(b) The bank Guarantees and Additional Charge: cl 7 of the HofA
159 BreakFree contends that Latitude evinced an intention not to proceed with the acquisition of the Developer's Assets at all and not just an intention not to proceed with the execution of the Sale of Shares Agreement.
160 Counsel for BreakFree submitted that Latitude's conduct was repudiatory, went "to the root of the contract" and evinced an intention not to be bound by the HofA in so far as Latitude failed:
(1) to provide (without explanation) the Second and Third Bank Guarantees under cl 7.2 of the HofA by 30 August 2004 or request an extension past 30 August 2004 to provide the Second and Third Bank Guarantees;
(2) to request or even secure the Third Bank Guarantee under cl 7.2 of the HofA by 30 August 2004;
(3) to tender or provide the fixed and floating charge referred to in cl 7.4.1 of the HofA.
That contention is, or those contentions are, misconceived on a number of bases.
161 First, it ignores the principles concerning repudiation. The relevant principles were summarised by Finn and Sundberg JJ in Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at [102] and [103] as follows:
"102. The principles governing repudiation of a contract are, as we understand it, not in issue and for present purposes can be stated shortly.
(i) A party will have repudiated a contract if, by words or conduct, it evinces an intention no longer to be bound by it or if that party shows it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way: Shevill v Builders Licensing Board(1982) 149 CLR 620 at 625-626; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd(1989) 166 CLR 623.
(ii) The party's conduct is to be judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd at 658 above; Satellite Estate Pty Ltd v Jacquet(1968) 71 SR (NSW) 126 at 150.
(iii) A party that acts on a genuine but erroneous view of its obligations under the contract will not for that reason alone have repudiated it. That party may still be willing to perform the contract according to its tenor: DTR Nominees Pty Ltd v Mona Homes Pty Ltd(1978) 138 CLR 423 at 431-432; Woodar Investment Development Ltd v Wimpey Construction UK Ltd[1980] 1 WLR 277. But persistence in an untenable construction will ordinarily be regarded as repudiatory: Summers v Commonwealth(1918) 25 CLR 144 at 152; and see Chitty on Contracts [25-018].
103. We would note, additionally, that in the case of contracts of significant duration in which interaction and some level of cooperation is required, it is common for parties without formally varying their contract to conduct their dealings inter se in ways that they find acceptable and convenient, fair and reasonable, or commercially necessary "rather than by reference to a priori rights and duties": cf Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd(1988) 5 BPR 11,110 at 11,117."
162 Secondly, the conduct of Latitude identified by BreakFree did not, judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person, evince an intention no longer to be bound by the HofA.
163 Latitude's failure to provide, request or even secure the Third Bank Guarantee was entirely referable to the fact that, on 20 August 2004, Frawley agreed that Latitude would only provide one more bank guarantee, a fact he confirmed to his solicitor: see [71] above. This was the type of conduct that Finn and Sundberg JJ considered in [103] of Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395.
164 Further, a request to extend the deadline for the satisfaction of cl 7 of the HofA was not, as submitted by counsel for BreakFree, identical to the procedure for extension of deadlines for the satisfaction of conditions precedent under cl 2.2 of the HofA. Clause 21.1 of the HofA applied to all other contractual variations and required the formal execution of a new deed. Its terms are mandatory - "[t]hese [HofA] may only be varied or replaced by a document duly executed by the parties". Time was of the essence (cl 21.5) and would, in relation to the provision of guarantees, have required formal amendment of the HofA. The efficacy of engaging in the procedure for formal amendment is questionable given that the parties' attention, in the week prior to 30 August 2004, was directed to a range of additional matters, including the warranties and other amendments sought by Latitude and communicated by its solicitors to BreakFree on 26 August 2004 [see [77ff] above]. In the circumstances, it was reasonable for Latitude to continue its negotiations on these matters without piecemeal amendment under cl 21.1 in respect of individual clauses such as the provision of guarantees under cl 7. The draft Sale of Shares Agreement forwarded by Middletons on 26 August 2004 was consistent with an intention that there be global amendments to the HofA in the form of a "document duly executed by the parties" pursuant to cl 21.1.
165 BreakFree's reference to the failure of Latitude to provide the Second Bank Guarantee under the HofA by 30 August 2004 erroneously focuses on only part of the circumstances which are to be judged objectively. Considered objectively, in light of all the circumstances, including the fact that Thompson had requested and received the bank guarantee from the Bank as early as 24 August 2004 and that all remained was for he and his wife to sign and fax the document, it cannot be said that the failure of Latitude to provide the Second Bank Guarantee to BreakFree, whether taken singularly or with any other fact or facts, evinced an intention on the part of Latitude no longer to be bound by the HofA.
166 The third event relied upon by BreakFree was the failure of Latitude to provide additional security (in the form of a fixed and floating charge or mortgage over the assets). BreakFree submitted this was further evidence of Latitude's repudiation of a critical term of the HofA. Clause 7.4.1 of the HofA was said to provide the contractual basis for this contention. That clause was in the following terms:
"As additional security for the performance by Latitude of its obligations under the Long Form Contract, Latitude will on the Possession Date grant to BreakFree a fixed and floating charge or mortgage …over the Assets to secure the payment of the Purchase Price and all monies payable to BreakFree in a form acceptable to BreakFree."
"Assets" was defined in cl 1 of the HofA to mean certain of the assets of the Developer's Business which BreakFree had purchased from BRD under the SAS Agreement.
167 There is no dispute that Latitude did not provide this "additional security" or that its provision was somehow linked to the obligation to provide a number of bank guarantees to BreakFree under cll 7.1 and 7.2 of the HofA. The question is whether the "additional security" could properly be construed as a term, let alone a critical term, of the HofA in circumstances where it was identified as security for performance of a Long Form Contract that was never negotiated in final form or executed.
168 BreakFree submitted that it did and that the obligation was a necessary implication of cl 7.4.1 of the HofA and that performance of it by 30 August 2004 was made critical under cl 21.5. Cl 22.5 of the HofA, headed 'Severance' and identified as a clause of general application, was said to require this construction. It provided for the severance of clauses held to be "invalid … or unenforceable" unless it was possible to 'read down [the clause] to the extent necessary to ensure that it is not ... invalid … or … unenforceable'.
169 BreakFree submitted that it was possible to read down cl 7.4.1 of the HofA and that the provision of additional security was consistent with the objective intention of the parties irrespective of whether finality, in the form of an Long Form Contract, was in fact reached by the 30 August 2006. This construction was said to be supported by considerations of business efficacy. Priority should be given, it was submitted, to preserving the parties' intention to be immediately bound even if the form of the arrangement was imperfect: Masters v Cameron at 360-361.
170 There are at least three reasons why these submissions should be rejected. Both relate to the terms of cl 7.4.1 of the HofA. First, cl 7.4.1 required that Latitude provide the charge or mortgage on the 'Possession Date'. This date was not defined by the HofA and must refer to the date on which Latitude took possession of the assets which it sought to acquire from BreakFree. Contrary to BreakFree's submission, the obligation to provide the charge was contingent on performance by BreakFree of its obligation to deliver these assets, defined in cl 1 as the assets of the Developer's Business. Latitude never took possession of these assets and could not be understood as undertaking, by cl 7.4.1, to confer on BreakFree a benefit unsupported by prior consideration. The second basis relates to the identification of the relevant consideration - the assets of the Developer's Business. Latitude could not provide security in respect of assets it did not possess.
171 Thirdly, the contention ignores the express terms of the HofA and the effect of it. The HofA was, as BreakFree submitted (see [105] above), a contract which, subject to the conditions precedent being satisfied, bound Latitude to purchase the Developer's Assets for $5.4 million. For the reasons set out above, the conditions precedent were satisfied. Latitude was bound to purchase those assets. The failure of Latitude to provide additional security pursuant to cl 7.4.1 of the HofA in relation to the long form contract did not constitute a breach of the HofA and, further, did not evince an intention on the part of Latitude no longer to be bound by the HofA.
172 During submissions, BreakFree argued that the position adopted by Latitude on this issue was inconsistent with its pleadings. In particular, BreakFree referred to the fact that the Reply filed by Latitude sought to explain its failure to provide the second and third guarantees under cl 7.2 of the HofA and the additional security referred to in cl 7.4.1 of the HofA as resulting "solely by reason of the notification by [BreakFree] of their purported termination of the [HofA]". In my view, the content of the Reply does not assist BreakFree. It does not and cannot alter the substance of Latitude's contention (which I accept) that Latitude was, or would have been able, to perform its obligations: eg see Section (4) below. The alleged failure to take the steps relied upon by BreakFree does not constitute repudiatory conduct on the part of Latitude.
173 For the reasons outlined above, Latitude's conduct was not otherwise repudiatory. There was no basis on which BreakFree was entitled to terminate the HofA.