Consequences Of An Invalid Claim Of Repudiation

The recent case of Zhu v Wang [2021] NSWSC 240 demonstrates some of the consequences of an invalid claim of repudiation and the impact that express default provisions within the contract may have on the amount of damages awarded.

These consequences must be considered before any party to a contract alleges, or accepts, repudiation.

What is repudiation?

Repudiation is a contractual breach (actual or anticipated), where it is undisputedly evident that the defaulting party is not able or willing to perform its all its obligations or that the breach is sufficiently serious that, in effect, the contract will not be performed.

‘Sufficiently serious’ has been explained as where:

1. ‘the facts must indicate an anticipated breach of an essential term of the contract, an anticipated fundamental breach or an anticipated delay which will frustrate the performance of the contract;
2. the absence of readiness or willingness must have a fundamental effect on the fair carrying out of the bargain as a whole;
3. the absence of readiness or willingness must go to the ‘root’ of the contract;
4. the absence of readiness or willingness must indicate that the promisor will not perform the contract in a vital respect;
5. the circumstances of the case must indicate that it would be ‘unfair’ to hold the promisee bound by the contract; and
6. the circumstances of the case must indicate that the promisor is ‘wholly and finally’ disabled from performing the contract.’¹

Whether a breach, or anticipated breach, of a contract is serious enough to amount to repudiation depends on the facts and contractual terms in each situation.

If a party (Party A) is incorrect as to another party’s (Party B) repudiation of the contract, it is almost always the case that Party A, by incorrectly claiming repudiation and acceptance of it, by that conduct then repudiates the contract themselves. Party A could then be sued by Party B for damages, even though it was Party B that had breached the contract, but not to the extent of a repudiation.

In instances where it is not clear if a party’s conduct amounts to repudiation, subject to the express provisions in the contract, the prudent course of action is to issue a notice of default, with a reasonable period for the breach to be rectified. If the breach is not rectified within the time period provided, then termination of the contract could follow.

Our case summary shows the consequences that can arise from an invalid claim of repudiation. It also provides some insight on to how the specific default provisions contained in the contract can impact the amount of damages awarded.

This case did involve other claims and legal concepts, but this article only refers to the repudiation aspects of this case.

It is critical that you always obtain legal advice before claiming that another party has repudiated a contract, otherwise you could be the party being sued.

Case Summary

• Zhu operated various entities, including Singways (Moore Park) Pty Ltd (Singways), involved in the retailing of furniture, bedding and associated items under the name ‘De Rucci’. Singways operated the De Rucci store at Moore Park, New South Wales.
• Wang controlled various entities, including De Rucci International Pty Ltd (De Rucci Int.), being the second respondent.
• The parties agreed that in exchange for De Rucci Int. providing the bank guarantee due by Singways to the landlord of the Moore Park store, De Rucci Int. was to manage the Moore Park store. The parties entered into a Management Agreement.
• The Management Agreement between Singways and De Rucci Int. dated 20 October 2016 provided that:
  • De Rucci Int. would provide the bank guarantee that Singways was obliged to provide to the landlord of the Moore Park store under the lease.
  • De Rucci Int. would manage the business operated from the Moore Park store.
  • De Rucci Int. would be paid a ‘commission’, being the ‘net profit’ resulting from the ‘gross earnings’ received from the business operated from the Moore Park store.
  • It would apply for a term that ended with the expiry of the lease.
  • $100,000 compensation was payable by Singways to De Rucci Int. if management of the Moore Park store was not handed over by 1 November 2016.
  • De Rucci Int. had to manage the business in compliance with the lease and the terms Management Agreement.
  • The Management Agreement could be terminated with 28 days’ notice if De Rucci Int.’s action/inactions amounted to a breach of the terms of the lease.
  • In the absence of a breach of the lease, either party could terminate the Management Agreement with 3 months’ notice and a payment of $100,000 to the other party.
• On 21 October 2016 De Rucci Int., provided a cheque for $107,317.90 to Singways, which was payable to the landlord. This cheque was subsequently deposited into the landlord’s account.
• Soon after the bank cheque was provided, Zhu proposed terms for a loan agreement relating to the $107,317.90 provided by De Rucci Int. and the terms of Zhu being paid a management fee. There was no final agreement as to the loan or management fee.
• In early 2019, Singways was deregistered. It was accepted that another company controlled by Zhu, HQ Living Pty Ltd, took on Singways rights and obligations, including under the Management Agreement.
• In late June 2019 the landlord of the Moore Park Store expressed concern to Zhu that the number of bedding displays within the Moore Park store (10) was more than the number permitted under the lease (6). In early July 2019, Zhu notified De Rucci Int. of the landlord’s concerns. The store manager for De Rucci Int. informed Zhu that this issue with the number of bedding displays would be taken care of.
• On 31 August 2019, Zhu had the locks on the Moore Park store changed, but permitted De Rucci Int.’s employees to enter the Moore Park store and to continue to work.
• On 7 September 2019, Zhu changed the EPTOS machines within the store so that all payments received from the business no longer went to De Rucci Int. Zhu also sent a message to Wang querying the non-payment of the management fee and notifying Wang that she had ‘taken back the store’. This message was followed up by an email on 12 September 2019 to the solicitors for De Rucci Int. expressing the similar terms. De Rucci Int. was denied all access to the Moore Park store form 13 September 2019 .
• The Moore Park store lease expired on 29 February 2020 and the full $107,317.90 was released, but retained by Zhu. Zhu had not otherwise repaid De Rucci Int. any of the $107,317.90 provided by it in October 2017.
• By way of a comparison, in the earlier case between these parties, De Rucci International Pty Ltd v Zhu [2020] NSWSC 1720, relevantly, it was held that:
  • Zhu’s conduct on 7 September 2019, as agent for HQ Living Pty Ltd, amounted to a repudiation of the Management Agreement;
  • because HQ Living Pty Ltd had not issued day 28 day notice, on the basis that De Rucci Int. breached the terms that applied to the lease, on 7 September 2019 HQ Living Pty Ltd was only entitled to terminate the Management Agreement with 3 months’ notice, which also meant that the $100,000 compensation was payable;
  • De Rucci Int. had accepted the repudiation; and
  • De Rucci Int. was entitled to $230,473.90 (plus interest and costs), comprising:
    • profit for the 3 month notice period $92,367, but this was discounted to 1 month’s profit of $30,789, on the basis that De Rucci Int. was entitled to $100,000 compensation payment under the Management Agreement;
    • $100,000 compensation as required to be paid if 3 months’ notice to terminate was given under the Management Agreement; and
    • $107,317.90, being for the repayment of the monies provided by De Rucci Int. for the security required under the lease.
• It was held by the NSW Supreme Court of Appeal that:
  • the breach of the lease by De Rucci Int. were serious, but not sufficiently serious to amount to a repudiation to the Management Agreement;
  • because the Management Agreement expressly provided that if there was a breach of the lease by De Rucci Int., HQ Living Pty Ltd could terminate with 28 days’ notice, it was incorrect for the primary judge to find that this right did not apply to HQ Living Pty Ltd just because it had not, before the repudiation, issued a notice exercising this right;
  • there were unremedied breaches under the Management Agreement, in that De Rucci Int. had breach a term of the lease. Further, this breach (having more than 6 bedding displays) had been continuing for some time prior to 31 August 2019 and existed on each of the dates:
    • 31 August 2019 – when the locks were changed;
    • 7 September 2019 – when the EPTOS machines were changed; and
    • 13 September 2019 – when De Rucci Int. was denied all access to the Moore Park store.
• on the date it repudiated the Management Agreement (being by one or more of those actions on 29 August, 7 and 13 September 2019), HQ Living Pty Ltd had the right to terminate the Management Agreement with 28 days’ notice; and
• relevantly, the Appeal Court set aside the damages orders of the primary judge and ordered that HQ Living Pty Ltd/Zhu pay De Rucci Int.:
  • $30,789, being about 1 months’ profit, on the basis that 28 days’ notice should have been given; and
  • $107,317.90, being a repayment of the monies provided by De Rucci Int. for the security required under the lease.

Lavan comment

In this case, if the Management Agreement did not provide for the right to terminate the agreement with:

• 28 days’ notice where the lease terms were breached; and
• 3 months’ notice (with $100.000 paid) in any other instance,

it is likely that De Rucci Int. would have been entitled to the commission it would have received until the end of the term of the Management Agreement, less any reduction based on De Rucci Int.’s obligation to mitigate its losses.

If a party is successful in a repudiation claim, ‘loss of bargain’ damages can be claimed and awarded. This is not the case in a ‘standard’ breach of contract claim.

Instead of accepting the repudiation, De Rucci Int. could have sued for specific performance. If successful, De Rucci Int. would have been entitled to continue to manage the business until the end of the lease term.

Once again, if a party is purporting accepting a repudiation, we can assist to ensure you that do not limit your rights or damages claim and ensure that any repudiation claim is warranted.