A party to a bilateral conditional contract is not allowed to exercise a right to terminate the contract because a condition has not been satisfied, where failure to satisfy the condition was caused by the party seeking to terminate.
The High Court in England and Wales reached the foregoing (but seemingly not foregone) conclusion in the case of Extra MSA Services Cobham v Accor UK Economy Hotels.
Background
The case concerned a development agreement for lease in relation to a hotel. It was a condition of the agreement that Extra would procure the necessary permissions, consents, etc. for the development. Extra undertook to use all reasonable endeavours to satisfy that condition as soon as possible after the date of the agreement. There was a mutual right to terminate in the event that the condition had not been satisfied by a longstop date.
Following two extensions of the agreement, due in part to Extra's failure to obtain the permissions, Extra served a notice to terminate the agreement on the ground that the necessary permissions had not been obtained. Accor's view was that Extra had not used all reasonable endeavours to obtain the permissions, so Extra could not rely on the termination provision.
Arguments
Extra sought a declaration from the court to the effect that they could terminate if the condition were not satisfied by the relevant date, and that they were not prevented from doing so even though it was they who had failed to comply with their contractual obligations.
Accor's argument was that Extra should not be entitled to benefit from their own failing and so were not entitled to terminate in this case.
Decision
The High Court agreed with Accor, holding that the contractual rights only allowed the parties to terminate the agreement if the consents proved impossible to obtain, despite the use of all reasonable endeavours by Extra.
(NB: the judgement related only to a point of law: the facts of the case have yet to be heard, and whether or not Extra was actually in breach has yet to be decided.)
Commentary
It is common for contracts to provide that the parties can walk away in the event that, through no fault of one party or the other, the conditions of the contract cannot be met. If planning permission is never going to be achievable, for example, the contract is frustrated and should be terminable. However, this judgement places a reasonable and logical limit on that common position. A party to a contract cannot rely on its own breach to secure an advantage.
The judgement is from a single judge in the High Court in England, so can be no more than persuasive in Scotland. However, it does appear to give voice to common sense and commercially expedient logic which we feel sure would be followed in Scotland for the same facts and circumstances.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
