By Katherine Gardner of Wolters Kluwer, CCH
The Court of Appeal in Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd  NSWCA 16 recently held that a purchaser (PGI) had not in fact repudiated a contract despite putting the vendor (SCA) on notice via letter, that unless the legal issues surrounding ownership of assets the subject of the sale agreement (contract) were resolved within 30 days, the contract would be terminated.
The decision illustrates that parties to a contract need to be certain that the test for repudiation (outlined below) has been satisfied before alleging repudiation, to avoid adverse consequences.
The vendor claimed that it had lawfully terminated the contract following the purchaser’s repudiation. However, the parties were found to have both subsequently treated the contract as not capable of being completed and the vendor had not lawfully terminated the contract. Consequently, the vendor was not entitled to damages for the alleged repudiation of the contract by the purchaser.
Test for repudiation
The court noted that “repudiation gives the other party the ‘right’ to elect to either affirm the contract, or accept the repudiation and terminate the contract”: . The test for repudiation or anticipatory breach of a contract is “whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.”
Applying this test, Barrett JA considered the quality of the conduct of the purchaser to determine whether it was capable of conveying to a reasonable person, in the situation of the vendor, renunciation of the contract as a whole or of a fundamental obligation under it.
“… Taken as a whole, the letter evinced a desire and an intention to see the contract completed according to its terms — emphasising, however, that those terms contemplated the giving of clear and unclouded title by SCA and that it was for SCA to find within a reasonable time means of achieving this in the face of the clearly flagged claims by the liquidators of NMA.”: 
This was the finding notwithstanding a statement in the letter’s penultimate paragraph that the purchaser would “have to terminate the Asset Sale Agreement” as this statement did not manifest an intention to renounce the contract. Rather, it put the vendor on notice that if at the end of the specified period, it had not resolved the “legal matter” regarding ownership of the subject assets, the purchaser would regard itself as in a position where the subject matter for which it had bargained (and which the vendor had promised to give) could not be delivered to it: .
Contrary to the finding above, the court proceeded to consider whether the vendor had in fact accepted the purchaser’s repudiation of the contract and therefore legally terminated the contract.
The purchaser argued that the parties were unable to comply with the following clause in the contract:
“Completion of this Agreement is subject to and conditional upon … the parties obtaining the consent of the Lessor to assign the Lease on terms satisfactory to the Purchaser.”
The agreement contained relevant definitions as follows:
- ‘Lease’ means the Vendor’s lease of the Business Premises.
- ‘Lessor’ means the lessor of the Business Premises.”
- The “Vendor” was SCA.
The purchaser argued that the vendor was not at the date of the contract, nor at any other time, the lessee of the Business Premises. Accordingly, there was never any lease within the definition above and therefore it was impossible for anyone to obtain consent to assignment of a non-existent subject matter. Consequently, the time for completion of the contract could never arrive and therefore even if the actions of the purchaser were repudiatory,
“… there was not in truth any repudiation because the contract could never bind either party to complete”: .
Wider application of the principle in: Shepherd v Felt and Textiles of Australia Ltd  HCA 21?
The principle has been helpfully restated (by Mason CJ) in Foran v Wight  HCA 51:
“[A] party who refuses to perform a contract can justify his action by pointing to grounds that justify his refusal even if at the time of refusal he was unaware of the existence of those grounds.”
According to Gleeson JA, in a separate judgment addressing the application of the Shepherd principle, “… its scope did not squarely arise on appeal.” However, this did not stop his Honour from expressing a tentative view that the scope of the Shepherd principle was not confined to supporting as justifiable a contractual act of discharge or termination of a contract, rather it could extend to apply to other contractual acts. However, in his view it should not apply to repudiation. The justification given for this view was as follows:
“Application of the Shepherd principle in the context of conduct which amounts to a repudiation, may be seen as undermining certainty in the parties’ contractual dealings with each other. It may also be inconsistent with the principle that repudiation by a contracting party gives the other party ‘the right to believe that the contract would not be performed according to its true construction’: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd  HCA 66; 61 CLR 286 at 304”: .
However, Gleeson JA finally concluded that the issue whether the Shepherd principle extended to justification of conduct which amounted to a repudiation, (short of the repudiating party also terminating the contract), should await consideration in an appropriate case.
Note: this decision will be explored in full in CCH’s NSW Conveyancing Law and Practice.