WHEN THREATENING CONDUCT BECOMES A BREACH OF CONTRACT
The Supreme Court of Victoria’s decision in MacDonald & Co v Kharty [2026] VSC 336 shows where threatening conduct in a commercial relationship demonstrates an unwillingness to perform a fundamental contractual obligation, it may justify immediate termination.
Background. MacDonald & Co Construction Pty Ltd (“Mac & Co”) engaged Kharty Property Group Pty Ltd (“KPG”) under a written subcontract for works relating to the construction of an early learning centre (Judgment [2]).
During a meeting at Mac & Co’s office on 19 March 2025, KPG’s representative punched the meeting table twice, moved angrily around the office, followed Mr MacDonald down a corridor while yelling abuse, and swore and gesticulated at staff. The representative also told Ms Nguyen, an employee of Mac & Co, “I’ll remember your face. You better watch your back” (Judgment [189]).
Mac & Co terminated the Subcontract immediately without first following its contractual show cause procedure (Judgment [10], [124]).
Why did the conduct amount to breach? In summary, the Court found that the conduct was aggressive and threatening, and in respect of the statement made to Ms Nguyen, “objectively unreasonable and inappropriate behaviour” (Judgment [189]).
This led the Court to find that the conduct breached clauses 2 and 85(c) of the Subcontract (Judgment [190]).
Clause 2 provided as follows: “The Subcontractor must with good faith carry out and complete the Subcontract Works in accordance with the Subcontract in a proper and workmanlike manner and to the satisfaction of the Builder.”
Clause 85(c) provided as follows: “85 The Subcontractor warrants that … (c) the Subcontract Works and every part thereof will be carried out and completed in accordance with good and safe work practices and so as to comply strictly with this Subcontract”.
The Court held that Clause 2 was an essential term and that the obligation to carry out the subcontract works in good faith was also a fundamental contractual obligation (Judgment [190], [200], [205] – [208]).
Usual content of the obligation of good faith. In doing so, the Court held that the “usual content of the obligation of good faith” that would be applicable would be as follows (Judgment [200]):
“[A]n obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.”
The Court found that the meeting on 19 March 2025 was intended to deal with “the manner of performance of the Subcontract Works”, and hence, clause 2 operated such that KPG was obliged to “… act reasonably and with fair dealing having regard to the interest of the parties” (Judgment [206]).
This connection between conduct and contractual performance was critical. The Court found that the conduct of KPG was such that “… a reasonable person in the position of Mac & Co would have understood … that KPG would not perform the fundamental obligation of good faith in carrying out the Subcontract Works” (Judgment [192]).
The Court gave particular weight to the conduct with respect to Ms Nguyen. The Court found that the words used “would have implied to a reasonable person in Mac & Co’s position that a staff member was not safe” and might remain at risk of future harm (Judgment [192]).
Given the above, the Court considered that an ongoing threat to the physical safety of an employee of a contractual counterparty disavowed the fundamental obligation to act reasonably when carrying out the subcontract works. It also “… fundamentally undermined the relationship of trust and confidence required to continue the carrying out of the Subcontract Works” (Judgment [193]).
As such, the Court held at Judgment [207] that “[i]n acting though [its representative] at Mac & Co’s offices in the manner [the Court had] found, KPG acted unreasonably and in breach of clause 2 of the Subcontract.”
Why was immediate termination available? Given the above, the Court held at Judgment [192] that “… a reasonable person in the position of Mac & Co would have understood as a consequence of KPG’s aggressive and threatening conduct that KPG would not perform the fundamental obligation of good faith in carrying out the Subcontract Works.”
The Court therefore held that the conduct therefore amounted to renunciation, and Mac & Co was entitled to terminate immediately on 19 March 2025 (Judgment [194], [248]).
Practical implications. The decision shows that workplace behaviour can become a contractual issue where cooperation, reasonableness and good faith are fundamental to performance. Threats against employees may undermine the trust and confidence required to continue a commercial relationship.
At this juncture, it is worth setting out the excerpt from paragraph 30 of Buchmueller v Allied Express Transport Pty Ltd [1999] FCA 319 referred to at Judgment [187]:
“If a contract for the provision of services is to be efficacious, there must be an express or implied term as to the conduct of each party towards third parties to the extent that such conduct may affect the other. If one party is abusive towards or threatens an employee of the other, it is likely to be highly disruptive of the relationship between the parties and of the business of each of them. If one party demonstrates a propensity to such behaviour it will be difficult for the relationship to continue. A threat of physical violence is inevitably so disruptive as to make it most unlikely that the persons concerned can continue to work together in a co-operative and trusting way. I conclude that it was an implied term of the contractual arrangements between the parties in this case that in the event of significant misconduct by either in the course of their joint business, the other could immediately terminate their relationship. The applicant's conduct was such as to justify his termination in this case. It would be unreasonable to expect the respondent to continue to allow the applicant to deal with clients on its behalf, once it knew that he responded to stress in business relationships by threatening violence. In those circumstances, no question of payment in lieu of notice arises. It is not necessary for me to consider that matter further.”
(emphasis added in the Judgment)
Businesses should respond promptly to serious incidents and preserve reliable evidence. Contemporaneous notes, witness accounts, correspondence and available recordings may be critical because renunciation is assessed objectively by asking what the conduct would convey to a reasonable counterparty.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.