Was a breach serious enough to justify termination?
TELFORD HOMES v AMPURIUS NU HOMES (CA) [2013]
The Court of Appeal (CA) overturned the earlier ruling of the High Court (HC) and held that a delay of several months in delivering a commercial development due to funding difficulties did not amount to a breach serious enough to justify termination of the contract in the context of the project as a whole.
Facts:
- The facts are as we reported in September 2012 and related to a contract the parties entered into in October 2007 for the development of four blocks of commercial properties.
- ANH maintained that T was in breach of its ‘due diligence’ and ‘reasonable endeavours’ commitments. T claimed that ANH had delayed too long in seeking to terminate and had affirmed the contract.
- The HC judge found that T’s breach was serious enough to entitle ANH to terminate the contract and sue for damages (ie it was a repudiatory breach) because it had stopped work, which was contrary to its obligation to proceed with due diligence.
- T appealed.
Decision:
- T’s appeal was successful. Whilst it was agreed that its delay in carrying out the works to blocks A and B and the deliberate decision to put the works on hold amounted to a breach of contract, the CA held that the HC had been wrong to find that T was in repudiatory breach. ANH had therefore not been justified in terminating the contract.
- The CA said it had to look at:
- whether the breaches were serious enough to amount to a repudiation of the contract;
- the position as at the date of purported termination of the contract; and
- any steps taken by T to remedy the accrued breaches of contract.
- The Court found as follows:
- Repudiatory breach
The test for repudiatory breach has historically been whether the injured party is deprived of ‘substantially the whole benefit’ under the contract or deprived of ‘a substantial part of the benefit it was intended to receive’ under the contract. Other cases have referred to breaches ‘going to the root of the contract’. Here, the Court considered that the benefit which ANH was intended to receive was a leasehold interest of 999 years’ duration in four blocks.
- In this case the CA made it plain that it did not like these different ‘metaphors’ of the test for repudiatory breach. Instead the Court said that it had to look at the effect of the breach on the injured party including:
- its financial loss;
- how much of the intended benefit under the contract it had already received;
- whether it could be adequately compensated by an award of damages;
- whether the breach was likely to be repeated;
- whether the guilty party would resume compliance with its obligations; and
- whether the breach had fundamentally changed the value of future performance of the guilty party’s outstanding obligations.
- The Court said that the effect of the breach was to increase the gap between the handover of blocks C and D and the handover of blocks A and B by six months. As the contract itself contemplated a gap of seven months which then became 13 months, there was no real loss to ANH. It was only deprived of one year out of the 999 year leases and this was not considered to be a substantial part of the benefit it was intended to receive.
- Looking at the kind of loss that ANH might be expected to suffer on the assumption that it was unable to market blocks C and D until A and B were completed, the additional funding required would have been about £100,000. These costs were readily calculable; and ANH could have been compensated in damages or by way of set-off against the purchase price. Set against a purchase price of over £8 million, and in the context of an overall development cost exceeding £100 million, this was not a loss of a scale of magnitude sufficient to warrant characterising the breach as repudiatory.
- Position at termination
The CA said the HC should not have looked at the position at the date of the breaches but at the date of termination - when ANH sought to terminate the contract, work on blocks A and B had been restarted. This principle applied to actual breaches as well anticipatory breaches. So when determining whether a breach is repudiatory, the Court will look at the position at the date of termination and will take into account any steps taken by the guilty party to remedy the accrued breaches of contract.
- Steps to remedy
At the date of termination, the delay that had already occurred had caused ANH no loss. Whilst future delay was likely to require ANH to fund deposits and the balance of the purchase price for blocks C and D for longer than it would otherwise have had to have done, T had offered to defer the completion of the purchase of blocks C and D, thus neutralising much of that expected loss. In addition, T had made strenuous (and successful) efforts to find the necessary funding and was committed to finishing the whole project.
- Repudiatory breach
Points to Note:
- Terminating for a serious or repudiatory breach is a right which exists independently under the general or ‘common’ law rather than under the express terms of the contract itself. This case provides some helpful guidelines for what is required to be able to do this but it confirms that the bar for the test for repudiatory breach remains extremely high and it can be difficult to show that a substantial benefit of the contract intended to be received has been denied sufficient to warrant termination. The best thing to do is to expressly state in the contract which levels of non-performance could trigger termination and what the financial and other consequences of that termination are to be. There was no discussion in the case report of any expressly agreed termination provision so one can only assume the agreement for lease was silent on that point.
- In determining whether a breach is repudiatory, it is necessary to look not just at the conduct of the guilty party at the date of breach and any remedial steps taken after a breach but also the conduct at the date of termination. Also, it seems a party can remedy an actual repudiatory breach, whereas previous cases had indicated that only a threatened repudiatory breach could be remedied.
- By purporting to terminate when it did not seemingly have the right to do so, the innocent party becomes the party in breach and may be liable for damages. Therefore any decision to terminate must be taken extremely carefully.