Failure to comply with non-essential terms of a contract
may now allow the innocent party to terminate a
It is generally accepted that breach of an essential term of
a contract can entitle the innocent party to either terminate
the contract based on repudiation, and recover damages for loss
of the contract, or alternatively to keep the contract alive
and recover damages for the particular breach in question.
Whether a term is essential depends on whether the term is of
such importance that the innocent party would not have entered
into the contract unless that term had been included.
Generally, however, if the breach is of a non-essential, or
intermediate, term, the only remedy available to the innocent
party is seeking to recover damages for that particular breach
it does not entitle the innocent party to terminate the
However, in December 2007 the High Court in Koompahtoo
Local Aboriginal Land Council v Sanpine Pty Ltd  HCA
61 held that a sufficiently serious breach of a
non-essential, or intermediate, term of a contract could in
certain circumstances allow the innocent party to terminate a
contract for repudiation.
Whether a breach is sufficiently serious will depend on the
importance of the intermediate term, and the consequences of
the failure to comply with those terms. This is a question of
construction of the contract in light of its commercial
purpose, and the business relationship between the parties.
In the Koompahtoo case, Sanpine failed to prepare
development programmes, control a joint venture account, and
maintain proper books and records, as specified in the
contract. The High Court held that while these terms were
intermediate, in that a failure to comply with them was not a
breach of an essential term, the breaches were significant and
their consequences were serious in that they deprived the
innocent party of a substantial benefit for which it had
In most technology development contracts there are a suite
of intermediate, or non-essential terms, which often include
such matters as the preparation of reports, the obligation to
keep the other party informed of progress, maintenance of
records, and other similar obligations. If a party (usually the
software provider) fails to comply with these clauses and the
consequences of such a failure are sufficiently serious in that
they deprive the client of a substantial part of the benefit
for which it contracted, a breach by the provider of those
intermediate, or non-essential, terms of the contract could
give rise to a right of the client to terminate the
An example of this could be where the provider fails to keep
sufficient records of a software development process, which
means that the client (or a third party provider) is unable to
reconstruct work done by the provider, resulting in substantial
loss of time and money to the client.
Suppliers should take note of the extension of existing
legal principles in this case to ensure that they comply in all
material respects with all terms of the contract, even though
they may not at first glance appear to be essential terms of
the contract, particularly where non-compliance could have
serious consequences. This also emphasises the need to always
ensure that obligation taken on in a contract are realistic and
can be complied with.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).