Aggressive and threatening conduct results in the immediate termination of a subcontract
 
Many standard form building contracts include a termination regime which expressly preserves the common law right to terminate for breach.  This was not the case in the decision MacDonald  & Co v Kharty [2026] VSC 336.
 
MacDonald & Co (Mac & Co) engaged Kharty (KPG) to carry out works including concreting and piling in respect of an early learning centre.  Disputes arose as to quality and sequencing of works, delays in payment and a significantly inflated back charge invoice.   An altercation occurred at a meeting at Mac & Co’s offices to discuss ongoing issues.  Some months earlier Mac & Co had put a proposal to end the subcontract and agree a final account.  KPG declined.
 
After hearing the contested evidence of the six attendees, and a further Mac & Co employee who was located near the meeting room at the time of the altercation, the Court found that KPG’s director had punched the meeting room table, followed one of Mac & Co’s directors down a corridor, yelling abuse and swearing, and threatened Mac & Co’s chief financial officer with the words, “I’ll remember your face.  You better watch your back”.   Later the same day Mac & Co’s solicitors forwarded a letter to KPG purporting to terminate the subcontract at common law on the ground of repudiation.

The contract terms included a regime for termination for substantial breach upon the giving of a show cause notice which embedded certain rights and protections for both parties (ability of KPG to show cause; ability of Mac & Co to terminate without fault even if Mac & Co failed to comply with the show cause regime ).  The Court noted that the contractual ground for termination (the existence of a substantial breach) was different to that required by the common law.
 
The question arose whether the subcontract restricted or limited Mac & Co’s ability to terminate at common law.  The Court referred to the judgment of Gleeson CJ, Gummow, Heydon and Crennan JJ in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 (Koompahtoo).  The term repudiation can be used in two different ways.   First, to refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract, that is a renunciation either of the contract as a whole or of a fundamental obligation under it.    Second, where there is a breach of contract which justifies termination.  Such breaches are classified into two categories – (a) a failure to comply within an essential term, (b) a sufficiently serious breach of a non-essential term.
 
The Court found that objectively construed the intention was for the contractual termination regime to replace Mac & Co’s common law rights of termination for breach (repudiation in the second sense identified in Koompahtoo) but the regime did not deal with the case of renunciation, that is, repudiation in the first sense identified in Koompahtoo.   In cases of renunciation the right to terminate is not assessed by reference to the criterion and language of breach, which may involve a legal question, but by reference to the entirely factual characterisation of the conduct.

The Court found that KPG’s conduct was such as to convey to a reasonable person in the situation of Mac & Co renunciation either of the contract as a whole or of a fundamental obligation under it.
 
An ongoing and prospective threat to the physical safety of a staff member of KPG’s contractual counterparty was a disavowal of the fundamental term of the subcontract to act reasonably in the carrying out of the subcontract works.  It fundamentally undermined the relationship of trust and confidence required to continue the carrying out of the works and demonstrated that KPG was not prepared to take its obligation to carry out the works in good faith seriously.
The Court also found that the director’s conduct constituted a breach of clause 2 of the subcontract which provided that KPG must, with good faith, carry out and complete the works.  The obligation of good faith attached not only to the completion of the works but the manner of its performance which included the discussions at the meeting.

The Court also noted that it would have been open to Mac & Co to terminate the subcontract in accordance with the contractual regime by issuing a notice of substantial breach, suspending the works pursuant to clause 44 of the subcontract and thereafter terminating upon the expiration of the five day notice period.
 
The termination regime notice requirements in building contracts are intended as a matter of fairness to provide an opportunity to respond, including to rectify any default.  Where the contract does not preserve the common law right to terminate, careful consideration must be given to whether there are grounds to bypass the contract and terminate at common law on the basis of renunciation.

Graeme Hellyer and Jane Lindgren
 
Liability limited by a scheme approved under professional standards legislation