
In the case of an intermediate term, being a non-essential term of the contract, the Court found that the breach must be so serious that it deprives a party to a contract of  “a substantial part of the benefit for which it contracted”.
 
The Court heard evidence that the private development company had breached its obligations to KLALC with respect to maintaining proper books of account and financial records, banking and spending of joint venture money.  Individually these were not essential terms of the contract that would give rise to an entitlement to terminate.  However, the breaches together were so significant that they went “to the root of the contract” and deprived KLALC of a substantial part of the benefit for which it contracted.
 
The Court found that breaches of intermediate terms could justify the termination of a contract.
 
For further information in relation to the law of termination and repudiation, contact Townsends Business & Corporate Lawyers on (02) 8296 6222.