Contractual relationships can be difficult. They require mutual commitment to a mutually beneficial interest. But what happens if one party isn’t toeing the line? Where do you turn for guidance or, if necessary, an ‘out’? THE CONTRACT!
However, the way forward might not be as clear as the black lettering on the pages you signed when you entered into the endeavour. Those clear as daylight clauses can become blurred and confusing when it comes to putting them into action. The security and termination clauses were the last thing on your mind when you approached the deal. You were too busy thinking about the countless benefits to consider that things might go sour down the road.
Recent decisions of the Federal Court of Australia and the New South Wales Court of Appeal have highlighted the importance of considering how things can go wrong, and why you should hope for the best and plan for the worst.
Decking the Ivy
Sydney’s celebrated Ivy precinct was recently the setting for more than a night out on the town. The construction of the opulent edifice also set the stage for a more academic dialogue when the New South Wales Court of Appeal was asked to consider the principal’s right to issue a Notice to Remedy and to rely on that notice as the basis for a call on security.
The case of Lucas Stuart Pty Ltd -v- Hemmes Hermitage Pty Ltd [2010] NSWCA 283 (Lucas Stuart) was part of a protracted dispute between the Principal, Hemmes Hermitage Pty Ltd, and Contractor, Lucas Stuart Pty Ltd for construction of “a multi-storey retail bar, restaurant and function centre” now known to Sydneysider’s as “The Ivy”. On entering into the contract Lucas Stuart had provided Hemmes with security for its obligations in the form of six undertakings issued by QBE Insurance (Australia) Ltd. The security could only be called on after the issue by Hemmes of a Notice to Remedy, such notice being able to be given in circumstances where Lucas Stuart had “not materially complied with its obligations” under the contract.
After receipt of Certificates of Practical Completion Hemmes issued a Notice to Remedy to Lucas Stuart. The Notice identified numerous defects and required rectification by a certain date. Lucas Stuart applied to the Court for an order restraining Hemmes from calling on the security in reliance on non-compliance with the Notice. It was submitted by Lucas Stuart that the Notice was invalid.
Gloomy pre-conditions
In his judgment MacFarlane JA examined the clause of the contract which related to the issue of the Notice. In particular his Honour examined the construction of the contract including under the heading “Main Obligations”.
It was noted that the contract did not restrict the use of headings to interpret clauses of the contract. While Lucas Stuart was required as one of its “Main Obligations” to construct the project strictly in accordance with the contract and to rectify defects it was not, in MacFarlane JA’s view, clear on the contract whether a “Material Obligation” had not been complied with. Such a finding required the failure by Lucas Stuart to be looked at in the context of the whole of the obligations rather than in isolation. Until that matter could be decided the validity of the Notice to Remedy issued by Hemmes remained indefinite.
The Court granted Lucas Stuart’s application for the restraining order pending consideration of whether there had in fact been a “Material Breach” which could be the basis for issue of the Notice and calling on the security.
Best Intentions
More recently, DibbsBarker was successfully involved in a review by the Federal Court of Australia into interpretation and termination of contracts in Al Jadeed TV -v- United Broadcasting International Pty Limited [2011] FCA 983 (Al Jadeed). These proceedings were brought by Al Jadeed, a broadcaster of the Arabic NewTV service, against its then Australian broadcaster, UBI.
In exchange for the right to broadcast NewTV in Australia UBI agreed to pay certain licence fees together with 50% of advertising revenues obtained by UBI for advertisements placed on the NewTV service.
Over the course of the relationship a series of payments due to Al Jadeed were made late. As a result, Al Jadeed sought to terminate the relationship. Communications between the parties were complicated by the fact that the persons involved indicated that English was not their native language.
Did that just happen?
The parties both made submissions to the Court on the circumstances in which a contract can be validly terminated.
It was clear that a right to termination could be expressed in clear words in the contract. However, it was also noted by his Honour that at common law a contract can be terminated for breach of an essential term or a serious breach of a non-essential term which could be relied on even if the terminating party wasn’t aware of it at the time of termination.
However, his Honour went on to say that the power relied on by the party seeking to terminate the contract must be expressed in any notice of termination in sufficiently clear terms that a reasonable person would understand the notice to be one terminating the contract.
Living in a Material World
Similar to the case of Lucas Stuart, the right given to terminate the agreement was enlivened in circumstances including:
at any time by giving the other party thirty (30) day’s prior written notice if the other party under this Agreement makes any material misrepresentation, commits any material breach or is unable to perform any of its material obligations.
Of course the question of whether any misrepresentation, breach or obligation relied on by Al Jadeed was “material” was not defined in the formal document and was something that the Court needed to consider.
Al Jadeed’s claim in the final proceedings that a failure by UBI to pay licence fees to Al Jadeed would constitute a “material breach” was not disputed.
In the course of the hearing it became apparent that UBI had, in addition to failing to pay licence fees, failed to pay 50% of advertising revenues as required by the agreement. The failure in itself was not, in the Court’s opinion, “material” due to the nominal amount. However, on a number of occasions prior to commencing proceedings UBI had written to Al Jadeed denying the existence of any such revenue.
The Court considered that particularly in circumstances where UBI was the only party with the knowledge to identify any advertising revenue, a representation as to the absence of those amounts constituted a “material misrepresentation”.
What was that you said?
Having established that UBI had committed both a “material breach” and a “material misrepresentation” the Court turned their attentions to whether any of a number of notices of termination issued by Al Jadeed were valid.
An early communication requiring payment of outstanding licence fees and a subsequent threat to terminate the transmission if payment was not forthcoming was found to be ineffective.
A second, lengthier, letter from Al Jadeed contained the statement that:
You should consider the Agreement signed in 2004 terminated with immediate effect, holding you fully responsible, in case of not settling outstanding amounts within 2 working days.
In response to this letter UBI responded denying any unpaid advertising revenue and the licence fees owing were paid within the 2 days required.
While there was some reservation on the Court’s part to place too much weight on Al Jadeed’s correspondence, it was concluded that “there is no ambiguity in the decision that the agreement is to be “terminated with immediate effect” by reason of “breach of contract”. The breach, although it was not known to Al Jadeed at the time, was the making of the material misrepresentation as to advertising revenues.
Clarity of perception
If anything can be learned from the cases of Lucas Stuart and Al Jadeed it is that clarity is the key. Clarity in the terms of the contract as to your rights and clarity in communication about your intentions (including the intention to terminate) are essential to secure your rights if a business relationship turns out to be less than rosy.
The Disputes and Litigation team at DibbsBarker have extensive experience and resources dedicated to providing you with advice on drafting effective contract clauses and enforcing them if matters takes a turn for the worse. To discuss further, please contact the leader of the DibbsBarker Disputes & Litigation Team:
Emma Hodgman | Partner
T +61 2 8233 9650
F +61 2 8233 9555
E emma.hodgman@dibbsbarker.com
