Repudiation Founded in Misconstruction of a Contract

In CH Leaman Investments Pty Ltd v Tuesday Enterprises Pty Ltd [2024] WASCA 142 (13 November 2024), the Court of Appeal of the Supreme Court of Western Australia addressed the law pertaining to repudiation, in particular in the context of where the putatively repudiating party asserts an erroneous interpretation of the contract to which they are party.

The court wrote:

[120]  The term ‘repudiation’ can be used in different senses. When used in the sense of ‘renunciation’ it refers to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. It is often described as conduct of a party which evinces an intention no longer to be bound by a contract or to fulfil the contract only in a manner substantially inconsistent with the party’s obligations. 65 As so described:

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. 66

[121]  The generally applicable principles as to repudiation by renunciation are well settled:

1. A party will have renunciated a contract where, by words or conduct:

(a) the party evinces an intention no longer to be bound by the contract; or

(b) the party shows that it intends to perform the contract only in a manner substantially inconsistent with its obligations and not in any other way. 67

2. The test for determining whether conduct is renunciatory is objective 68 — the party’s conduct is to be judged objectively by the effect it would be reasonably calculated to have upon a reasonable person in the position of the other party. 69 Accordingly, repudiation is not to be ascertained by an inquiry into the subjective state of mind of the party in default. 70

3. Renunciation of a contract is a serious matter and is not to be lightly found or inferred. 71

4. The whole circumstances of the case must be examined to see whether there is a renunciation. 72

[122]  Something more should be said about the second proposition in [121] above given the terms of cross-appeal ground 1. At particular 1.5 of cross-appeal ground 1 the respondents allege error in the primary judge’s renunciation finding as her Honour did not consider it relevant whether the respondents believed their action was justified by the terms of the SPA. The primary judge stated that the test of whether the conduct is repudiatory or a renunciation of the SPA is an objective test. 73

[123]  The authorities cited in support of proposition 2 at [121] above establish that the primary judge was correct to so hold. The objective test of repudiation leaves no room for consideration of whether an alleged repudiator subjectively held an honest belief that its action was justified by the contract. The alleged repudiator’s state of mind is irrelevant. What matters is the character of the repudiator’s conduct. 74

[124]  Particular 1.5 of cross-appeal ground 1 is wholly without merit. It is difficult to understand why this assertion of error was made. We accept that there are authorities which might be read as suggesting that the defaulting party’s bona fides (or lack of bona fides) is a relevant consideration. 75 But at the appeal hearing counsel for the respondents submitted that the test was objective. 76 Counsel for the respondents effectively made the same submission at trial before the primary judge in submitting that Mr Zilkens’ actual subjective intention was not relevant. 77

[125]  It might be that the respondents are seeking to make a different point. For reasons we will come to, it should be accepted that where an alleged repudiator outwardly manifests an honest belief that its action is justified by the contract, that is conduct to be judged objectively by what it would convey to a reasonable person in the position of the other party. But the primary judge was not dealing with that point at the impugned passage. Her Honour was simply discarding, as irrelevant, the subjective and uncommunicated beliefs of the respondents.

[126]  Bearing on this point, there are cases in which courts have held that there was no repudiation where a party merely asserted an erroneous interpretation of a contract. That line of authority must now be examined.

[127]  In Ross T Smyth & Co Ltd v T D Bailey, Son & Co Lord Wright observed that ‘a mere honest misapprehension, especially if open to correction, will not justify a charge of repudiation’. 78 In Woodar Investment Development Ltd v Wimpey Construction UK Ltd the members of the House of Lords referred to a series of cases where assertion by one party to another of an honestly held but erroneous view of the validity or effect of a contract did not constitute repudiation. Those cases included Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd. 79 James Shaffer Ltd v Findlay Durham & Brodie and Sweet & Maxwell Ltd v Universal News Services Ltd. 80

[128]  The cases are fact specific. However, out of deference to the argument of counsel for the respondents we will examine the authorities on which counsel specifically relied.

[129]  James Shaffer Ltd v Findlay Durham & Brodie .s said to support the proposition that a party who takes action relying simply on the terms of the contract, and not manifesting by its conduct an ulterior intention to abandon the contract, is not to be treated as repudiating the contract. 81 The case involved a long-term supply contract. The defendants, export distributors, had agreed to pass on orders of not less than £80,000 per year for 10 years with an option for a further 5 years. They failed to do so. The defendants honestly believed that their failure was not a breach of contract. In negotiations the defendants said that the obligation under the contract did not go beyond passing on whatever orders they received. The plaintiff relied on this statement as a repudiation of the contract.

[130]  The Court of Appeal found that the defendants’ construction of the contract was erroneous in law. The Court of Appeal held, however, that the breach did not evince an intention not to be bound by the contract. Importantly, although there was an erroneous construction, there was no reason to doubt that the defendants thought that ‘it was a tenable view’. 82

[131]  Singleton LJ considered it not possible to say that the defendants had evinced an intention to no longer be bound by the contract because they raised a question as to the construction of the contract. 83 Morris LJ stated that it could not be said that the construction advanced by the defendants was an ‘absurd construction’ – while erroneous it was not an ‘impossible or a stupid point of view to suggest’. 84 Upjohn J agreed that the defendants’ construction was ‘not absurd or untenable’ and that the construction contended for was put forward in complete good faith. 85 In the circumstances each member of the Court of Appeal was not satisfied that the defendants by their acts and conduct evinced an intention to no longer be bound by the contract. As Morris LJ put it: ‘I have no doubt that [the defendants] wanted to go on with the contract’. 86

[132]  No different principle is at work in James Shaffer Ltd v Findlay Durham & Brodie. The case is decided conformably with the generally applicable principles we have discussed at [120]–[121] above. The case should be understood as an example of the court not being satisfied that a party had evinced an intention to no longer be bound by a contract merely because the party contended that it was able to perform the contract in accordance with an erroneous but tenable construction of its obligations under the contract.

[133]  The respondents also relied on Woodar Investment Development Ltd v Wimpey Construction UK Ltd.

[134]  That case concerned a contract to buy certain land. There was a prospect that planning permission for development might be granted. By a special condition the purchasers reserved a right to rescind ‘if prior to the date of completion’ a relevant authority ‘shall have commenced’ a process for compulsory acquisition of the property or part thereof. In fact, before entry into the contract the Secretary of State for the Environment had, to the knowledge of both parties, commenced the procedure for compulsory acquisition of part of the land. Subsequently the purchasers sent a notice purporting to rescind based on the pre-contract draft compulsory purchase order. The vendors brought an action for a declaration that the condition gave the purchasers no right to rescind and in subsequent proceedings sought damages. The trial judge, Fox J, held that the purchasers were not entitled to invoke the condition and by doing so had wrongfully repudiated the contract. The Court of Appeal affirmed Fox J’s decision that the purchasers had repudiated the contract.

[135]  In the House of Lords there was no challenge to the trial judge’s finding that the special condition could not be invoked because the relevant procedure had started before the date of the contract — it therefore not falling within the words ‘shall have commenced’. However, by a majority (Lord Wilberforce, Lord Keith of Kinkel and Lord Scarman; Lord Salmon and Lord Russell of Killowen dissenting) the House of Lords allowed the purchasers’ appeal. The majority held that the evidence of the purchasers’ conduct was insufficient to support a finding of repudiation.

[136]  There was general acceptance that in assessing whether there had been repudiatory conduct by one party it was necessary to look at the party’s conduct as a whole. 87 A member of the minority also accepted that a party’s action or inaction on the basis of a mistaken belief as to its rights under a contract need not amount to a renunciation. 88 The difference between the majority and the minority predominantly arose in characterising the purchasers’ conduct as a matter of fact.

[137]  Lord Wilberforce stated:

In the present case, without taking [the purchasers’] conduct generally into account, [the vendors’] contention, that [the purchasers] had repudiated, would be a difficult one. So far from repudiating the contract, [the purchasers] were relying on it and invoking one of its provisions, to which both parties had given their consent. And unless the invocation of that provision were totally abusive, or lacking in good faith, (neither of which is contended for), the fact that it has proved to be wrong in law cannot turn it into a repudiation. 89

[138]  Lord Wilberforce then examined the purchasers’ conduct. This included discussions between representatives of the vendors and the purchasers. The purchasers expressed their intention to rely on the special condition. The vendors expressed their intention to seek a judicial determination of the validity of any such notice purportedly given under the contract. His Lordship discerned an assumption on the part of the purchasers, not disputed by the vendors, that both sides would abide by the decision of the court. 90

[139]  Lord Wilberforce considered this ‘quite insufficient’ to support the case for repudiation concluding, as a ‘clear conclusion of fact’, that the purchasers manifested no intention to abandon, or to refuse future performance of or to repudiate the contract. 91 His Lordship also observed that:

[I]t would be a regrettable development of the law of contract to hold that a party who bona fide relies upon an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights. Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations. To uphold [the vendors’] contentions in this case would represent an undesirable extension of the doctrine. 92

[140]  The other members of the majority in the House of Lords also found that nothing in the purchasers’ conduct evinced an intention to refuse performance of the contract. 93 Separately, Lord Keith of Kinkel identified earlier authorities in which the assertion by one party to the other of an honestly held but erroneous view as to the validity or effect of a contract did not constitute repudiation. 94 Lord Keith concluded:

Where one party, honestly but erroneously, intimates to the other reliance upon a term of the contract which, if properly applicable, would entitle him lawfully to rescind the contract, in circumstances which do not and are not reasonably understood to infer that he will refuse to perform his obligations even if it should be established that he is not so entitled, legal proceedings to decide that issue being in contemplation, I do not consider it in accordance with ordinary concepts of justice that the other party should be allowed to treat such conduct as a repudiation. Nor, in my opinion, are there any considerations of convenience which favour that course. 95

[141]  The minority took a different view of the facts. Lord Salmon considered it was obvious from the surrounding circumstances that the purchasers had made up their mind that in no circumstances would they comply with their contractual obligation to buy the land at the contract price. 96 Lord Russell of Killowen thought that the notice of rescission was wholly unequivocal in saying, in effect, that the purchasers would not in any circumstances fulfil the contract. 97

[142]  Counsel for the respondents focused on the English authorities to the exclusion of the Australian authorities. There are, however, a number of relevant Australian authorities including High Court of Australia authorities. First in time is Summers v Commonwealth. 98 There, sitting as a judge at first instance, Issacs J (as his Honour was then) considered whether there had been a mutual abandonment or abrogation of a contract. His Honour approved earlier authority to the effect that the persistent maintenance of an untenable construction of a contract on a matter of essential substance should be regarded as not consistent with a continuing intention to observe the contractual obligations. 99 That observation is not strictly concerned with inferring repudiation. But it inevitably follows that persistence in an untenable construction will ordinarily be regarded as repudiatory.

[143]  Next is the important case of DTR Nominees Pty Ltd v Mona Homes Pty Ltd. 100

[144]  The facts in DTR Nominees Pty Ltd are complicated. For present purposes it is enough to say that the case involved a contract to sell land. The parties to the contract adopted conflicting interpretations as to what was required under the contract. Each party then claimed to rescind the contract on the ground that the other party had repudiated and renounced the contract. On the interpretation found by the plurality (Stephen, Mason and Jacobs JJ; Aickin J agreeing) the vendor was in breach of the contract. However, there was a real constructional issue to be resolved — the trial judge preferred a different construction to that which found favour in the High Court.

[145]  Having succeeded on the constructional issue, the purchasers submitted that the vendor should be found to have repudiated or renounced the contract as the vendor was acting on an erroneous view of its obligations by its continued adherence to an incorrect interpretation of the contract. The plurality stated:

No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. 101

[146]  The plurality endorsed observations to the effect that, where parties cannot agree about meaning, the true construction must be determined by the court. Hence a party should not too readily be found to have refused to perform an agreement by contentious observations in the course of discussions or argument. 102 The plurality then stated:

In this case [the vendor] acted on its view of the contract without realising that [the purchasers] were insisting upon a different view until such time as they purported to rescind. It was not a case in which any attempt was made to persuade [the vendor] of the error of its ways or indeed to give it any opportunity to reconsider its position in the light of an assertion of the correct interpretation. There is therefore no basis on which one can infer that [the vendor] was persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement. 103

[147]   DTR Nominees Pty Ltd is properly understood as a case where there was a bona fide dispute as to the true construction of a contract expressed in unclear terms. 104 In those circumstances the court is not justified in drawing an inference that the relevant party intended not to perform the contract according to its terms or that it repudiated the contract. 105  DTR Nominees Pty Ltd is, so understood, consistent with a general principle identified by Mason J, as his Honour was then, (Murphy and Aickin JJ agreeing) in the subsequent case of Green v Sommerville. There Mason J referred to it being a general principle of the law of contract that ‘the court will not readily infer from a party’s insistence on a wrong construction of a contract that he is unwilling to perform it according to its true construction’. 106 That is all the more so where there is a common mistake and it is sought to infer repudiation from a party’s assertion that it intends to perform the contract by doing what both parties erroneously believe to be required by way of performance (at least until the mistake is exposed). 107

[148]  Finally, mention should be made of Sopov v Kane Constructions Pty Ltd. There the Court of Appeal in Victoria conducted a comprehensive review of the authorities dealing with repudiation by erroneous interpretation. 108 After reviewing the authorities Maxwell P and Kellam JA stated:

The distinctions drawn in the cases may be summarised as follows:

1. For party A merely to assert, or argue for, a wrong interpretation of the contract will usually not be enough to justify party B drawing an inference of repudiation …

2. The inference of repudiation can more readily be drawn when the interpretation relied on by party A is clearly or obviously untenable and party A:

(a) acts (or threatens to act) unilaterally on the basis of the interpretation; or

(b) persists in the interpretation in the face of communications from party B pointing out the error. 109 (citations omitted)

[149]  In addition to the distinctions identified in Sopov v Kane Constructions Pty Ltd. the authorities we have referred to support the following propositions:

1. The generally accepted principles as to repudiation by renunciation 110 remain applicable where a party acts, or threatens to act, based on an erroneous interpretation of the contract and it is claimed that the party thereby repudiated the contract.

2. There are cases in which a party evinces an intention that it will not perform the contract according to its terms by acting or threatening to act on an incorrect interpretation of a contract. 111 This is more likely to be the case where:

(a) the construction adopted by the defaulting party is clearly or obviously ‘untenable’ 112 — conduct or threatened conduct which cannot reasonably be justified by the terms of the contract may be such as to convey to a reasonable person in the position of the other party a renunciation of the contract or of a fundamental obligation under the contract; or

(b) the erroneous construction adopted by the defaulting party is maintained steadfastly despite correction. 113 In other words the defaulting party is not ‘open to correction’. 114

3. However, the court is not justified in drawing an inference that the relevant party intended not to perform the contract according to its terms — or that it repudiated the contract — where there is nothing more than a bona fide dispute as to the true construction of a contract expressed in unclear terms. 115 Nor where, viewed objectively, the party is willing to perform the contract according to its tenor; to recognise its heresy; or to accept an authoritative exposition of the correct interpretation. 116

4. The issue is resolved objectively by reference to the effect that the defaulting party’s conduct would have on a reasonable person in the position of the other party. 117 It follows that an uncommunicated subjective belief is irrelevant even if the defaulting party honestly believes that its act or threatened act is justified by the contract based on an erroneous interpretation thereof. 118

5. Where, however, such a belief is made known by the defaulting party to the other party, the expression of that belief is conduct outwardly manifested which is to be taken into account in deciding whether a reasonable person in the position of the other party would infer that the defaulting party had renunciated the contract. 119

(emphasis added)

65 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 [44] .

66 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [44] .

67 Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 , 625 – 626; Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 33, 40; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623, 634, 643, 647 – 648, 658, 666.

68 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (281), (294).

69 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (648), (657–658); Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (44].

70 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (647), (657).

71 Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 , 71. See also: Woodar Investment Development Ltd v Wimpey Construction UK Ltd (292); Shevill v Builders Licensing Board (633); Progressive Mailing House Pty Ltd v Tabali Pty Ltd (32); Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (643), (657).

72  Woodar Investment Development Ltd v Wimpey Construction UK Ltd (280–281), (292), (294–296), (299); Shevill v Builders Licensing Board (633).

73 Primary reasons [334].

74 Sopov v Kane Constructions Pty Ltd [2007] VSCA 257; (2007) 20 VR 127 [9] . See also [10]–[17].

75 See eg R & A Cab Co Ltd v Kotzman [2008] VSCA 68 [49].  Woodar Investment Development Ltd v Wimpey Construction UK Ltd also refers to bona fides: (283).

76 Appeal ts 158.

77 ts 728.

78 Ross T Smyth & Co Ltd v T D Bailey, Son & Co (72).

79 Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding Co Ltd (1919) 121 LT 628 .

80 Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 .

81 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (283).

82 James Shaffer Ltd v Findlay Durham & Brodie .118).

83  James Shaffer Ltd v Findlay Durham & Brodie (121).

84 James Shaffer Ltd v Findlay Durham & Brodie (123).

85 James Shaffer Ltd v Findlay Durham & Brodie (126).

86 James Shaffer Ltd v Findlay Durham & Brodie (124).

87 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (280), (289–290), (292), (294), (298–299).

88 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (291–292).

89 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (280).

90 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (281–282).

91  Woodar Investment Development Ltd v Wimpey Construction UK Ltd (282).

92 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (283). Compare, however, the contrary observations of Lord Russell of Killowen: (293).

93 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (296) Lord Keith of Kinkel, (299) Lord Scarman.

94 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (295–296).

95 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (297).

96 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (289–290).

97 Woodar Investment Development Ltd v Wimpey Construction UK Ltd (292).

98 Summers v Commonwealth [1918] HCA 33; (1918) 25 CLR 144 .

99 Summers v Commonwealth (152).

100 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 .

101 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

102 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

103 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

104 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (37). See also DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

105 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (433).

106 Green v Sommerville [1979] HCA 60; (1979) 141 CLR 594 , 611.

107 Dainford Ltd v Smith [1985] HCA 23; (1985) 155 CLR 342 , 366.

108 Sopov v Kane Constructions Pty Ltd [7] –[17] .

109 Sopov v Kane Constructions Pty Ltd [17].

110 See [120]–[121] above.

111  DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

112 Sopov v Kane Constructions Pty Ltd [17] . See also [18], [123], [129]–[141], [148]. Compare: James Shaffer Ltd v Findlay Durham & Brodie (118), (123), (126); Woodar Investment Development Ltd v Wimpey Construction UK Ltd (280), (283).

113 Summers v The Commonwealth .152); DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

114 Ross T Smyth & Co Ltd v T D Bailey, Son & Co (72).

115 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432 – 433).

116 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432).

117  See the generally applicable principles discussed at [121.2] and [123] above.

118 Sopov v Kane Constructions Pty Ltd [9] –[11] .

119 See eg: Woodar Investment Development Ltd v Wimpey Construction UK Ltd (280–283), (297); DTR Nominees Pty Ltd v Mona Homes Pty Ltd (432–433).