Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49 (30 March 2005)

Last Updated: 30 March 2005

FEDERAL COURT OF AUSTRALIA

Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49

CORPORATIONS – CONTRACTS - administration - deed of company arrangement – proof of debt - breach of contract – right to terminate for breach – whether structure of contractual arrangements such as to disentitle innocent party from terminating for serious breach of contract – repudiation and serious breach of contract discussed.

Corporations Act 2001 (Cth) ss 553, 1321

Amann Australia Pty Ltd v The Commonwealth of Australia [1991] HCA 54; (1990) 22 FCR 527 referred to
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 cited
Bentsen v Taylor [1893] 2 QB 274 cited
Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159 cited
Bridge v Campbell Discount Co Ltd [1962] AC 600 referred to
Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 cited
Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312 cited
Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 cited
Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 cited
Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 cited
Fullers’ Theatres Ltd v Musgrove [1923] HCA 12; (1923) 31 CLR 524 cited
Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409 discussed
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 cited
Honner v Ashton (1979) 1 BPR 9478 discussed
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26 discussed
In re Asphaltic Wood Pavement Co (Lee & Chapman’s case) (1885) LR 30 Ch D 216 discussed
Larratt v Bankers & Traders’ Insurance Co (1941) 41 SR 215 cited
Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 referred to
Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434 cited
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 208 ALR 213 cited
Panoutsos v Raymond Hadley Corporation of New York [1917] 2 KB 473 cited
Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; [1980] AC 827 referred to
Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd [1978] HCA 8; (1978) 139 CLR 231 discussed
Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 cited
Rawson v Hobbs [1961] HCA 72; (1961) 107 CLR 466 referred to
Ross T Smyth & Co Ltd v T D Baily Son & Co [1940] 3 All ER 60 cited
Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 referred to
Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 referred to
Stocznia Gdanska SA v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574 cited
Suisse Atlantique Societe D’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 referred to
Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 cited
United Australia Ltd v Barclays Bank Ltd [1997] UKHL 17; [1941] AC 1 cited
Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003 cited
Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 cited

IN THE MATTER OF NATIONAL EXPRESS GROUP AUSTRALIA (SWANSTON TRAMS) PTY LTD (RECEIVER AND MANAGER APPOINTED) SUBJECT TO A DEED OF COMPANY ARRANGEMENT) SIMON ALEXANDER WALLACE SMITH & ANOR v THIESS INFRACO (SWANSTON) PTY LTD
V 1145 of 2004

FRENCH, WEINBERG & ALLSOP JJ
30 MARCH 2005
MELBOURNE AND SYDNEY BY VIDEOLINK

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	SIMON ALEXANDER WALLACE-SMITH FIRST APPELLANT PETER GEORGE YATES SECOND APPELLANT
AND:	THIESS INFRACO (SWANSTON) PTY LTD RESPONDENT
JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE OF ORDER:	30 MARCH 2005
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellants pay the respondent’s costs of the appeal.













Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	SIMON ALEXANDER WALLACE-SMITH FIRST APPELLANT PETER GEORGE YATES SECOND APPELLANT
AND:	THIESS INFRACO (SWANSTON) PTY LTD RESPONDENT

JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE:	30 MARCH 2005
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

FRENCH J

Introduction

1 The privatisation of the public transport system of trams and trains in Victoria in 1999 was effected by an elaborate array of contracts between the Government of Victoria, the companies which undertook to operate the system and those who agreed to provide maintenance and other support services. It was an important element of those contractual arrangements that the Government retained the power to direct parties to some of the contracts to continue to provide the agreed services notwithstanding that there may have been breach entitling them to terminate those contracts and withdraw their services. These provisions allowed the Government to ensure continuity in the provision of important public facilities notwithstanding that one or other of the private parties may have failed to meet its contractual obligations.

2 In 1999, members of the National Express Group of Companies were granted franchises to operate tram and train systems in Melbourne. As it turned out their projections had been optimistic and their operations were not financially viable. Their UK-based parent company decided in 2002 to cease supporting them financially.

3 One of the companies, which was operating Melbourne Trams, National Express Group Australia (Swanston Trams) Pty Ltd (NX Swanston) ceased to meet its obligations to pay an important infrastructure maintenance provider, Thiess Infraco (Swanston) Pty Ltd (Thiess Swanston). These payments were due to be made in respect of the maintenance of the tram system and pursuant to an agreement with Thiess Swanston known as the Swanston Infrastructure Maintenance Agreement (IMA). Thiess Swanston, which had also entered into an agreement (the Direct Agreement) directly with the Director of Public Transport (the Director), gave notices of default to both NX Swanston and the Director. The Director appointed receivers to NX Swanston under securities it held over that company. Subsequently, voluntary administrators were appointed and, in July 2003, a Deed of Company Arrangement was entered into by the company and its creditors.

4 Pursuant to the Direct Agreement, Thiess Swanston was required by the Director, on 24 December 2002, to continue to meet its obligations under the IMA upon the basis that the receivers would step into the shoes of NX Swanston. Thiess Swanston was paid for its services by the receivers from that time. In September 2003, Thiess Swanston, NX Swanston, the Director and the receivers entered into a Settlement Deed extending the operation of the IMA pending entry into a new agreement upon which the old IMA would terminate. Such termination was expressly stated to be for a breach by NX Swanston of the original IMA. No new agreement was made pursuant to the Settlement Deed. In September 2003, Thiess Swanston lodged a proof of debt under the Deed of Company Arrangement. $6,860,909 of the proof related to unpaid progress claims from November and December 2002. The balance of $20,623,499 related to loss of profits. The latter component of the claim was lodged as a contingent claim under the Deed of Company Arrangement. The relevant contingency was termination of the IMA for breach by NX Swanston and associated with that breach a right to claim damages for loss of bargain. At the time that the claim was lodged, because of restrictions, imposed by the IMA, upon the right to terminate it, that contingency had not occurred.

5 On 17 April 2004, an agreement, called a Transfer Agreement, was made under which the assets and employees used by Thiess Swanston to provide infrastructure maintenance services were transferred to another company, MetroLink Victoria Pty Ltd (MetroLink), and the original IMA terminated. Termination was stated to be for breaches by NX Swanston of the original IMA.

6 On 1 April 2004, the administrators of the Deed of Company Arrangement rejected Thiess Swanston’s claim for loss of profits on the basis that it had no contractual right to terminate the IMA upon the appointment of the receivers and managers on 22 December 2002. Accordingly, it was said to have no claim for loss of profits under the Deed.

7 On 7 September 2004, after hearing an application by Thiess Swanston challenging the administrators’ decision, Finkelstein J made an order that they admit the proof in full but subject to valuation. The administrators have appealed against his Honour’s decision.

8 In substance the administrators assert that the right to terminate the IMA was extinguished by the provisions of that agreement and related contractual documents. Alternatively it is put that the right to terminate the IMA for breach by NX Swanston was effectively lost by its affirmation under the terms of the Settlement Deed and later the Transfer Agreement of April 2004. A further alternative argument is that the IMA was terminated consensually by the Transfer Agreement and that such termination did not constitute acceptance of a repudiation of the IMA. The right to terminate having been either extinguished, lost or abandoned, the contingency upon which the claim for loss of profits depended, namely termination for breach by Thiess Swanston, never arose.

9 For the reasons which I have set out below, in my opinion these contentions, reflected in the various grounds of appeal, are not made out. The appeal should be dismissed.

Factual and Procedural Background

10 In 1999, the Victorian Government undertook the privatisation of its public trains and trams transport system. The National Express Group of Companies was a bidder for franchises to operate those parts of the system known as Bayside Trains, Swanston Trams and Yarra Trams. The Group’s holding company is National Express Group PLC, a British publicly listed corporation.

11 In anticipation of the grant of franchises National Express Group (Australia) Pty Ltd entered into an Infrastructure Maintenance Agreement (IMA) with Thiess Contractors Pty Ltd (Thiess Contractors). That agreement was dated 14 May 1999. It provided that, in the event that the National Express Group was awarded the franchises the IMA would record the terms and conditions upon which Thiess Contractors would provide infrastructure maintenance services.

12 The National Express Group was awarded the franchise. Franchise Agreements were made with respect to the train system and the two tram networks. In relation to Swanston Trams a Franchise Agreement was made on 25 June 1999 between the Director and NX Australia (Swanston Trams) Pty Ltd (NX Swanston). The recitals to the agreement recorded that the Director and NX Swanston had entered into an Infrastructure Lease for the lease of ‘tram infrastructure’ to NX Swanston for the ‘franchise period’ which was a term of 12 years (recital A). NX Swanston had agreed ‘to operate tramway passenger services on that tram infrastructure on the terms of this agreement’ (recital B). NX Swanston and the Infrastructure Maintenance Service Provider, defined relevantly as a subsidiary of Thiess Contractors, would enter into an Infrastructure Maintenance Service Agreement for the maintenance of the tram infrastructure (recital D). The franchise agreement also required that the Infrastructure Maintenance Service Provider enter into a separate agreement with the Director which was to be designated a ‘Franchise Entity Direct Agreement’ (recital C). The term ‘Franchise Entity’ covered not only the Infrastructure Maintenance Service Provider but also other service providers under the Franchise Agreements.

13 The term of the Franchise Agreement was 12 years (cl 4.2) subject to a right on the part of the Director unilaterally to extend the agreement for a period of up to six months. Clause 18 of the Franchise Agreement dealt with its termination. It defined various ‘termination events’ which were expressed largely in terms of breaches by the franchisee but extended to breaches by Franchisee Entities of the obligations under contracts to which they were party. One of the termination events defined in cl 18 was the valid termination of a Transaction Document (cl 18.1(2)), ie, in effect, any of the various contractual documents established under the franchise system (cl 1.1). Clause 18.2 provided for termination of the Franchise Agreement by the Director on written notice to the franchisee, NX Swanston. Clause 18.3 provided:

‘Notwithstanding any rule of law or equity to the contrary, this agreement may not be terminated except as provided in clause 18.2.’

14 Upon the execution of the Franchise Agreement, the IMA of 14 May 1999 was novated by a Deed of Novation dated 23 July 1999. That Deed reconstituted the IMA as two agreements, with identical terms, one relating to the Swanston tram network and the other relating to the Bayside train system. Under the Deed in its application to the Swanston tram network, the parties to the IMA became NX Swanston and Thiess Swanston. National Express Group Australia (Bayside Trains) Pty Ltd (NX Bayside) and Thiess Infraco (Bayside) Pty Ltd (Thiess Bayside) became the parties to the agreement in its application to the Bayside train network.

15 The Deed of Novation provided that, from its Effective Date, NX Swanston had rights against and owed obligations to Thiess Swanston in connection with the IMA and vice versa as if each were a party to it in place of NX Australia and Thiess Contractors respectively (cl 3.1(a)). Events of default under the former composite IMA were separated out so that events of default relevant to the IMA-Bayside did not constitute events of default for the purposes of the IMA-Swanston (Schedule 1 cl 10).

16 The term of the IMA was three years (cl 4.1 and definition of ‘Term’ in cl 1.1). The term could be extended at the discretion of NX Swanston for up to three successive periods of three years allowing for a maximum total period of 12 years. The agreement contained provisions relating to its termination and that of ‘Key Contracts’. Key Contracts were defined in the IMA by reference to their definition in the Franchise Agreement. That definition included:

‘Any agreement or arrangement for the provision of Rolling Stock or Infrastructure maintenance services.’ (Franchise Agreement cl 1.1 Schedule 16 Pt 1 Item 5)

The Franchise Agreement required NX Swanston to procure that Thiess Swanston would not, except as permitted by its terms, ‘avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of ... a Key Contract’ (cl 23.5(a)(i)). The agreement provided that a franchise entity, for which read Thiess Swanston, could terminate a Key Contract, for which read the IMA, if the Director were reasonably satisfied that it was ‘... no longer necessary for the Franchise Entity to have the benefit of the Key Contract’; or ‘that Franchise Entity has made adequate alternative arrangements for the continued operation of the Franchise Business’ (cl 23.5(b)). If a franchise entity were to terminate a Key Contract ‘ ... in breach of this Agreement’ (sic) then the Franchisee was required to procure the Franchise Entity, at the request of the Director, to enter into an agreement immediately following that request with each counter party to the Key Contract in the terms set out in the relevant Direct Agreement (cl 23.5(c)).

17 As required of NX Swanston by cl 23 of the Franchise Agreement, the IMA between NX Swanston and Thiess Swanston contained limitations on termination in cl 24. Thiess Swanston acknowledged that the IMA was a Key Contract and agreed to cooperate in the implementation of a Direct Agreement with the Director (cl 24.2(c)). Of importance in this case is cl 24.4 of the IMA which provided:

‘24.4 Termination of Key Contracts

(a) Thiess must not, except as permitted by paragraph (b):

(i) avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of;
(ii) suspend the performance of any of its obligations under; or
(iii) do or permit anything that would enable or give grounds to another party to do anything referred to in sub-paragraph (i) or (ii) in relation to,

this Agreement.

(b) Thiess may terminate a Key Contract if the Director is reasonably satisfied that:

(i) it is no longer necessary [for]Thiess to have the benefit of the Key Contract; or
(ii) Thiess has made adequate alternative arrangements for the continued operation of the Franchise Business.

(c) If Thiess terminates a Key Contract in breach of this Agreement, Thiess must, at the request of the Director, enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement.’

The language of cl 18.3 of the Swanston Franchise Agreement, which set the termination provisions for that agreement expressly against ‘any rule of law or equity to the contrary’, was not replicated in the IMA.

18 Clause 34.1 of the IMA set out a dispute resolution process and provided for termination by NX Swanston if an ‘Event of Default’ occurred. The definition of ‘Event of Default’ in cl 34.1(a) applied to defaults by either party including non-payment of amounts due (cl 34.1(a)(i)) and Insolvency Events (cl 34.1(a)(iv)). The definition included defaults defined by reference to Thiess Swanston only (cl 34.1(b)). The processes of giving notice of default, referral to dispute resolution, the provision of time for remedying defaults and the rights of termination were all formulated on the assumption of a default by Thiess Swanston. Despite the bilateral aspects of the definition no provision was made in cl 34 conferring any rights on Thiess Swanston in the event of a default by NX Swanston. The right of NX Swanston to terminate for default by Thiess Swanston was set out at cl 34.6.

19 Under cl 36, if a Force Majeure event continued for more than 30 business days the party not affected by it could terminate the agreement on 14 days’ notice. Force Majeure events were defined in cl 1.1 but none of those definitions is relevant for present purposes.

20 Under cl 11(c)(ii) of the IMA Thiess Swanston agreed, and undertook to NX Swanston, to enter into a Direct Agreement with the Director. That clause provided:

‘Thiess agrees to:
...

(ii) execute and provide to the Franchisee upon request the Franchise Entity Direct Agreement and the Franchisee Deed of Charge, and Thiess undertakes to the Franchisee to comply with the requirements of each of those deeds;’

In discharge of that obligation Thiess Swanston entered into the Direct Agreement on 26 July 1999. Its object was to ensure, inter alia, that Thiess Swanston would be contractually obligated to the Government of Victoria in relation to the provision of infrastructure maintenance services under its IMA with NX Swanston.

21 The Direct Agreement contained a provision limiting the rights of Thiess Swanston to terminate or suspend performance of its obligations under the IMA. Under cl 5.1, absent default, Thiess Swanston could only terminate or suspend the performance of its obligations in accordance with the terms of the IMA if it had given the Director not less than six months prior notice. It could not, without the consent of the Director, terminate or suspend its performance during the last 12 months of the term of the IMA or any extension of it. Clause 5.2 dealt with termination or suspension for default. Thiess Swanston could only terminate or suspend the ‘performance of its obligations’ under the IMA for default if it had given a notice to the Director and to NX Swanston setting out the default (cl 5.2(a)(i)) and if either of the following conditions was satisfied:

‘A. if the Default is capable of remedy, the Default has not been remedied within 30 days of the date on which the Default Notice is given to the Director and the Franchisee or such longer period as is allowed for remedy of the Default under the Contract; or

B. if the Default is not capable of remedy, all of the obligations of the Franchisee under the Contract do not commence and continue to be performed within 30 days of the date on which the Default Notice is given to the Director and the Franchisee or such longer period as is allowed under the Contract.’

Termination of the performance of obligations under the IMA for default was prohibited under certain circumstances. By cl 5.2(b) it was provided:

‘The Franchise Entity may not terminate, or suspend the performance of its obligations under, the Contract as a result of a Default if:

(i) the Director has notified the Franchise Entity that he or she is entitled to exercise his or her step-in right under the Franchise Agreement or the Security has become enforceable; and
(ii) an Enforcing Party is performing all of the Franchisee’s obligations under the Contract.’

The term ‘Enforcing Party’ was defined in cl 1.1 as:

‘... the Director, or any receiver, receiver and manager, agent, attorney or nominee appointed or acting under the Security or the Franchise Agreement.’

The prohibition in cl 5.2 bears the construction that it related to the performance of the obligations of Thiess Swanston under the IMA and not to termination of the agreement itself. Clause 24.4(a)(i) of the IMA on the other hand was directed to termination of ‘this agreement’. Clause 24.4(b) was directed to termination of ‘a Key Contract’. This distinction in language suggests that cl 5.2 of the Direct Agreement was concerned to impose an obligation on Thiess Swanston to continue to provide maintenance services. That obligation derived its force from the Direct Agreement and did not depend upon the continuing existence of the IMA.

22 Clause 5.3 provided for ‘Cure Rights’ whereby an Enforcing Party on becoming aware of the default could take steps to remedy or procure the remedy of the default or commence and continue to perform the obligations of the franchisee under the contract. The termination and suspension provisions contained in the Franchise Agreement, the IMA and the Direct Agreement may be seen as part of a scheme to ensure that the Victorian Government was in a position to maintain the continuity of public transport services uninterrupted by purely contractual events. The relationship between the qualifications upon the right to terminate recognised by the Direct Agreement and those imposed by the IMA was a matter of debate on the hearing of this appeal.

23 There were other agreements made by NX Swanston relevant to the operation of the Swanston tram franchise. A Fleet Maintenance Agreement (New Rolling Stock) dated 31 March 2000 was made between NX Swanston and Siemrail (Vic) Trams Pty Ltd. Both parties could terminate the agreement in certain circumstances (cl 28.1). A Manufacture and Supply Agreement (Swanston Trams) dated 31 March 2000 was made between NX Swanston, Siemens Ltd and GATX Rail (SW-1) Pty Ltd. Siemens could terminate this agreement under certain circumstances (cl 25.1 and 25.8).

24 The members of the National Express Group commenced operating train and tram services in Victoria under their respective franchise agreements. Thiess Swanston provided maintenance services as required and was paid for those services in accordance with the terms of the IMA until December 2002. On 3 December 2002, the company sent its November progress payment claim dated 1 December 2002 to NX Swanston in the amount of $3,989,731 (excluding GST) pursuant to the provisions of the IMA (cls 10.2(a) and 10.2(b)). Payment was due on 17 December 2002 (cl 10.3(a)).

25 As it turned out the National Express companies were unable to operate profitably. On 16 December 2002, the National Express Group PLC, the British parent company for the Group, gave formal notice to the Victorian Government that it would stop providing funds to enable its ‘train and tram subsidiaries to meet their liabilities as and when they fell due with effect from December 2002’. On the same day, the Minister for Transport announced that the NX franchisees would surrender their franchises with effect from 23 December 2002.

26 Thiess Bayside, in reference to its own situation and that of Thiess Swanston, wrote to the National Express Group on 17 December 2002 referring to the announcement that parent company funding to the National Express subsidiaries would cease and seeking clarification of the position as it had received no notice to that effect itself. The National Express Group replied to Thiess Swanston and Thiess Bayside the same day that it was in negotiation with the Victorian Government for an orderly handover of the franchise businesses once funding ceased.

27 The amount of $3,989,731 due to Thiess Swanston on 17 December 2002 was not paid. On 19 December 2002, Mr Don Johnson, a director of Thiess Swanston, sent a letter to the Director and to the Chief Operating Officer of the National Express Group by way of ‘Default Notice pursuant to clause 5.2 of the Direct Agreement specifying that a Default under the IMA has occurred’. The letter referred to the press release from National Express Group PLC. It referred also to the confirmation by NX Swanston that it was not in a position to advise Thiess Swanston whether it would pay amounts that were due and that would become due to it under the IMA. Thiess Swanston was owed the sum of $3.989 million under the IMA in respect of its November progress payment claim which was due and payable on 17 December 2002. The default specified was:

‘The failure by National Express Group Australia (Swanston Trams) Pty Ltd, in breach of the IMA, to pay the sum of $3.989m currently due and payable to Thiess Infraco.’

The notice was served on the Director on 20 December 2002.

28 On 22 December 2002, acting under securities granted by NX Swanston, the Director appointed receivers and managers over its assets. Thiess Swanston sent a second default notice dated 23 December 2002 to the Director and to the Chief Operating Officer of NX Swanston in the following terms:

‘This is a Default Notice under the Direct Agreement.

The Default is the appointment of a receiver and manager to National Express (Swanston Trams) which we were advised by the receiver occurred on 22 December 2002. The appointment of a receiver and manager constitutes an Event of Default and an Insolvency Event under the Infrastructure Maintenance Agreement.’

On 23 December 2002, Simon Alexander Wallace-Smith and Robert William Whitton were appointed, pursuant to s 436A of the Corporations Act 2001 (Cth), as joint and several voluntary administrators of the companies in the National Express Group including NX Swanston.

29 On 24 December 2002, the Director sent a letter to Thiess Swanston stating that, pursuant to the Direct Agreement, it was not entitled to terminate or suspend its obligations under the IMA. A notice, pursuant to cls 3(b) and 5.2(b) of the Direct Agreement was attached to the letter:

‘I give notice that:

(a) The Security (as that term is defined in the Direct Agreement) given by NX Australia (Swanston Trams) Pty Ltd ACN 087 494 997 ("the Franchisee") in favour of the Director of Public Transport, became enforceable on 22 December 2002; and
(b) An Enforcing Party (as that term is defined in the Direct Agreement) is performing all of the Franchisee’s obligations under the Contract (as that term is defined in the Direct Agreement).’

The ‘Enforcing Party’ comprised the receivers appointed by the Director. As appears below, Thiess Swanston continued to provide maintenance services as required by the IMA until 18 April 2004 when the work was transferred to another company. It was paid for its services by the receivers who were by statute personally liable to make those payments (s 419 Corporations Act).

30 On 24 December 2002, Thiess Swanston lodged a further progress claim dated 1 January 2003 with NX Swanston in the amount of $7,682,838.22 excluding GST due on 14 January 2003. The balance said to be due, including the unpaid claim, was $11,314,569.89. With GST it was $12,446,026.88. On 30 December 2002, the receivers disclaimed liability for outstanding debts incurred by NX Swanston and NX Bayside before their appointment. They suggested any claims be referred to the administrators. The progress claim dated 1 January was due for payment on 14 January 2003 pursuant to cl 10.3(a) of the IMA. It was not paid and Thiess Swanston sent the Director and NX Swanston a third default notice dated 22 January 2003 pursuant to cl 5.2 of the Swanston Direct Agreement. This notice claimed a sum due of $3.691 million pursuant to the progress payment claim for December 2002. The amount stated appears to have been in error. On the same day Thiess Swanston sent a letter to the Director seeking ‘immediate clarification from the Director as to whether the Enforcing Party will perform this obligation ...’. The company expressly reserved its right to terminate the IMA.

31 On 23 June 2003, the creditors of each of the affected companies in the National Express Group resolved that the companies execute a Deed of Company Arrangement in accordance with a proposal put to the creditors. On 26 June 2003, Robert Whitton resigned as a voluntary administrator. On 1 July 2003, the appellants were appointed, by order of Finkelstein J, as administrators of the Deed of Company Arrangement, pursuant to s 447 of the Corporations Act. The Deed itself was executed on or about 14 July 2003 by NX Swanston, NX Bayside, other companies in the National Express Group, the Director, each of the Receivers and Managers and the appellants as the administrators. Under the terms of the Deed the Director and the National Express Group PLC contributed a total of $30 million to the Available Property. This was to be established as a fund for the unsecured creditors of the companies covered by the Deed.

32 The Deed of Company Arrangement provided for the Franchisee companies (including NX Swanston) to be released from all claims against them upon receipt of the contributions from the National Express Group and from the Director (cl 9.1). Creditors with claims were thereupon entitled to make equivalent claims against the amounts contributed (the Available Property) and to prove for them (cl 9.5). Clause 14 provided for the making of claims and the preparation by the administrators of an Admitted List.

33 The kinds of matters which could be the subject of Claim and therefore an Equivalent Claim against the Available Property appears from the definition of ‘Claim’ in cl 1.1 of the Deed:

‘Claim means a debt payable by, or claim against, a Franchise Company (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim arising on or before the Appointment Date but does not include a claim against a Franchise Company for Employee Entitlements.’

Clause 14.2 of the Deed applied to the proof of Equivalent Claims the provisions of Subdivisions A, B, C and E of Div 6 of Pt 5.6 of the Corporations Act (other than ss 553(1A) and 554F) and regulations 5.6.39 to 5.6.44 and 5.6.46 to 5.6.57 of the Corporations Regulations 2001 with appropriate modifications.

34 On 9 September 2003, the Director, NX Swanston, NX Bayside, Thiess Swanston and Thiess Bayside and the receivers entered into a Settlement Deed. The recitals of the Settlement Deed referred to the making of the IMAs, the Direct Agreement and the appointment of the receivers and managers. It recited that the parties had agreed to settle their differences on issues arising out of the receivership on the terms set out in the Deed.

35 The Settlement Deed extended the term of the Swanston IMA on and from the date of the Deed. These parties were required to negotiate in good faith an agreement to replace and supersede the original IMA. The Deed provided in cl 2.2(c):

‘If [Thiess Swanston] and NX Swanston do not enter into the New Swanston IMA on or before 31 December 2003, [Thiess Swanston] and NX Swanston will continue to be bound by the Original Swanston IMA.’

Thiess Swanston acknowledged and agreed that until the new Swanston IMA was entered into, it and NX Swanston would ‘... continue to be bound by the Original Swanston IMA’ (cl 2.2(d)(i)). The Original Swanston IMA would terminate on commencement of the New Swanston IMA (cl 2.2(d)(iii)). The New Swanston IMA would terminate on the date that the receivers ceased to carry out the business of NX Swanston unless certain events occurred (cl 2.2(d)(iv)). This clause differed from the equivalent provision of the Settlement Deed for the Bayside train system. Under that provision the New Bayside IMA or the Original Bayside IMA, as the case might be, would terminate on the date that the receivers ceased to operate the business of NX Bayside (cl 2.1(c)(iv)).

36 It was agreed under the Deed of Settlement that the termination of the Original Swanston IMA pursuant to cl 2.2(d) would be for ‘breaches by NX Swanston of the Original Swanston IMA which occurred before 22 December 2002’ (cl 2.2(e)). This was no doubt intended to avoid any suggestion that Thiess Swanston was permanently waiving its right to terminate or electing to affirm the IMA. The Director consented to the termination and replacement of the Original Swanston IMA (cl 2.2(f)) and did so pursuant to cl 4.1(b) of the Direct Agreement and cl 2.4 of the Swanston Franchise Agreement.

37 Thiess Swanston covenanted in favour of the Director and NX Swanston that it would ‘not seek to terminate the Original Swanston IMA or the New Swanston IMA by reason of an Insolvency Event occurring in relation to NX Swanston (cl 2.2(g))’. ‘Insolvency Event’ was defined in the Deed and included the stopping or suspension or threat to stop or suspend payment of all or a class of debts.

38 On or about 17 April 2004, the assets and employees utilised by Thiess Swanston to provide infrastructure maintenance services were transferred to MetroLink under the terms of the M>Tram Transfer Agreement (Infrastructure Maintenance) (Transfer Agreement) to which the Director was a party. M>Tram was the designation given in the Transfer Agreement to NX Swanston. The Transfer Agreement provided for the IMA to terminate on commencement of a new Franchise Agreement dated 19 February 2004 between the Director and MetroLink. The termination was stated to be for breaches by NX Swanston of the IMA which had occurred before 22 December 2002 (cl 2(a)).

39 Clause 2 of the Transfer Agreement was in the following terms:

‘2. EXISTING INFRASTRUCTURE MAINTENANCE AGREEMENT

M>Tram and the Transferor acknowledge and agree that:

(a) the Existing Infrastructure Maintenance Agreement will terminate on commencement of the Franchise Agreement for breaches by M>Tram of the Existing Infrastructure Maintenance Agreement which occurred before 22 December 2002;
(b) until the Completion Date each is bound by and must continue to perform its obligations under the Existing Infrastructure Maintenance Agreement (including in relation to the payment of claims for work performed up to the Completion Date) in accordance with the terms of that agreement; and
(c) notwithstanding termination of the Existing Infrastructure Maintenance Agreement and without limiting the Settlement Deed, the Transferor and M>Tram will continue to perform their respective obligations in relation to work performed up to the Completion Date in accordance with the terms of that agreement.’

Clause 6.1 of the Transfer Agreement required that, from the date of execution of the document until completion of the sale and purchase of assets Thiess Swanston would ‘carry on the business in the usual way’ (cl 6.1(a)) and would not ‘vary or terminate any contract relating to the Business ...’ (cl 6.1(i)).

40 On 1 September 2003, Thiess Swanston lodged a proof of debt with the appellants claiming $27,484,408. This amount was said to be owing to the company by NX Swanston as at 23 December 2002. The particulars of the claim included the following:

‘Consideration (state how the debt arose)	Amount
November and December 2002 Progress Claims UNPAID.	$ 6,860.909
Loss of Profit from balance of term.	$19,138,605
Agency works – loss of profit.	$ 1,388,352
Early return of lease vehicles.	$ 28,294
Termination of subcontractors/novation costs	$ 68,248’

41 By a letter dated 8 December 2003 the appellants admitted the unpaid progress claim totalling $6,860,909. They said that the claim of $20,623,499 for loss of profits did not constitute a claim as defined under the Deed of Company Arrangement. A claim under the Deed had to be ‘"a debt or claim arising on or before the Appointment Date", the appointment date being 23 December 2002.’ There had been no contractual breach between the parties as at that date. A claim in relation to a breach of contract had not arisen as at 23 December 2002. The appellants did not immediately reject the claim but suggested that Thiess Swanston seek its own legal advice. Correspondence ensued. On 1 August 2004, the appellants finally advised of the disallowance of the claim for loss of profits. They gave Thiess Swanston a notice of Partial Rejection of Formal Proof of Debt or Claim pursuant to reg 5.6.54(1) of the Corporations Regulations.

42 The grounds for the rejection of Thiess Swanston’s claim for loss of profits as set out in the notice were as follows:

‘2. The Infrastructure Maintenance Agreement ("Agreement") between yourselves and National Express Group Australia (Swanston Trams) Pty Ltd ("NEGA") did not confer on you a contractual right to terminate the Agreement upon the appointment of the Receivers and Managers to NEGA on 22 December 2002. Accordingly, you have no claim for loss of profits under the Deed.’

43 Thiess Swanston instituted proceedings in this Court against the appellants seeking an order that they admit the loss of profits component of its claim. The application was brought under ss 447A and 447E of the Corporations Act and regulation 5.6.54 of the Corporations Regulations. It was heard by Finkelstein J on 4 August 2004. On 7 September 2004, his Honour made an order that the appellants admit in full, but subject to valuation, Thiess Swanston’s proof of debt lodged on 1 September 2003. He also ordered that the appellants pay Thiess Swanston’s costs of the application.

44 On 16 September 2004, the appellants filed a notice of appeal against his Honour’s decision.

The Reasons for Decision of the Primary Judge

45 His Honour set out in his reasons the history of the events outlined above.

46 In considering the applicable principles his Honour began by observing that Thiess Swanston was only entitled to maintain its claim for loss of profits if, at 23 December 2002, it had a ‘contingent’ debt or claim against NX Swanston. The Deed, in using that term, (no doubt his Honour was here referring to the definition of ‘Claim’), intended to pick up the meaning of ‘contingent debt’ or ‘contingent claim’ in the insolvency provisions of the Corporations Act. The relevant provision had its genesis in bankruptcy law. It was to bankruptcy law in relation to contingent claims that his Honour turned.

47 His Honour reviewed case law and textbook writings on the topic of contingent debts in bankruptcy and corporate insolvency. He concluded that a claimable debt would arise when, by reason of a company’s insolvency, it became impossible for it to perform a contract. This was so notwithstanding that a formal breach of the contract had not occurred at the time of the winding up order – In re Asphaltic Wood Pavement Co (Lee & Chapman’s case) (1885) LR 30 Ch D 216 at 224.

48 His Honour found in any event that, as at 23 December 2003, NX Swanston was in breach of the IMA as it had failed to pay the claim due on 17 December 2002. Ordinarily this would have entitled Thiess Swanston to terminate the agreement. Moreover, NX Swanston had repudiated the IMA in the sense that it informed the Victorian Government and Thiess Swanston that it was no longer able to perform its obligations.

49 The learned trial judge rejected the proposition that because the IMA remained in force until 2004, Thiess Swanston should be taken to have elected not to discharge it. Thiess Swanston was not entitled to terminate it without the consent of the Director, which consent was not forthcoming until the Transfer Agreement. Thiess Swanston had no power to elect to terminate. To that point it ‘had no power but to go on with the IMA’ (at [20]).

50 His Honour referred to the usual rule that when a contract is terminated for breach the contracting parties are discharged from their obligations to perform the contract in the future but accrued rights including any claims for damages are unaffected. The administrators contended that, because the IMA was terminated by agreement, accrued rights, including any loss of bargain damages, were lost. His Honour accepted that an action in damages could be bargained away. But that would require something in the nature of an accord and satisfaction. His Honour, however, took the view that there was no accord and satisfaction which extinguished Thiess Swanston’s cause of action against NX Swanston.

The Grounds of Appeal

51 There are nine grounds of appeal.

‘1. The Court erred in finding that the Infrastructure Maintenance Agreement ("Swanston IMA") conferred a right upon Thiess Infraco (Swanston) Pty Ltd ("Thiess Swanston") to terminate or accept a repudiation of the Swanston IMA.

2. The Court erred in not finding that any termination of the Swanston IMA by Thiess Swanston prior to the "relevant date" of 23 December 2002 would not have been a termination for breach of the Swanston IMA, but a termination in breach of the Swanston IMA, and thus did not entitle Thiess Swanston to claim damages for loss of profits.

3. The Court erred in not finding that the effect of the Swanston IMA, and clauses 11(c)(iii), 24.2 and 34 in particular, was to prohibit Thiess Swanston from terminating the Swanston IMA for breach, or accepting a repudiation of the Swanston IMA.

4. The Court erred in finding that Thiess Swanston had not elected to continue with or affirm the Swanston IMA.

5. The Court erred in finding that the Swanston IMA could be terminated with the consent of the Director of Public Transport ("the Director").

6. The Court erred in finding that Thiess Swanston had a right to terminate the Swanston IMA, which right was held in suspense waiting the Director’s consent.

7. The Court erred in finding that it was necessary to show something in the nature of an accord and satisfaction before it could be established that an action in damages had been bargained away.

8. The Court erred in not finding that the basis upon which the Swanston IMA was in fact terminated was inconsistent with Thiess Swanston having accepted any repudiation by National Express Group Australia (Swanston Trams) Pty Ltd ("NX Swanston") of the Swanston IMA.

9. The Court erred in finding that on the proper construction of the Swanston IMA, Thiess Swanston had a contingent debt or claim against NX Swanston as at the relevant date.’

Limitations on the Exercise and Consequences of Common Law Rights of Termination

52 A contract is terminated when the parties to it are discharged from the future performance of their contractual obligations. Rights and obligations accrued at the time of termination may continue. Termination may occur by agreement, by frustration of the contract or by the exercise of a right to terminate. The right to terminate a contract arises at common law where a party breaches a term of the contract which is one of its ‘conditions’ or ‘essential’ terms.

53 The test of whether a condition is essential is:

‘... whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor.’
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642 (Jordan CJ) approved in Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322 at 337.

When a party to a contract announces, before the time for its performance of an essential term of the contract, that it will not perform it the innocent party is entitled to treat that as an anticipatory breach which constitutes a repudiation of the contract and gives rise to a right to terminate it by rescission – Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 at 416 (Brennan J), see also 395 (Mason CJ) and 441 (Dawson J). Serious or multiple breaches of terms which are not construed as conditions or essential may also give rise to the right to terminate. Where one party repudiates its obligations under the contract or delays in performance the other party may terminate.

54 The concept of anticipatory breach overlaps with that of repudiation whereby a party renounces its liabilities under the contract and indicates an intention no longer to be bound by it or only to fulfil it in a manner which is substantially inconsistent with its obligations. In that event the innocent party may accept the repudiation, discharging itself from further performance and sue for damages. The word ‘rescission’ is used to describe a termination in those circumstances albeit it is not rescission ab initio but preserves accrued rights and obligations – Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625-626 (Gibbs CJ, Murphy and Brennan JJ agreeing).

55 Subject to limiting cases discussed below, the common law rights of termination may be supplemented or displaced, in whole or in part, by a term of the contract itself or by statute – see generally J Carter, ‘Termination in the Law of Contract’ in Furmston (ed) The Law of Contract, Butterworths, 2^nd Edition (2003) 1317-1318.

56 The effect of a contractual provision relating to termination on the common law rights of termination is a matter of construction. The existence of such provisions in a contract does not necessarily evince an intention to provide exhaustively for the circumstances in which it may be terminated. Rawson v Hobbs [1961] HCA 72; (1961) 107 CLR 466 was a case in which a contractual ‘annulment’ provision coexisted with common law rights of termination – at 480 (Dixon CJ), 491 (Windeyer J). Amann Australia Pty Ltd v The Commonwealth of Australia [1991] HCA 54; (1990) 22 FCR 527 was an example of partial displacement of common law rights of termination. In that case the termination provision of a contract for the supply of aerial coastal surveillance services to the Commonwealth, was held to be exhaustive of common law rights other than the right to terminate for anticipatory breach – 532 (Davies J), 544 (Sheppard J) and 555 (Burchett J). In Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, the Court held that ordinary principles of contract law including those relating to termination or repudiation apply to leases. Mason J, with whose reasons Wilson and Deane JJ expressly agreed in their separate judgments, said (at 30):

‘If it be accepted that the principles of contract law apply to leases, it is not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of such common law rights as may otherwise be appropriate. It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine for repudiation or fundamental breach.’

57 Progressive Mailing is also authority for the proposition that the recoverability of damages for loss of bargain in the event of repudiation or breach of an essential term is not conditioned upon common law discharge for breach although it is a necessary condition that the defendant can no longer be required to perform the contract in specie:

‘This essential foundation may be established by a common law rescission of the contract by the innocent party or by a termination of the contract in the exercise of a contractual power so to do. In either event, assuming repudiation or fundamental breach by the defendant, he could no longer be required to perform the contract and is liable for damages for loss of bargain. The well-recognised distinction between common law rescission and termination pursuant to a contractual power supplies no reason in principle why such damages are recoverable by the innocent party in one case and not in the other, provided of course that the exercise of the power is consequent upon a breach or default by the defendant which would attract an award of such damages.’ (at 31 (Mason J))

His Honour went on to reject the proposition that termination of a contract in the exercise of a contractual power could establish an affirmation of the contract debarring the innocent party from suing for damages for breach on the ground of repudiation or fundamental breach (31).

58 The principle that termination of a contract is a necessary condition for recovery of loss or bargain damages was restated in Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 260-261 (Mason CJ, Deane, Dawson and Toohey JJ agreeing). The contrary view suggested by Barwick CJ in Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21; (1976) 136 CLR 444 at 450 was disapproved.

59 The characterisation, by the House of Lords, of the right to sue for loss of bargain damages as a ‘secondary obligation’ arising upon termination of the contract is consistent with the approach taken in Progressive Mailing and Sunbird Plaza - Photo Production Ltd v Securicor Ltd [1980] UKHL 2; [1980] AC 827 at 845 (Lord Wilberforce) and 849 (Lord Diplock) – cited in Sunbird Plaza at 261 (Mason CJ).

60 It may be accepted as a general proposition that the right of parties to a contract to terminate the contract for breach can be defined exhaustively by the terms of the contract itself. In the limiting case of a refusal by one party to perform its part of the contract at all, that is a global repudiation of its contractual obligations, a question may arise whether the other party can be barred by a term of the contract from accepting that repudiation and treating itself as discharged. The concept may be thought of as raising the contractual analogue of the Zen question – what is the sound of one hand clapping? Where there are two parties to a contract and one declares its intention no longer to perform its obligations under the contract it may be difficult to discern any sensible basis upon which a restriction on termination, which depends for its existence on the very contract that has been repudiated, is to be construed if enforceable at all. Questions of validity for want of mutuality can arise as in the case of ‘termination for convenience’ clauses in government contracts – N.Seddon, Government Contracts Federal State and Local, 3rd Edition, Federation Press (2004) at 5.5. See also KK Puri, Australian Government Contracts: Law and Practice (1978) CCH at par 1505.

61 Clauses restricting or barring termination are to be construed ‘... according to [their] natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity’ – Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500 at 510. That formulation is subsumed in the principles generally applicable to the construction of contractual terms and conditions – Codelfa Construction Pty Ltd v Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 350; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 208 ALR 213 at 221 [22]. As appears from the latter case the genesis of the transaction, and the background, context and market in which the parties are operating may all be considered in ascertaining ‘the commercial purpose of the contract’.

62 In identifying the intention of clauses dealing with termination for breach of a contract it is necessary to keep in mind that ‘clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of contract arising by operation of law’ – Stocznia Gdanska SA v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574 at 585, cited with approval in Concut v Worrell [2000] HCA 64; (2000) 75 ALJR 312 at 317 – [23] (Gleeson CJ, Caudron and Gummow JJ). In the Concut decision their Honours went on to say:

‘Thus an express provision for termination for breach in certain circumstances may be regarded as designed to augment rather than to restrict or remove the rights at common law which a party otherwise would have had on breach.’

63 The construction of clauses limiting rights of termination, like that of exemption clauses of which they may be seen as a subset, should avoid absurdity which would defeat the main purpose of the contract – Darlington Futures at 510 citing H & E Van Der Sterren v Cibernetics (Holdings) Pty Ltd (1970) 44 ALJR 157 at 158 (Walsh J, Barwick CJ and Kitto J agreeing) and Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd [1978] HCA 8; (1978) 139 CLR 231 at 238 (Barwick CJ). In the latter case Barwick CJ cited Suisse Atlantique Societe D’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 for the proposal that (at 238-239):

‘Whilst exemption clauses ... should be construed strictly, they are of course enforceable according to their terms unless their application according to those terms should lead to an absurdity or defeat the main object of the contract or, for some other reason, justify the cutting down of their scope.’

Lord Wilberforce in Suisse Atlantique considered the possibility of limiting cases which would fall outside the scope of any exemption clause (at 432):

‘One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exception clause to a particular kind of breach.’

Subject to that class of case it was ‘a question of contractual intention’ whether a particular breach was covered. The more radical the breach, the clearer must be the language of an exemption clause to cover it. The so called ‘four corners’ rule referred to in relation to the bailment of goods may perhaps be seen as a particular application of the general proposition in Lord Wilberforce’s judgment – see Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd [1966] HCA 46; (1966) 115 CLR 353 at 377 (Windeyer J). It is questionable whether the proposition that an exemption clause will not apply to the limiting case posited by Lord Wilberforce is a rule of law. Lord Wilberforce did not make a definitive statement to that effect. Rather the difficulty of identifying any sensible operation for an exemption clause in such a case flows from the attempt to apply ordinary constructional principles to an extreme situation.

64 The proposition that a right to terminate may be barred without being extinguished is not novel. A party to a contract with a right to terminate that contract for breach at common law may be estopped from so doing by its conduct and the estoppel removed by later notice – Bentsen v Taylor [1893] 2 QB 274 at 283 (Bowen LJ); Panoutsos v Raymond Hadley Corporation of New York [1917] 2 KB 473 at 479. In Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 439, Mason and Deane JJ said:

‘If what is said or done amounts to a clear and unequivocal representation that the particular right will not be asserted for a period of at least x days, a representation to that effect can be relied on to found an estoppel.’

An estoppel against the exercise of a right to terminate for a time does not carry the consequence of extinguishment of the right of termination which is associated with an election to affirm the contract. A party may contract to waive or defer the exercise of its termination rights for a time without extinguishing them. In such a case the effect of the second contract upon the first is a matter of construction – Concut v Worrell at 316 [19] citing Commissioner of Taxation v Sara Lee Household and Bodycare (Australia) Pty Ltd [2000] HCA 35; (2000) 74 ALJR 1094 at 1098 – [22]. Similarly, it would seem that a party may contract to defer a right of contractual termination without thereby abandoning any claim for loss of bargain damages that may arise because, for example, of an hiatus between the original contract and that which effects the continuation of obligations under it or replaces them with a set of like obligations to different parties.

65 Despite the constructional difficulties in the way of applying a clause limiting rights of termination as against a party who refuses or is unable to perform a contract at all, a prohibition against ceasing to perform contractual services following termination may be made effective by way of a second contract with a third party. There is no reason in principle why a party to one contract may not bind itself under a second contract to continue to perform services required under the first even though the counterparty to the first has repudiated its obligations and the innocent party has terminated as against the defaulter. While the first contract might be terminated by the innocent party as against the counterparty, the innocent party is obliged under the second contract to continue to do what it would have had to do under the first contract were it still in place. The terms and conditions including consideration for the continuing performance of those obligations would derive from the second contract. In such a case the existence of the second contract would not deprive the innocent party of the right to terminate as against the defaulting counterparty and to sue for loss of bargain damages to the extent that they were not offset by benefits received under the second contract. The second contract would give rise to a fresh obligation owed to the third party to do whatever it is that would have to be done to perform obligations under the first contract.

66 An alternative model which would maintain the first contract in force would use a provision in a second contract barring or limiting the exercise by the innocent party of its rights to termination under the first contract and thus holding the innocent party to the performance of its obligations under that contract. The consideration, including payment for so doing would be provided for in the second contract. The substantive practical difference between the two theoretical mechanisms lies in the availability of the remedy of termination to the innocent party against the repudiating party in the first contract.

67 As has already been noted, cl 5.2 of the Direct Agreement prohibited Thiess Swanston from terminating or suspending ‘the performance of its obligations’ under the IMA where a step-in notice had been given by the Director. It in effect required Thiess Swanston to continue to do all of the things it was required to do under the IMA on the basis that a specified Enforcing Party, in this case the receivers, was ‘performing all of the Franchisee’s obligations under the Contract’. The clause was not drawn so as to prevent termination of the contract with NX Swanston. Rather it was directed to require continuity of maintenance services from Thiess Swanston. That was achieved by the assumption, under the Direct Agreement, of obligations to continue providing the services required to be provided under the IMA. The receivers were not parties to the Direct Agreement. The obligation assumed by Thiess Swanston under that agreement was owed to the Director.

68 On the basis of the preceding analysis it seems that it was the first of the two models set out in the preceding general discussion that was adopted in this case. The relevant second contract was the Direct Agreement. The third party was the Director. An alternative construction would read cl 5.2 as extending to prohibit termination of the IMA. On that construction the second model would be applicable. In the event, the choice of construction of cl 5.2 and the model applicable to the Direct Agreement does not affect the outcome of the case for it does not alter the time at which the IMA was formally terminated. That was done under the terms of the Transfer Agreement.

Appeal Ground 1 – Whether Thiess Swanston had a right to terminate the IMA for breach.

69 Clause 24.4(a) of the Swanston IMA provides that Thiess Swanston must not ‘except as permitted by par (b) ... avoid, release, surrender, terminate, rescind, discharge (other than by way of performance) or accept the repudiation of ... this Agreement’.

70 The acts to which par (a) applies include acts which can be done consensually or in the exercise of common law rights. Paragraphs (a) and (b) can be read in two ways. One construction would see common law rights of termination extinguished so that all that is left is what amounts to a discretion on the part of the Director to release Thiess Swanston from its agreement. Another construction would see the common law rights not extinguished but exercisable only upon the fulfilment of the conditions defined in cl 24.4(b). That is to say, before Thiess Swanston could terminate for cause, the Director must be reasonably satisfied that ‘... it is no longer necessary [for] Thiess to have the benefit of the [IMA] ...’ and that Thiess Swanston has made ‘adequate alternative arrangements...’.

71 Only the word ‘termination’ is used in cl 24.4(b) to refer to permitted action. As Lord Radcliffe said in Bridge v Campbell Discount Co Ltd [1962] AC 600 at 620:

‘"Terminate" is an ambiguous word, since it may refer to a termination by a right under an agreement or by a condition incorporated in it or by deliberate breach by one party amounting to a repudiation of the whole contract.’

The word is generic and wide enough to encompass rescission, discharge and acceptance of repudiation. At common law each of these constitutes the termination of the contract. Termination may also occur by agreement involving release or surrender of contractual rights – see generally J Carter, ‘Termination in the Law of Contract’ (op cit) at 1317. All of these mechanisms for termination are left intact by cl 24.4(a) but conditional upon the satisfaction of the requirements in cl 24.4(b). This approach to construction accords with the language of the clause and least disturbs existing common law rights. It is also consistent with its contractual purpose of maintaining continuity in the provision of public transport services. That purpose is not undermined by a construction of the contract which would defer or condition, rather than extinguish, common law rights of termination. The fact that ‘termination’ appears in cl 24.4(a) as one of a number of terms relating to the cessation of a contract, does not mandate its narrow construction in cl 24.4(b) as referring only to consensual termination. The words ‘release’ and ‘surrender’ in cl 24.4(a) are capable of reference to consensual termination. The generic construction of ‘termination’ being open under cl 24.4(b) and having a non-extinguishing operation in respect of common law rights of termination it should be adopted rather than a construction which would have an extinguishing effect.

72 The preceding construction of cl 24 is not affected by cl 34 of the IMA. That clause specifies a process whereby NX Swanston could terminate the IMA for default by Thiess Swanston. It contains no mechanism for termination by Thiess Swanston. That does not support its characterisation as a code for termination. A provision which does not in terms deal with termination by one party can hardly be characterised as a code on the subject. So to do, in this case, would be inconsistent with the existence of cl 24 and its regulation of termination by right or by agreement on the part of Thiess Swanston.

73 The view which I have formed of the construction of cl 24 is consistent with cl 5 of the Direct Agreement which works on the assumption that there is a right in Thiess Swanston to terminate for breach by NX Swanston, albeit the right may be practically confined by the conditions upon its exercise. The provisions of cl 5.2(b) of the Direct Agreement which bar termination or suspension of performance where the Director exercises the step-in option, assume the existence of a right to terminate otherwise exercisable, albeit upon the conditions set out in cl 24.4(b). The obligation on Thiess Swanston to obey the constraints imposed by cl 5.2(b) is imported into the IMA by cl 11(c)(ii) of that agreement. It should be stated here that the fact that the IMA and the Direct Agreement came out of generic moulds which were intended to apply to a variety of contractual arrangements relating to the privatisation of tram and train services in Victoria, does not alter the proper approach to their construction by reference to their particular contents.

74 The learned primary judge was, in my opinion, correct to hold as he did that Thiess Swanston could terminate the IMA and that cl 24.4 ‘limited the circumstances’ on which it could do so [2]. His Honour also rejected the contention that cl 34 was a code and that only NX Swanston could terminate the agreement in case of default. This was, as his Honour held, ‘... an untenable proposition as reference to cl 24, which expressly contemplates termination by Thiess, shows...’ [2].

75 It was submitted for the appellants that ‘no provision of the Swanston IMA conferred upon Thiess Swanston a contractual right to terminate on the ground of event of default, breach or other circumstance which might give rise to a claim for the purposes of the Deed of Company Arrangement’. Put that way, the submission begs the question whether, and to what extent, the agreement affected common law rights of termination. It was a matter for the appellants to persuade the Court that the common law rights of termination (encompassing discharge, rescission and acceptance of repudiation) were extinguished by the IMA. This has not been established.

76 In so far as the appellants’ submissions suggested that cl 24.4(b) applied to consensual termination only, they are not accepted. The mode of termination regulated by cl 24.4(b) covers all of the modes contemplated by cl 24.4(a).

77 The first ground of appeal fails.

Appeal Ground 2 – Whether the Court erred in not finding a termination of the IMA would have breached the IMA.

78 In the second ground of appeal it is contended that the learned primary judge should have found that any termination of the Swanston IMA by Thiess Swanston prior to 23 December 2002 would have breached the Swanston IMA ‘... and thus did not entitle Thiess Swanston to claim damages for loss of profits’.

79 Had Thiess Swanston purported to terminate the Swanston IMA prior to 23 December 2002 without the Director first being reasonably satisfied of the matters referred to in cl 24.4(b), that termination would have constituted a breach of cl 24.4(a). It is questionable however what, if any, remedy would have been available at the suit of NX Swanston.

80 As at 23 December 2002, Thiess Swanston had sent to the Director two default notices under cl 5.2 of the Direct Agreement. The first was sent on 19 December and the second on 22 December. A termination of the IMA as at 23 December 2002 would have breached cl 5.2 of the Direct Agreement.

81 The conclusion that the exercise by Thiess Swanston of its common law termination rights prior to 23 December 2002 would have breached the IMA does not lead to the conclusion reflected in appeal ground 2 that it is thereby not entitled to claim damages for loss of profits. That proposition necessarily rests on the premise that cl 24 extinguishes termination rights rather than conditions their exercise. As the conclusion advanced in appeal ground 2 is not supportable, that ground also fails.

Appeal Ground 3 – Whether the Court erred in not holding that Thiess Swanston was prohibited from terminating the IMA for breach.

82 This appeal ground relied upon cls 11(c)(ii), 24.2 and 34 of the IMA for the proposition that Thiess Swanston was prohibited from terminating the IMA for breach or from accepting a repudiation of it.

83 Clause 11(c)(ii) of the IMA required that Thiess Swanston enter into a Direct Agreement with the Director. Although NX Swanston was not a party to the Direct Agreement, Thiess Swanston covenanted with NX Swanston in cl 11(c)(ii) of the IMA to comply with the requirements of the Direct Agreement. That agreement provided for the issue of default notices, for a minimum time to elapse following such issue and for the Director to exercise step-in rights via the IMA receivers in relation to the role of NX Swanston under the IMA. In the latter event, Thiess Swanston had to continue to perform the services required under the IMA. On the preferred construction of cl 5.2, referred to earlier in these reasons, this obligation did not amount to a bar on the termination of the IMA contract. The prohibition created by cl 5.2 derived its force from the Direct Agreement and related to the continued performance of services due by Thiess Swanston under the IMA rather than to the continuation of the IMA itself. Even if this construction be wrong and the prohibition created by cl 5.2 went to the termination of the IMA, it was a prohibition enforceable at the suit of the Director in relation to the exercise of rights arising vis a vis Thiess Swanston and NX Swanston under the IMA. It was not a prohibition which would necessarily remain in force for the balance of the term of the contract. It did not and could not operate to extinguish the right to terminate the IMA. The terms of cl 24 conditioned the right of termination on the Director’s reasonable satisfaction but did not prohibit its exercise.

84 The clauses of the IMA relied upon in appeal ground 3 do not, for the reasons previously discussed, effect a global prohibition in respect of the exercise of termination rights. Nor do they extinguish those rights. Appeal ground 3 fails.

Appeal Ground 4 – Whether Thiess Swanston elected to affirm the Swanston IMA.

85 A party to a contract whose counterparty has acted in such a way as to give rise at common law to a right to terminate the contract may have to choose between exercising the right of termination and affirming the contract. This is a choice between inconsistent rights said to constitute an ‘election’ to proceed one way or the other. Importantly, a party who elects to exercise one right inconsistent with another cannot, in the ordinary course, resile from that election and choose to exercise the other right:

‘... if a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act of showing that he has chosen the one he cannot pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose.’

United Australia Ltd v Barclays Bank Ltd [1997] UKHL 17; [1941] AC 1 at 30.

86 The essential elements of an election were stated by Stephen J in Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at 648:

‘Election as between inconsistent contractual rights does not call for any conscious choice as between two sets of rights, it being enough that there should be intentional and unequivocal conduct together with knowledge of the facts giving rise to the legal rights.’

It is not necessary for election that there be a consciously ‘choosing’ mind. McTiernan ACJ agreed with Stephen J. Neither Stephen J nor Mason J was of the view that it was necessary for the electing party to be aware of the existence of the legal right to choose as long as the party was aware of the facts giving the right to rescind the contract. Mason J said (at 658):

‘If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected.’

87 The question in the present case is upon what basis could it be said that Thiess Swanston elected to affirm the IMA. Against the learned primary judge’s finding that Thiess Swanston’s right to terminate for breach or repudiation was ‘held in suspense’ the appellants argued that Thiess Swanston had continued to perform the Swanston IMA until April 2004. They relied upon its agreement in the Settlement Deed and again in the Transfer Agreement to continue with the Swanston IMA. The appellants argued that Thiess Swanston thereby affirmed the Swanston IMA rather than treated it as discharged by reason of any alleged repudiation by NX Swanston.

88 Counsel for Thiess Swanston pointed out that when the administrators were appointed on 23 December 2002, Thiess Swanston had unequivocally expressed its intention to terminate the IMA for default by NX Swanston. It served notices of default in accordance with cl 5.2 of the Direct Agreement. The defaults were never remedied. Thiess Swanston took the first and at that time, the only step, open to it to set in train the process of termination for default which process is said to have culminated with the Transfer Agreement. It was submitted that the Director’s reasonable satisfaction, required by cl 24.4(b) of the Swanston IMA, was to be inferred from his execution of the Transfer Agreement. He could not have executed it unless so satisfied. That was because the Transfer Agreement provided for a new franchisee to take over NX Swanston’s role and a new contractor to take over Thiess Swanston’s role – circumstances contemplated by cl 24.4(b) of the IMA and cl 5.2(b) of the Direct Agreement. They were the circumstances necessary to keep the public transport system running.

89 Thiess Swanston was obligated to NX Swanston by reason of cl 11(c)(ii) of the IMA, read with cl 5.2(b) of the Direct Agreement, not to terminate the performance of its services while the Director exercised the step-in right. The continued performance of infrastructure maintenance services by Thiess Swanston up until 18 April 2004 did not involve any choice between a right to terminate and right to affirm. On the view which I have taken of the preferable construction of cl 5.2, it did not prevent Thiess Swanston from terminating the IMA provided that the company continued to deliver the maintenance services as required by the Direct Agreement following the exercise by the Director of his step-in right. However Thiess Swanston’s right to terminate the IMA continued to be deferred by operation of cl 24.4 of the IMA. There was no affirmation of the IMA by reason of Thiess Swanston’s continuing performance of the services for which the IMA provided.

90 The Settlement Deed made on 9 September 2003 provided for a new Swanston IMA to replace the original IMA which would terminate upon the commencement of the new agreement. The Deed of Settlement foreshadowed a termination of the IMA as between NX Swanston and Thiess Swanston. That never occurred. In any event the Deed expressly reserved the characterisation of the termination of the original IMA as a termination for breach. That position was again reserved in the Transfer Agreement.

91 It cannot be said in the circumstances that the conduct of Thiess Swanston up until and including its execution of the Transfer Agreement involved any unequivocal communication of a choice to affirm the IMA. On the contrary, Thiess Swanston reserved its position at all times, its right to terminate being constrained by the conditions upon its exercise imposed by the agreements which it had entered into. Ground 4 therefore also fails.

Appeal Ground 5 – Whether termination with consent was possible.

92 Appeal ground 5 asserts error on the part of the learned primary judge in finding that the Swanston IMA could be terminated with the consent of the Director.

93 The relevant passages in his Honour’s judgment appear at [2] and [20]. At [2], in describing the provisions of the IMA his Honour said of Thiess Swanston’s right to elect to terminate the contract for breach:

‘It had no power to make an election in the sense that it could not terminate the IMA. That right was held in suspense waiting the director’s consent, unless, of course, before that consent was given, Thiess chose to go on with the IMA come what may regardless of the prior breach.’

At [20] his Honour said:

‘As I have pointed out Thiess was not entitled to terminate the contract for breach or repudiation without the consent of the Director, and it did not obtain that consent until it entered into the transfer agreement; the Director’s consent is to be inferred by his execution of the transfer agreement.’

94 The IMA does not in terms speak of the prior ‘consent’ of the Director as a condition of the right to terminate. Rather it speaks of the Director’s ‘reasonable satisfaction’ about certain things (cl 24.2(b)). It may be seen that by his use of the term ‘consent’ his Honour referred to the requirements set out in cl 24.2(b) and, perhaps by extension, to the requirements of cl 5.2 in so far as the Director might decide against having receivers step into the shoes of the franchisee under the IMA.

95 There was no error in his Honour’s statement which was consistent with the proposition that the exercise of termination rights was conditioned in the IMA by reference to the Director’s ‘reasonable satisfaction’.

Appeal Ground 6 – A right in suspense.

96 Appeal ground 6 takes issue with his Honour’s finding that the right to terminate the IMA ‘was held in suspense’. This was a metaphor reflecting the proposition that the rights of termination were not extinguished by the terms of the agreement which deferred the exercise of those rights to the satisfaction of the conditions stipulated by the agreement as necessary to its exercise. It might be at some point that the ‘suspended’ right, by effluxion of time without satisfaction of the conditions for its exercise and by reason of changing circumstances, might be taken to have no practical significance. It might in such a case for all intents and purposes be regarded as extinguished. This does not mean that his Honour’s use of the metaphor reflected legal error. Ground 6 also fails.

Appeal Ground 7 – Whether accord and satisfaction was necessary to bargaining away of the damages claim

97 The learned primary judge considered at [21] the contention by the administrators that the Swanston IMA was terminated by agreement and that any accrued rights, which would ordinarily include loss of bargain damages were lost. His Honour accepted that an action in damages may be bargained away but that it was necessary to show something in the nature of an accord and satisfaction. His Honour referred to McDermott v Black [1940] HCA 4; (1940) 63 CLR 161 and the following passage from the judgment of Dixon J (at 183-184):

‘An agreement not to sue upon particular allegations might give a defendant a good equitable plea, but at common law it would be necessary for him to show that it amounted to an accord and satisfaction discharging the cause of action or else that it gave rise to an estoppel.

The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.’

98 It might otherwise be put that a cause of action, like any other right may to all intents and purposes be ‘lost’ or ‘bargained away by agreement or its enjoyment barred temporarily or permanently by an estoppel. It may be the subject of a contractual release supported by consideration. It may be the subject of a contractual promise not to enforce it, again supported by consideration or perhaps a promise to pursue it only upon the occurrence of certain events. His Honour’s observations were directed to the administrator’s submission that the IMA and any accrued right to loss of bargain damages had been terminated by agreement. In substance he found there was no agreement to that effect. He said (at [21]):

‘Here there was no accord, expressed or implied. There is, therefore, no need to inquire into its satisfaction.’

His Honour’s statement of principle, in the circumstances of the case, was unexceptionable. That leaves open however, the critical question whether in truth any cause of action for loss of bargain damages had been extinguished by agreement.

Appeal Ground 8 – Whether the termination of the Swanston IMA under the Transfer Agreement was termination for breach

99 The appellants submitted that the basis upon which the Swanston IMA was in fact terminated was inconsistent with Thiess Swanston having ever purported to accept any repudiation of the contract by NX Swanston. Clause 2 of the Transfer Agreement achieved termination by mutual assent of Thiess Swanston and NX Swanston not by any unilateral acceptance by Thiess Swanston of repudiation.

100 The question that arises is whether, by the Transfer Agreement, Thiess Swanston effected a consensual termination which was unable to be characterised as a termination on account of NX Swanston’s breach of contract. As appears earlier in these reasons the right to terminate for breach was not extinguished by the restrictions placed upon its exercise under cl 24 of the IMA. Nor, if cl 5.2 were construed as a restriction upon termination of the agreement, was the right to terminate extinguished by that restriction. A question arises whether the right to terminate could only be exercised upon the reasonable satisfaction of the Director under cl 24.4.

101 The Director’s reasonable satisfaction, required under cl 24.4, was a condition upon the right of termination for breach which could not be enforced by the Director under the IMA as the Director was not a party to that agreement. It might be that any failure by NX Swanston to resist a termination for breach, other than upon the Director’s reasonable satisfaction of the matters in cl 24.4(b), could be actionable at the instance of the Director as a breach of cl 23.5 of the Franchise Agreement although the remedies which would be available in such an action are not clear.

102 There is no doubt that NX Swanston and the Director could make an agreement with Thiess Swanston which would have the effect of varying or lifting the restrictions imposed by cl 24.4(b) of the IMA and as between the Director and NX Swanston removing any obligation upon NX Swanston under the Franchise Agreement to endeavour to enforce the restriction. It was not necessary to posit an implied ‘reasonable satisfaction’ on the part of the Director under cl 24.4(b) of the IMA in order to achieve that result.

103 The Director, NX Swanston and Thiess Swanston were all parties to the Transfer Agreement. All agreed to terminate the IMA without reference to the Director’s reasonable satisfaction under cl 24(b). Moreover, all agreed that the termination was for ‘... a breach by [NX Swanston] of the Existing Infrastructure Maintenance Agreement which occurred before 22 December 2002’. The termination that was effected by agreement preserved the rights that Thiess Swanston would have enjoyed upon a termination for breach. It is not fatal to that construction that Thiess Swanston did not express the termination as acceptance of a repudiation. It was at pains from the time of the repudiation of the contract by NX Swanston to preserve, and to the extent contractually possible, to exercise the rights it had in respect of the termination of the IMA.

104 In my opinion the Transfer Agreement did not extinguish any right to claim damages which Thiess Swanston would have had against NX Swanston by reason of its breach of the contract. Importantly there was no general release of such liabilities as NX Swanston may have owed to Thiess Swanston in connection with the termination of the contract. The question about the quantum of such liabilities and the extent that they may have been subject to offsets by payments that Thiess Swanston received from the receivers is a separate issue. In my opinion therefore, ground 8 fails.

Appeal Ground 9 – Whether Thiess Swanston had a contingent debt or claim against NX Swanston at the relevant date

105 In light of the conclusions reached with respect to the preceding grounds of appeal, the question whether the claim for loss of profits reflected a contingent debt or claim within the meaning of the Deed of Arrangement, is to be answered in the affirmative. The learned primary judge in his reasons for judgment discussed contingent claims in the context of claims for breaches of contract which had not occurred at the time of bankruptcy or winding up as the case may be but which were future breaches which would occur by reason of such events. He cited In Re Asphaltic Wood Pavement Co where, prior to its liquidation a company had entered into a construction contract but not completed the work. There was held to be a provable claim for damages for breach of contract in that case. There Cotton LJ said (at 224):

‘It is argued that this is not a liability at the time because there was no breach. At the time when the company commenced its liquidation, it was under a contract which implied a liability to maintain these streets if it were required. It is now rendered impossible by the winding-up for the company to do that, and in my opinion ... that is properly a liability the damages for which are capable of being proved.’

106 The hypothesis upon which his Honour based his initial discussion about contingent claims was, in the event, academic. For, as his Honour correctly held (at [17]):

‘In any event, as it turns out, as at 23 December 2002 NX Swanston was in breach of the IMA. It had failed to pay the fee due on 17 December 2002 and this was a breach of an essential term of the IMA, time being of the essence. Ordinarily this would entitle Thiess to bring the IMA to an end:....’.

And further (at [18]):

‘Not only was NX Swanston in breach of an essential term of the IMA, before being placed into administration it had repudiated the IMA in the sense that it informed both the Victorian government and Thiess that it was no longer able to perform its obligations. That this amounted to a repudiation cannot be doubted:....’

107 The question of contingency remained alive however for the right to claim for loss of profits would not crystallise except upon termination of the IMA for breach. The success of the appellants’ case in this respect depends upon their making good one or either of the propositions that:

1. The right to terminate for breach was extinguished by the provisions of the IMA.

2. The right to terminate was lost by affirmation of the contract or by agreement pursuant to the provisions of the Settlement Agreement and/or the Transfer Agreement.

108 The entitlement to terminate and to claim damages for loss of bargain had arisen as at 23 December 2002. The exercise of the entitlement to terminate was, for reasons already explained, conditioned upon, but not extinguished by, the requirements of cl 24 of the IMA. Nor was it extinguished by Thiess Swanston’s obligations under cl 5.2 (however construed) of the Direct Agreement, which were incorporated by reference into the IMA. There was never any election on the part of Thiess Swanston to affirm the contract notwithstanding the breach. The provision of Infrastructure Maintenance Services in accordance with the terms of the IMA after 23 December 2002 was done pursuant to an obligation imposed upon Thiess Swanston by the Direct Agreement. That was an obligation enlivened by the notice from the Director on 24 December 2002 that the receivers, as Enforcing Party, were performing ‘all of the franchisee’s obligations’ under the IMA. Those obligations of course did not include obligations to meet payments already due and owing. Thiess Swanston maintained and repeatedly asserted its entitlement to termination and, by necessary implication, its entitlement to any claim for loss of bargain damages. For these reasons appeal ground 9 fails.

Conclusion

109 In my opinion, none of the grounds of this appeal is made out. That is to say nothing about the claimed quantum of loss of profits. At the moment it is difficult to see upon what, if any basis, the claimed quantum of loss of profit damages rests. That, however, is a matter for valuation by the administrators in accordance with his Honour’s order. The appeal should be dismissed with costs.

I certify that the preceding one hundred and nine (109) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Associate:

Dated: 30 March 2005

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	SIMON ALEXANDER WALLACE-SMITH FIRST APPELLANT PETER GEORGE YATES SECOND APPELLANT
AND:	THIESS INFRACO (SWANSTON) PTY LTD RESPONDENT

JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE:	30 MARCH 2005
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

WEINBERG J:

110 This is an appeal from a judgment of Finkelstein J allowing an application by a creditor challenging the rejection of a proof of debt by a company’s administrators: Thiess Infraco (Swanston) Pty Ltd v Smith [2004] FCA 1155; (2004) 209 ALR 694.

111 The facts are in relatively short compass. In 1999, the Victorian Government privatised the public transport system in Victoria. Franchises were awarded to various private organisations to operate the transport system. Three franchises were granted to Australian-based subsidiaries of National Express Group Plc (‘NX’), a British publicly listed company. One such franchise was awarded to National Express Group Australia (Swanston Trams) Pty Ltd (‘NX Swanston’) for a term of ten years.

112 It soon became apparent that the NX subsidiaries could not operate profitably. In December 2002, the British parent withdrew its financial support. Shortly thereafter, all of the NX subsidiaries went into administration. Ultimately, they entered into Deeds of Company Arrangement. The Deeds made provision for the extinguishment of creditors’ claims upon payment to them, out of a $30 million fund established by the Victorian Government and the British parent, of a sum less than the full amount of their claims. One group of creditors whose claims would be compromised were those who had a ‘debt payable by, or claim against, [a franchisee] (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim arising on or before’ 23 December 2002. That was the day on which NX Swanston went into administration.

113 The respondent, Thiess Infraco (Swanston) Pty Ltd (‘Thiess’) claims to be a creditor of NX Swanston. It lodged a proof of debt with the appellants, who are the administrators of the particular Deed that is central to this appeal. The proof was for unpaid services for work done before 23 December 2002, and for loss of profits. The administrators rejected the proof insofar as it claimed loss of profits, and Thiess challenged that decision pursuant to s 1321 of the Corporations Act 2001 (Cth).

114 The contractual arrangements giving effect to the privatisation process were complex. On 14 May 1999, National Express Group (Australia) Pty Ltd (‘NX Australia’) entered into an Infrastructure Maintenance Agreement (‘the IMA’) with Thiess Contractors Pty Ltd. On 23 July 1999, that agreement was novated to, inter alia, NX Swanston and Thiess. It was agreed that Thiess would provide infrastructure maintenance services to NX Swanston for a period of three years, extendable at the option of NX Swanston.

115 On 25 June 1999, the Director of Public Transport (‘the DPT’) and NX Swanston entered into a Franchise Agreement. On 26 July 1999, the DPT and Thiess entered into a Direct Agreement. The terms of these agreements are set out in some detail in the judgments of French J and Allsop J, and I shall not repeat them here. It is sufficient to note that pursuant to the Direct Agreement between the DPT and Thiess, Thiess gave various undertakings designed to protect the public interest in the operation of the transport system. Clause 5.2 of that agreement prevented Thiess from terminating or suspending the IMA in terms different from cl 24.4 of the IMA. That clause will be discussed below. Clause 5.2(a) provided that Thiess could terminate or suspend the performance of its obligations under the IMA for default on the part of NX Swanston but only if it had given notice of that default to the DPT, and either the default was not remedied within thirty days or, if it could not be remedied, if the obligations of NX Swanston under the IMA did not commence and continue to be performed within that period. Clause 5.2(b) provided that Thiess could not terminate or suspend the IMA if the DPT notified Thiess that he would assume responsibility for NX Swanston’s obligations under the IMA.

116 There are several provisions of the IMA that are of critical importance in this case. Clause 34 sets out the circumstances under which the IMA could be terminated in the case of certain defined ‘Events of Default’. The primary judge considered it curious that cl 34 appeared to give NX Swanston alone, and not Thiess, the right to terminate the IMA. The wording of that clause had led to a submission that it was a ‘code’, governing the entire IMA and enabling only NX Swanston to terminate the agreement in case of default. His Honour rejected that submission. He noted that cl 24, which did not deal with any question of default, expressly contemplated termination of the IMA by Thiess.

117 The primary judge regarded cl 24 as important for other reasons. It was concerned with contracts called ‘Key Contracts’. By a complicated trail, "Key Contracts" were defined to include the IMA. Clause 24.4 limited the circumstances in which Thiess could terminate a Key Contract. It required, as a condition of Thiess doing so, the DPT to be reasonably satisfied that it was no longer necessary for Thiess to have the benefit of the Key Contract, or to be reasonably satisfied that Thiess had made adequate alternative arrangements for the continued operation of the franchise business. Moreover, the clause went on to say that if Thiess terminated a Key Contract in breach of the IMA, it would be obliged, at the request of the DPT, to enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement between the DPT and itself.

118 Thiess provided maintenance services to NX Swanston in accordance with its obligations under the IMA, and received payment for those services throughout the period 1999 to 2002. On 16 December 2002, NX announced that it had given notice to the Victorian Government that it would no longer continue to provide funds to enable its train and tram subsidiaries to meet their liabilities. Later that day, the relevant Minister announced that the NX subsidiaries would hand back their franchises with effect from 23 December 2002.

119 On 17 December 2002, Thiess, which was owed approximately $4 million under the IMA, sought clarification of NX Swanston’s position, and its intentions under the IMA. NX Swanston immediately replied that it was negotiating with the Victorian Government for an orderly handover of the franchise businesses once its parent company ceased to provide funding.

120 On 19 December 2002, a director of Thiess sought an assurance from the Chief Operating Officer of NX Australia that NX Swanston would continue to pay the amounts due to Thiess. The Chief Operating Officer said that no such guarantee could be given.

121 On 20 December 2002, Thiess served a default notice on the DPT pursuant to cl 5.2 of the Direct Agreement. The default identified in the notice was the failure by NX Swanston, in breach of the IMA, to pay the sum of $3.989 million currently due and payable to Thiess. Two days later, on 22 December 2002, the DPT, acting pursuant to certain securities granted by NX Swanston to the Victorian Government, appointed Receivers and Managers over the company’s assets. Thiess then served a further default notice of the DPT, relying upon the appointment of the Receivers as a further event of default under the IMA. To secure the continued operation of the Swanston tram system, the DPT notified Thiess that it could not terminate or suspend the IMA, and that it was required to honour its obligations under that agreement. Thiess performed those obligations until 18 April 2004 when the IMA was terminated, and was paid for those services by the Receivers.

122 The IMA ultimately came to be terminated in the following circumstances. On 9 September 2003, Thiess, NX Swanston, the DPT, the Receivers and various other parties, executed a Settlement Deed. The Settlement Deed was intended to enable the contracts concerning the franchise to be renegotiated while at the same time keeping the original contracts on foot. As the primary judge noted, as no new contracts were made, most of the Settlement Deed never came into operation. Some of its provisions are, nonetheless, important.

123 Clause 2.2 provided that the IMA would be extended until a new maintenance agreement was struck. In the meantime, Thiess would not seek to terminate the IMA by reason of an ‘insolvency event’, which included the suspension of the payments of debts, insolvency and the appointment of an administrator. Eventually a new operator was found. The franchise operation was transferred to that new operator under what was described as the ‘M>Tram Transfer Agreement (Infrastructure Maintenance)’ dated 17 April 2004 (‘the Transfer Agreement’) to which Thiess, NX Swanston, the DPT and various others were parties. By cl 2 of that agreement, both NX Swanston and Thiess acknowledged and agreed that the IMA ‘will terminate on commencement of the Franchise Agreement for breaches by [NX Swanston] of the [IMA] which occurred before 22 December 2002’. The parties further acknowledged and agreed that until the ‘Completion Date’ (that being the ‘Franchise Commencement Date’, as defined under the Franchise Agreement), each was bound by and obliged to continue to perform its obligations under the IMA. As the primary judge noted, the existing IMA thereby came to an end.

124 It can readily be seen that the original contractual arrangements between NX Swanston and Thiess were unusual in at least one key respect. They restricted Thiess’ rights to terminate the IMA, and effectively prevented it from doing so without the DPT’s consent. The reason for this was plain. It was intended to ensure that there would be continuity in the provision of vital public transport services even if one or other of the private parties to that agreement failed to meet its contractual obligations.

125 There cannot be any serious doubt that NX Swanston repudiated the IMA when it told Thiess on 17 December 2002 that, by reason of its parent company’s decision to withdraw financial support, it would no longer be able to meet its liabilities as and when they fell due. The critical issue in this appeal is whether Thiess thereby acquired a contingent right to sue NX Swanston for damages for loss of profits, and whether that right existed prior to 23 December 2002, being the date specified in the Deeds of Company Arrangement. If, prior to that date, Thiess had a ‘claim’ (within the meaning of that expression in cl 1.1 of the relevant Deed), it was entitled to have its proof of debt accepted by the administrators. If Thiess did not have such a ‘claim’, the administrators acted correctly in rejecting the proof of debt.

126 The administrators refused to admit Thiess’ claim for loss of profits as a ‘claim’ under the relevant Deed because they maintained that Thiess had no right, under the IMA, to terminate notwithstanding NX Swanston’s repudiation of that agreement. In accordance with well-established authority, if Thiess could not terminate the contract, it could not recover for loss of profits. They contended that Thiess had bargained away any ordinary common law right that it might otherwise have had to terminate for breach of an essential condition by agreeing to maintain services unless and until the DPT was satisfied that adequate alternative arrangements could be made.

127 It is necessary therefore to consider the legal principles that govern termination of contracts, as they apply to this appeal. It is trite law that a contract may come to an end in various ways. For example, events may occur after a contract has been made which make its performance pointless, more difficult, or even impossible. Such events may result in the termination of the contract by operation of law on the basis that it has been frustrated.

128 Another way in which a contract can come to an end is by termination after breach of an essential condition. It is clear that all contracts involving an exchange of promises are conditional in the sense that each party’s obligation to perform is conditional on the performance of all essential promises by the other. Breach of an essential condition by one party confers on the other party the right to terminate the contract. Non-fulfilment of such a condition does not normally result in the automatic termination of the contract, but creates a right to terminate by election. A right to terminate for breach may be lost by conduct indicating that the right will not be exercised. Such conduct may amount to an affirmation of the contract, or waiver of the right to terminate, or may give rise to an estoppel. In any event, the effect of termination is that, in the absence of agreement to the contrary, the contract comes to an end. However, it does so prospectively, leaving accrued obligations unaffected.

129 As a general proposition, the parties are free to agree between themselves whether, and in what circumstances, there shall be a right to terminate for breach. A right to terminate for breach also arises by law, provided that the breach is serious enough.

130 It is common for commercial contracts to provide for rights of termination in response to breach (or ‘default’). The parties are free to specify what breaches shall justify termination, how the right to terminate shall be exercised, and what effect the exercise of that right shall have. A contract may validly stipulate that even a minor breach will entitle the other party to terminate. Such terms are frequently included in contracts for the sale of land.

131 Importantly, for present purposes, the law exercises a degree of control over contractual provisions conferring a right to terminate. In general, such provisions are construed strictly, limiting the right to terminate in circumstances where the breach or breaches are relatively innocuous. The present appeal raises a different issue. The question is whether Thiess, an innocent party, should be deprived of its right to sue for loss of profits, because its right to terminate in response to NX Swanston’s act of repudiation was to some degree constrained.

132 The appellants in this case accept that, unless otherwise agreed, a right to terminate for breach, pursuant to the terms of a contract, operates concurrently with any right conferred by law to do so. That principle is well established.

133 In Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409, a contract in writing for the sale of land provided that a deposit of a particular amount should be paid, and the balance of the purchase price paid by a specific date. It further provided that, if the purchaser defaulted, the vendor might, without notice, sell the land and rescind the contract, and any monies paid on account of the purchase should then be forfeited to the vendor as liquidated damages. The purchasers duly paid the deposit, but prior to the due date requested an extension of time for payment of the balance. The vendor agreed to that extension of time. Subsequently, the purchasers’ solicitor informed the vendor that they would not proceed with the purchase. The vendor thereupon gave the purchasers a notice which, after reciting the agreement, the date fixed for settlement, and their failure to settle, gave them a new date by which to make settlement, and informed them that if that did not occur, the vendor would sue them for breach of contract. The purchasers failed to complete the purchase and subsequently the vendor sold the land at a lower price. He claimed to recover as damages the difference between the original contract price and the price at which he sold the land. The purchasers claimed the vendor was entitled only to forfeit their deposit.

134 The High Court held that the sale by the vendor was not effected under the recision clause of the contract, but independently thereof. Accordingly, the vendor was entitled to recover the damages claimed. Dixon CJ noted that the purchasers had done more than merely default upon their obligations. They had renounced and refused to perform the entire contract. His Honour said at 415-6:

‘True it is that it was not accepted at once either as a breach or as an anticipatory breach. What was done was to place the purchasers on notice that they would be sued for breach if they did not complete before the date named by the notice. This was not an unconditional affirmance of the contract notwithstanding the renunciation. It was a demand for performance coupled with an intimation that refusal or failure to perform would result in proceedings for damages. That is to say it kept the contract open for a limited time and conditionally upon compliance. If time is an essential condition, to extend it does not waive the effect of the stipulation as a condition [cases omitted] ... In the same way to give a party refusing to perform a fixed time to resile from his refusal and to notify him that failing his doing so he will be sued for his breach does not amount to an unconditional waiver of the refusal as a renunciation. Here the inference of fact is plain that the purchasers were maintaining their attitude of refusal to go on with the sale.
In these circumstances, the vendor was entitled to treat the contract as discharged by breach. He himself was ready and willing up to the expiration of the notice. His election to treat the contract as discharged by the purchasers’ breach was sufficiently manifested by his proceeding to advertise the property for sale, and by his selling it. By that time, the purchasers were in actual breach and that breach was accompanied by an intention clearly evinced of setting the contract at nought. It is hard to see why this should not enable the vendor to treat the whole contract as discharged by the purchasers’ breach or in other words to treat the contract as no longer binding upon him. This means that both parties would be discharged from further performance of the contract. The whole contract was involved, including the clause relating to rescission.’

See also generally N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract, 8^th Australian ed, LexisNexis Butterworths, Sydney, 2002 (‘Cheshire and Fifoot’) at [21.3] and the cases cited at footnote 9 thereto.

135 However, the appellants submit that it is equally well established that the parties can agree, expressly or by implication, that the right to terminate for breach will be governed exclusively by the contract. They say that in such circumstances, courts will give effect to their agreement. For example, in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 (‘Progressive Mailing House’), Mason J said at 30:

‘It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine for repudiation or fundamental breach. But in this case the parties have not attempted to do so.’

136 In accordance with this principle, the learned authors of Cheshire and Fifoot note that in Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, a clause entitling the Commonwealth to terminate its contract with Amann by giving a notice requiring Amann to show cause was held to constitute an exclusive code governing termination for breach thereby depriving the Commonwealth of any concurrent right to terminate by law.

137 In my view, the present case does not fall within the Progressive Mailing House principle. This is because the facts, as presented, do not take the case outside what the authors of Cheshire and Fifoot describe as a ‘presumption of concurrence’. In Concut Pty Ltd v Worrell (2000) 176 ALR 693, the High Court held that a clause in an employment contract giving the employer a right to dismiss for wrongful conduct augmented, rather than removed, the right given by law to terminate for such conduct. In a joint judgment, Gleeson CJ, Gaudron and Gummow JJ at [23] reiterated the long established principle that clear words are needed to rebut the presumption that a contracting party ‘does not intend to abandon any remedies for breach of the contract arising by operation of law’. There is a helpful discussion of this principle in Cheshire and Fifoot at [21.3] and in the cases cited at footnote 13 thereto, particularly Stocznia Gdanska SA v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574 at 585 per Lord Goff; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717 per Lord Diplock; Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117 at 135 per Powell J; and Dover Fisheries Pty Ltd v Bottrill Research Pty Ltd (1994) 63 SASR 557 at 573 per Prior J.

138 Unless otherwise agreed, the effect of terminating a contract for breach is the same whether the right to terminate is conferred by the contract itself, or by law. However, that principle is subject to an important qualification. If the right to terminate is provided by law, the terminating party can sue for damages representing the full value of the lost performance. This is generally known as ‘loss of bargain’ damages. However, where the right to terminate is justified only under the contract, and not by law, it appears that such damages cannot be recovered. In substance, discharge of a contract, by termination for repudiation or breach, is necessary before such damages can be recovered.

139 This doctrine is supported by the decision of the High Court in Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620. In that case, a lease provided that if rent was unpaid for 14 days or if the lessee was in breach of any covenants or if certain other events occurred such as bankruptcy or liquidation, the lessor could re-enter the land ‘without prejudice to any action or other remedy the lessee has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event’. The lessee was constantly late in paying rent. The lessor re-entered and claimed as damages for breach of contract an amount equal to the rent payable over the balance of the term. The High Court held that the lessor was not entitled to recover damages for non-payment of rent.

140 It was accepted, in principle, that when one party commits a breach of contract entitling the other to rescind, and that innocent party does rescind, they are entitled to damages for loss of bargain. The damages were the loss of benefits that the performance of the contract would have conferred upon the innocent party. However, it did not follow from the fact that a contract conferred upon the party the right to terminate the contract that it also conferred the right to recover damages as compensation for the loss sustained as a result of the failure of the lessee to pay rent. Accordingly, the lessor was entitled to recover arrears of rent, but not entitled to the actual damages awarded by the trial judge.

141 The distinction that Shevill drew between damages for loss of bargain being available only when there has been a breach entitling the innocent party to rescind, and the unavailability of such damages when there has been a lesser breach, has been much criticised. However, Shevill has never been overruled. Indeed, it was expressly cited with approval by the High Court several years later in Progressive Mailing House. See also Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245. It goes without saying that Shevill has been repeatedly followed by lower courts.

142 In my opinion, the primary judge’s finding that Thiess had a right to terminate for breach of an essential condition, or repudiation (albeit one that was ‘held in suspense’), was justified. Thiess’ right to terminate for breach was conferred by law. Nothing in the IMA took away that right. The IMA merely imposed a restriction upon its exercise in the form of a condition that had first to be met. The right was, in that sense, ‘contingent’, but nonetheless a right that existed before 23 December 2002. The presumption of concurrence was in no way rebutted. His Honour’s metaphor of ‘suspense’ was, with respect, entirely apt. The primary challenge to his Honour’s judgment is therefore rejected.

143 It follows that I agree with both French J and Allsop J that the primary judge correctly rejected the appellants’ contention that the IMA denied Thiess the right to terminate for breach or repudiation. I also agree with virtually all that their Honours have said regarding the issue of election or affirmation, subject only to what appears below. I would therefore reject each of the appellants’ grounds of appeal, leaving only ground eight for further consideration.

144 This takes me to the point upon which French J and Allsop J part company. French J would reject all of the grounds of appeal, including ground eight. Allsop J would uphold ground eight, and allow the appeal on that limited basis.

145 Ground eight asserts that the primary judge erred in not finding that the basis upon which the IMA was in fact terminated was inconsistent with Thiess having accepted any repudiation by NX Swanston of the IMA. In substance, the ground contends that the termination of the IMA was brought about by mutual assent, and had nothing to do with any acceptance on the part of Thiess of NX Swanston’s repudiation of that agreement.

146 French J rejects this contention. He concludes that any termination of the IMA brought about by the Transfer Agreement cannot properly be described as ‘consensual’. He notes that all of the parties to the Transfer Agreement accepted that the termination had been brought about by NX Swanston’s breach of the IMA. That breach had occurred prior to 23 December 2002.

147 French J further notes that the termination that was effected by the Transfer Agreement specifically preserved any rights that Thiess would have enjoyed upon a termination for breach. The fact that Thiess did not insist upon incorporating into the Transfer Agreement any statement to the effect that the termination of the IMA resulted from its acceptance of NX Swanston’s repudiation was not fatal to its claim.

148 Allsop J, on the other hand, notes that the Transfer Agreement, which he describes as ‘the M>Tram Agreement’, provided for the termination of the IMA, the commencement of a new Franchise Agreement between the DPT and a separate entity (MetroLink) and the commencement of employment by MetroLink of employees of Thiess should they take up the offer. His Honour observes that cl 2(a) of the Transfer Agreement provides that NX Swanston and Thiess mutually agree to end the IMA upon the commencement of the new franchise arrangement. The receivers ceased to have possession of the assets, and ceased to operate the business of NX Swanston at precisely the moment of completion under the Transfer Agreement, namely 3.00 am on 18 April 2004. Until that moment, all of NX Swanston’s obligations under the IMA continued to be performed by the receivers, at least for the purposes of the Direct Agreement. In his Honour’s view, at no point prior to the termination of the IMA by the operation of the Transfer Agreement did Thiess have an entitlement to terminate the IMA by any general law right of termination.

149 Allsop J concludes that the IMA came to an end, not because Thiess exercised an antecedently existing general law right to terminate, but only because of the operation of the Transfer Agreement. It may also be noted that the Transfer Agreement did not, in terms, attribute the termination of the IMA to an acceptance by Thiess of NX Swanston’s repudiation.

150 However, this is by no means the end of the matter. The relevant parties to the Transfer Agreement, NX Swanston and Thiess, not only acknowledged but also agreed that the IMA would terminate at the appointed time ‘for breaches of the [IMA] which occurred before 22 December 2002’: see cl 2(a) (emphasis added). That statement seems to me to be more than just a recitation of historical fact. It lies at the core of the Transfer Agreement, and explains why the IMA is finally being brought to an end. Allsop J’s characterisation of this aspect of the agreement as something other than the exercise by Thiess of a general law right of termination or recission, namely as an agreement to treat the ending of the IMA as an ending for breach of the IMA, has its attractions. It represents a view of the clause that is plainly open. However, with great respect, it is not a view that commends itself to me.

151 In my opinion, cl 2(a) must be read as a whole, and in the context of the entire Transfer Agreement. The clause also operates against the background of the parties’ dealings throughout the entire period from the time that NX Swanston repudiated the IMA until the Transfer Agreement came into effect. The link between the termination of the IMA, and the past breaches as described, is drawn for a purpose and is intended to have a practical and operational effect. It is important to note that, at no stage during the period leading up to the Transfer Agreement did Thiess do anything to suggest that it had abandoned any rights that it may have had, under general law principles, to bring the IMA to an end. There is also nothing to suggest that the "presumption of concurrence" (to which I have previously referred) was rebutted. There is nothing in the evidence to suggest that Thiess, by entering into the Transfer Agreement, bargained away its right to terminate for repudiation. In the absence of any indication that Thiess stood to benefit from abandoning that right, it would have been foolish in the extreme for it to do so. Thiess would have given up, for no apparent reason, its right to recover damages for loss of profits.

152 The construction of cl 2(a) that I prefer, namely that it implicitly constituted termination by acceptance of repudiation, seems to me to find textual support in the agreement when read as a whole. It is also supported by the principles formulated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 347-8, particular his Honour’s observation that the courts had come to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. To suggest that Thiess had to spell out, in terms, that its right to terminate under general law principles was not being abandoned simply in order to preserve that right would, in my view, be unfair, and hardly consonant with basic principles of justice.

153 The primary judge certainly seems to have viewed the matter in this way. He noted that as at 23 December 2002 NX Swanston was in breach of the IMA. It had failed to pay the fee due on 17 December 2002. This was a breach of an essential term, time being of the essence. In addition, NX Swanston had repudiated the IMA by informing both the Victorian Government and Thiess that it was no longer able to perform its obligations. Ordinarily, both the breach of an essential term, and the repudiation, would entitle Thiess to terminate the IMA, and sue for loss of profits.

154 The primary judge then noted that Thiess had not terminated the IMA at any time shortly after NX Swanston’s breach, and repudiation. That led the administrators to contend that the IMA should be treated as if the breach had never occurred, and as if the IMA had never been repudiated. His Honour regarded that submission as having as its foundation the doctrine of election. However, he concluded that the fact that the IMA remained in force until 2004 should not be treated as an affirmation or an election not to discharge that agreement. Thiess was not entitled to terminate the contract for breach or repudiation without the consent of the DPT, and Thiess did not obtain that consent until it entered the Transfer Agreement. To that point Thiess had no choice but to go on with the IMA. It had no power to elect to terminate the IMA. Its right to do so was ‘held in suspense’ and could only be exercised with the DPT’s consent unless, in the meantime, Thiess chose to go on with the IMA ‘come what may’. As his Honour noted, this Thiess most definitely did not do.

155 I agree with the primary judge’s observation regarding the issue of election. I also agree with his Honour’s conclusion that Thiess did not bargain away its right to sue for ‘loss of profit damages’ by any form of accord and satisfaction. Thiess did nothing to suggest that it was prepared to give up, or had given up, any accrued right that it had to sue for such damages. Clause 2(a) of the Transfer Agreement makes it clear that the termination of the IMA on 18 April 2004, though in form a termination by agreement, was implicitly at least an exercise of the power to terminate in response to the antecedent breach and repudiation. The possibility of exercising that power had stood in limbo for approximately sixteen months, but it had never in any true sense been abandoned.

156 It follows that, in my opinion, the appeal must be dismissed.

I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.

Associate:

Dated: 30 March 2005

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 1145 of 2004

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	SIMON ALEXANDER WALLACE-SMITH FIRST APPELLANT PETER GEORGE YATES SECOND APPELLANT
AND:	THIESS INFRACO (SWANSTON) PTY LTD RESPONDENT

JUDGES:	FRENCH, WEINBERG & ALLSOP JJ
DATE:	30 MARCH 2005
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

ALLSOP J:

157 This is an appeal from orders made by a Judge of this Court under s 1321 of the Corporations Act 2001 (Cth) in which the appellants, who are the deed administrators in respect of a company called National Express Group Australia (Swanston Trams) Pty Ltd (the "Company"), were directed to admit in full (but subject to valuation) the respondent’s proof of debt and were ordered to pay the respondent’s costs of the application before the primary judge.

158 The following is a convenient index for these reasons:

Brief factual background [159] – [166]
Contractual framework [167] – [226]
Structure [167] – [168]
The Franchise Agreement [169] – [188]
The Direct Agreement [189] – [201]
The IMA [202] – [226]
Further relevant facts [227] – [285]
The nature of the application [257]
The primary judge’s reasons [258] – [264]
The Notice of Appeal [265] – [270]
The Appellants’ Submissions [271] – [278]
The Respondent’s submission [279] – [285]
The Disposition of the Appeal [286] – [339]
My views in summary [286]
The disposition of the arguments [287] – [339]
The primary contention of the respondent [287] – [288]
The proper construction of the IMA and
the ability of the respondent to terminate [289] – [315]
Understanding the events following
22 December 2002 in the light of the proper
construction of cll 24 and 34 of the IMA
and cll 4 and 5 of the Direct Agreement [316] – [323]
The asserted affirmation or election -
the Settlement Agreement [324] – [330]
The asserted affirmation or election -
the M>Tram Agreement [331] – [339]
The legal position of the parties in the events that have happened [340] – [346]
Orders [347]

Brief factual background

159 On 22 December 2002, receivers and managers were appointed to the Company. On 23 December 2002, the appellants were appointed administrators of the Company. On 14 July 2003, the appellants were appointed deed administrators of the Company under and pursuant to a deed of company arrangement ("DOCA") executed by the Company on the same date. On or about 1 September 2003, the respondent sent to the appellants a proof of debt or claim in the form provided by Form 535 in Schedule 2 to the Corporation Regulations 2001. The proof stated that the Company was on 23 December 2002, and still was, justly and truly indebted for loss of profit "from [the] balance of [the] term" (in the sum of $19,138,805) and from "agency works" (in the sum of $1,388,352), for "early return of lease vehicles" (in the sum of $28,294) and for "termination of subcontracts/novation costs" (in the sum of $68,248). These claims, totalling $20,623,499, were accompanied by a claim for $6,860,909 for past progress claims. (I will describe the contractual arrangements by reference to which these claims were made shortly.) On 1 April 2004, the appellants admitted the claim for past progress claims (for $6,860,909), but rejected the balance of the claims.

160 The grounds for disallowance of the sums totalling $20,623,499 were expressed by the appellants as follows:

The Infrastructure Maintenance Agreement ("Agreement") between yourselves and National Express Group Australia (Swanston Trams) Pty Ltd ("NEGA") [the Company] did not confer on you a contractual right to terminate the Agreement upon the appointment of the Receivers and Managers to NEGA on 22 December 2002. Accordingly, you have no claim for loss of profits under the Deed.

(The contract in question, the Infrastructure Maintenance Agreement, is hereafter referred to as the "IMA".)

161 I will turn presently to the various underlying contracts. For now, four things should be noted. First, no argument took place on appeal differentiating in any way the four elements of the rejected part of the claim. The rejected part of the claim was dealt with as "loss of profits" or loss of the benefit of the contract in question. That was how the rejected claim was described in evidence by an officer of the respondent, Mr Southon: "loss of profits suffered by [the respondent] as a result of the termination of [the IMA]". Secondly, the appellants rejected part of the proof on the basis that the respondent had no entitlement to terminate (and had not terminated) its contract (the IMA) with the Company otherwise than by mutual agreement with the Company. Thirdly, the correctness of that proposition was the burden of the appellants’ argument on appeal. Fourthly, whilst the respondent contested the correctness of that proposition by reference to the proper construction of the documents in question and in the events that had occurred, the primary argument of the respondent, put orally on appeal, was that to characterise the issue in that fashion was to misconceive the correct framework of analysis.

162 The dispute arose out of the contractual arrangements governing the privatisation in 1999 of the Victorian public transport system.

163 The Company, as part of a group of companies including a British publicly listed company, National Express Group plc ("NX plc"), was one of the successful tenderers to operate part of the Victorian transport system. The Victorian Government awarded franchises to National Express Group Australia (Bayside Trains) Pty Ltd ("NX Bayside") for 15 years for part of the Melbourne metropolitan train service and to the Company for 10 years for part of the Melbourne metropolitan tram service.

164 The respondent agreed to provide "infrastructure maintenance services" to the Company in connection with the operation of the Company’s franchise. A company related to the respondent, called Thiess Infraco (Bayside) Pty Ltd ("Thiess Bayside"), agreed to provide infrastructure maintenance services to NX Bayside in connection with the operation of its train franchise.

165 The Director of Public Transport (the "Director"), notwithstanding the privatisation of the relevant activities, assumed a central place in the contractual arrangements for the purpose, it is clear, of protecting the public interest in the operation of the activities in question.

166 Against that background, one comes to the relevant contracts.

Contractual framework

Structure

167 There was no debate on appeal as to the fact that each of the contracts referred to below can be viewed as part of the known factual matrix of each other contract.

168 The structure of the contractual arrangements can be simplified, relevantly, as follows:

(a)	an agreement between the Director and the Company entitled, "Franchise Agreement – Swanston" (the "Franchise Agreement") dated 25 June 1999,
(b)	the IMA between the Company and the respondent effectively entered by novation on 26 July 1999, and
(c)	a deed between the respondent and the Director entitled "Franchise Entity Direct Agreement – Thiess Infraco (Swanston) Pty Ltd" (the "Direct Agreement") made on 26 July 1999.

The Franchise Agreement

169 The Franchise Agreement, as its name suggests, dealt with the grant of the Swanston tram franchise to the Company.

170 By cll 4.1 and 4.2 of the Franchise Agreement the Company agreed to provide the relevant passenger services and operate the "Franchise Business" for twelve years, subject to termination (cl 18) and extension (cl 4.3). The phrase "Franchise Business" was defined as meaning:

Franchise Business means the business of:

(a)	providing Passenger Services (not including charter services, specialist dining services or specialist refreshment services);
(b)	the maintenance and operation of (including the grant of access to) Infrastructure; and
(c)	any business or activity associated with the activities described in paragraphs (a) and (b),

to be conducted by the Franchisee (whether on its own account, through or by one or more Franchise Entities) on or after the Franchise Commencement Date.

171 The Franchise Agreement dealt with services, capital and capital investment, timetables, passengers, fares, and other aspects of operation. Unsatisfactory aspects of operation gave rise to what were defined as "Call-In Events": persistent timetable deviations (cl 7.4), unsatisfactory results from customer satisfaction surveys (cl 8.5), unsatisfactory surveys of concession usage (cl 9.4(l)) and unsatisfactory rolling stock maintenance and renewal (cl 31.1).

172 Part III of the Franchise Agreement was entitled "Call-In, Breach and Termination". Clause 15 dealt with "Call-In Events". It set out a regime for the identification, discussion concerning and remedying, of such matters. Notification of the same type of Call-In Event three times in 36 months and each subsequent notification of the same type was, at the election of the Director, a "Franchisee Breach".

173 Clause 16 dealt with "Franchisee Breach", which phrase was defined in cl 1.1 as meaning:

Franchisee Breach means:

(a)

any failure by the Franchisee to comply with its obligations under this Agreement or any other Transaction Document (including a Financial Franchisee Breach) or the occurrence of a circumstance giving rise to a Franchisee Breach under Clause 6.1 (Load Standards), 7.4 (Breach and Termination Thresholds), 10.1(c) (Customer Service Standards), 15.4 (three Call-in Events), paragraph 3.1, 3.3 or 3.4 of Part 2 of Schedule 6 (Rolling Stock), paragraph 3.4 of Part 3 of Schedule 7 (False Information) or paragraph 3 of Part 10 of Schedule 14 (False Information); or

(b)

any failure by any other Franchise Entity to comply with any of its obligations under its Franchise Entity Direct Agreement or any other Transaction Document to which it is a party.

174 Clause 16 provided for notice, "Cure Plans", "Cure Periods" in respect of remediable Franchisee Breaches; and for penalties for Franchisee Breaches not capable of remedy or not remedied.

175 As can be seen from paragraph (b) of the definition of Franchisee Breach at [173] above, the failure of a "Franchise Entity" to comply with its obligations under its "Franchise Entity Direct Agreement" or other "Transaction Document" could be a breach of the Franchise Agreement by the Company. The definition of the phrase "Franchise Entity" in cl 1.1 included the respondent by its reference to, and definition of, the phrase "Infrastructure Maintenance Service Provider":

Franchise Entity means:

(a)	for the purposes of Clauses 11.8, 11.9(b), 11.9(c), 11.11, 11.14, 11.16(d), 12.2(f), 13.2, 13.3, 13.6, 13.8, 13.10, 15.1, 18.1(e), 18.1(j), 21.2, 21,4, 21.6, 21.7, 22.2, 25, 30.1 and 36 and Schedule 1, each of the Franchisee, the Infrastructure Maintenance Service Provider, the Rolling Stock Maintenance Service Provider and the Committed Rolling Stock Maintenance Provider, and
(b)	for all other purposes, each of the Franchisee, the Infrastructure Maintenance Service Provider and the Rolling Stock Maintenance Service Provider.

...

Infrastructure Maintenance Service Provider means a wholly owned subsidiary of Thiess Contractors Pty Ltd (ACN 010 221 486) being a company incorporated in Victoria of 493 St Kilda Road, Melbourne, Victoria or such other infrastructure maintenance service provider as nominated by the Franchisee and approved by the Director from time to time which, in each case:

(a)	has entered into a Direct Agreement with the Director, in a form approved by the Director, under which it undertakes to the Director (amongst other things) to be bound by provisions of this Agreement which are expressed to apply to a Franchise Entity; and
(b)	has granted a Security Interest over its assets and undertaking in favour of the Director in a form approved by the Director.

176 The phrase "Franchise Entity Direct Agreements" (sic: Agreement) was relevantly defined in cl 1.1 as meaning:

(a) A Direct Agreement between the Director and the Infrastructure Maintenance Service Provider; ...

The Direct Agreement between the respondent and the Director will be dealt with presently. It fell within this definition.

177 The phrase "Transaction Documents" was defined in cl 1.1 to include, amongst other documents, the Franchise Entity Direct Agreement.

178 Clause 16.8 of the Franchise Agreement provided for the Director to seek equitable relief including specific performance and injunctive relief against a Franchise Entity that was in breach.

179 Clause 17 was entitled "Step-In For Franchisee’s Breach". In defined circumstances of seriousness (including a "Termination Event"), the Director might himself or herself or through agents enter into and remain in possession of assets, operate and manage assets and operate the Franchise Business. One of the serious circumstances in which the Director could avail himself or herself of taking over the role of the Franchisee in this way was defined by cl 17.1(a)(i)(B)(4) as an uncured Franchisee Breach which in the opinion of the Director gave rise to a right of a party to a "Key Contract" to terminate the "Key Contract". The phrase "Key Contract" was defined as meaning an agreement or arrangement (a) identified in such a way as to include an agreement or arrangement for infrastructure maintenance services (and thus the IMA), or (b) which was designated by cl 23.2 as a "Key Contract".

180 Thus, the Franchisee Agreement contemplated the stepping-in by the Director when the Company had so conducted itself that important contractors to the Company may have (in the opinion of the Director) rights of termination. One can see in this provision an important safeguard against disruption and dislocation which might be caused to the transport system if such a contractor were to rely on its contractual rights against the Company and terminate the underlying "Key Contract" which, through its operation, provided important support to the operation of the transport system.

181 Clause 18 was entitled "Termination". It had five subclauses. No provision of cl 18 gave any right to the Company to terminate the Franchise Agreement. Clause 18.1 identified in paragraphs (a)-(o) a number of events which were called "Termination Events". All the breaches were identified as of the Company (as Franchisee) or of Franchise Entities, not the Director. Clause 18.2 dealt with termination by the Director upon the occurrence of a Termination Event. Clause 18.4 dealt with continuation of accrued and surviving rights after termination. Clause 18.5 treated as waived any restitutionary rights of the Company upon a lawful termination by the Director. Clause 18.3 was in the following terms:

No other right to terminate
Notwithstanding any rule of law or equity to the contrary, this Agreement may not be terminated except as provided in Clause 18.2.

182 Though it should be noted that cl 1.2 of the Franchise Agreement provided that headings are for convenience only and did not affect interpretation, the terms of cl 18.3 in the context in which it appeared clearly addressed any right to terminate, and not merely the Director’s right to terminate. I will deal in due course with the content of verb "terminate".

183 Clause 19 of the Franchise Agreement dealt with "Financial Default", a phrase defined in cl 1.1 as meaning:

[A] failure by a party to pay when due any money which the party is obliged to pay to the other under a Transaction Document.

184 Clause 19 provided for interest, but did not independently provide for termination. It would apply to any late payment by the Director to the Company.

185 Clause 20 of the Franchise Agreement dealt with "Force Majeure". Detailed provision was made for the identification of events and circumstances that would amount to such. The clause did not provide for termination upon force majeure.

186 Clause 23 of the Franchise Agreement dealt with "Key Contracts". The IMA was a Key Contract. From the definition of the phrase "Key Contracts", it can be seen that there were other contracts which satisfied the definition, including contracts which Franchise Entities entered into with others. Clause 23.2 imposed certain limits upon the Company in relation to Key Contracts. The Company was not to enter into, and was required to procure that each other Franchise Entity not enter into, Key Contracts that were "Long Term Key Contracts" as defined in cl 23.1(c), unless the Director approved the terms of the contract in question and the Director had entered a Direct Agreement in respect of that Key Contract: cl 23.2(d). In respect of Key Contracts other than Long Term Key Contracts, the Company was not to enter into, and was required to procure that each other Franchise Entity not enter into, Key Contracts unless the Director had entered a Direct Agreement in respect of that Key Contract: cl 23.2(a). Similar provisions limited the amendment and assignment of Key Contracts: cll 23.3 and 23.4. Though the IMA was a Key Contract, it was not a Long Term Key Contract.

187 Clause 23.5 of the Franchise Agreement dealt with termination of Key Contracts as follows:

(a)	The Franchisee must not, and must procure that each other Franchise Entity does not, except as permitted by paragraph (b):
(i)	avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of;
(ii)	suspend the performance of any of its obligations under; or
(iii)	do or permit anything that would enable or give grounds to another party to do anything referred to in subparagraph (i) or (ii) in relation to,

a Key Contract.

(b)	A Franchise Entity may terminate a Key Contract if the Director is reasonably satisfied that:
(i)	it is no longer necessary for the Franchise Entity to have the benefit of the Key Contract, or
(ii)	that Franchise Entity has made adequate alternative arrangements for the continued operation of the Franchise Business.

(c)

If a Franchise Entity terminates a Key Contract in breach of this Agreement, the Franchisee must, or must procure that the Franchise Entity does, at the request of the Director, enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement.

(It is to be recalled that the phrase "Franchise Entity" was defined as to include the Franchisee, that is the Company.)

188 Thus, cll 18.3 and 23.5 of the Franchise Agreement (a) denied the Company a right to terminate the Franchise Agreement and (b) required the Company not to put an end to, and to procure other Franchise Entities not to put an end to, underlying Key Contracts supporting the Franchise Business other than in circumstances in cl 23.5(b) of the Franchise Agreement within the reasonable satisfaction of the Director, representing the public interest.

The Direct Agreement

189 The Direct Agreement defined the words "Contract" and "Franchise Agreement" to mean the IMA and the Franchise Agreement, respectively.

190 In clause 2(a) of the Direct Agreement the respondent undertook to the Director to do, or to refrain from doing, anything that the Company (as Franchisee) had agreed in the Franchise Agreement to procure a Franchise Entity (the respondent) to do or refrain from doing. Thus cll 23.2, 23.3, 23.4 and 23.5 in the Franchise Agreement became the subject of direct promises by the respondent to the Director. Most importantly for present purposes, by this use of cl 2(a) the respondent undertook contractually to the Director by reference to cl 23.5 of the Franchise Agreement, except as permitted by cl 23.5(b), not to:

(i)	avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of;
(ii)	suspend the performance of any of its obligations under; or
(iii)	do or permit anything that would enable or give grounds to another party to do anything referred to in subparagraph (i) or (ii) in relation to,

...

the IMA (as the relevant Key Contract between the Company and the respondent).

191 Thereafter, in cl 2 of the Direct Agreement, the respondent made various promises to the Director about aspects of its relationship with the Company.

192 In cl 3 of the Direct Agreement, certain consents and acknowledgments were given. Clause 3(b) was in the following terms:

The Franchise Entity consents to the creation of the Security and acknowledges and agrees that:
...

(b) (enforcement) any Enforcing Party may, at any time after the Director has given notice to the Franchise Entity stating that:

(i) the Security has become enforceable; or
(ii) a Step-in Party is entitled to exercise the Step-in Right under the Franchise Agreement,

exercise all or any of the Powers, and perform all or any of the obligations, of the Franchisee under or in relation to the Contract as if it were the Franchisee to the exclusion of the Franchisee; ...

193 The phrase "Enforcing Party" was defined in cl 1.1 in a way to include the Director and any receiver or receiver and manager appointed by the Director.

194 In cl 4 of the Direct Agreement, the respondent gave various undertakings to the Director, including, in cl 4.1(b), the following:

The Franchise Entity undertakes to the Director as follows, except to the extent the Director consents.
...

(b) (Termination, release, etc) It must not, except as permitted by Clause 5:

(i)	avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of; or
(ii)	suspend the performance of any of its obligations under,

the Contract [the IMA].

195 As with cl 2(a), cl 4 may be seen as reflecting the Company’s obligation under the Franchise Agreement to procure the respondent to act, or refrain from acting, otherwise than in accordance with cl 23.5 of the Franchise Agreement. Clauses 23.5(a)(i) and (ii) of the Franchise Agreement mirror cll 4.1(b) (i) and (ii) of the Direct Agreement. However, cl 4 of the Direct Agreement is subject to what is permitted in cl 5 of the Direct Agreement the terms of which are different to cl 23.5(b) of the Franchise Agreement.

196 Clause 5 of the Direct Agreement, dealt with termination and was in the following terms:

5.1	Termination or suspension without cause

If there is no Default:

(a)	subject to paragraph (b), the Franchise Entity may only terminate, or suspend the performance of its obligations under, the Contract in accordance with the terms of the Contract and if it has given the Director not less than six months’ prior notice; and
(b)	the Franchise Entity must not, without the consent of the Director, terminate, or suspend the performance of its obligations under, the Contract during the last twelve months of the term of the Franchise Agreement not during any extension of the term of the Franchise Agreement.

5.2	Termination or suspension for default
(a)	Subject to paragraph (b), the Franchise Entity may only terminate, or suspend the performance of its obligations under, the Contract as a result of a Default in accordance with the terms of the Contract and if:
(i)	the Franchise Entity has given notice (a Default Notice) to the Director and the Franchisee setting out the Default; and

(ii) either

(A)	if the Default is capable of remedy, the Default has not been remedied within 30 days of the date on which the Default Notice is given to the Director and the Franchisee or such longer period as is allowed for remedy of the Default under the Contract; or
(B)	if the Default is not capable of remedy, all of the obligations of the Franchisee under the Contract do not commence and continue to be performed within 30 days of the date on which the Default notice is given to the Director and the Franchisee or such longer period as is allowed under the Contract.
(b)	The Franchise Entity may not terminate, or suspend the performance of its obligations under, the Contract as a result of a Default if:

(i) the Director has notified the Franchise Entity that he or she is entitled to exercise his or her step-in right under the Franchise Agreement or the Security has become enforceable; and

(ii) an Enforcing Party is performing all of the Franchisee’s obligations under the Contract.

5.3	Cure rights
(a)	On becoming aware of any Default, an Enforcing Party may take steps to:

(i) remedy, or procure the remedy of, the Default; or

(ii) if the Default is not capable of remedy, commence and continue to perform the obligations of the Franchisee under the Contract.

(b)

To the extent reasonably requested by an Enforcing Party for the purpose of exercising its Powers under this Deed the Franchise Entity must promptly provide the Enforcing Party with any information in its possession (including details of any steps which the Franchise Entity considers appropriate to be taken to, remedy the Default or, if the Default is not capable of remedy, to commence and continue to perform all of the obligations of the Franchisee under the Contract).

5.4	Application of clauses

Clauses 5.1 and 5.2 apply despite anything in the Contract or any other document and whether or not the Director has exercised any Power under the Security or the Franchise Agreement.

197 Plainly, cl 5 is a clause designed for Direct Agreements with Franchise Entities generally. Both cll 5.1 and 5.2 (dealing with termination and suspension where there is no default and where there is default, respectively) assume that the Franchise Entity (here the respondent) has a right to terminate the contract or suspend performance of its operations. The appellants submitted that that is not necessarily an indication that such rights exist in the IMA. However, the "Contract" and the "Franchise Agreement" to which cll 5.1 and 5.2 refer were defined in cl 1.1 of the Direct Agreement in terms specifically identifying the IMA and the Franchise Agreement as follows:

Contract means the agreement titled "Infrastructure Maintenance Agreement" dated 14 May 1999 between National Express Group (Australia) Pty Limited and Thiess Contractors Pty Limited as novated to the Franchise Entity and the Franchisee by a novation agreement dated on or about the date of this Deed between National Express Group (Australia) Pty Limited, NX Australia (Bayside Trains) Pty Limited, the Franchisee, Thiess Contractors Pty Limited, Thiess Infraco (Bayside) Pty Limited and the Franchise Entity, a copy of which is set out in the Annexure.
...

Franchise Agreement means the franchise agreement entitled "Franchise Agreement – Swanston" dated 25 June 1999 between the Franchisee and the Director.

198 The phrase "Default" was defined in cl 1.1 of the Direct Agreement in very wide terms, as follows:

Default means:

(a)	any breach by the Franchisee of any of its obligations under the Contract or any event of default, termination event of similar event (whatever called) under the contract; or
(b)	any other event or circumstance which would entitle the Franchise Entity to avoid, terminate, discharge or rescind the Contract or treat it as repudiated or suspend the Franchise Entity’s performance of obligations under it.

199 Also the word and phrase "Franchisee" and "Franchise Entity" were defined in the Direct Agreement as the Company and the respondent, respectively.

200 The above definition of "Default" was plainly intended to encompass any basis that the respondent had for complaint against the Company under the IMA, whether a breach of a specific contractual provision (see limb (a) of the definition) or a general law entitlement to accept a repudiation or terminate for a sufficiently serious breach (treating those two circumstances as conceptually separate: Honner v Ashton (1979) 1 BPR 9478, 9489-93; Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, 144-45) or otherwise put an end to the IMA ab initio or in futuro, (see limit of (b) of the definition).

201 The appellants submitted that cll 5.1 and 5.2 of the Direct Agreement proceed upon a wider framework than the IMA (though that is how the word "Contract" is defined) and that they do not assist in importing into the IMA any rights of termination (without, or on the basis of, default) which might be seen to be recognised by cll 5.1 and 5.2 of the Direct Agreement. It should be noted that the evidence disclosed that there were contracts between the Company and other Franchise Entities in which there was clearly a right to terminate in both parties.

The IMA

202 On 14 May 1999, National Express Group (Australia) Pty Ltd ("NX Group Australia") and Thiess Contractors Pty Ltd entered an agreement entitled "Infrastructure Maintenance Agreement". On or about the date of the execution of the deed being the Direct Agreement, 26 July 1999, the parties to the original IMA were replaced by novation, relevantly in relation to the Swanston tram franchise, by the inclusion of the Company and the respondent. Other parties concerning the Bayside train franchise were also parties to the novation agreement. The IMA, for present purposes, can be seen to be an agreement between the Company and the respondent. Where the IMA agreement refers to the "Franchisee" it is a reference to the Company and where it refers to "Thiess" it is a reference to the respondent.

203 The nature of the maintenance work provided for was described as follows:

"Maintenance Works" means works conducted on the Infrastructure in order to preserve the Infrastructure in a functional state and fit for purpose, including the replacement or renewal of any asset which forms part of the Infrastructure with a modern equivalent asset of similar form, fit and function, and includes:

(a)	Routine Maintenance Works;
(b)	Major Periodic Maintenance;
(c)	Interoperator Maintenance Works; and
(d)	Infrastructure Enhancements -

for each Franchise Business.

204 One can see from this definition the centrally important position and role of the respondent’s activities and obligations in the operation of the transport system for the commuting public.

205 The term of the IMA for the respondent was three years, with an option in the Company (but not the respondent) to extend for a total of nine years (on three occasions, for three years on each occasion).

206 One of the conditions to be satisfied before the IMA had legal force and effect was the satisfaction of each of the conditions in cl 2.2 of the IMA. Clause 2.2 (f) was in the following terms:

(f) the execution by Thiess of the Franchise Entity Deed of Charge and the Franchise Entity Direct Agreement;

Thus, the entry into the Direct Agreement by the respondent with the Director was a condition precedent to legal force and effect of the IMA.

207 Clause 10 of the IMA provided that the Company pay the respondent within 14 days of receipt of progress payment claims.

208 Clause 11 of the IMA dealt with sale and transfer of assets. By cl 11(c)(ii), the respondent agreed with the Company as follows:

(c) Thiess agrees to:
...

(ii) execute and provide to the Franchisee upon request the Franchise Entity Direct Agreement and the Franchisee Deed of Charge, and Thiess undertakes to the Franchisee to comply with the requirements of each of those deeds;

[emphasis added]

Thus, by cl 11(c)(ii) of the IMA the respondent agreed with the Company to honour the terms of the Direct Agreement, which included the respondent’s agreement with the Director in cl 2(a) of the Direct Agreement and, through it, cl 23.5 of the Franchise Agreement, and cl 5.2 of the Direct Agreement, which also limited the rights of termination of the IMA.

209 Clause 24 of the IMA dealt with "Key Contracts". Clause 24 may be seen to use terminology and to have a structure more easily conformable with the position of the parties prior to novation. Nevertheless, even after novation, its form revealed the mirroring of provisions in the Franchise Agreement, in the Direct Agreement and in the IMA. For instance, cl 24.4, dealing with termination of Key Contracts, was in the following terms:

24.4	Termination of Key Contracts
(a)	Thiess must not, except as permitted by paragraph (b):

(i) avoid, release, surrender, terminate, rescind, discharge (other than by performance) or accept the repudiation of;
(ii) suspend the performance of any of its obligations under; or
(iii) do not permit anything that would enable or give grounds to another party to do anything referred to in sub-paragraph (i) or (ii) in relation to,

this Agreement.

(b)	Thiess may terminate a Key Contract if the Director is reasonably satisfied that:

(i) it is no longer necessary Thiess to have the benefit of the Key Contract; or
(ii) Thiess has made adequate alternative arrangements for the continued operation of the Franchise Business.

(c)	If Thiess terminates a Key Contract in breach of this Agreement, Thiess must, at the request of the Director, enter into an agreement immediately following that request with each counterparty to the Key Contract on the terms set out in the relevant Direct Agreement.

210 Clause 24.2(c) recognised the IMA as a Key Contract, in the following terms:

(c) Thiess acknowledges that this Agreement is a Key Contract and agrees to cooperate in the implementation of a Direct Agreement with the Director.

211 Clause 24.4 of the IMA can be seen as the Company’s compliance with cl 23.5 of the Franchise Agreement and the respondent’s further compliance with cl 2(a) of the Direct Agreement.

212 Clause 34 of the IMA dealt with termination and default. It commenced by setting out the "Events of Default" in cl 34.1. It will be recalled that in the Direct Agreement the word "Default" was defined in very wide terms as including "any ... event or circumstance which would entitle the [respondent] to avoid, terminate, discharge or rescind [the IMA] or treat it as repudiated or suspend the [respondent’s] performance of obligations under it." (See [198] above.)

213 Clause 34.1(a) set out sixteen events or circumstances which were events of default in relation to either party. They included non-payment ((a)(i)), an Insolvency Event ((a)(iv)), a Material Adverse Effect ((a)(vi)) and cross-default ((a)(vii)).

214 Clause 34.1(a)(i) was in the following terms:

Each of these events or circumstances is an Event of Default under this Agreement:

(a) in relation to either party:

(i) (non-payment) if a party fails to pay any amount that is due and payable by it under this Agreement within 14 Business Days of its due date;

...

215 Clause 34.1(a)(iv) was in the following terms:

(iv) (Insolvency Event) if an Insolvency Event occurs in respect of a party or any of its subsidiaries;

...

The definition of "Insolvency Event" in cl 1.1 of the IMA was sufficiently wide to encompass the events which occurred from or about 16 December 2002 and which are described below.

216 Clause 34.1(a)(vi) was in the following terms:

(v) (Material Adverse Effect) if an event or a change occurs which could, or could in the reasonable opinion of the other party, have a Material Adverse Effect on the party or any of its subsidiaries;

...

217 The phrase "Material Adverse Effect" was defined in cl 1.1 of the IMA as follows:

"Material Adverse Effect" means, in respect of a person, a material adverse effect on:

(a) its business, property or financial condition;
(b) its ability to perform its obligations under this Agreement; or
(c) the effectiveness or priority of any Security Interest in this Agreement.

218 Clause 34.1(a)(vii) was in the following terms:

(vii) (cross-default) if:

(A) any Financial Indebtedness of a party or any of its subsidiaries becomes due for payment (other than at the option of the party or the relevant subsidiary) before the stated maturity of that Financial Indebtedness;
(B) an agreement by any person with a party or any of its subsidiaries to provide or underwrite financial accommodation, or to acquire or assume any risk in respect of Financial Indebtedness, is prematurely terminated; or
(C) any money or commodity owing or deliverable by a party or any of its subsidiaries in respect of any Financial Indebtedness is not paid or delivered when due for payment or delivery (having regard to any applicable period);

219 Clause 34.1(b) set out seven events or circumstances which were events of default in relation to the respondent only (without limiting the generality of cl 34.1(a)).

220 Clause 34.2 dealt with the consequences of an event of default. It was limited in terms to the Company giving a notice to the respondent for asserted default by the respondent.

221 Clauses 34.3 to 34.5 dealt with the procedure for the respondent to remedy any breach by it that had been notified to it, in a defined "Cure Period" under a "Cure Plan".

222 Clause 34.6 then provided for termination for default, but only by the Company as follows:

34.6 The Franchisee’s Right to Terminate – Event of Default
If Thiess fails to cure a Event of Default within the Cure Period for that Event of Default, and the Event of Default is a serious breach or default under this Agreement, then the Franchisee will be entitled to:

(a)	terminate this Agreement immediately by written notice to Thiess, in which event this Agreement will terminate on the date specified in that notice; and
(b)	exercise all legal and equitable rights and remedies available to the Franchisee (whether under this Agreement or not).

223 The structure of cl 34 is of some importance. Clause 34.1(a) was bilateral, in that it identified events of default by both parties. Yet the IMA provided no apparent consequence for the coming into existence of an event or circumstance of default by the Company. It will be necessary to deal in some more detail with cl 34 below. It suffices to say here that the IMA contained no clause equivalent to cl 18.3 of the Franchise Agreement which expressly limited termination on any basis to the provisions of the Franchise Agreement, and only in favour of the Director.

224 Clause 36 of the IMA dealt with force majeure. This clause did provide the respondent with a contractual right of termination of the IMA. The phrase "Force Majeure Event" was defined in cl 1.1 of the IMA in terms which it is unnecessary to set out. Clause 36.1 provided for a procedure for notification in connection with such an event. Cluse 36.3 provided as follows:

36.3	Termination

If a Force Majeure Event continues for more than 30 Business Days, the party not affected by the Force Majeure Event may terminate this Agreement by giving at least 14 days’ notice to the other party.

225 It is to be recognised that any right of the respondent to terminate under cl 36.3 would be constrained at the suit of the Director by cll 5.1 and 2(a) of the Direct Agreement (the latter adopting mutatis mutandis the provisions of cl 23.5 of the Franchise Agreement and the former being incorporated into the IMA by cl 11(c)(ii) of the IMA).

226 Clause 43.10 of the IMA made time of the essence in the IMA for all obligations. Thus, at common law a failure to pay moneys due under the IMA was by the express terms of the contract an essential or serious breach which would ordinarily give rise to a right of termination at general law, the parties having mutually agreed upon the seriousness of that conduct.

Further relevant facts

227 On 3 December 2002 a progress payment claim for November 2002 in a sum $3,989,000 was lodged by the respondent with the Company. Pursuant to the terms of the IMA, it was payable on 17 December 2002.

228 On 16 December 2002, there was a press release from the "National Express Group" which stated, amongst other things:

... we have given notice today to the Victorian Government that we will stop providing funds to enable the train and tram subsidiaries to meet their liabilities as and when they fall due with effect from December 2002.

229 On 17 December 2002, an officer of Thiess Bayside wrote to the Chief Operating Officer of NX Group Australia about the IMA. It will be recalled that the IMA, as novated, involved infrastructure maintenance for both the Bayside trains and the Swanston trams. The letter stated as follows:

We refer to the press release by National Express Group PLC yesterday concerning its intentions relating to its train and tram operations. That press release states that National Express has ‘given notice today to the Victorian Government that we will stop providing funds to enable the train and tram subsidiaries to meet their liabilities as and when they fall due with effect from 23 December 2002.

We have not received any notice to this or any other effect from National Express. To clarify the position, we request that you advise us in writing by 5 p.m. Wednesday 18 December 2002 of National Express’s position and intentions under the IMA, and in particular whether National Express remains ready and able to perform its obligations under the IMA prior to and after 23 December 2002.

230 Also on 16 December 2002, the Director issued a press release. It stated, amongst other things:

Transport Minister Peter Batchelor said today the Government aimed to deliver public transport services with as little disruption as possible following the decision of National to cease operating its train and tram businesses and hand back its franchises.

Mr Batchelor said National Express – the operator of M>Train, M>Tram and V/Line passenger – had informed the Government late today that its decision would take effect from December 23.

231 On 17 December 2002, the Chief Operating Officer of NX Group Australia wrote to an officer of Thiess Bayside and of the respondent. The letter stated the following in relation to the IMA:

I refer to your letter of today’s date and my previous telephone conversations with you and Don Argent in relation to the recent press release by National Express Group plc ("NEG plc").

As noted in your letter NEG plc has stated that it "will stop providing funds to enable the train and tram subsidiaries to meet their liabilities as when they fall due with effect from 23 December 2002".

As discussed with you, and as stated by the Victorian government in its press release of 16 December 2002, we are currently in negotiations with the State for an orderly handover of the franchise businesses once NEG plc ceases to provide funding.

232 The November progress claim of the respondent was not paid on the date on which payment was contractually due under the IMA, 17 December 2002.

233 On 20 December 2002, the respondent sent a letter (dated 19 December 2002) to the Director which contained the following:

...
National Express Group plc has by press release stated that it will cease providing funds to its subsidiaries to meet their liabilities as and when they fall due with effect from 23 December 2002. National Express has this morning confirmed to Thiess Infraco that it cannot advise as to whether it will pay to Thiess Infraco the amounts which are overdue, and which will become due, to Thiess Infraco under the IMA.

As a consequence of the failure of the National Express Group Australia to pay the amounts due to Thiess Infraco under the IMA, the circumstances could arise that Thiess Infraco itself may not be able to meet debts as and when they fall due.

It is Thiess Infraco’s strong desire to continue trading and to continue providing services pursuant to the IMA. In order to ensure that this is possible, payments of the amounts due to Thiess Infraco are required today, or alternatively, we seek and appropriate guarantee from the Director that the amounts due, or which will fall due, to Thiess Infraco under the IMA will be paid.

234 On the same day, 20 December 2002, the respondent sent to the Director and to NX Group Australia a notice said to be a Default Notice under cl 5.2 of the Direct Agreement which was in the following terms:

This is a Default Notice pursuant to clause 5.2 of the Direct Agreement specifying that a Default under the IMA has occurred.

National Express Group plc has by press release stated that it has ‘given notice... to the Victorian Government that we will stop providing funds to enable the train and tram subsidiaries to meet their liabilities as and when they fall due with effect from 23 December 2002’. National Express Group Australia (Swanston) Pty Ltd has this morning confirmed to Thiess Infraco that it is not in a position to advise Thiess Infraco whether it will pay to Thiess Infraco amounts due, and which will become due, to Thiess Infraco under the IMA.

Thiess Infraco (Swanston) is currently owed the sum of $3.989M under the IMA in respect of its November progress payment claim which was due and payable on 17 December 2002.

The Default is:

•	The failure by National Express Group Australia (Swanston Trams) Pty Ltd, in breach of the IMA, to pay the sum of $3.989m currently due and payable to Thiess Infraco.

235 The communications between officers of Thiess and National Express adverted to in these communications was the subject of evidence of Mr Southon in paragraph 21 of his affidavit as follows:

I am informed by Don Johnson, a Director of Thiess Swanston, and believe that on 19 December 2002 he had a meeting with Peter Strachan of National Express Group in which he asked for assurances that NX Swanston would pay to Thiess Swanston the overdue sums owing to Thiess Swanston for the November progress claims and the sums that would become owing to Thiess Swanston under the December progress claims. Peter Strachan responded that he could provide no such guarantees and any resolution depended upon a decision from the Government.

236 On 22 December 2002, receivers and managers were appointed to the Company by the Director. After this appointment, the respondent sent another notice of default under cl 5.2 of the Direct Agreement to the Director and to NX Group Australia in the following terms:

This is a Default Notice under the Direct Agreement.

The Default is the appointment of a receiver and manager to National Express (Swanston Trams) which we were advised by the receiver occurred on 22 December 2002. The appointment of a receiver and manager constitutes an Event of Default and an Insolvency Event under the Infrastructure Maintenance Agreement.

237 On 24 December 2002, the Director sent a letter to the respondent in the following terms:

Please find enclosed a notice pursuant to Clauses 3.(b) and 5.2(b) of the Direct Agreement.

I confirm that, pursuant to the Direct Agreement, upon receipt of this notice, you are not entitled to terminate or suspend your obligations under the Contract (as that term is defined in the Direct Agreement) as a result of a Default by [the Company].

238 The enclosed notice stated as follows:

I give notice that:

(a) The Security (as that term is defined in the direct Agreement) given by [the Company] ("the Franchisee") in favour of the Director of Public Transport, became enforceable on 22 December 2002; and
(b) An Enforcing Party (as that term is defined in the Direct Agreement) is performing all of the Franchisee’s obligations under the Contract (as that term is defined in the Direct Agreement).

239 On 24 December 2002, a letter was sent to "Thiess Infraco" on behalf of companies in the National Express Group, including the Company, which stated, amongst other things, the following:

As you would be no doubt aware, National Express Group (Bayside Trains), and National Express Group (Swanston Trams), have been placed into the hands of Receivers and Managers by the Director of Public Transport as contemplated by the Franchise Documents. From the perspective of the operation of the Thiess Infraco Companies with National Express in the short term will not be greatly affected, and indeed, the Infrastructure Maintenance Agreement dated 14 May 1999 is still the operative contract between the Thiess Infraco companies and National Express.

240 On or about 24 December 2002, the respondent provided to the Company a further progress claim post-dated to 1 January 2004 for the month of December 2002 in the sum of $7,682,838. Under cl 10 of the IMA this sum was due on 14 January 2003.

241 On 30 December 2002, one of the receivers and managers of the Company wrote to the respondent and Thiess Bayside and stated the following:

In my capacity as Receiver and Manager of both of the Franchisees, I confirm that the Franchisees will pay the Thiess Infraco companies for services rendered by them under the IMAs during the course of the receivership (i.e. services provided after 3.00 am on Sunday 22 December 2002). I also confirm that I have the benefit of an indemnity from my appointor, the Director of Public Transport, in respect of those liabilities.

However, I do not propose to adopt the IMAs nor do I propose to pay any outstanding debts of the Franchisees under the IMAs for services rendered prior to my appointment. I suggest you forward your claims for these debts to the Franchisees’ administrators, Mr Simon Wallace-Smith and Mr Robert Whitton of Deloittes, so that those debts may be dealt with in the course of the administration of the Franchisees.

I understand that the Office of the Director of Public Transport has sent you a notice under Clause 3(b) and 5.2(b) of the Franchise Entity Direct Agreements dated 16 July 1999 between the Thiess Infraco companies and the Director. As a consequence of service of that notice, the Thiess Infraco companies are prohibited from terminating or suspending their obligations under the IMAs while I, in my capacity as receiver and manager of the Franchisees, am performing the obligations of the Franchisees under the IMAs. I assume that the Thiess Infraco companies will therefore continue to provide the services they are contracted to provide under the IMAs in accordance with the terms of the Franchise Entity Direct Agreements. Could you please confirm that this is your intention.

242 On 23 January 2003, a further Default Notice pursuant to cl 5.2 of the Direct Agreement was sent by the respondent to the Director and the Company in respect of the failure to pay the December progress claim.

243 The provisions of the DOCA, that was entered into on 14 July 2003, provided for claims to be made by reference to the definition of the word "Claim" as follows (the "Appointment Date" being 23 December 2002):

Claim means a debt payable by, or claim against, a Franchisee Company (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim arising on or before the Appointment Date but does not include a claim against a Franchisee Company for Employee Entitlements.

(The phrase "a Franchisee Company" included the Company.)

244 On 9 September 2003, various parties entered a document entitled "Settlement Deed". Those parties did not include the appellants. The parties were: the Director, Thiess Bayside, the respondent, the Company, NX Bayside and the receivers. The recitals to the Settlement Deed state that the parties had agreed to settle their differences on issues arising out of the receivership on the terms set out therein. The nature of those differences was not the subject of debate on appeal.

245 Clause 2.2 of the Settlement Deed was entitled "New Swanston IMA" and was in the following terms:

2.2 New Swanston IMA

(a) The term of the Original Swanston IMA is extended, in accordance with Clause 2.2(d) below, to apply to the maintenance services provided by TIS to NX Swanston on and from the date of this Deed.
(b) TIS and NX Swanston must negotiate in good faith an agreement (the New Swanston IMA) to replace and supersede the Original Swanston IMA.
(c) If TIS and NX Swanston do not enter into the New Swanston IMA on or before 31 December 2003, TIS and NX Swanston will continue to be bound by the Original Swanston IMA.
(d) TIS acknowledges and agrees that:

(i) until the New Swanston IMA is entered into between NX Swanston and TIS, TIS and NX Swanston will continue to be bound by the Original Swanston IMA;
(ii) the receivers will decide in their absolute discretion whether the Original Swanston IMA or the Swanston IMA 2000 will be used as the basis of the negotiation referred to in paragraph (b)
(iii) the Original Swanston IMA will terminate on the commencement of the New Swanston IMA; and
(iv) unless the New Swanston IMA or, if paragraph (c) applies, the Original Swanston IMA) is novated or assigned to the Swanston Successor Operator at the election of NX Swanston the New Swanston IMA will terminate on the date that the Receivers cease to operate the business of NX Swanston.

(e) The termination of the Original Swanston IMA pursuant to Clause 2.2(d) will be for breaches by NX Swanston of the Original Swanston IMA which occurred before 22 December 2002.
(f) Pursuant to Clause 4.1(b) of the Swanston Franchise Entity Direct Agreement and Clause 23.5 of the Swanston Franchise Agreement and subject to Clause 2.4, the Director consents to the termination and placement of the Original Swanston IMA on the commencement of the New Swanston IMA.
(g) Without limiting the operation of the Swanston Franchise Entity Direct Agreement, TIS covenants in favour of the Director and NX Swanston that it will not seek to terminate the Original Swanston IMA or the New Swanston IMA by reason of an Insolvency Event occurring in relation to NX Swanston.

[Emphasis added]

246 The phrases "New Swanston IMA" and "Original Swanston IMA" were defined in cl 1.1 of the Settlement Deed as follows:

New Swanston IMA means the proposed agreement between NX Swanston and TIS to replace and supersede the Original Swanston IMA, referred to in Clause 2.2(b).
...

Original Swanston IMA means the Infrastructure Maintenance Agreement dated 14 May 1999 as novated to NX Swanston by the Novation Deed.

247 The acronym "TIS" was a reference to the respondent. "NX Swanston" was a reference to the Company.

248 The evidence discloses that a New Swanston IMA was not agreed either before or after December 2003.

249 The Settlement Deed also contained provisions for the respondent to enter further agreements with the Director to bring the Direct Agreement in line with the New Swanston IMA between the respondent and the Company. Clause 2.4 was in the following terms:

2.4 Swanston Franchise Entity Direct Agreement

(a)	TIS acknowledges and agrees that the Swanston Deed of Charge is valid and enforceable and secures the obligations of the TIS under the Transaction Documents (as defined and including the Swanston Franchise Entity Direct Agreement).
(b)	As a condition precedent to the New Swanston IMA, TIS must:

(i) at the discretion of the Director either:

(A) enter into a new agreement with the Director on substantially similar terms to the Swanston Franchise Entity Direct Agreement to apply to the New Swanston IMA; or
(B) amend the Swanston Franchise Entity Direct Agreement to apply to the New Swanston IMA; and

(ii)	at the discretion of the Director either:

(A) provide the Director with a deed of charge in exchange for the Swanston Deed of Charge on terms no more or less favourable to the Director than the terms of the Swanston Deed of Charge, to apply to the new agreement or amended Swanston Franchise Entity Direct Agreement referred to in paragraph (i); or
(B) amend the Swanston Deed of Charge to the extent necessary (but on terms no more or less favourable) for the Swanston Deeds of Charges to apply to the new agreement or amended Swanston Franchise Entity Direct Agreement referred to in paragraph (i).

250 Clause 2.5 of the Settlement Deed envisaged the introduction of a "successor operator", in the following terms:

2.5 Transfer or assignment of the New Bayside IMA and the New Swanston IMA
TIB and TIS acknowledge that neither the Director nor the Receivers are obliged to procure the transfer of assignment of:

(a)	the New Bayside IMA or the Original Bayside IMA from TIB to the Bayside Successor Operator; and
(b)	the New Swanston IMA or the Original Swanston IMA (as extended pursuant to this Deed) from TIS to the Swanston Successor Operator.

251 The phrase "Swanston Successor Operator" was defined in cl 1.1 of the Settlement Deed as follows:

Swanston Successor Operator means the operator succeeding NX Swanston in the conduct of the business of NX Swanston.

252 On 17 April 2004, a further agreement was entered into by various parties. Again, the parties did not include the appellants. The parties were the Director, the Company, the receivers, the respondent, MetroLink Victoria Pty Ltd ("MetroLink"), Transfield MetroLink Pty Ltd ("TML") and Transdev Victoria Pty Ltd ("TV").

253 Under this agreement, called the "M>Tram Transfer Agreement (Infrastructure Maintenance)" (the "M>Tram Agreement"), the respondent and the Company agreed to put an end to the IMA and provided for MetroLink to enter a new arrangement to provide infrastructure maintenance services. The restructure can be summarised as follows by reference to the recitals to the M>Tram Agreement:

(a)	The respondent agreed with the Company to terminate the IMA on the commencement of a new franchise agreement between the Director and Metrolink.
(b)	The respondent further agreed, in accordance with the Franchise Agreement and the Direct Agreement to enter the M>Tram Agreement for the transfer of the assets and employees used in the business of maintaining the infrastructure under the IMA; and Metrolink agreed to take those assets and employees.
(c)	Metrolink entered the M>Tram Agreement for itself and for TML and TV as partners in a partnership styled "Yarra Trams".

254 Clause 2 of the M>Tram Agreement provided for the termination of the IMA (referred to as the "Existing Infrastructure Maintenance Agreement") in the following terms:

M>Tram [the Company] and the Transferor [the respondent] acknowledge and agree that:

(a)	the Existing Infrastructure Maintenance Agreement will terminate on commencement of the Franchise Agreement for breaches by M>Tram of the Existing Infrastructure Maintenance Agreement which occurred before 22 December 2002;
(b)	until the Completion Date, each is bound by and must continue to perform its obligations under the Existing Infrastructure Maintenance Agreement (including in relation to the payment of claims for work performed up to the Completion Date) in accordance with the terms of that agreement; and
(c)	notwithstanding termination of the Existing Infrastructure Maintenance Agreement, and without limiting the Settlement Deed, the Transferor and M>Tram will continue to perform their respective obligations in relation to work performed up to the Completion Date in accordance with the terms of that agreement.

[emphasis added]

255 Clause 4.4 of the M>Tram Agreement linked the end of the old arrangements with the beginning of the new arrangements as follows:

4.4 Interdependency with Franchise Agreement
The parties acknowledge and agree that Completion under this document:

(a)	is interdependent with and conditional upon the issue of a Certificate of Commencement under the Franchise Agreement; and
(b)	must occur on the same day as the issue of a Certificate of Commencement under the Franchise Agreement.

256 It is to be noted that in both the Settlement Deed and the M>Tram Agreement the termination of the Original Swanston IMA and of the Existing Infrastructure Maintenance Agreement, respectively, were "acknowledged and agreed" to be for "breaches by [the Company] of the [IMA] which occurred before 22 December 2002." As I have said, the appellants were not parties to either of these agreements.

The nature of the application

257 The originating process was filed on 13 April 2004. The substantive order sought was in the following terms:

1.

An order that the defendants admit the loss of profits component of the plaintiffs’ claim against National Express Group Australia (Swanston Trams) Pty Ltd ACN 087 494 997 (Receivers and Managers Appointed) (Subject to Deed of Company Arrangement) submitted to the defendants and dated 1 September 2003.

The primary judge’s reasons

258 After describing the factual background, the primary judge said that the respondent was entitled to prove if it had a contingent debt or claim for the purposes of the DOCA. His Honour said that the definition of "Claim" was derived from s 553 of the Corporations Act. (It should be noted, however, that the definition of "Claim" in the DOCA used the phrase "being a debt or claim [including contingent] arising on or before [23 December 2002]", whereas s 553 used the phrase "being debts or claims [including contingent] the circumstances giving rise to which occurred before the relevant date". No argument took place on appeal as to the significance, if any, of such difference in wording.

259 The primary judge then dealt with the law on contingent claims or debts. In [9] and [10] of his reasons the primary judge said:

Since 1869 it has never been doubted that if at the date of bankruptcy the bankrupt was bound by an executory contract the creditor could prove as a contingent creditor for any losses that he might suffer from a past or future breach of that contract. This accords with the evident purpose of bankruptcy which is to permit all creditors to share in the distribution of the assets of the bankrupt and to leave the debtor thereafter free from the liability of previous obligations. ...

The view that a future breach of contract could be proved as a contingent claim not only accords with principle, it conforms to the opinions of textbook writers and is supported by the cases. ...

260 The primary judge referred to a decision of the Full Court of this Court in Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 and said at [16] of his reasons:

It is necessary to mention the obiter opinion of the Full Federal Court in Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 which suggests a different rule. According to that case, a right to sue for damages for a future breach of a contract when looked at before the breach is not a contingent claim; it is a mere expectancy and therefore not provable. I do not propose to apply that dictum. It is contrary to both the purpose of the legislation and authority.

261 The primary judge found both a serious breach and repudiatory conduct prior to 23 December 2002. In [17] and [18] of his reasons for judgment the primary judge said:

In any event, as it turns out, as at 23 December 2002 NX Swanston was in breach of the IMA. It had failed to pay the fee due on 17 December 2002 and this was a breach of an essential term of the IMA, time being of the essence. Ordinarily this would entitle Thiess to bring the IMA to an end: Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409, 418-419; Tropical Traders Limited v Goonan [1964] HCA 20; (1964) 111 CLR 41, 53-55; Mehmet v Benson [1965] HCA 18; (1965) 113 CLR 295, 305-306; Neeta (Epping) Pty. Limited v Phillips [1974] HCA 18; (1974) 131 CLR 286, 297-298; Bunge Corporation, New York v Tradax Export S.A. Panama [1981] UKHL 11; [1981] 1 WLR 711, 716.

Not only was NX Swanston in breach of an essential term of the IMA, before being placed into administration it had repudiated the IMA in the sense that it informed both the Victorian government and Thiess that it was no longer able to perform its obligations. That this amounted to a repudiation cannot be doubted: Peter Turnbull and Company Proprietary Limited v Mundus Trading Company (Australasia) Proprietary Limited [1954] HCA 25; (1954) 90 CLR 235, 246-248; Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401, 437; Mahoney v Lindsay (1980) 55 ALJR 118, 120; Foran v Wight [1989] HCA 51; (1989) 168 CLR 385, 394-395, 421, 434.

262 The primary judge then noted the submission of the appellants based on the fact that at no time prior to 23 December 2002 did the respondent purport to terminate the IMA or accept the Company’s repudiation thereof. The primary judge said:

... The foundation for this submission lies in the doctrine of election. According to that doctrine if a person has two inconsistent rights (eg the right to rescind a contract for breach and the right to affirm the contract and sue for damages) when he has chosen one course he cannot afterwards choose the other: United Australia, Limited v Barclays Bank, Limited [1997] UKHL 17; [1941] AC 1, 30.

263 The primary judge rejected this argument in [20] of his reasons:

In my view, the mere fact that the IMA remained in force until 2004 should not be treated as an affirmation or an election not to discharge that agreement. As I have pointed out Thiess was not entitled to terminate the contract for breach or repudiation without the consent of the Director, and it did not obtain that consent until it entered into the transfer agreement; the Director’s consent is to be inferred by his execution of the transfer agreement. To that point Thiess had no choice but to go on with the IMA. To that point it had no power to elect to terminate the IMA. That right was held in suspense and could only be exercised on the Directors’ consent, unless, in the meantime, Theiss chose to go on with the IMA come what may. That is a critical point because, as I see it, there can only be an election if the wronged party is in a position to choose between inconsistent rights. In William W. Bierce, Limited, A Corporation  v Hutchins 205 US 340 (1907) at 346, Holmes J, delivering the opinion of the US Supreme Court, said: "Election is simply what its name imports; a choice, shown by an overt act, between two inconsistent rights, either of which may be asserted at the will of the chooser alone ... He may keep in force or avoid a contract after the breach of a condition in his favor ... In all such cases the characteristic fact is that one party has a choice independent of the assent of anyone else." That election does not cover the involuntary acceptance of the benefit of contract finds some support in theory in English cases: see for example Forman & Co. Proprietary, Limited v The Ship "Liddesdale" [1900] AC 190, 204-205.

264 Finally, his Honour rejected the argument of the appellants that the IMA was terminated by agreement and any accrued rights to damages were lost. The primary judge dealt with this argument as follows:

... I accept that an action in damages may be bargained away. What is necessary, however, is to show something in the nature of an accord and satisfaction. "The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim.": McDermott v Black [1940] HCA 4; (1940) 63 CLR 161, 183-184. Here there was no accord, express or implied. There is, therefore, no need to inquire into its satisfaction.

The Notice of Appeal

265 The Notice of Appeal contained nine grounds which can be divided into a number of sections. First, grounds 1, 2 and 3 were to the effect that the primary judge erred by failing to construe the IMA as denying any right in the respondent to terminate the IMA for breach or repudiation. Those grounds were as follows:

1.	The Court erred in finding that the Infrastructure Maintenance Agreement ("Swanston IMA") conferred a right upon Thiess Infraco (Swanston) Pty Ltd ("Thiess Swanston") to terminate or accept a repudiation of the Swanston IMA.

2.

The Court erred in not finding that any termination of the Swanston IMA by Thiess Swanston prior to the "relevant date" of 23 December 2002 would not have been a termination for breach of the Swanston IMA, but a termination in breach of the Swanston IMA, and thus did not entitle Thiess Swanston to claim damages for loss of profits.

3.	The Court erred in not finding that the effect of the Swanston IMA, and clauses 11(c)(iii), 24.4 and 34 in particular, was to prohibit Thiess Swanston from terminating the Swanston IMA for breach, or accepting a repudiation of the Swanston IMA.

266 Secondly, the issue of election or affirmation was contained in ground 4, and arguably ground 8 (though ground 8 may be seen as having a somewhat different significance than affirmation or election):

4.	The Court erred in finding that Thiess Swanston had not elected to continue with or affirm the Swanston IMA.

...

8. The Court erred in not finding that the basis upon which the Swanston IMA was in fact terminated was inconsistent with Thiess Swanston having accepted any repudiation by National Express Group Australia (Swanston Trams) Pty Ltd ("NX Swanston") of the Swanston IMA.

267 Thirdly, allied to grounds 1, 2 and 3, grounds 5 and 6 concerned the right to terminate as construed:

5.	The Court erred in finding that the Swanston IMA could be terminated with the consent of the Director of Public Transport ("the Director").

6.	The Court erred in finding that Thiess Swanston had a right to terminate the Swanston IMA, which right was held in suspense waiting the Director’s consent.

268 Fourthly, issue was taken in ground 7 with the relevance of accord and satisfaction:

7.	The Court erred in finding that it was necessary to show something in the nature of an accord and satisfaction before it could be established that an action in damages had been bargained away.

269 Fifthly, by way of conclusory ground, ground 9 stated:

9. The Court erred in finding that on the proper construction of the Swanston IMA, Thiess Swanston had a contingent debt or claim against NX Swanston as at the relevant date.

270 There was no notice of contention.

The appellants’ submissions

271 The primary submission of the appellants was that the respondent had no entitlement to terminate the IMA. Clause 24.4(a) of the IMA ousted, it was said, the rights described therein, which were sufficiently widely expressed to encompass all species of mechanisms for ending the body of rights being the IMA. Clause 24.4(b) of the IMA recognised, but then constrained, the ability of the respondent to leave the IMA only by consensual termination. Such a "right" of termination did not give rise to a possible claim for damages for breach of contract.

272 It was submitted that the word "terminate" in cl 24.4(b) was to be contrasted with the fuller phrases in cl 24.4(a). There was no contractual right in the respondent to terminate in cl 34 of the IMA. Thus, it was said, "terminate" in cl 24.4(b) (and also where it appeared in cl 24.4(a)) could only mean termination by consent.

273 The appellants’ argument, based as it was on the textual contrast between the words used in cll 24.4(a) and (b) and the lack of any contractually denominated right of termination in cl 34 depended, to a degree, on giving to the phrase "accept the repudiation of" in cl 24.4(a) the contractually intended role of dealing with the consequences of serious breach of contract going to the root of the contract. If that were ousted by cl 24.4(a) and not recognised otherwise by cl 24.4(b), and if, as it did, cl 34 provided no contractually denominated right in the respondent to terminate, the only "type" of termination left which could be the subject of the recognition in cl 24.4(b) was "consensual" termination. This construction was, it was said, conformable with the other agreements, and in particular with the inability of the Company to terminate the Franchise Agreement.

274 The terms of the Settlement Deed could not be used, it was said, to establish the Director’s reasonable satisfaction for the purposes of cl 24.4(b) of the IMA even if the asserted termination could be seen as a Claim under the DOCA. The consent of the Director for clause 2.2(f) of the Settlement Deed was not, it was said, the reasonable satisfaction of the Director for the purposes of cl 24.4(b) of the IMA.

275 The right to terminate for breach or repudiation, if it existed, was not "held in suspense" as found by the primary judge at [20] of his reasons. There were said to be four essential errors in this conclusion of the primary judge:

(a)	The respondent affirmed the IMA by continuing to perform the IMA until April 2004 and by agreeing to the Settlement Deed and M>Tram Agreement.
(b)	The way in which the IMA was in fact terminated (by mutual assent of the Company and the respondent) was inconsistent with the acceptance of a repudiation.
(c)	Termination in conformity with cl 24.4(b) of the IMA was limited to the circumstances in cl 24.4(b)(i) and (ii). The reasonable satisfaction of the Director to these matters was not obtained. This argument, in part, rested on an anterior assertion that termination in cl 24.4(b) was only consensual termination. It also rested on the argument that, as a matter of fact, the requirements of cl 24.4(b) as to the Director’s reasonable satisfaction were not met.
(d)	The lack of any right to terminate for breach meant that no right could be "held in suspense".

276 The appellants rejected the existence of a "contingent claim" at 23 December 2002. The only relevant contingency, it was said, could be the respondent’s supposed right to terminate the IMA for breach or to accept a repudiation by the Company of the IMA. This contingency did not exist because the respondent did not have at 23 December 2002 any such right and at no time could it have such a right. This was a re-assertion of the primary argument.

277 Alternatively, if a contingent claim existed as at 23 December 2002, based on the future possible termination of the IMA, the Court would apply hindsight to assess whether the contingency should be recognised. The arguments which found the election or the affirmation, it was said, destroyed the contingency.

278 Alternatively, even if the primary judge was correct in his construction of cl 24.4(b), what existed was not a contingent or future claim, but a mere expectancy of the kind referred to in Lam Soon.

The respondent’s submissions

279 By way of introduction, the respondent stressed that in the days leading up to 23 December 2002, the Company committed a number of serious defaults under the IMA:

(a)	On 17 December 2002, it failed to pay the November 2002 progress claim of $3,989,000, being a breach of an essential term of the IMA, time having been made of the essence by cl 43.10 of the IMA.
(b)	Between 16 and 19 December 2002, the Company’s parent stated publicly that it would no longer provide funds to enable the Company and NX Bayside to meet their liabilities.
(c)	On about 16 December 2002, the Minister for Transport reported that the Company would cease operations and hand back its franchise.
(d)	On 22 December 2002, the appointment of receivers and managers by the Director to the Company and NX Bayside.

280 These were breaches, it was said, of cll 34.1(a)(i) (non-payment), 34.1(a)(iv) (Insolvency Event), 34.1(a)(vi) (Material Adverse Effect) and 34.1(a)(vii) (cross-default). No argument to the contrary was put. The findings of the primary judge in [17] and [18] of his reasons ([261] above) were not contested on the appeal.

281 The first submission, put orally by Mr Burnside QC, who, with Mr Woodward, appeared for the respondent, was that the concentration on whether a right of termination existed as at 23 December 2002 focussed attention on the wrong question. The claim, he submitted, for which the respondent was entitled to prove, was for payment under the IMA for the amount for which the IMA provided. This amount included a profit component. The following extract from the oral submissions encapsulated the primary argument.

[T]hat right could be exercised in several possible ways, depending on the course of history. The expected course was that the parties would all perform their respective roles, in which case payment would continue until the end of the contract period. Another possibility was that the contract would be brought to a premature end and, if that was done in a way that did not sacrifice Thiess' right to payment, then its right would simply be exercisable by a different mechanism. That mechanism would be a claim for damages, whether for breach or for breach of an essential term, or by way of accepting a repudiation if permitted to, but by one mechanism or another the right to receive payment as prescribed by the contract would result in payment in accordance with the contract.

It doesn't matter at all in our submission whether that payment is converted into a claim for damages upon breach or upon termination by whatever mechanism.
...

The claim that is sought to be made out in this case is simply a claim to be paid, and that right existed from the day the contracts were signed and continued in existence until the transfer agreement brought an end to that right. Plainly enough after the transfer agreement was executed Thiess could no longer claim the profit component of the agreement that related to a period beyond the signing of the transfer agreement, but up to the signing of the transfer agreement its right to be paid remained. Of course, it's been paid some part of its entitlement, namely that part which reflects its expenses, but it hasn't been paid that part which reflects the profit component of the bargain it struck.

282 The second extract cited above was then corrected:

I'm sorry, I'm being corrected. They continued to be paid the profit component whilst they performed the work, and what they claim is the profit to which they were entitled in the future. Of course, they can't seek for the future period the expenses which by definition they haven't had to incur, but they've been deprived of the value of their bargain from the date the contract came to an end by virtue of the transfer agreement.

283 In the alternative, it was submitted that there was a right to terminate:

The right to terminate is merely the event which crystallises or makes certain the path by which the right to payment is to be enforced. It's clear, however, in our submission, that at the time of the appointment on 23 December 2002 there was a right to bring the contract to an end if Thiess so wished. It wasn't obliged to accept the repudiation. It was entitled to continue performing, it was entitled to continue to be paid, but it could if it wished accept the repudiation, but that right was suspended because of the terms of the agreement which it had entered.

284 Thus it was said:

The right to bring it to an end by orthodox contractual means remains in suspension, but the right to be paid continues because the right to be paid arises under the contract which, by hypothesis, hasn't been brought to an end. That's a right to be paid the full amount which the contract stipulates, including the profit component. Then the question is - and we would say the question really is on one view irrelevant because if there's a right to be paid, there's a right to be paid and that's an end of it, and his Honour's judgment was plainly right in ordering that the profit element of the agreed payments be admitted to proof - but the debate has focussed on the meaning of "terminate" and the effect of the restriction, or rather the scope of the restriction, on termination provided in particular by the IMA.

285 The essence of the further arguments of the respondent were as follows:

(a) The respondent did not give up its right under the general law to terminate and recover damages for breach.
(b) That right arose both on the breach of an essential term and for a repudiation.
(c) the exercise of the right was governed by cll 24.4 and 34 of the IMA and cl 5.2 of the Direct Agreement.
(d) Those provisions operated to suspend, but did not extinguish, the respondent’s right to be compensated for the loss of its bargain.
(e) The conduct of the respondent following the service of the notice by the Director was not an affirmation of the IMA.
(f) The M>Tram Agreement effected the termination of the IMA for breach by the Company, and thus operated to crystallise the respondent’s claim for the loss of its bargain.
(g) The M>Tram Agreement and the acknowledgements by the Director in that agreement evidence the Director’s "reasonable satisfaction" required by cl 24.4(b) of the IMA.
(h) Assessed as at 23 December 2002, the respondent had a claim for the loss of its bargain (representing the balance of the term of the IMA) payable on a contingency; namely, the termination of the IMA for breach, subject to satisfying the pre-requisites for such termination prescribed by the IMA and the Direct Agreement.

The disposition of the appeal

My views in summary

286 The following is an outline summary of my views to be read with what follows:

(a)	I reject the respondent’s submission that the claim was one merely for payment.
(b)	I reject the appellants’ submission that the only right of termination recognised by cl 24.4(b) of the IMA was termination by consent.
(c)	As at 23 December 2002, and at the time of lodgement of its claim the respondent had a contingent claim falling within the meaning of "Claim" in the DOCA.
(d)	The contingent claim as at those dates was based on the conduct of the Company prior to 23 December 2002 in committing a breach of contract agreed to be essential and evincing an intention not to be bound by the IMA according to its terms.
(e)	This conduct of the company was sufficient to entitle the respondent pursuant to the general law right to terminate the IMA if, or when, the provisions of the IMA permitted the respondent so to act.
(f)	There was no affirmation or election destroying that contingency by the respondent entering into the Settlement Agreement.
(g)	However, the IMA was ended by agreement being the M>Tram Agreement not by the exercise of any general law right to end the IMA. The contingency was destroyed by a means other than the acceptance of repudiatory conduct.

The disposition of the arguments

The primary contention of the respondent

287 It is convenient to deal first with the submissions put orally on appeal by Mr Burnside that the claim was for the contractual right to payment and that the concentration in the argument on termination and the right to terminate reflected a distraction from the true issue in the case.

288 I reject this argument. The claim in the proof was for loss of profits or loss of bargain. Such a claim is in the nature of a claim for damages recoverable if the contract is put to an end, not if the contract remains unterminated: Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245, 260, (per Mason CJ with whom Deane J, Dawson J and Toohey J agreed at 265) and 273 (per Gaudron J); Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21; (1976) 136 CLR 444, 458 (per Gibbs J, Mason J and Jacobs J, contra Barwick CJ at 450); Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 31 (per Mason J with whom Wilson J and Deane J agreed generally, and Dawson J agreed); and Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; [1980] AC 827, 844-5, 849. The correction of the error by Mr Burnside in his address reveals the reason for this principle. If, as contended for by the appellants, the respondent was entirely lacking any right to put an end to the IMA by reason of any conduct of the Company, whether arising out of the terms of the IMA or at general law, then there was no capacity to put the contract to an end (whether the language of rescission or termination is used). Thus there could be no claim for damages for loss of profit or the lost benefit of the bargain. The views of Barwick CJ in Ogle at 450 that loss of bargain damages can be sued for before the contract was rescinded (terminated) in circumstances of actual, as opposed to anticipatory, breach was rejected by the Court in Sunbird Plaza and again, implicitly, in Progressive Mailing House.

The proper construction of the IMA and the ability of the respondent to terminate

289 The importance of this question is revealed by the reasons of the primary judge concerning the nature of a contingent debt or claim. If (as it had) the Company so conducted itself by 23 December 2002 as to provide the foundation for the termination of the IMA at the instance of the respondent for breach (whether as a remedy for serious breach or by way of an acceptance of repudiatory conduct) and if such a termination were possible by the respondent (whether or not dependent upon other events occurring, such as the satisfaction of the Director of certain things) the basis for the existence of a contingent claim as at 23 December 2002 can be appreciated.

290 It was, therefore, central to the appellants’ argument that any right in the respondent to end the contract for breach or repudiation by the Company had been ousted by the IMA, in particular by cll 24.4(a) and 34 of the IMA. The only recognition given by cl 24.4(b) of the IMA was, it was said, to termination by mutual agreement between the respondent and the Company, which type of termination could not, of its nature, give rise to a claim for damages. Further, even that type of termination was subject to the Director’s reasonable satisfactions set out in cl 24.4(b) of the IMA.

291 It is to be recognised, and it was not in dispute, that the IMA is to be read in the framework of the Direct Agreement and the Franchise Agreement. It is also to be recognised, and it was also not in dispute, that a matter of significant background to understanding the operation of all the relevant agreements was the manifest public interest in maintaining the fluent operation, as far as possible, of the transport system for the public. In that regard, the Director was given a central position in the contractual framework, with a significant degree of power and control.

292 The Franchise Agreement provided a number of important elements for the overall construction of inter-locking rights and obligations. It was express and pellucid that only the Director could terminate the Franchise Agreement. Clause 18.1 of the Franchise Agreement defined the phrase "Termination Events" by reference to conduct of the Company and any relevant "Franchise Entity". There was no conduct of the Director that was a defined "Termination Event". Clause 18.2 gave express power to the Director (and only the Director) to terminate the Franchise Agreement by contractual provision. Clause 18.3 then excluded any other right of termination whatsoever. Expressed as it was, in the passive voice, and given its terms, cl 18.3 of the Franchise Agreement was plainly intended to deal with termination by both parties. The Director was limited to termination under cl 18.2. The Company could not terminate on any basis – under the contract, at law or in equity.

293 This lack of legal capacity in the Company to put an end (other than, of course, by mutual contractual assent) to a relatively long term contract can be explained by a number of factors. The Company was dealing with the Crown in the right of the State of Victoria. There was thus no commercial solvency risk from the contingencies and vicissitudes of business. Access was being granted, on a long term basis, to a business, hitherto a public utility, for the ongoing use and benefit of the public. In those circumstances, one can see as rational and explicable the commercial decision of the Company to bind itself to the franchise for its full term. Any risk could really only be described as sovereign risk.

294 Clause 23.5 of the Franchise Agreement provided the terminological framework to bind both the Company (directly in cl 23.5 of the Franchise Agreement) and the respondent (by clause 2(a) of the Direct Agreement) to a regime concerning termination of Key Contracts, which included the IMA.

295 Thus, cl 18 of the Franchise Agreement made clear that the Franchise Agreement could not be terminated by the Company; and cl 23.5 of the Franchise Agreement limited the Company’s and other Franchise Entities’ (such as the respondent) capacities to put an end to the underlying Key Contracts.

296 Before turning to the IMA and the Direct Agreement, it is appropriate to address three issues of relevance to all the agreements: (a) the contractual exclusion or limitation of general law remedies for breach of contract, (b) the question of terminology concerning remedies for breach of contract, and (c) how these issues affect the construction of the relevant documents here.

297 There is no doubt that a party’s right to accept a repudiation of a contract, or to end a contract because of breach of a serious or essential term, can be excluded by contract. In discerning the intention of the parties in that regard, however, there is a principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon available remedies for breach of contract arising by operation of law: Concut Pty Ltd v Worrell (2000) 176 ALR 693, 699 at [23] (per Gleeson CJ, Gaudron J and Gummow J); Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689, 717 (per Lord Diplock); Stocznia Gdanska SA v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574, 585 (per Lord Goff of Chieveley, agreed with by Lord Hoffmann, Lord Hope of Craighead and Lord Hutton); and see also Carter Breach of Contract (2^nd Edn) [779] and cases there cited.

298 Clause 23.5 of the Franchise Agreement contained a structure repeated in cl 24.4 of the IMA and cl 4.1(b) of the Direct Agreement. It is evident that the drafter of each contract attempted to use such verbs that in common legal parlance state the various remedies of a party to a contract to put an end to the contract in some fashion. The word "avoid" is generally taken to mean set aside ab initio. The word "release" generally encompasses some bilateral consensual arrangement, but may involve the unilateral surrender of rights. The word "surrender" could involve a bilateral consensual arrangement or unilateral act. The words "terminate" and "rescind" have at times bedevilled debate in the field of remedies for breach of contract and associated questions. The word "rescind" can mean setting aside ab initio, such as for misrepresentation. It can also mean the ending of the contract in futuro, leaving accrued rights, including accrued secondary rights to sue for damages, in place: McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457, 476-77; Progressive Mailing House at 30-31; Johnson v Agnew [1980] AC 367; and Photo Productions Ltd at 844. The word "termination" can mean termination by consent, but it can be, and often is in modern legal expression in Australia, used to denote ending a contract for serious breach either pursuant to a contractual entitlement or at common law as a remedy for a serious breach of contract or consequent upon a repudiation by one party or upon a frustration by supervening events: see Carter op cit pp 65-6 [323]-[327]; and Carter and Harland Contract Law in Australia (4^th Ed) Chs 19 and 20. This notion of terminate (meaning to end) will generally signify the ending of the contract in futuro. The word "discharge" is sometimes used in a similar fashion to the word "terminate" where there has been a breach and a party becomes entitled to leave, or be discharged from, the contractual arrangement.

299 It would be a mistake, in my view, to treat each of the words used by the drafter in cl 23.5(a)(i) of the Franchise Agreement and in the cognate provisions in these agreement (cl 24.4(a)(i) of the IMA and cl 4.1(b)(i) of the Direct Agreement) as having a clear meaning, mutually exclusive from all the other expressions used. The drafter was attempting, succinctly but comprehensively, it seems to me, to ensure that any capacity at all to end the contract in question would not be exercised, except as permitted by the related and following paragraph (cl 23.5(b) of the Franchise Agreement, cl 24.4(b) of the IMA and cl 5 of the Direct Agreement). An aspect of this overlap of meaning is to be found in the relationship between the word "terminate" and the phrase "accept the repudiation of". The word "terminate" is apt to pick up the notion of the common law right to end a contract for a serious breach of contract (including for a breach of a term agreed to be essential) and to put an end to the contract consequent upon the acceptance of repudiation. In any given circumstance, a serious breach going to the root of the contract and repudiatory conduct may both be present, though it is necessary to keep the notions distinct: Honner v Ashton at 9489-93 per Mahoney JA; Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, 625-6 (per Gibbs CJ); Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, 64 (per Upjohn LJ); Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, 144-45 (per McHugh JA). Repudiation requires attention to the evincing of any intention not to be bound by the obligations of the contract: see for example Ross T Smyth & Co v T D Bailey and Son & Co [1940] 3 All ER 60 at 71-2 per Lord Wright and Larratt v Bankers & Traders’ Insurance Co (1941) 41 SR 215 at 233 per Jordan CJ; a serious breach of contract warranting termination requires attention to the nature and consequences of the breaches: see Treitel Remedies for Breach of Contract: A Comparative Account (Oxford, 1988) pp 350-51; Carter Breach of Contract (2^nd Ed) pp 158-59; and Honner v Ashton p 9492; Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434, 443-44; Ross T Smyth & Co Ltd v T D Baily Son & Co at 72 per Lord Wright; Hongkong Fir at p 72 per Diplock LJ; Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, 380 per Buckley LJ; Fullers’ Theatres Ltd v Musgrove [1923] HCA 12; (1923) 31 CLR 524 at 537-38 per Isaacs and Rich JJ; Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003, 1012; and on appeal [1911] AC 394; and Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159, 178. Though, of course, the parties may (as they did in cl 43.10 of the IMA) agree upon the essentiality of a term or of a fact. Of course, one body of facts may be both a breach going to the root of the contract and a repudiation. That said, however, as a matter of language and legal mechanics, if repudiatory conduct is accepted by the innocent party, the innocent party will then put an end to or terminate the contract by the manifestation of such acceptance and the expression of the ending of the arrangement.

300 I would not attribute to the drafter of cl 23.5(a) of the Franchise Agreement (and to the drafter(s) of the cognate provisions: cl 24.4(a)(i) of the IMA and cl 4.1(b)(i) of the Direct Agreement) an intention to draw a clear distinction between the word "terminate" and the phrase "accept the repudiation of". They can be distinct and they can be related; it depends on the context and the circumstances.

301 Thus, it is difficult to see why the word "terminate" in cl 23.5(b) of the Franchise Agreement (and in the cognate provisions: cl 24.4(b) of the IMA and cl 5.2(a) of the Direct Agreement) would not have the meaning it has in cl 23.5(a) of the Franchise Agreement (and cl 24.4(a) of the IMA and cl 4.1(b)(i) of the Direct Agreement), that is, end the contract in futuro for whatever reason the law might permit same: terminate pursuant to the terms of the contract, at general law for breach of an essential term or consequent upon repudiatory conduct or consensually.

302 Turning to the IMA, cl 34 conferred no contractual right on the respondent to terminate the IMA. There was, however, no clause such as cl 18.3 of the Franchise Agreement manifesting an intention that the IMA not be capable of termination otherwise than by the contractual regime for the benefit of one party. Clause 34 of the IMA does, however, limit the entitlement to terminate for breach under the IMA to the Company. One question is whether that is to be seen as a code, thereby impliedly negating any entitlement in the respondent to terminate the contract, at general law, for serious breach or consequent upon the acceptance of repudiatory conduct. I would not conclude that cl 34 of the IMA impliedly excludes such common law rights of the respondent. First, I bear in mind the rule of construction referred to earlier. Secondly, cl 34.1 provides for certain events or circumstances to be "Events of Default" of both parties: the Company and the respondent. That expression, "Events of Default", is picked up by the balance of the clause dealing with the regime concerning Events of Default committed by the respondent. It is, in cl 34.1 in particular, an expression that is also apt to describe what the parties have designated as breaches of contract. What they have not done in relation to breaches by the Company (that is, Events of Default committed by the Company) is provide for a regime concerning termination pursuant to the terms of the contract. These Events of Default, nevertheless, stand as breaches of contract. If they are otherwise made essential, such as cl 34.1 (a)(i) concerning payment within 14 days is made essential by cl 43.10 making time of the essence, that will, subject to the balance of the IMA restricting or curtailing the right, enable the respondent to terminate the IMA, at general law, for breach of a term made essential by the terms of the contract in question. If the Events of Default in cl 34.1 are not made contractually essential, it would be necessary to assess the nature and gravity of the breach in question to determine whether the breach deprives the party not in default of substantially the whole benefit from the contract: Hongkong Fir at 69 (per Diplock LJ); Shevill at 625-2; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 556-57, 561-62; and Progressive Mailing House at 31 and 37; or it would be necessary to assess whether the conduct of the Company were such was to evince an intention not to be bound by the contract.

303 Thus, whilst cl 34 of the IMA can be seen clearly as a clause which only provided a contractual regime of termination to the Company, it can also be seen to identify what the parties regarded as breaches of contract by both parties. In particular because of that role of cl 34.1, I see no basis to conclude that cl 34 is a code impliedly excluding the respondent’s entitlement to rescind or terminate at common law for a breach agreed to be essential or sufficiently serious as to go to the root of the contract or consequent upon a repudiation by the Company.

304 One then comes to cl 24.4 of the IMA. There is no doubt that cl 24.4(a) of the IMA ousts (except as permitted by (b)) the remedies there identified. The remedies there identified are, as I have said, an evident attempt (in my view, a skilful and succinct, but comprehensive attempt) to identify legal mechanisms to put an end to contracts, ab initio and in futuro. The terms of the provision are that the respondent "must not" do certain things. It denies the entitlement (however arising) of the respondent to do any of those things, except as permitted by paragraph (b). Some criticism was made in argument of the drafting of this structure as "word processing drafting" or as being impossible to account for other than by "loose drafting". That, with respect to counsel who put those submissions, did not give credit to the evident care in the drafting, which was founded, in its juxtaposition of what is in cll 24.4(a) and (b) of the IMA (and in cognate provisions), on an appreciation of the importance of not upsetting past arrangements, but permitting, with appropriate controls, termination in the future.

305 The real issue of construction is whether cl 24.4(b) of the IMA is, as the appellants contended, limited to consensual termination (and thereby, of its nature, incapable of supporting a claim for damages for loss of bargain), or whether it is apt to encompass termination for serious breach or the ending of the contract consequent upon an acceptance of repudiatory conduct.

306 I reject the appellants’ arguments that since cl 34 of the IMA did not give a contractual right of termination to the respondent the right of termination recognised (though not conferred) by cl 24.4(b) of the IMA must only be a consensual termination, and that the separate identification of acceptance of repudiation in sub cl 24.4(a) of the IMA meant that "termination" in cl 24.4(a) and (b) could not include either or both the related notions of termination for serious breach or of ending the contract consequent on a repudiation. I would give the various expressions in cl 24.4(a) their full potential meaning. They no doubt overlap to a degree. What was ousted, completely, by cl 24.4(a) of the IMA, and not saved by the permitted exception in cl 24.4(b) of the IMA, was the ability to set aside the contract in the past, whether ab initio or from some other date earlier than the act of termination. What was permitted, subject to the conditions in cl 24.4(b), was to bring the contract to an end, to terminate it, but only from that time forward. That is the notion of terminate – it is to end. I do not see the use of the word "terminate" in cl 34 of the IMA as limiting the use of the word "terminate" in cl 24, to a point of lack of content. As I have said, the word "terminate" has a number of possible meanings. In its context in cl 34 of the IMA it means terminate pursuant to the terms of the contract. In cl 24.4 of the IMA its content is naturally fuller. The respondent has no contractual right to terminate under cl 34. That does not, it seems to me, deprive the respondent of a common law right of ending the contract (terminating it) in the way that I have described earlier. Once one rejects the assertion that the absence of a right in the respondent to terminate under the contract in cl 34 of the IMA removes any right to terminate at common law in the respondent, it follows that the content of the word "terminate" in cl 24.4 of the IMA is wider than consensual termination and that the word "terminate" in cl 24.4, including cl 24.4 (b) is apt to include termination under the general law.

307 This view is supported, it seems to me, by an appreciation of the balance of the rights and obligations of the respondent in the cognate agreements. The Direct Agreement recognised in cl 5.2 a capacity in the respondent to terminate the "Contract" (defined in the Direct Agreement as the IMA) for the default of the Franchisee (defined in the Direct Agreement as the Company). This is put to one side by the appellants as "boiler-plate drafting". To an extent this may, perhaps, be so. Under cl 2(a) of the Direct Agreement the respondent undertook to the Director the obligations in cl 23.5 of the Franchise Agreement. So, as between the Director and the respondent, the respondent agreed not to do anything in cl 23.5(a) of the Franchise Agreement, unless permitted by cl 23.5(b). The respondent agreed (with the Company) that it could only terminate in circumstances set out in cl 24.4(b) and (with the Director via cl 2(a) of the Direct Agreement that it could only terminate in circumstances set out in cl 23.5(b) of the Franchise Agreement. So, insofar as cll 4.1 and 5.2 of the Direct Agreement purport to give a wider capacity to the respondent to act that through cll 24.4 or 23.5, some resolution of cll 2(a) and 23.5 with cll 4.1 and 5.2 would need to be undertaken. That resolution need not be undertaken to resolve this dispute. For present purposes, it is enough to understand that cl 5.2 of the Direct Agreement recognised a right of termination in the respondent for Default by the Company. Clause 23.5(b) of the Franchise Agreement as adopted by cl 2(a) of the Direct Agreement, and as owed to the Director, and the identical cl 24.4(b) owed to the Company under the IMA, restricted the capacity of the respondent to terminate by conditioning it upon the Director’s state of satisfaction. Clause 5.2 of the Direct Agreement also laid down a regime for notifying the complaint (by notification to the Director and the Company) and identified further (and different) circumstances in which any right of the respondent to terminate was not to be operative: cl 5.2(b). Clause 11(c)(ii) of the IMA made those further restrictions in cl 5.2(b) binding on the respondent in favour of the Company under the IMA.

308 There is no doubt that as at 23 December 2002 the Company had breached the provisions of the IMA for timely payment of sums due under the IMA. Time had been agreed to be of the essence in the IMA. This breach of a contractually agreed essential term of the IMA gave rise (subject otherwise to the terms of the IMA) to an entitlement at general law to terminate the IMA. Also, there is no doubt that by 23 December 2002 the Company had, through the actions of those that controlled it, repudiated its obligations under the IMA.

309 The respondent was bound, however, to comply with the constraints in the Direct Agreement and in the IMA in dealing with these circumstances. This duty was owed to the Director under the Direct Agreement and to the Company under the IMA, which also by cl 11(c)(ii) picked up the obligations in the Direct Agreement.

310 Clause 5.2(a) of the Direct Agreement (incorporated as it was into the IMA) only permitted termination "as a result of a Default in accordance with the terms of the Contract [the IMA]". The word "Default" had a very wide meaning in the Direct Agreement. It is not to be seen as linked to the notion of termination for an event of default under cl 34 of the IMA, limited as that was to the Company. The two limbs of the definition of "Default" in the Direct Agreement are amply sufficient to encompass the Company’s breach and repudiatory conduct here. The words "in accordance with the terms of the Contract [the IMA]" in cl 5.2(a) may, because of the width otherwise of the definition of "Default", be read flexibly to be wider than referring merely to the exercise of rights of termination pursuant to contract (under cl 34 of the IMA).

311 Alternatively, cl 5.2 of the Direct Agreement might be seen as "boiler-plate drafting" and the words "in accordance with the terms of the Contract [the IMA]" in cl 5.2(a) restrict the type or range of Default (otherwise widely defined) upon which the respondent could rely in terminating the IMA to such defaults as the IMA identified as the basis for contractual termination. There are no such defaults: see cl 34 of the IMA. Therefore, on this construction, the compliance by the respondent with cl 5.2 of the Direct Agreement in favour of the Company (by cl 11(c)(ii) of the IMA) would have the respondent unable to terminate because it had no right to terminate for a Default "in accordance with the terms of the Contract [the IMA]", notwithstanding the wide definition of "Default" in the Direct Agreement.

312 I prefer the former construction. I do not see the phraseology in cl 5.2(a) affecting the width intended in cl 24.4(a) and (b) of the IMA (and cognate clauses) of the word "terminate" (and the other words in cl 24.4(a)). Once one gives the word "terminate" in cl 24.4(a) and (b) a meaning to encompass termination at general law for serious breach or upon an acceptance of a repudiation, I do not see the words of cl 5.2(a) of the Direct Agreement by the use of the phrase "in accordance with the terms of the Contract [the IMA]" as cutting down that width and elevating cl 34 of the IMA to a code. This is especially so given that the word "Default" in the Direct Agreement is defined so widely in reach and is defined as specifically related to "the Contract" – the IMA.

313 The requirement of notice under cl 5.2 of the Direct Agreement provides the opportunity for the Director to step in and take over the operation of the Franchise Business. Thus, the continued existence of the general law right of termination in the respondent for serious breaches, or repudiation, of the IMA by the Company, controlled and regulated by the procedure in cl 5.2 can be seen to underpin and reinforce the continuity of the services to the public. The respondent’s possession of a right to give a Notice of Default for such serious breaches or repudiatory conduct in connection with the IMA enabled the Director to be apprised of those circumstances and to understand whether it was appropriate to step in under cl 17.1(a)(i)(B)(4) of the Franchise Agreement. It accords with the business-like and smooth running of the transport system for contracting parties such as the respondent to be able, in a way controlled or regulated by the Director in the public interest, contractually to complain about breaches of essential terms or going to the root of the contract or of repudiatory conduct by the Company under the IMA so that the Director is able to take steps of his or her own in the public interest under the terms of the Franchise Agreement or related Transaction Documents including the security documents to deal with the Company.

314 Thus, I reject the primary submission of the appellants that the proper construction of the IMA in the context of the cognate agreements was that the respondent was only entitled to terminate the IMA (as recognised by cl 24.4(b)) by consensual arrangement. The terms of cl 24.4(b) of the IMA recognised, in my view, the general law entitlement of the respondent (if circumstances otherwise gave rise to it) to terminate the IMA for breach of an essential term or consequent upon, or as, the manifestation of the acceptance of the repudiation.

315 Therefore, with a qualifying comment, I would reject grounds 1, 2 and 3 of the Notice of Appeal. The qualifying comment that I would make is in relation to ground 1. To the extent that the primary judge’s reasons may be seen to express a view that the IMA conferred a right of termination (contractually) upon the respondent, his Honour would have erred. I do not, however, so read his reasons. I read the primary judge as having viewed cl 24.4(b) of the IMA as recognising the general law right of termination.

Understanding the events following 22 December 2002 in the light of the proper construction of cll 24 and 34 of the IMA and cll 4 and 5 of the Direct Agreement

316 Undoubtedly, the Company, by its failure to pay the November progress claim timeously, was in breach of an essential term of the IMA; and, by the intentions publicly expressed by and on behalf of the Company, it evinced an intention not to be bound by the IMA according to its terms.

317 From 19 December 2002, employing the procedure designated by cl 5.2(a) of the Direct Agreement, the respondent served notices of the breaches that occurred. The first Notice of Default, dated 19 December 2002 ([233] above), described the "event or circumstance which would entitle the [respondent] to ... treat [the Contract viz the IMA] as repudiated" (see limb (b) of the definition of "Default" in the Direct Agreement). However, the notice did not specify such as the Default. The Default was identified as the failure to pay the $3.989 million timeously. No submission was put as to any inadequacy in the notice in this, or in any other respect.

318 Of course, the respondent was not entitled to terminate the IMA at this point: cl 5.2 modified its common law right by requiring a procedure to be undertaken. This procedure was undertaken. The cl 5.2 notices were issued and time was thereby provided which enabled the Director to consider his position.

319 On 24 December 2002, the Director exercised his right to give a notice contemplated by cl 5.2(b) of the Direct Agreement. (See the notice at [234] above.) It is necessary to recognise what the effect of cl 5.2(b) and the notice was. Clause 5.2(b) of the Direct Agreement (made applicable to the IMA by cl 11(c)(ii) of the IMA) denied the respondent the power to exercise any entitlement at general law to end the IMA if, first, the Director notified the respondent that he or she was exercising a step in right (cl 5.2(b)(i)), and, secondly, an Enforcing Party (which term included the receivers and managers) was performing all of the Company’s obligations under the IMA (cl 5.2(b)(ii)). The second requirement did not depend on the contents of the notice asserting it to be the fact (as occurred here), but on the fact of that occurring.

320 A notice sufficient for cl 5.2(b)(i) was given.

321 The parties were agreed on appeal that the receivers and managers performed all of the Franchisee’s (the Company’s) obligations under the Contract (the IMA) for the purposes of cl 5.2(b)(ii) of the Direct Agreement after 3 pm on 22 December 2002 until they ceased to have possession of the assets.

322 Thus, so long as cl 5.2(b)(ii) of the Direct Agreement was satisfied, the respondent was, by cl 5.2 of the Direct Agreement (adopted as an obligation to the Company by cl 11(c)(ii) of the IMA) not entitled to exercise any right under general law to terminate the IMA based on the conduct up to 23 December 2002, or after that date to the extent that such a right might otherwise have arisen.

323 Further, to the extent that some change of circumstance would lead to the conclusion that cl 5.2(b)(ii) of the Direct Agreement was not satisfied, it would still be necessary, before the respondent could exercise its common law right of termination, for the Director to be reasonably satisfied of the matters in sub cll 24.4(b)(i) and (ii) of the IMA.

The asserted affirmation or election – the Settlement Agreement

324 The Settlement Agreement (to which the respondent was a party) contained provisions to the effect that the IMA was extended, that until the coming into effect of the "New Swanston IMA" the respondent would continue to be bound by the IMA as extended, that the IMA would terminate on the commencement of the "New Swanston IMA" and that if no New Swanston IMA came into effect the respondent and the Company would continue to be bound by the IMA: see sub cll 2.2 (a), (c) and (d) of the Settlement Agreement. These matters were agreed subject to the assertion or qualification in cl 2.2(e) that the termination of the IMA on the commencement of the New Swanston IMA would "be for breaches by [the respondent] of the [IMA] which occurred before 22 December 2002."

325 The Notice of Appeal and the submissions of the appellants did not seek to distinguish between the notions of affirmation and election. It is sufficient to deal with the arguments on principles of election. The true nature of election is the making of a choice in the face of two mutually exclusive courses of action: Spencer Bower and Turner The Law Relating to Estoppel by Representation (3^rd Ed, 1977) p 313 cited by Deane J, Toohey J, Gaudron J and McHugh J in Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26, 41. As their Honours said on the following page (p 42) in Immer, when the asserted election is the continuing on of an agreement in circumstances where a right to terminate or rescind has arisen the relevant choice is not whether to go on with the contract or not, but whether to abandon the right to terminate or rescind or not. After referring to passages from the judgments of Kitto J and Mason J in Tropical Traders Ltd v Goonan [1964] HCA 20; (1964) 111 CLR 41, 55 and Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634, 656, respectively, their Honours said that a right to rescind will not necessarily be lost by election or affirmation if the relevant party acts on the basis that the contract remains on foot. Likewise Brennan J at 30 said that the act amounting to the election must be unequivocal and an act may be consistent with the continuance of the contract, but also consistent with the reservation of the right to terminate.

326 Given the continuing satisfaction of cl 5.2(b)(ii) of the Direct Agreement, made relevant to the IMA by cl 11(c)(ii) of the IMA, the respondent had no entitlement to take the step of termination. Also, the respondent was only able to terminate the IMA when the Director was reasonably satisfied of the matters in cl 24.4(b)(i) and (ii). Further, the terms of cl 2.2(e) might be seen to be an express reservation of the entitlement to terminate at some point.

327 On the other hand, even accepting that the respondent’s power to terminate had not crystallised at the date of the Settlement Agreement (whether because of one or both of cl 5.2(b) of the Direct Agreement (read with cl 11(c)(ii) of the IMA) and cl 24.4(b) of the IMA) the Settlement Agreement may be seen as more than merely continuing to perform obligations under the IMA. It involved an extension of the IMA. It provided for the entry into a new agreement between the parties and upon that event occurring the IMA was to cease to have effect. If a New Swanston IMA had come into effect, the IMA would have ended, not because of any act of general law termination on the basis of the matters referred to in cl 2.2(e), but because of the operation of the Settlement Agreement itself. However, a New Swanston IMA did not come into effect.

328 The Director’s consent in cl 2.2(f) of the Settlement Agreement was expressed to be pursuant to cl 4.1(b) of the Direct Agreement and cl 23.5 of the Franchise Agreement. It was not expressed by reference to cl 24.4 of the IMA. Also, it was conditional on the replacement of the Direct Agreement and deed of charge as contemplated by cl 2.4 with new agreements involving the respondent. Such consent by the Director was not the satisfaction envisaged by cl 24.4(b). Clause 24.4(b)(i) involved a satisfaction that it was no longer necessary (implicitly necessary in the public interest being protected by the Director) for the respondent to have the benefit of "the Key Contract". The phrase "Key Contract" picked up the definition in the Franchise Agreement which picked up paragraph 5 in Schedule 16 to the Franchise Agreement:

Any agreement or arrangement for the provision of ... Infrastructure maintenance services.

The Settlement Agreement anticipated the respondent continuing to provide such services under an agreement that fell with this definition.

329 Clause 24.4(b)(ii) of the IMA involved a satisfaction about alternative arrangements for the continued operation of the Franchise Business. This involved, implicitly, in my view, arrangements alternative to those which involved the respondent. Under the Settlement Agreement the respondent continued to be involved. There was thus no satisfaction of the Director for the purposes of cl 24.4(b)(ii).

330 Notwithstanding what might be described as the tension between the provisions of the Settlement Agreement and the exercise of, or the existence of, a suspended right of termination, it must be recalled that for the reasons that I have explained the respondent was not in a position to exercise any such right. It in fact had no present entitlement to terminate. Such an entitlement might never arise. There were circumstances that had occurred in the past which would give it an entitlement to terminate the contract to which it was bound if certain other events occurred. For there to be an election the respondent must be seen to make a choice inconsistent with the maintenance of the potential springing into existence of that right. I do not think that the entry into the Settlement Agreement was such a choice. Though the IMA was extended, the terms of the arrangement, including in particular cl 2.2(e), can be seen to reserve the respondent’s position concerning the Company’s conduct before 22 December 2002. If a New Swanston IMA were to be entered the choice might need to be confronted. It is unnecessary to examine that circumstance as it did not arise.

The asserted affirmation or election - the M>Tram Agreement

331 The M>Tram Agreement provided for the precise contemporaneous occurrence of the following events:

(a)	the termination of the IMA,
(b)	the commencement of the new franchise agreement between the Director and MetroLink,
(c)	the giving of title to the assets and effective possession and operational control of the assets, and
(d)	the commencement of employment by Metrolink of employees of the respondent should they take up the offer.

332 It is important to appreciate that in cl 2(a) of the M>Tram Agreement the Company and the respondent mutually agreed to end the IMA on the commencement of the new franchise arrangement. The evidence disclosed that Completion as defined under the M>Tram Agreement was at 3 am on 18 April 2004. The evidence also disclosed that the receivers ceased to have possession of the assets and operate the business of the Company at the same time, 3 am on 18 April 2004.

333 The parties were agreed on the appeal that up to 3 am on 18 April 2004 (that is, up to the time of the termination of the IMA by the terms of the M>Tram Agreement) the receivers were performing all of the Company’s obligations under the IMA for the purposes of cl 5.2(b)(ii) of the Direct Agreement. Thus, at no point prior to the ending of the IMA by the operation of the M>Tram Agreement did the respondent have an entitlement to terminate the IMA by exercise of any general law right of termination.

334 The IMA came to an end, not because the respondent exercised an antecedently existing general law right to terminate. Such a right, presently exercisable, did not antecedently exist given the terms of cl 5.2(b)(ii) of the Direct Agreement and the performance by the receivers of the obligations under the IMA. Rather, the IMA came to an end by force of an agreement (the M>Tram Agreement) of the parties to the IMA that the IMA should end at the time identified in the M>Tram Agreement. No cause of the termination of the IMA was identified other than the M>Tram Agreement. It was said on behalf of the respondent that the relevant parties to the M>Tram Agreement (the Company and the respondent) agreed that the IMA would terminate at the appointed time "for breaches of the [IMA] which occurred before 22 December 2002": see cl 2(a) of the M>Tram Agreement. This aspect of the contractual agreement between the Company and the respondent in the M>Tram Agreement was not, however, the exercise of a general law right of termination or rescission. It was an agreement to treat the ending of the IMA as an ending for breach of the IMA. That may have given the Company a right to sue under this contract (that is, the M>Tram Agreement), but it did not change the immutable realities that the respondent, at no time, purported to exercise its general law right to end the IMA and that the respondent did not have the right to do so prior to the ending of the IMA, because of the continued satisfaction of cl 5.2(b)(ii) of the Direct Agreement (adopted, as it was, into the IMA) by the receivers, up to the end of the IMA. The instant the disentitling effect of cl 5.2(b)(ii) might be seen to have been removed, the IMA was at an end perforce the agreement between the Company and the respondent. Indeed, the removal of the disentitling effect of cl 5.2(b)(ii) was only caused by the ending of the IMA. Thus, as the appellants submitted, the terms of this aspect of the M>Tram Agreement do not bind the appellants by forcing on them the consequences of an act (acceptance of repudiatory conduct) which did not happen.

335 The above demonstrates that the entry into, and effectuation of, the M>Tram Agreement was inconsistent with the continued existence of the potential future use of a right at common law to terminate the IMA. The entry into, and effectuation of the M>Tram Agreement can be seen as an act of election (as asserted in ground 4 of the Notice of Appeal) or as the IMA in fact being terminated by a mechanism different from, and inconsistent with, an ending of the IMA by the exercise of a general law right to terminate or rescind the IMA (as asserted in ground 8 of the Notice of Appeal). In this respect, I accept the submissions of the appellants.

336 Once it is recognised that the IMA ceased to exist by mutual agreement and not by the act of acceptance of repudiatory conduct, the contingent right became devoid of content, since the agreement, in respect of which the right existed (suspended hitherto by cl 5.2(b)(ii)), has been ended by agreement. In order to overcome this the respondent must, as the appellants submit, treat cl 2(a) of the M>Tram Agreement as something that it was not – the ending of the IMA by the acceptance of repudiatory conduct.

337 The above analysis does not involve an acceptance of the proposition that the relevant satisfactions of the Director contemplated by cl 24.4(b) were not manifested by the circumstances surrounding the M>Tram Agreement. The Director was a party to the M>Tram Agreement. The consent implicit in that participation must be seen to be to the respondent no longer providing the infrastructure maintenance services under the extended IMA and to MetroLink thereafter providing such services in the operation of the Franchise Business to be taken over by MetroLink.

338 The appellants assert that the Director’s consent to the new arrangements did not meet the description of the requirements of cl 24.4(b)(i) and (ii) of the IMA. It is hard to understand why it did not. Clause 24.4(b) of the IMA did not call for any particular manifestation of satisfaction. It calls for a state of satisfaction in respect of two matters. It seems to me that implicit within the Director’s participation as a party to the M>Tram Agreement was the satisfaction by him that circumstances described in sub cll 24.4(b)(i) and (ii) of the IMA existed.

339 Viewing the matter in the way I do, notions of accord and satisfaction are irrelevant. The fact is that the Company and the respondent agreed to terminate the IMA. They agreed to terminate it for breach by the Company committed prior to 22 December 2002. That may mean that the Company has agreed to put itself in a contractual position based on that hypothesis. It does not, however, mean that the IMA was ended by the exercise of a general law right of termination. The right to terminate never emerged from the disentitling bonds of cl 5.2(b)(ii) before the IMA was ended. The general law right to terminate was never exercised. The operative mechanism of ending the bilateral contractual arrangement, being the IMA, was the contractual arrangement being the M>Tram Agreement.

The legal position of the parties in the events that have happened

340 Thus, the position of the parties as at 23 December 2002 was that the Company had committed a breach of an essential term of the IMA and had evinced an intention not to be bound by the IMA according to its terms. Subject to the IMA, the respondent would from those circumstances have had a general law entitlement to terminate the IMA. The balance of the terms of the IMA prevented that right being exercised, or disentitled the respondent from exercising it, whilst and unless certain circumstances existed (cl 5.2(b) of the Direct Agreement made relevant by cll 11(c)(ii) and 24.4(b) of the IMA).

341 Plainly those circumstances might arise. Therefore, there is no doubt, it seems to me, that there was a contingent claim, and not merely an expectancy as at 23 December 2002: Lam Soon at 41-44. It is unnecessary to deal with the questions whether the primary judge’s distillation of what the Full Court said in Lam Soon was accurate for all purposes and whether Lam Soon was, in any respect, wrong.

342 Whilst there was a contingent claim as at 23 December 2002, for the reasons I have expressed, after 3 am on 18 April 2004, the capacity to terminate the IMA became devoid of both content and value because the IMA otherwise ended by agreement of the parties.

343 Thus, at 1 September 2003, the respondent had a contingent claim, though on 18 April 2004 (at least after 3 am on that day) the claim no longer existed. It might be said only to have had its value affected, but that is too limited a view. The contingent claim was founded on the possibility that circumstances would come to pass allowing the respondent to terminate the IMA on the grounds which came into existence prior to 22 December 2004. After 3 am on 18 April 2004, that possibility no longer existed. The claim thereafter had no foundation. It could be seen no longer to exist, and not merely to have no value.

344 The application was made to the Court before 18 April 2004. The application was disposed of by the primary judge after 18 April 2004. His Honour directed that the proof be admitted in full. That was not an order or declaration that as at 22 December 2002 or as at the date of the lodgement of the proof the respondent had a contingent claim. Rather it was a direction that the appellants admit the respondent’s contingent claim as part of their then current obligations under the DOCA.

345 For the reasons I have expressed, as at 7 September 2004, the contingent claim no longer existed. Thus, it should not have been directed, at that time, to have been admitted.

346 The parties were in substantive dispute as to the current position. Whilst it may be that an essential step in the analysis of that was the assessment of whether a contingent claim existed as at 22 December 2002, the parties were not fighting about a matter of historical interest, but about present entitlement. The orders should reflect that reality.

Orders

347 For the above reasons the orders that I would make are:

(a)	The appeal be allowed.
(b)	The direction and order made by the Court on 7 September 2004 be set aside.
(c)	In lieu thereof it be ordered that:
(i)	the application be dismissed; and

(ii) the plaintiff pay the defendants’ costs.

(d)	The respondent pay the appellants’ costs of the appeal.

I certify that the preceding one hundred and ninety two (192) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate:

Dated: 30 March 2005

Counsel for the Appellants:	A C Archibald QC with P D Crutchfield
Solicitor for the Appellants:	Clayton Utz
Counsel for the Respondent:	J W K Burnside QC with E W Woodward
Solicitor for the Respondent:	Hunt & Hunt
Date of Hearing:	15 November 2004
Date of Judgment:	30 March 2005