Under What Circumstances Can An Agreement Be Terminated?

In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61

("Koompahtoo"), the High Court has confirmed the ability of a party to a contract to terminate, where the other party has breached a non-essential term of the contract.

The Facts

Koompahtoo entered into a joint venture agreement with Sanpine Pty Limited ("Sanpine"). Koompahtoo contributed the land, and Sanpine managed its development.

The joint venture failed to obtain approval for the land to be rezoned for commercial use. An administrator, subsequently appointed to Koompahtoo, terminated the joint venture agreement, as Sanpine had failed to keep proper accounts or financial records for the duration of the joint venture. The administrator asserted that Sanpine had, by its conduct, repudiated the agreement, by breaching its obligations under the agreement.

There were no express provisions in the joint venture agreement setting out the circumstances in which any of the parties could unilaterally terminate the agreement. Sanpine commenced proceedings in the Supreme Court of NSW for wrongful termination and sought a declaration that the joint venture agreement was still on foot.

The Issue

Whether a breach of a non-essential term gives rise to a right to terminate.

The High Court of Australia

The High Court dismissed Sanpine's claim, holding that Koompahtoo had validly terminated the joint venture agreement.

The majority classified contractual terms into three (3) categories:

• A "condition", which is a term agreed between the parties to be essential, a breach of which gives the innocent party a right to terminate the agreement;
• A "warranty", which is a term (or promise) agreed between the parties to be nonessential, a breach of which does not give either party a right to terminate the agreement; and
• An "intermediate term", which is a term agreed between the parties to be nonessential, a breach of which may give the innocent party a right to terminate the agreement, depending on the "seriousness" of the breach.

The majority held that there are three (3) circumstances in which the right to terminate an agreement arises:

• Breach of an "essential" term of the agreement;
• Breach of a "non-essential" term or "intermediate" term" of the agreement, which:

• Where one's party's conduct shows an unwillingness or inability to perform its obligations under the agreement (that is, repudiation).

The majority held that Sanpine's contractual obligations under the agreement were nonessential or "intermediate terms", and that Sanpine had committed "sufficiently serious" breaches of these obligations, entitling Koompahtoo to successfully terminate the agreement.

The majority held that the repeated breaches by Sanpine of its obligations under the agreement went "to the root of the contract" and deprived Koompahtoo "of a substantial part of the benefit for which it contracted", by preventing Koompahtoo from assessing the financial position of the joint venture and from making informed decisions about the joint venture.

The Implications

The Koompahtoo case highlights the importance of expressly setting out in an agreement the circumstances under which the agreement may be terminated. Parties must be alive to the circumstances in which a right to terminate may occur, when negotiating, which will minimise the risk about the validity of any purported termination and it will also reduce the likelihood of parities incurring costs litigating the issue.

It is imperative that solicitors be instructed when a contract is being drafted, and when a decision is being made to terminate an agreement to ensure there is a proper legal basis for the termination.

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.