Breaches capable of being remedied
Stobart Capital v Esken (High Court) [2022]
Commercial contracts, almost without exception, contain fairly standard termination provisions. These distinguish between breaches that are capable of remedy and those that are not. In the former case, termination is only allowed if, notice of the breach and an opportunity to remedy having been given, the breaching party fails to do so within the stated period. However, contracts rarely, if ever, specify which breaches fall into which category and what amounts to a sufficient remedy. One therefore has to look to the courts for guidance as to which breaches the courts consider capable of remedy and what a contracting party has to demonstrate in order to have sufficiently remedied the breach.
Facts:
The claimant, Stobart Capital, was founded by Andrew Tinkler, the former chief executive officer of the defendant, Esken, formerly Stobart Group Ltd. Stobart Capital and Esken entered into a Management Agreement, under which Stobart Capital was required (amongst other things) to introduce and develop new business opportunities for Esken. The Agreement contained the following termination provision: ‘This Agreement may be terminated by either Party … if … the other Party has committed a material breach of its obligations under this Agreement and (where such breach is capable of remedy) fails to remedy such breach within 28 days after receiving notice requiring the same to be remedied.’
The relationship between the parties broke down, precipitated by the removal of Mr Tinkler as a director of Esken. A little under a year later, Esken served notice on Stobart Capital purporting to terminate the Management Agreement on a number of grounds including that Stobart Capital was in material breach for failing to introduce and develop new business opportunities as required under the terms of the Agreement.
Stobart Capital brought proceedings for £4.6 million it claimed was payable by Esken. Stobart Capital claimed that Esken’s termination of the Management Agreement was invalid and that fees had therefore continued to accrue.
Stobart Capital submitted that even if it was in breach of the requirement to introduce and develop new business opportunities, the termination provisions in the Management Agreement required Esken to give it 28 days to remedy any such breach. Esken argued that Stobart Capital could not have remedied its failure to introduce business opportunities because those missed opportunities were gone forever. Accordingly, Esken argued, it did not need to give notice of the breaches or allow Stobart Capital 28 days to remedy them.
Decision:
The Court held that Stobart Capital had not been in material breach. The court quoted an earlier case which had emphasised that such a breach needed to be ‘substantial’ or a ‘serious matter’ but does not need to be repudiatory conduct (giving rise to a right of termination at common law). Another case referred to, outlined the factors to be taken into account in determining materiality including the actual breaches that occurred, the consequence of the breaches to the non-breaching party, the breaching party’s explanation for the breaches; the breaches in the context of the Agreement; the consequences of holding the Agreement terminated and the consequences of upholding the Agreement as remaining in force.
It then went on to consider the question of whether, had such breaches occurred, they would have been capable of remedy.
The Court considered the judgment in Schuler v Wickman dating from 1974 in which ‘remedy’ was given two possible meanings, either making good any damage already done or, alternatively, putting matters right for the future. The court said that the emphasis ought to be on the latter.
Reference was also made to a more recent Court of Appeal judgment in Force India Formula One v Etihad Airways. In that case Etihad sponsored the formula one racing team. However, at one point they changed the livery of their cars to remove reference to Etihad. The court gave this as an example of a breach not capable of remedy. The ‘genie cannot be put back in the bottle’. An analogy was drawn with the publication of confidential information which, for fairly obvious reasons, is generally regarded as not being capable of remedy.
The Court concluded that any breaches of the performance obligations owed under the Management Agreement would have been capable of remedy as being matters which could have been put right for the future.
Despite this finding on the ‘material breach’ grounds, Esken was ultimately held to have validly terminated the Management Agreement on other grounds.
Points to Note:
- If considering terminating for material breach, consider very carefully whether the breaches relied upon are likely to fall within the fairly broad category of breaches capable of being remedied.
- When drafting or negotiating contracts, consider very carefully the need for explicit drafting to provide for independent rights of termination which do not rely upon the uncertain notions of ‘material breach’ and whether breaches are ‘capable of being remedied’.