Terminating a commercial contract: have you given an effective notice?16 March 2020 Authored by: Oliver Caine, Graham Roberts | Topics: Banking and financial services, Building and construction disputes, Construction and infrastructure, Litigation and dispute resolution
Terminating a commercial contract is an important step, which, if done incorrectly, can have serious adverse consequences such as liability for damages.
It is critical to consider the provisions of the contract as a whole to confirm that there is both a valid basis to terminate and that required procedures have been complied with.
For instance, many commercial contracts include requirements as to the timing, content and service of notices.
A recent decision of the Victorian Court of Appeal considered the principles relevant to giving of notices of termination and has demonstrated how non-compliance with the notice provisions of a contract can have adverse consequences.
In JPA Finance Pty Ltd v Gordon Nominees Pty Ltd, the dispute concerned the termination of a call option deed for an option to purchase units in a trust.
The relevant clause specified that any notice had to be:
(a) in writing and signed by an authorised person
(b) addressed and delivered to the intended recipient at the address or fax number specified in the call option deed.
Following a dispute, JPA gave a ‘termination notice’ that was:
(a) in writing
(b) signed by its solicitors
(c) addressed to the solicitors for GNPL, who was the other party to the deed.
Importantly, although the content of the notice was appropriate, it did not comply with the specified ‘manner and mode’ for the giving of the notice. Although the notice was sent to the correct address (the address of the solicitors), critically, it was addressed to GNPL’s solicitors and not to GNPL itself.
GNPL argued that the purported notice of termination was defective and that the contract had not been validly terminated.
GNPL did not seek damages for wrongful termination but sought to enforce the contract.
GNPL argued that the purported notice given by JPA was ineffective and that the deed had not been terminated.
At first instance, the Victorian Supreme Court agreed with GNPL’s argument, finding that the deed had not been validly terminated. JPA then appealed that decision.
On appeal, the Court said that, in deciding whether the notice of termination had been given in accordance with the clause, it was necessary to consider, first, the proper construction of the terms of the deed, and second, the proper construction of the notice given by JPA.
In considering the construction of the deed, the Court explained that whether strict compliance with the notice provisions was required depended on the construction of the contract as a whole having regard to its commercial purpose.
The Court considered that, apart from contracts of guarantee or suretyship, commercial contracts should generally be interpreted practically so that their effect is not defeated by a narrow and technical application of the notice provisions.
In considering the construction of the notice given by JPA, the Court similarly reasoned that notices should generally be given a commercially sensible interpretation to give effect to the intention of the parties. The key question was how a reasonable recipient would have understood the notice.
The Court found that the notice given by JPA was effective to terminate the contract.
Although the notice was not formally addressed to GNPL (rather, it was addressed to its solicitors), the Court found that the notice had been addressed to GNPL in a substantive way as it was readily apparent from the language of the notice that it was directed to GNPL.
The Court considered that the commercial purpose of the deed was to ensure that notices were directed to the attention of the relevant party through their solicitors. Accordingly, it was not necessary for that party to be ‘formally named by way of address, rather than being otherwise apparent as the intended recipient on the face of the notice’.
The Court explained that it ‘would be highly technical and merely destructive of the parties’ bargain, if such a notice were to be treated as ineffective’.
In our view, parties should always adhere strictly to the specific requirements in a contract for the giving of a notice to minimise the risk of technical legal arguments concerning the validity of the notice.
To do so, it is critical to pay careful attention to the contractual requirements as to the timing, content and method of service of the notice.
Although the Court’s decision may provide some comfort in circuimstances where the method of giving the notice does not strictly comply with the notice provisions in the contract, it is important to be aware of the Court’s observation that strict compliance is required in contracts of guarantee or suretyship.
Similarly, the Court also noted the possibility of a different result if the contract in question contained a particular clause stating that strict compliance was necessary.
Of course, as a threshold issue, any party seeking to terminate a contract must have a valid basis for doing so and comply with any preconditions to termination that are specified in the contract, such as issuing a notice to remedy breach.
Overall, the Court’s decision serves as an important reminder that it is crucial to carefully check all of the provisions in the contract before seeking to terminate.
If you would like more information regarding these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.