The Full Court of the Federal Court recently considered the
unusual circumstance of a party to a contract seeking to rely on an
express right of termination, even though that party had itself
repudiated the contract.
The judgment of Perram J in Allphones Retail Pty Ltd v Hoy
Mobile Pty Ltd (Goldberg and Jacobson JJ agreeing), the Allphones
decision, identified a tension, not previously considered by the
Courts, between the contractual and common law positions regarding
termination by a party that has repudiated the agreement.
Although the tension was resolved by the Court in favour of the
parties' express contractual rights, the right of termination
may not have been available at common law.
The case involved a franchise agreement between Allphones
Retail, as franchisor, and one its franchisees, Hoy Mobile. Hoy
operated under Allphones' banner as a retail seller of mobile
phones that were not tied to any particular carrier.
In the dispute each party accused the other of serious financial
irregularities: Allphones accused Hoy of committing fraud by
'unlocking' and selling mobile phones that were previously
locked to a specific service provider, and Hoy accused Allphones of
failing to account for commissions owing to it under the franchise
After Allphones became aware of Hoy's conduct in unlocking
the phones, it gave notice to terminate the agreement in accordance
with an express contractual right to terminate for fraud.
Hoy claimed that Allphones was not entitled to terminate the
agreement because by failing to pass on the commissions to Hoy,
Allphones had repudiated the agreement1.
Hoy sought an order that the franchise agreement remained on
foot, in spite of the material breaches by both parties. Allphones
claimed that it had validly terminated the agreement and the
relationship had therefore been brought to an end.
At first instance, the primary judge, Rares J, found that:
Allphones had repudiated the agreement by deliberately and
deceitfully withholding its share of the commissions from Hoy;
in keeping with what appears to be the common law position,
Allphone's repudiatory conduct disentitled it from exercising
the express right to terminate for Hoy's fraudulent
By reason of those findings, Rares J held that the franchise
agreement remained on foot.
On appeal, Allphones argued, among other things, that the common
law position was not relevant because Allphones had relied upon an
express contractual right of termination.
Perram J agreed that it was not necessary to reach a view on the
position at common law as it had "no impact on the position of
express powers of termination". His Honour therefore confined
his decision and reasoning to express contractual rights of
Interestingly, His Honour considered that parties could
expressly provide that the rights of termination conferred under
the agreement could be exercised, even where the party seeking to
rely upon the power had repudiated the agreement.
Perram J reasoned that it would not make sense for a party with
an express right of termination under contract (albeit having
repudiated the agreement), to be locked into an 'inescapable
bargain' where the other party has committed a serious breach
such as fraud.
Perram J found little value in the case authorities or academic
authority cited and relied upon by the primary judge, which dealt
only with the common law position and were inconclusive.
This case demonstrates the Courts' preference to recognise
and give effect to parties' agreed contractual rights, even
though the outcome may be at odds with the common law.
While parties do not usually intend to terminate agreements at
the time of negotiating and agreeing their terms, the potential
benefit of making allowance for the circumstances which might give
rise to termination, and even agreeing that termination will be
effective where the terminating party has itself repudiated the
agreement, is borne out by this decision.
Making such provision in the agreement should also avoid any
difficulties in determining the parties' respective rights
under the common law, which appears to remain undecided.
1 Repudiation takes place where one party to a
renounces his/her obligations or liabilities under the
evinces an intention to no longer be bound by the
shows an intention to be bound by the contract only in a
way that is not consistent with his/her obligations under the
contract and not in any other way. The other party to the contract
may elect to terminate for the repudiatory breach or seek specific
performance of the contract.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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