Termination for material breach
MOUNTWEST 838 v BACKMUIR TRADING [2012]
Some useful help was provided in this decision on when a breach of contract is considered material, whether that breach is capable of remedy and what is required for a notice to terminate a contract to be effective.
Facts:
- The parties entered into an agreement granting M an option to develop a wind farm on B’s property. M was obliged to provide B with copies of proposed planning applications for comment before submission to the planning authority and to consider B’s representations.
- M submitted a planning application to the relevant authority without sending B a copy. Consequently, B sought to terminate the contract in accordance with its provisions. B could terminate:
- on notice if M failed materially to perform its obligations and such failure was incapable of being remedied; or
- if the breach was capable of remedy, but M had not remedied the failure following a written notice specifying the failure and requiring it to be remedied within a reasonable time as specified in the notice.
- B therefore wrote to M requiring it to remedy its failure “if it is capable of being remedied” and to provide a copy of the planning documents within 21 days. M provided the documentation within this timeframe and also offered to take B's representations into account and, if necessary, to amend the application.
- Subsequently, B served a formal notice of termination on M stating that it had failed to remedy the breach on the basis that the planning documents were provided after the planning application had been submitted. In error, the notice did not refer to the correct date of the initial letter requiring the failure be remedied.
Decision:
The Scottish Court was required to answer three questions:
- Was there a material breach? Yes - the Court held that M’s failure to send a copy of the planning permission to B was a material breach as although the whole purpose of the contract was to develop a wind farm, it was a key mutual intention of the parties that B wanted to be involved in the planning process at the pre-application stage since it would significantly affect its property. This is why the parties had agreed a requirement for M to send planning applications in advance to B to enable it to submit comments if it wanted to. The Court therefore said that M’s failure to comply with the relevant provision “deprived [B] of an important right which went to the root of the agreement”.
- If the breach was material, was it remediable? Again yes -
- the breach was found to be capable of remedy as the planning application was at an early stage and the local planning committee had not considered it at the time the breach occurred;
- the Court also looked at the issue of whether the breach was remediable in another way - was the ‘mischief’ created by M's omission cured? Although the fact of the breach occurring cannot be undone, the Court found that the breach was adequately remedied. B had asked for the documents which M had then supplied. If B had wished to insist on M withdrawing its application and beginning the process again, that was a simple message to convey. B could have easily and clearly set this out in its letter. Instead B did not indicate any steps other than the supply of documentation which M had complied with.
- Did B serve a valid notice of termination? No, it had not served a valid notice of termination for an ‘irremediable’ breach. If it had intended to do this its letter should have been expressed in more definite terms rather than leaving it open as to whether or not the failure could be remedied. It was inconsistent to give M a timescale within which it had to supply the planning documentation and then later claim that the breach could not be remedied. The Court also said that in such an important matter as a termination notice it was critical that all dates referred to should be accurate.
The Court also considered whether the contract was affirmed. It rejected T's submission that A's delay in ending the agreement meant A had affirmed the contract, saying that for this to have been the case, there must be very clear evidence that the injured party has indeed elected to continue with the agreement. A had conducted prolonged negotiations with T in the interim period (without prejudice to its entitlement to terminate) and this was perfectly legitimate and did not amount to affirmation. The Court emphasised that this was an ongoing, continuing breach by T which could still be used by A as a basis to terminate. The position may well have been different in relation to a once and for all, one-off breach.
Points to Note:
- The Court provided some useful guidance regarding termination of a contract for material breach. In determining materiality the Court’s starting point was to look at the whole contract and the purpose of the provisions in question. Although earlier cases have focussed on the consequences of the breach in assessing materiality, the Court here said that was not the sole measure. In this sense the case is relatively exceptional.
- As there is no precise legal definition of ‘material breach’, deciding whether a particular breach is ‘material’ under a contract is difficult. Although not particularly relevant to the facts of this particular decision, there may be circumstances where it might be worthwhile stating expressly where the threshold of ‘materiality’ lies.
- It is important to be definitive if a breach is considered to be incapable of being remedied. Note however, that the vast majority of breaches are capable of being adequately remedied in a legal sense (breach of confidentiality is the most often cited exception).
- If an injured party requires a breach to be remedied and indicates in the notice what will be regarded as an effective remedy, it is not then possible to subsequently argue that something more was required.
- The case is also a useful reminder that it is essential that termination notices contain correct date references and are properly addressed and served in accordance with contractual notice clauses. Any notice to be served under an agreement should always be carefully checked to ensure that it is strictly in accordance with the terms of the contract and cannot be declared invalid on that basis.