A recent decision by the NSW Court of Appeal in the case of Lucas Stuart Pty Ltd v Hemmes Hermitage Pty Ltd has found that a breach of a "main obligation" under a contract did not constitute material non-compliance. Instead a determination was required as to whether there was a failure to materially comply with the obligations of the contract as a whole.
This decision has significant implications for contracts in the technology sector in which "material breach" of the contract is often used as a "for cause" termination event. Clauses such as the one in Lucas Stuart Pty Ltd v Hemmes-Hermitage Pty Ltd do not specify detailed circumstances that amount to a material breach of the contract and under this decision would require breach of the contract "as a whole" before it could be used to terminate. Drafting of this nature should be avoided.
This case also reflects the increasing tendency of the courts to narrowly construe termination events which increases the risk of liability for parties who seek to rely upon such clauses. If you require a right to terminate a contract for a specific reason, which in the technology sector may include events such as failure by a party to meet key milestones, acceptance testing, service levels or defect rectification, these reasons must be carefully drafted to allow you to rely upon them to successfully terminate your contract and avoid protracted disputes.
These clauses are best drafted and agreed upon by the parties at the outset while everything is still "rosy" and the parties are working towards a commercial arrangement together, rather than at the "thorny" end of a troubled or failed relationship where reliance on termination events will be scrutinised by parties against ambiguous drafting of the contract terms. General termination rights must also be carefully drafted to take into account the court's reasoning in this case.
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