Services

HG Alert: Case note on contract: express right of termination trumps repudiation - 04 Sep 2009

The Full Court of the Federal Court recently considered the unusual circumstance of a party to a contract seeking to rely on an express right of termination, even though that party had itself repudiated the contract.

The judgment of Perram J in Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd (Goldberg and Jacobson JJ agreeing), the Allphones decision, identified a tension, not previously considered by the Courts, between the contractual and common law positions regarding termination by a party that has repudiated the agreement.

Although the tension was resolved by the Court in favour of the parties’ express contractual rights, the right of termination may not have been available at common law.

The case involved a franchise agreement between Allphones Retail, as franchisor, and one its franchisees, Hoy Mobile. Hoy operated under Allphones’ banner as a retail seller of mobile phones that were not tied to any particular carrier.

In the dispute each party accused the other of serious financial irregularities: Allphones accused Hoy of committing fraud by ‘unlocking’ and selling mobile phones that were previously locked to a specific service provider, and Hoy accused Allphones of failing to account for commissions owing to it under the franchise agreement.

After Allphones became aware of Hoy’s conduct in unlocking the phones, it gave notice to terminate the agreement in accordance with an express contractual right to terminate for fraud.

Hoy claimed that Allphones was not entitled to terminate the agreement because by failing to pass on the commissions to Hoy, Allphones had repudiated the agreement. Repudiation takes place where one party to a contract a) renounces his/her obligations or liabilities under the contract; b) evinces an intention to no longer be bound by the contract; or c) shows an intention to be bound by the contract only in a way that is not consistent with his/her obligations under the contract and not in any other way. The other party to the contract may elect to terminate for the repudiatory breach or seek specific performance of the contract.

Hoy sought an order that the franchise agreement remained on foot, in spite of the material breaches by both parties. Allphones claimed that it had validly terminated the agreement and the relationship had therefore been brought to an end.

At first instance, the primary judge, Rares J, found that:

  • Allphones had repudiated the agreement by deliberately and deceitfully withholding its share of the commissions from Hoy; and
  • in keeping with what appears to be the common law position, Allphone’s repudiatory conduct disentitled it from exercising the express right to terminate for Hoy’s fraudulent conduct.

By reason of those findings, Rares J held that the franchise agreement remained on foot.

On appeal, Allphones argued, among other things, that the common law position was not relevant because Allphones had relied upon an express contractual right of termination.

Perram J agreed that it was not necessary to reach a view on the position at common law as it had “no impact on the position of express powers of termination. His Honour therefore confined his decision and reasoning to express contractual rights of termination.

Interestingly, His Honour considered that parties could expressly provide that the rights of termination conferred under the agreement could be exercised, even where the party seeking to rely upon the power had repudiated the agreement.

Perram J reasoned that it would not make sense for a party with an express right of termination under contract (albeit having repudiated the agreement), to be locked into an ‘inescapable bargain’ where the other party has committed a serious breach such as fraud.

Perram J found little value in the case authorities or academic authority cited and relied upon by the primary judge, which dealt only with the common law position and were inconclusive.

Practical significance

This case demonstrates the Courts’ preference to recognise and give effect to parties’ agreed contractual rights, even though the outcome may be at odds with the common law.

While parties do not usually intend to terminate agreements at the time of negotiating and agreeing their terms, the potential benefit of making allowance for the circumstances which might give rise to termination, and even agreeing that termination will be effective where the terminating party has itself repudiated the agreement, is borne out by this decision.

Making such provision in the agreement should also avoid any difficulties in determining the parties’ respective rights under the common law, which appears to remain undecided.