Wrongful termination amounted to repudiatory breach
Digital Capital v Genesis Mining Iceland (High Court) [2021]
Purporting to terminate a contract is a very serious step and not one to be undertaken lightly. Terminating wrongly can have very serious consequences and lead to a defaulting party being able to escape from an onerous contract. Remember also to consider that common law rights to terminate for very serious ‘repudiatory’ breaches may exist alongside express rights.
Facts:
This was a dispute arising out of an agreement for the provision of certain regulatory and software services related to cryptocurrency payments. Each party alleged that the other had repudiated the agreement. The service provider, Digital Capital, claimed for payment of certain invoices allegedly payable under the terms of the agreement. The customer, Genesis Mining, who had stopped paying Digital Capital’s invoices, alleged that the service provider failed to provide the services which it had contracted to provide and therefore it was not obliged to pay the invoices in question and was also entitled to recover payments previously made on grounds of a total failure of consideration. The service provider denied that it was in breach of the agreement as alleged and maintained that the customer's purported termination was itself a repudiatory breach which the service provider duly accepted.
In January 2017, a detailed service agreement (the “Agreement”) was signed. Under the Agreement Digital Capital was to provide the core back-office software platform relating to physical payments, account opening, payment processing, issuing of payment cards, wire transfers and currency exchange. Digital Capital also agreed to obtain all-important regulatory licenses. For its part, Genesis Iceland was to provide the front-end platform through which customers could request that their cryptocurrency be exchanged into traditional currencies or paid to a third party. The Agreement provided for a target go live date of July 2018, but this was not met. Solicitors for Genesis purported to terminate in July 2019.
Clause 16.1 provided that “Either party may terminate this Agreement with immediate effect by notice to the other party on or at any time after a material breach by the other party of any of its obligations under this Agreement which (if the breach is capable of remedy) the other party has failed to remedy within thirty (30) days after receipt of notice giving particulars of the breach and requiring the other party to do so”.
In addition, clause 16.5 expressly preserved [in addition to the right to terminate] ‘any other right or remedy of either party in respect of the breach concerned’.
Genesis failed to serve any notice requiring breaches to be remedied (most likely according to the judge because of their own financial difficulties) so they had to argue that Digital Capital's breaches were more than merely material but were so serious as to be repudiatory justifying immediate termination without any opportunity to remedy. It was maintained that an independent right to terminate at common law existed which was not excluded by clause 16.1 and its requirement to give notice and an opportunity to remedy.
If Digital Capital had committed breaches of contract which were independently repudiatory then was Genesis entitled to bypass clause 16.1 altogether and exercise its common law right to terminate for repudiatory breach? Was Digital Capital in repudiatory breach of the Agreement as opposed to simply being in material breach? Since there was no overt renunciation of the Agreement by Digital, it had to be established either that Digital Capital evinced an intention by its conduct to no longer perform, whether through unwillingness or inability, or that it was in breach going to the root of the contract. The claim rested on an alleged failure by Digital Capital to deliver a software system with the required functionality within a reasonable time. In the alternative, reliance was placed on Digital Capital's failure to supply proof of the state of development of its system in response to Genesis' requests.
Decision:
In the circumstances, the express contractual right to terminate for material breach did not preclude either party relying upon any common law right to terminate for material breach. In addition, clause 16.1 did not have the effect of requiring Genesis to provide a notice to remedy the breach, before it was entitled to terminate the contract under the common law for repudiatory breach.
However, the judge formed the clear view that even if Digital Capital was in material breach in all the respects alleged, it was not in repudiatory breach.
Digital Capital had plainly attempted to provide a system which met the requirements of the contract. The system was functional in the sense that it could process payments, card transactions and exchange currency. “It may not have done everything it was supposed to do, but it was not so wholly inadequate as to justify [Genesis] throwing up the contract altogether”.
Digital Capital was justified in believing that meetings were to be arranged at which many of the outstanding matters would have been identified and addressed. Given the need for collaboration which necessarily has to take place in a project such as this one, the mere existence of deficiencies and gaps in the system does not, according to the judge, evince any unwillingness or inability to perform, let alone an intention not to be bound by the provisions of the Agreement.
The concerns identified were capable of remedy, many (and possibly all) within 30 days and there was no evidence to suggest that Digital Capital would not have been able and willing to address any concerns raised by Genesis. As the judge said, “It is hardly a promising foundation for an allegation of repudiation that the breaches relied upon can be cured within a short space of time”.
The judge rejected the claim based on a failure to provide evidence on the state of development, finding that two presentations of the developed system had been given.
Genesis was therefore ordered to pay Digital Capital’s outstanding invoices plus damages (to be assessed) arising out of the wrongful termination.
Points to Note:
- Ignoring an express contractual right to terminate and, instead, relying upon repudiatory breach at common law is a risky strategy not least because if you get it wrong the counterparty can themselves terminate on you and claim damages.
- Consider the drafting of any contract carefully to assess whether the express termination regime exists in parallel with rights at common law. Common law rights may not, as this case illustrates, require that an opportunity to remedy needs to be given. They may also give rise to a different entitlement to damages which could be valuable depending upon the circumstances.