Repudiatory breaches and ability to terminate contract

In Telford Homes (Creekside) Ltd v Ampurius NU Homes Holdings Ltd [2013] EWCA Civ 577, the Court of Appeal confirmed that an actual breach of contract that could potentially amount to a repudiatory breach may be capable of remedy before the innocent party purports to terminate the contract, meaning that the breach is not repudiatory and that the innocent party’s right to terminate the contract does not arise. In such a case, the actions of the party in breach between the date the breach occurred and the date the innocent party purported to terminate the contract will be taken into account by the court.

Background

In 2008, the parties entered into an agreement under which the respondent property company, Ampurius NV Homes Holdings Ltd (Ampurius) agreed to take 999-year leases of four blocks being developed by the appellant construction company, Telford Homes (Creekside) Ltd (Telford). The development was to be completed in two stages, with two blocks being completed in July 2010 and a further two blocks being completed in February 2011.

As a result of funding difficulties, Telford suspended construction work on two of the blocks in June 2009 and allowed progress on the other two blocks to slip (the first two blocks were completed in January and April 2011 respectively). After 15 months of negotiations with Telford, in October 2010, Ampurius alleged that the suspension of the construction works was a repudiatory breach of the contract as Telford had not carried out the works with due diligence and had not used reasonable endeavours to procure completion by the target dates, as was required under the contract. Unbeknownst to Ampurius, two weeks before they gave notice to terminate the contract, Telford had resumed work on the development. The High Court held that the appellant’s delay amounted to a repudiatory breach of the contract which occurred in July 2010, the first of the target dates that was missed, because at that point it was clear that the target dates would not be met. Telford appealed.

Telford’s Arguments

Telford argued that the judge had not sufficiently assessed the intended benefit of the contract to Ampurius in order to decide whether the breaches of contract had deprived Ampurius of a substantial part of that benefit. Telford further argued that the judge had chosen the wrong date on which to determine whether there was a repudiatory breach of contract.

Court of Appeal – Test for Repudiatory Breach

Applying the dicta of Diplock LJ in Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26, the Court of Appeal held that previous cases had used as the relevant test whether the breach had deprived the injured party of “substantially the whole benefit” of the contract, which is the same test as that applicable to frustration, so the bar is set high. The court also referred to other cases where the question posed by the court was whether the breach deprived the “injured party of a substantial part of the benefit to which he is entitled under the contract”. On the face of it there is a tension between whether the breach deprives the innocent party of “substantially the whole benefit” or “a substantial part of the benefit”. However, the Court of Appeal referred to the dicta of Lord Wilberforce in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757 where he held that the difference between the two tests does not reflect a divergence of principle, but represents “applications to different contracts, of the common principle that, to amount to repudiation a breach, must go to the root of the contract”.

The Court of Appeal held that, regardless of which test one adopts, the starting point is to consider what benefit the injured party was intended to obtain from the performance of the contract. The next step is then to look at the effect of the breach on the injured party, such as: What financial loss it has caused? How much of the intended benefit has already been received by the innocent party? Can the innocent party be adequately compensated? Is the breach likely to be repeated? Will the guilty party resume compliance with his obligations? Has the breach fundamentally changed the value of future performance of the guilty party’s outstanding obligations?

The benefit that Ampurius intended to obtain from the performance of the contract was four 999-year leases of the blocks. The judge at first instance appeared to view the four blocks as a single project and concluded that Ampurius would only receive two of the four blocks within a reasonable time. The judge focused on the difficulties caused to Ampurius by only receiving two of the blocks whilst construction of the other two blocks continued. The Court of Appeal found that the judge had overstated the possible problems caused by the delay as the contract in fact envisaged a two-stage handover and seven months of interference whilst two of the blocks were complete but construction continued on the other two. Even if the contract did not provide for a staged handover, the interference caused by the delay was not of such a great magnitude extent as to fall into the category of repudiatory breach.

The court considered the hypothetical case where all four blocks were delivered one year behind schedule. As Ampurius would still obtain the four leases it contracted for, the court said that a delay of one year in the context of 999-year leases did not deprive Ampurius of a substantial part of the benefit they were intended to receive.

A further relevant factor was that, as at the date Ampurius purported to terminate the contract, it had accepted that the delay had not caused it any actual loss, only that it would cause loss in the future. The court held that it would be unusual for a breach that caused no loss to amount to a repudiatory breach. In a situation where no actual loss is caused, the loss the injured party was seeking to avoid by accepting the alleged repudiation should be considered. In the present case, the damage that would have been suffered by Ampurius by waiting for the completion of the second two blocks would have been GBP 100,000.00, a figure representing the costs of Ampurius funding its original deposit and purchase price for an additional six months, which in the context of a GBP 100 million development was not large enough to be characterised as a repudiatory breach. Further, it was relevant that as the damages were calculable, Ampurius could have been adequately compensated.

Date to Apply the Test

At first instance, the judge found that the repudiatory breach occurred in July 2010 when it became clear that the target dates would not be met and applied the test at this time. As a result of this, the judge did not take into account the actions of Telford restarting construction after July 2010. The Court of Appeal held that the judge had applied the test at the wrong date.

The correct date for assessing whether a breach is repudiatory is the date when the injured party purports to terminate the contract on the grounds of the breach, even in a case of actual rather than anticipatory breach. The court again referred to Diplock LJ in Hong Kong Fir Shipping where he said that the court had to “look at the events which had occurred as a result of the breach at the time at which the [innocent party] purported to rescind the [contract]”.
The date at which the test should be applied is important because it goes to the question of whether a party in breach can remedy that breach before it is accepted as terminating the contract by the innocent party.

The court referred to the judgment of Rix LJ in Stocznia Gdanska SA v Latvian Shipping Company [2002] EWCA Civ 889 where he held that “as long as the contract remains alive, the innocent party runs the risk that…the party in breach will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract”.

Roth J had taken the position that a party in breach could cure an anticipatory breach, but not an actual breach and as the breach in the present case was an actual breach it could not be cured. However, the Court of Appeal held that the same test applied to both anticipatory and actual breaches with the result that actual breaches could also be cured.
Therefore, a breach of contract that could amount to a repudiatory breach may be capable of remedy before the innocent party purports to terminate the contract. In such a case, the actions of the party in breach between the date the breach occurred and the innocent party terminating the contract will be taken into account.

Similarly, if there is a delay in performance of any ongoing obligation, the party in breach may make up the delay by faster performance in which case the court may find that there is no repudiatory breach.
In the present case Ampurius did not purport to terminate the contract until 22 October 2010, but by that time work on the blocks had been restarted so it could no longer be said that the cessation of work was indeterminate and prolonged as the judge at first instance had said.

The judge had applied the test at the wrong time and did not give adequate weight to the intended benefit that Ampurius was due to receive under the contract. The delay and damage suffered by Ampurius, when considered in the context of 999-year leases, did not deprive Ampurius of substantially the whole benefit of the contract or even a substantial part of that benefit so could not be classified as repudiatory.

Comment

This case is interesting for the way the court assesses whether a breach is significant enough to amount to a repudiatory breach and for demonstrating that such breaches can be remedied, regardless of whether the breach is actual or anticipatory.

When assessing the gravity of the breach, the court will look at the entirety of the commercial agreement between the parties and any steps taken to remedy the breach when deciding whether the innocent party can terminate the agreement on the back of the breach. The innocent party should therefore be aware that if the breach is of a continuing obligation, any actions of the defaulting party to make up for its breach that occur before the innocent party purports to terminate the contract will be taken into consideration by the court. If the actions of the defaulting party are sufficient to remedy the breach or mean that it is no longer repudiatory, the right to terminate may have been lost. The innocent party should therefore monitor the actions of the party in breach if it wishes to take its time in deciding whether to terminate the agreement to ensure its right to do so is not lost.
One way to deal with any uncertainties over whether an innocent party can terminate a contract following certain breaches is to deal with the question when negotiating the contract. The parties can include provisions in the contract detailing in what circumstances the contract can be terminated, thus avoiding any arguments over whether a breach is repudiatory or not.

When an innocent party becomes aware that a repudiatory breach has been committed, it is put to election and the innocent party can either accept the repudiatory breach and terminate the contract or affirm the contract by continuing to perform its obligations under it. If the innocent party wishes to take time to decide whether to terminate a contract, it should be careful that its actions do not amount to an election to affirm the contract with the result that it will lose its right to terminate the contract based on the repudiatory breach. Note that a non-waiver clause may be ineffective to preserve a right to terminate (see Tele2 International v Post Office Ltd [2009] EWCA Civ 9, February 2009 Litigation Review).

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.