Historically, the position at common law has been that a party who was not ready, willing and able to perform a contract was not entitled to be discharged from its performance by reason of the other party being in breach of an essential term.

This principle had previously been applied when dealing with an express right of termination, until the decision of the Full Federal Court in Allphones Retail Pty Ltd v Hoy Mobile Pty Ltd [2009] FCAFC 85 (Allphones) clarified the law concerning the express right to terminate in circumstances where the party exercising that right had repudiated the contract themselves.

Key facts

The matter concerned a franchise agreement relating to an Allphones retail shop location at Westfield Eastgardens.

Amongst other provisions, the franchise agreement provided that Hoy was entitled to be paid 72.5% of any commissions received by Allphones in respect of a sale from Hoy’s store of mobile phones connected to networks, who paid the sales commissions to Allphones.

During negotiations with Optus in 2004, Allphones secured an agreement that they would be paid $150 for each new post-paid phone activated under a “stretch bonus”. Allphones did not treat this as falling under the commission clause and, as such, did not pass on 72.5% of the bonuses to Hoy.

Furthermore, amounts were alleged to be payable to Hoy when customers renewed their contracts, with Optus paying Allphones a $30 bonus when this occurred. Allphones treated this as not being payable under the abovementioned commission clause.

Additionally, Allphones was making deductions to commissions owing to Hoy’s satisfaction with “refreshing” franchise stores’ appearances and get-ups.

In 2006, Allphones discovered that Hoy had been fraudulently “unlocking” mobile devices and onselling them without being subject to a fixed service provider. The franchise agreement permitted termination if Hoy was fraudulent in connection with the operation of the business.

Hoy, in response, contended that the withholding of commissions and deductions to commissions payable to Hoy was a repudiation of the franchise agreement. Allphones was not entitled to exercise an express power under that same agreement (being termination).

In the first instance, the primary judge found in favour of Hoy and determined that Allphones could not exercise the express power to terminate because “parties could only exercise rights under an agreement who were ready, willing and able to perform that agreement” [at 23].

Issues considered

Repudiation issue

On appeal, Allphones proffered two submissions regarding their alleged repudiation of the agreement. Those were that:

(a) Its actions were based on a bona fide interpretation of the agreement, and so could not be said to evince an intention not to be bound; and

(b) The primary judge erred in finding that the obligation to pay commission was an essential term.

As to (a), this argument was rejected by the primary judge, finding that Allphones did not genuinely hold this belief.

As to (b), the primary judge found that the “deliberate and deceitful” withholding of the commissions payable to Hoy over the life of the contract amounted to “an intention that he was prepared to carry out his part of the contract if and only when it suited him, and in the way that suited him [379]”.

Their Honours, therefore, upheld the finding that Allphones had repudiated the agreement. This left Allphones with the Entitlement to Terminate argument, which dealt with their express right to terminate pursuant to the agreement, despite being established that they themselves had repudiated.

The Entitlement to Terminate

It was accepted that Hoy had committed fraud under the agreement. However, the primary judge had considered Allphone’s own repudiation enough to disallow them of the right to exercise their express right of termination.

Perram J’s judgment helpfully walks through the primary judge’s reasoning, which considers the position at common law and how that has evolved, alongside academic literature supporting the same. In this regard, it is an exhaustive and complete judgment regarding express powers of termination under contract when in breach.

His Honour first reflected on the primary judge’s interpretation of the position at common law, citing the principle at [52] that “a party who was not ready, willing and able to perform a contract was not entitled to treat himself as discharged from its performance by reason of the other party being in breach of an essential term”, then holding that this principle should also apply in the case of an express contractual right of termination.

The primary judge cited the decisions in Collins v Baltern (1767) 2 Wils 347 at 351 (per Wilmot CJ) and Foran v Wight (1989) 168 CLR 385 at [408] (per Mason CJ) in support [at 52].

On appeal, Allphones submitted that the position at common law was irrelevant where it relied “on an express entitlement to terminate pursuant to [the contract]” [at 53].

At [55], addressing his views on the primary judge’s decision in this regard head-on, his Honour said:

I do not think it is necessary to reach a view on whether a party who has repudiated an agreement may take advantage of a breach by the other party of an essential term and, thereupon, terminate the agreement. That is because the outcome of that question has no impact on the position of express powers of termination. It is, I think, plain that parties could by their compact expressly provide that powers given to them under it could be exercised even where the party seeking to do so had repudiated the agreement. None of the familiar doctrines which can strike at the validity of contractual terms would invalidate such a provision.

Following on at [56], his Honour noted the absurd result that would follow if it were to be presumed that, where two parties had repudiated an agreement, neither would be able to exit the agreement notwithstanding the express bargain between them that either could.

This would, in effect, his Honour noted, “lock the victim of a fraud into an escapable bargain which its perpetrator as a result of an act of repudiation which may be trivial by comparison”.

Although Hoy raised in submissions a quote from Lord Findlay in Morris v Brown [at 53], which provided that:

…a party to a contract which imposes certain obligations and confers certain rights upon him cannot claim to exercise those rights while repudiating his obligations in material particulars…

his Honour found this to be obiter in the circumstances of the judgment, as no issue had arisen in Morris v Brown concerning the ability of a repudiating party to exercise an express power under a contract.

His Honour did manage to locate a decision of the Queensland Supreme Court[1] where the “suggested principle” had been applied, that being:

As a general principle, where a contract is terminated relying on such a contractual right, the parties’ rights are primarily defined by the contract and not by the general law. But the provisions of clause 13.1 do not abrogate or circumvent the principle that a party guilty of repudiatory conduct cannot rescind for the other party’s breach. No such exception to the application of the principle may be gleaned from any of the cases.

However, his Honour did not agree with the reasoning of Muir J, who had not provided any authority for nor the nature of the “general principle” he had cited.

Finding little support for the proposition in the general law, his Honour turned to academic literature, citing Professor Carter in the 2nd edition of Breach of Contract:

Thus, although a repudiation does not itself terminate the performance of the contract, the promisor, whether or not liable to pay damages, may be unable to rely upon a promisee’s failure to perform as a breach of contract.

However, from [63-70], his Honour concluded that the cases relied upon provide little support for the above proposition.

At [71], his Honour cites Chesire and Fifoot’s Law of Contracts (8th Australian edition), which reads at [943]:

A party who is unwilling or unable to perform the contract is not entitled to terminate a contract for breach by the other party.

His Honour notes that this statement is then footnoted by a list of authorities and followed by a statement that “the principle evidently applies (unless otherwise agreed, no doubt) to a contractual right to terminate: Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187″.

Again, however, his Honour disagreed with this application of this reference, stating that no such issue arose in Burger King.

His Honour then followed this with a statement that no such mention of the principle is found in several other leading authorities on contracts [73], effectively demonstrating that he had exhausted his research on the topic.

In summary, Perram J addressed the primary judge’s two main bases for the conclusion that Allphones could not terminate the agreement:

(a) That where a party has brought about the happening of an event which makes performance of a contract impossible, it should not be able to avoid the contract (Suttor v Gundowda Pty Ltd (1950) 81 CLR 414 at [441] per Latham CJ, Williams and Fullagar JJ).

(i) The facts of the case provided that Hoy’s fraud was entirely brought about by Hoy – for this principle to apply, the fraud would have needed to be causally connected with the actions of Allphones, which it was not.

(b) That the statement of Mason CJ in Foran v Wight [at 52], that the plaintiff is required to show that they are ready and willing to perform, had application to express contractual provisions.

(i) His Honour simply found that in the circumstances, and in consideration of extensive academic and legal text, he did not regard the principle as one whose existence should be accepted.

Allphones, despite repudiating the contract, was therefore found to have validly the agreement.

Key takeaways

Providing that a contract contains an express right for a party to terminate, a party who has repudiated the agreement in some manner may still exercise that right.

Common law had previously developed to a point which accepted that a party must show that they were ready, willing and able to perform an agreement in order to exercise any right to terminate, and extended to preventing express rights of termination under the contract. The decision in Allphones confirms that this is no longer the case.

Allphones has practical significance for many day to day commercial contracts, particularly building disputes, where parties are often alleged to have repudiated an agreement yet still want to reply on express rights arising under the contract.

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Should you require assistance with navigating complex contractual disputes, please do not hesitate to contact our building & construction team.

  [1] Tropac Timbers Pty Ltd v A-One Asphalt Pty Ltd [2005] QSC 378, per Muir J at [21].