Adam Robinson

Termination of Contract

Termination of ContractThe High Court’s decision in Koompahtoo v Sanpine spelled out the circumstances which can give you a right, under the common law, to terminate a contract. You’ll have a right to seek termination of a contract if:

  1. an essential term of the contract was breached; or
  2. a non-essential term of the contract, causing substantial loss, was breached; or
  3. repudiation of the contract took place.

What Is An Essential Term Of A Contract?

Essential terms are also known as conditions; they are distinct from warranties. A term is said to be essential when it is of such importance to the party receiving a contractual promise “that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise” and the other party knows or ought know of this.

A breach of an essential term will give the innocent party a right to terminate a contract and seek to recover damages for the loss of contract.

A breach of a warranty, on the other hand, will not give you a right to terminate a contract. The available remedy is to seek recovery of damages caused by a breach of warranty (Sale of Goods Act 1896 (Qld)).

It should be noted that even though most contracts use specific language to differentiate between essential and non–essential terms, for example, by using words like ‘conditions’ and ‘warranties’, such usage is not compulsory and the meaning of terms will be determined by the Court, including the meaning of ‘conditions’ if such words were used (Wickman Machine Tool Sales Ltd. v L. Schuler A.G. [1974] AC 235, [1973] 2 All ER 39).

What is a non-essential term of a contract?

A non-essential term is a term occupying a place somewhere between a condition and a warranty (Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15 at 561-2), which is why it’s often referred to as an intermediate term in common law. An intermediate, or non-essential term is classified as a term of lesser importance than an essential term because its breach doesn’t give you a right to terminate a contract but its legal value is higher than that of a warranty—a breach of warranty only gives you a right to damages caused by a warranty breach (Sanpine Pty Ltd v Koompahtoo Local Aboriginal Land Council & Ors [2006] NSWCA 291 at 176).

A contract can be terminated, however, if a breach of an intermediate term is sufficiently serious. To determine if a sufficiently serious breach of an intermediate term took place, the courts will consider:

  1. if the whole of the contract was affected by the breach so that its fulfilment is seen substantially different from that originally intended by the parties, as a result of the breach;
  2. the seriousness of the breach will depend on the consequences of the breach, both actual and foreseeable, for the innocent party;
  3. the onus of proof is on the innocent party to show the seriousness of the consequences of the breach which will be assessed by the court.

What is a repudiation of a contract?

In common law, repudiation may refer to conduct which indicates an unwillingness or an inability of a party to perform a substantial part of the contract. It can demonstrate itself in a form of an intention to no longer be bound by the contract or “to fulfil it only in a manner substantially inconsistent with the party’s obligations.”

In Freeth v Burr ((1874), L.R. 9 C.P. 208 at p. 214), Justice Keating said : “It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his part of the contract.”

This is an important point to keep in mind—a party does not necessarily repudiates a contract when it acts on misinterpreted terms of it (although repudiation may arise if the party persists on wrongful interpretation after the terms have been clarified and brought to their attention). If a party to a contract misinterprets its terms but the other party, instead of trying to clarify the terms, attempts to terminate the contract for repudiation, it may find itself being a repudiating party, giving the party that was acting wrongfully in the first place an opportunity to terminate the contract.

Unexpected twists like that highlight the importance of professional legal advice in the area of commercial law.

A team of experienced solicitors at Hollingworth & Spencer is available to assist your business in matters of commercial law should you require any advice.

Intellectual Property Protection Strategy

Intellectual PropertyHow much information do you think a humble 8GB USB stick can hold? Let’s run some numbers quickly: a typical 1,500 words Microsoft Word document should be about 20kb which means you can save roughly 400,000 documents on an 8GB stick or 3,200,000 on a 64GB one. More than three million documents on a $50 storage device. Impressive.

There was a case in the Supreme Court of New South Wales back in 2004, before USB sticks were invented, Woolworths v Olson where an injunction (a restraint of trade) was sought, and granted against Mr Olson by his then former employer Woolworths. What happened?

Mr Olson had access, through his employment, to valuable confidential information codenamed “Project Mercury” – a software system designed to transform Woolworths’ product supply procedures. Only key employees were privy to this information, and Mr Olson was one such employee. He received and accepted a job offer from Franklins, a direct Woolworths’ competitor. On the last day of his employment with Woolworths, Mr Olson sent by email several files relating to Project Mercury, from his work computer to his wife’s home computer. These were extremely confidential and valuable. Woolworths discovered the theft and took Mr Olson to court seeking a so called “restraint of trade”, that is, a court order preventing Mr Olson from being employed by Franklins for at least some time. Initially losing at the first hearing, Woolworths was granted an injunction against Mr Olson by the NSW Court of Appeal.

Mr Olson did not have a USB stick and only a handful of files, not millions, were stolen. Today though, an entire corporate database or millions of files can be stored on a small storage device and taken to the outside world without anyone noticing anything (Edward Snowden anyone?).

A Value Worth Protecting

Unlike tangible property, it’s hard to put a dollar value on intellectual property. How much does information cost? Is it worth protecting at all? Do you want to find out the hard and expensive way or would you rather prefer to safeguard your business against intellectual property loss or damage?

Even though most businesses realise that intellectual property must be protected from competitors, too many still make a mistake of assuming that there’s little can be done to protect confidential IP from its own workers. While it’s normal and indeed commendable to trust your employees, it’s equally foolish not to have some protective measures in place if things go wrong, which they do sometimes.

Here is a list of measures you can implement in your business to minimise exposure to intellectual property theft or unauthorised use:

  • Document control and management system: as an intellectual property owner, you should be able to know at any instance what kind of access and to what kind of information is available to any particular person in your organization at all times. An audit log must be maintained showing who accessed what and when that will help identify a potential breach should a suspicion arise;
  • Employee education: make sure your workers are aware of the intellectual property’s value and of the consequences of tempering with it in an unauthorised manner;
  • Email control system: keeping a log of email traffic is both preventative and investigative tool that will help safeguard your IP (recall the Woolworths case above);
  • External email control system: with web based email services such as Gmail or Hotmail, it’s easy to bypass an internal email system and send away intellectual property through one of these services – your business should be protected from that by implementing a system which will not allow access to external email services;
  • Review policy: the likelihood of IP theft will be reduced if every employee is aware that the digital trail they leave behind when they decide to move on will be reviewed to ensure no breach of intellectual property has occurred.

To help you navigate through the complexities of intellectual property issues, Hollingworth & Spencer Lawyers are available for any assistance your business may require. To quote one famous American, “By failing to prepare, you are preparing to fail.” It was true in 18th century, and still true in 21st.

Building a Resalable Business

gearsPeople sell their businesses all the time. Usually they do this because they’re ready to retire or perhaps want to relocate elsewhere, maybe do something else or just want to cash in, whatever the reason may be. Other times, and this happens more often than you think, a sweet offer comes out of nowhere and you begin to contemplate that age old proverbial question—to sell or not to sell (or is it, to be or not to be?)?

As a commercial law firm, we have seen plenty of regret among business owners who could not clinch a lucrative sale of their business when a ready to buy entrepreneur knocked on their door with cash in hand only because their business wasn’t as good “under the hood” as it appeared to the outside world.

Even if you’re not thinking of selling right now, as a business owner you should be prepared for all kinds of eventualities and a sale of your business is one of them. If you want to be ready when the time comes to sell, consider these few points we recommend.

Always Ready

Successful business owners are good at what they do—running their business. Selling it, however, is an entirely different undertaking. To be in a position to sell, keep in mind the idea of selling your business at all times because it will impact all areas of your business and decision making.

Business Structure

Decide the legal structure of your business before you start operating it. Is it going to be a sole trader operation, a partnership, a company or something else? This is where legal and accounting advise can make or, in the absence of it, break your business.

Different business structures have different legal and tax implications. Get it wrong off the bat and you could be up for unexpected tax and legal liabilities or a restructure. Neither of these are fun and you’ll do yourself a favour to get it right from the start.

Business Plan

We’re not going to give a lecture on how to create a competent business plan. We’ll say this though—it’s imperative you have one. In it, outline your marketing strategy; know how you’re going to attract and retain your customers; devise steps to create or improve your brand; set realistic financial goals and funding sources if necessary.

A functioning business plan is not something you make in the beginning, get your business going and then forget about. It should be adjusted from time to time to reflect changed circumstances and growth of your business. An updated business plan is a powerful bargaining chip in negotiations.

Business Records

Make every effort to keep your financial records accurate. This is where a buyer will look to see if your business is a fair dinkum or a pair of window dressings with a financial mess behind it.

Business Infrastructure

The value of your business will increase if you’ll be able to demonstrate an independent enough infrastructure that can function without you. A system with robust processes in place will help a buyer to have confidence in their ability to run your business without major dramas once they step in to replace you.

Business Contracts and Obligations

Review your contracts to ensure everything is in good order at all times: leases, client and supplier contracts, hire, licence or purchase agreements. A pitfall to look out for is whether or not any of the contracts your business is a party to can be re-assigned to a third party, which is why we mentioned above to keep the sale of your business in mind at all times—think twice before binding your business to a contract you won’t be able to get out of when needed.

On the other hand, if a buyer can see that they’re getting a good, long term contract(s) with your business, all of a sudden you may feel like you can ask a better price.

If you employ staff, review their employment contracts to ensure you will not breach any statutory laws or obligations by selling your business. As always, if you’re not sure where you stand, seek legal advice. And even if you think you know what you’re doing, double check with an experienced solicitor anyway.

Intellectual Property

Make sure you have a clear understanding of what is and what is not intellectual property. Knowing this will have a direct impact on the sale price of your business since intellectual property, like any other property, varies in price. Although an exact figure is not easy to determine, you should at least know what it is you own so that you can negotiate armed with proper knowledge.

For example, a business name isn’t worth much since it’s not protected by law and is not a property while a trade mark is both protected and a property. Knowing these kinds of nuances can be a game changer when it comes to selling your business. As before, a legal advice will provide you with information necessary for a good business decision in this area of law.

Conclusion

Take the steps to prepare your business for sale regardless of the stage it is at right now. Whether you’re already thinking of selling or simply want to be ready should the opportunity come along, speak to a lawyer you can trust about your plans.

Due to the impact of specific facts on any given case please treat this information as a general guide and not as legal advice. If you require advice on how to adequately protect your security rights please contact Adam Robinson on 07 3123 5700.