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.
To discuss drafting solutions to address issues identified by
this case please contact one of our partners listed as authors of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
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