Among the questions which came before the Victorian Court of Appeal for consideration in Kane v Sopov1 were: whether an incorrect interpretation of a contract can amount to repudiatory conduct; and when might a party be disentitled from terminating a contract?

In Kane, the conduct of Sopov (the owners) which Kane (the builder) considered to be repudiatory included:

  • deduction of liquidated damages from certified progress certificates and a subsequent refusal to remedy the default when provided with an opportunity to do so;
  • recourse to the bank guarantee with neither an actual entitlement nor compliance with the contractual machinery for recourse; and
  • purporting to take the works out of the builder's hands.

The owners alleged that their conduct was not repudiatory but even if it was, the builder was disentitled by its own conduct from accepting any alleged repudiation and hence terminating the contract. The court disagreed.

The alleged disentitling conduct of the builder was the issue of a notice to show cause which identified the default as a failure to pay the progress claim, rather than a progress certificate which was issued later than the 14 days allowed by the contract, and the purported reliance on that notice to suspend the works. The notice was issued prior to the decision in Brewarrina v Beckhaus2 and at a time when a failure to issue a progress certificate within the time set out by the contract meant that the progress claim was automatically payable in full. However, while the notice identified a failure to pay the progress claim, later correspondence issued by the builder also identified the owners' wrongful deduction of liquidated damages from the certified amount as a serious breach of the contract. The owners refused to remedy that breach.

The joint judgment of Maxwell P and Kellam JA found that "the objective test of repudiation...leaves no room for consideration of whether the party in breach...held the honest belief that its action was justified by the contract. Axiomatically, the repudiator's state of mind is irrelevant, what matters is the character of the repudiator's conduct".

The court further rejected the suggestion that acting upon an incorrect interpretation of a contract in reliance upon legal advice could excuse the otherwise repudiatory conduct.

The court held that, viewed objectively, the steps taken by the builder were "a justifiable exercise of a contractual right". In contrast, the owners "persisted willy nilly" in an "obviously untenable" interpretation of the contract and the builder was "well justified" in drawing the inference of repudiation on both bases.

The owners' subsequent application for special leave to appeal to the High Court was dismissed.

Footnotes

1 Kane Constructions Pty Ltd v Sopov, Walker and Stacks Properties Pty Ltd [2007] VSCA 257.

2 Brewarrina Shire Council v Beckhouse Civil Pty Ltd (2003) 56 NSW LR 576

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