Association of Corporate Counsel Terminating a Contract: Principles and Perils Canberra, 4 July 2019 Norton Rose Fulbright Australia Jeffrey Goldberger Special Counsel Email [email protected] Contents Introduction ....................................................................................................................... 1 Variation or Termination .................................................................................................... 1 Termination of a contract at Common Law ........................................................................ 4 Express termination clauses ............................................................................................ 50 Loss of bargain damages ................................................................................................ 57 Termination for convenience and good faith .................................................................... 58 Termination under a show cause process ....................................................................... 61 Termination by abandonment .......................................................................................... 63 Termination of leases utilising contractual principles ....................................................... 64 The process of termination .............................................................................................. 66 Election and the loss of a termination right ...................................................................... 66 Election and multiple termination rights ........................................................................... 70 Termination, election and specific performance ............................................................... 75 Concluding observations ................................................................................................. 78 APAC-#89913926-v1 2 © Norton Rose Fulbright Australia 1 Introduction The expression "termination" in relation to contracts has a number of meanings. In Martech International Pty Ltd v Energy World Corporation Ltd1, French J noted: In summary the word 'termination' when referring to the discharge of a contract has a variety of possible meanings. It may be limited to non-consensual termination by the action of one or other party to the contract. It may extend to discharge of the contract by effluxion of time. That is a consensual termination in the limited sense that it is part of the agreement from the outset. The word may also be construed as applying to a discharge of a contract by agreement or by abandonment which may be taken to amount to the same thing. The decision whether to terminate a contract presents both commercial and legal risk. Modern commercial contracts typically incorporate termination regimes which cover default, insolvency and convenience as separate categories. There are specific issues and associated risks with each regime and there are always traps for the unwary. Further, it is important to consider the relationship between a contractual termination regime and the common law principles governing termination. However, as a preliminary matter it is important to distinguish between a contract variation and a termination by consent with entry into a new contract. This distinction has assumed a more immediate practical significance in light of the recent Commonwealth ipso facto legislation which was enacted in 2017. 2 Variation or Termination As noted by Le Miere J in GB Energy Ltd v Protean Power Pty Ltd2 what purports to be a variation may in substance constitute a mutual termination of an existing contract and entry into a new contract. In Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Limited3 the plurality said at 533: When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. The distinction between variation and termination (sometimes wrongly referred to as rescission) was addressed in the earlier High Court decision in Tallerman and Company Pty Limited v Nathan's Merchandise (Victoria) Pty Limited4 where Williams J adopted the following passage in the speech of Lord Dunedin in Morris v Baron & Co5 at 25: The difference between variation and rescission is a real one, and is tested, to my thinking, by this: in the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself. 1 [2006] FCA 1004 2 [2009] WASC 333 3 (2000) 201 CLR 520 4 (1957) 98 CLR 93 5 [1918] AC 1 APAC-#89913926-v1 1 © Norton Rose Fulbright Australia And in Concut Pty Ltd v Worrell6 the plurality having referred to the passage from Sara Lee set out above said: Their Honours went on to refer to the judgment of Taylor J in Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd. Taylor J had rejected submissions that (a) "it is impossible by a subsequent agreement, merely, to vary or modify an existing contract" and (b) "[an] agreement which purports to vary an existing contract operates ... first of all to abrogate entirely the existing contractual relationship and, then, to reinstate the terms of the old contract as varied or modified by the new agreement". His Honour, to the contrary, accepted the propositions that (a) the earlier contract might be rescinded altogether, the determining factor being the intention of the parties disclosed by the later agreement; (b) partial rescission is a variation, not the destruction, of the contractual relationship between the parties; and (c) the earlier contract may be varied by way of (i) partial rescission with or without the substitution of new terms for those rescinded and (ii) the addition of new terms with or without any partial rescission at all. In Tallerman, Kitto J spoke in terms which involved acceptance of propositions (a) and (b) as identified above, adding that whilst "in strict logic" a variation may be a new contract, "the discharge of an old contract is a matter of intention". [20] The decision of the majority in the Court of Appeal in the present case appears to involve the holding that there was a discharge of the prior contractual relationship between Concut and Mr Wells, that the Service Agreement became the exclusive charter of the contractual rights and duties of the parties, and that subsisting rights and liabilities under the prior contract, including those arising by reason of breach thereof, were compromised or released. However, the text of the Service Agreement itself, as well as the surrounding circumstances, indicate that such a conclusion would not be in accord with the manifest intention of the parties. Ultimately whether an agreement constitutes a variation or a mutual termination and entry into a new contract is a question of intention. The issue was considered by the Federal Court in BAE Systems Australia Ltd v Cubic Defence New Zealand Ltd7. The applicant (BAE Systems) sought a declaration that a purported termination for convenience of its subcontract with the respondent (Cubic) was unlawful, invalid and a breach of the subcontract. The subcontract contained the following provision: 12.3 Termination for Convenience 12.3.1 in addition to any other rights it has under the Contract, the Prime Contractor may terminate the Contract or reduce the scope of the Contract by notifying the Subcontractor in writing only where; a. it has received a corresponding notice to that effect from the Commonwealth, or b. where the Prime Contractor becomes liable for Postponement costs due to a postponement event continuing beyond a period of 60 days in accordance with clause 6.3b. c. where the Prime Contractor has been terminated by the Commonwealth for any reason provided for under the Prime Contract. On 31 October 2011 the respondent (Cubic) wrote to the applicant and, relevantly said: Please be advised that the Commonwealth of Australia has terminated for convenience that portion of Prime Contract Number C438921 that includes all Operations Support and Maintenance (O/S&M) requirements. Cubic Defence New Zealand (Cubic), in turn, hereby terminates for convenience all of the corresponding O/S&M requirements in Contract Number SC-BAEAU CTC US (the Contract) pursuant to Contract Clause 12.3.1. This termination for convenience is effective as of 29 November 2011. 6 [2000] HCA 64 7 [2011] FCA 1434 APAC-#89913926-v1 2 © Norton Rose Fulbright Australia In fact what previously occurred between Cubic as Prime Contractor