Insolvency trumps loss of bargain claim

Recent Court of Appeal case demonstrates that a claimant’s insolvency can be a remedy for a claim of damages flowing from repudiation of a contract.

Insolvency trumps loss of bargain claim

The recent Court of Appeal case of the Gilligan ‘s Backpackers Hotel & Resort Pty Ltd & Anor v Mad Dogs Pty Ltd [2016] QCA 304 demonstrates that a claimant’s insolvency can in some cases be a remedy for a claim of damages flowing from repudiation of a contract.

 

Facts

    • Gilligan ‘s Backpackers Hotel & Resort Pty Ltd (GBH) owned and operated a hotel in Cairns
    • Mad Dogs Pty Ltd (Mad Dog) operated a food and cartering services business
    • GBH repudiated a three year supply contract with Mad Dog by wrongfully terminating the contract;
    • Mad Dog subsequently terminated the contract and sued GBH for damages for repudiation;
    • Mad Dog was successful in the Supreme Court and was given judgment in the amount of $351,193.57 for loss of its bargain.

 

Was Mad Dog ready willing and able to perform the contract?

GBH did not dispute that it had repudiated the contract or that Mad Dog was entitled to terminate the contract.  However on Appeal GBH argued that Mad Dog should not have been awarded any damages for loss of its bargain due to GBH’s wrongful termination of the contract, because Mad Dog was insolvent at the date of termination and therefore was not ready, willing and able to perform the agreement. GBH also relied on s 588G of the Corporation Act 2001 (Cth), which provides that a director of an insolvent company has a duty to prevent the company from incurring more debt.  A director who is aware or on reasonable grounds suspects insolvency, also contravenes s 588G and is guilty of an offence, if he or she allows the company to incur further debt.  Both parties accepted that Mad Dog would naturally have incurred further debt if it continued to perform the contract.  Therefore, if Mad Dog was insolvent, it was unable to lawfully conduct its business.

 

Mad Dog was Insolvent

The Court of Appeal overturned the court at first instances judgment and found that Mad Dog was insolvent at the date of termination.  It follows that Mad Dog was therefore not able to perform the agreement.  Accordingly, Mad Dog was also not entitled to any damages for the loss of its contract.  This case serves as reminder for defendants that the solvency of a claimant is an important factor to consider in determining whether a party is ready willing an able to perform the contract.

 

For more information regarding insolvency

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