MacDonald & Co v Kharty [2026] VSC 336

Owen Cooper  |  Skye Lu

Key takeouts

• Threatening conduct during a commercial relationship can amount to renunciation of a contract if, viewed objectively, it shows an unwillingness to perform a fundamental contractual obligation or destroys the trust and confidence needed for continued performance.
• A detailed contractual termination regime (such as a show cause process) may displace a party’s common law right to terminate for breach but will not necessarily exclude termination for renunciation. Parties who intend to preserve common law termination rights for breach should do so expressly.
• An express obligation to carry out work in good faith may extend beyond physical construction work to include meetings, negotiations and discussions about how the work will be performed.

Facts

MacDonald & Co Construction Pty Ltd (Mac & Co) engaged Kharty Property Group Pty Ltd (KPG) under a subcontract for concreting, excavation, piling and related works for an early learning centre in Burwood East, Victoria.

By March 2025, the project was under strain. The parties were in dispute over defects, delays and outstanding work. They met at Mac & Co’s office on 19 March 2025 to discuss the remaining scope and proposed solutions.

The meeting broke down. KPG’s general manager punched the boardroom table twice, followed Mac & Co’s director through the office while shouting abuse, swore and gestured at staff, and told Mac & Co’s chief financial officer: ‘I’ll remember your face. You better watch your back’.

Mac & Co terminated the subcontract that afternoon. It did not use the contractual show cause process specified in the contract, which would ordinarily have required written notice and an opportunity for KPG to respond before termination.

KPG later served a payment claim under Victoria’s security of payment legislation. An adjudicator awarded KPG $204,583 including GST. Mac & Co challenged that outcome, arguing that the payment claim had no valid reference date because the subcontract had already been terminated.

Decision

The Supreme Court of Victoria held that Mac & Co had validly terminated the subcontract on 19 March 2025 for renunciation. Because the subcontract had been effectively terminated before the payment claim was served, there was no valid reference date, and the adjudication determination was invalid.

The reasoning turned on three questions:

1. did the contractual termination process replace or augment Mac & Co’s common law right to terminate for breach;
2. if so, did that displacement extend to termination for renunciation; and
3. did KPG’s conduct in fact justify termination on that basis?

The show cause process was mandatory for substantial breach

The subcontract contained a detailed process for dealing with a ‘substantial breach’, under which Mac & Co could issue a notice requiring KPG to explain or remedy the breach. If KPG did not do so, Mac & Co could take the work out of KPG’s hands or terminate the subcontract.

The Court found that this process replaced Mac & Co’s common law right to terminate for breach. Several features of the subcontract pointed to that result: the process gave KPG an opportunity to respond, set out what would happen if termination was later found to be improper, and sat alongside separate insolvency provisions that expressly preserved other rights and remedies. The absence of similar wording in the substantial breach provisions pointed towards an intention to exclude common law rights.

The contractual process did not cover renunciation 

The Court drew a distinction between a ‘substantial breach’ (which triggers the show cause process) and renunciation (conduct that objectively demonstrates a party is no longer willing to honour the contract, or a fundamental obligation under it).

The show cause process was designed to deal with breach, but not with renunciation. Mac & Co therefore retained the right to terminate immediately if KPG’s conduct amounted to renunciation of the subcontract.

The threats undermined a fundamental obligation 

The subcontract required KPG to carry out and complete the works in good faith. The Court held this was an essential term and that the obligation extended beyond physical construction work to meetings and negotiations about how the work would be performed.

The threat to the chief financial officer was especially important because it was forward-looking and suggested an ongoing risk to her safety. Viewed objectively, the aggressive and threatening conduct showed that KPG would not perform its fundamental obligation to act in good faith. It also destroyed the trust and confidence needed for the parties to continue working together.  KPG’s conduct therefore amounted to renunciation and Mac & Co was entitled to terminate immediately without following the contractual show cause process.