UK: Court Of Appeal Clarifies Time For Determining Whether Breach Of Contract Repudiatory

Last Updated: 19 June 2013
Article by Stuart Shepherd and Reema Shour

Telford Homes (Creekside) Limited v. Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577

The fact that the Court of Appeal in this case disagreed with the first instance Judge on whether a landlord's breaches of a lease agreement were repudiatory illustrates the difficulty faced by an innocent party in deciding whether and when its counterparty's breach becomes sufficiently serious as to entitle it to terminate the contract and claim damages. The Court of Appeal's judgment provides useful guidance on a number of issues arising in relation to repudiatory breaches including: how to determine whether a breach of an innominate term in a contract is sufficiently serious as to amount to repudiatory breach; when the determination as to the nature and seriousness of the breach should be made; and when a repudiatory breach can be cured.

The background facts

In October 2008, the parties entered into a lease agreement relating to four commercial units in a property development. T was the developer of the property but also the landlord under the anticipated leases. A was an investor and intended tenant. The leases were to be for 999 years from completion of each block and the lease agreement provided a target completion date of 21 July 2010 for two of the commercial blocks, with the two remaining blocks to be completed by 28 February 2011. Under the lease agreement, T was to use its reasonable endeavours to complete the work by the target completion dates "or as soon as reasonably possible thereafter" and to carry out the work on the property with due diligence. Work on the blocks commenced promptly but, in June 2009, T suspended work on the two blocks with a target completion date of 28 February 2011 due to cash flow problems. It was not clear when the work would be restarted although the parties entered into detailed correspondence and extensive negotiations to try and resolve the situation. At all times, however, T maintained that the work would in due course be recommenced and the blocks would be completed, albeit late. Finally, on 22 October 2010, A purported to accept what it deemed to be T's repudiatory breach in delaying the work to the two blocks in question and terminated the lease agreement. Unknown to A, however, T had restarted work on those two blocks a few weeks earlier, on 4 October 2010. T, therefore, denied that it was in repudiatory breach, alleged that A was itself in repudiatory breach for failing to settle some outstanding payments and sought to terminate the lease agreement.

The first instance decision

The Judge found that the above obligations to use reasonable endeavours and to carry out the work with due diligence were innominate terms and found in favour of A, holding that T was in repudiatory breach. In essence, he held that the parties' agreement envisaged a single project involving four blocks and that it would frustrate the commercial purpose of the agreement if A were required to lease only two blocks, while the rest of the development was put on hold. He found that by the end of 2009 (when work on the two delayed blocks had been suspended for five months), if not before, T's breach of contract in failing to progress the work with due diligence had become sufficiently serious as to be repudiatory. He further held that T was in breach of its contractual obligation to use its reasonable endeavours to complete the work by the target completion dates or as soon as reasonably possible thereafter, with that breach becoming repudiatory by at least July 2010. The Judge considered it irrelevant that T had recommenced work before A purported to terminate, in circumstances where A was unaware that the work had restarted when it decided to terminate.

T appealed. It did not challenge the finding that it was in breach of its reasonable endeavours and due diligence obligations under the lease agreement. It did, however, contend that those breaches were not repudiatory and did not entitle A to terminate the lease. T's principal arguments were that:

  1. the Judge did not adequately analyse the benefit A was intended to receive under the lease agreement in order to decide whether the breaches had deprived it of at least a substantial part of that benefit; and
  2. in assessing whether the breaches were repudiatory, the Judge did not focus on the right date, which was the date when A purported to terminate the lease agreement.

The Court of Appeal decision

Lord Justice Lewison gave the leading judgment. Citing a number of cases, including the House of Lords decision in Hongkong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd [1961] 2 LLR 478, he confirmed the Court had to look at the position as at the date of the purported termination of the contract and that this applied both to actual breaches as well as anticipatory ones (there was a suggestion that, based on some past case-law, this was true only in respect of anticipatory breaches, but his Lordship disagreed). In his opinion, therefore, the first instance Judge had been wrong to consider whether T's breaches were repudiatory in late 2009. Rather, he should have assessed the nature and seriousness of the breaches when A purported to terminate the leases on 22 October 2010. As to whether the breaches in question were sufficiently serious to be deemed repudiatory, his Lordship identified the following relevant factors which required consideration:

  1. What benefit A was intended to obtain from performance of the lease agreement.
  2. The effect of the breach on A, including: its financial loss; how much of the intended benefit of the contract it had already received; whether it could be adequately compensated in damages; whether the breach was likely to be repeated; whether T would resume compliance with its obligations under the contracts; whether the breach fundamentally changed the value of T's future performance of its outstanding obligations.

In this case, A was intended to receive the benefit of a 999 year lease of the commercial units, including any rents and profits that would be earned during that period. The length of delay to the completion of the two blocks was, in Lord Justice Lewison's view, insignificant in the context of a 999 year lease and did not amount to depriving A of a substantial part of the benefit it was intended to receive under the intended leases. He further stated that, absent any attempt to make time of the essence, delay will only amount to a repudiatory breach if and when it becomes so prolonged as to frustrate the contract. On the facts, the delay caused A little, if any loss: among other things, there was no suggestion that the market value of the commercial units declined significantly during the period of delay. Furthermore, the fact that T had taken steps to remedy its accrued breaches of contract before A decided to accept the breaches and terminate was an important factor to take into consideration. His Lordship concluded that the breaches in question were not, therefore, repudiatory at the time A purported to terminate on 22 October 2010.

Lord Justice Tomlinson, in his supporting judgment, added that the Court of Appeal did not need to decide whether the breaches of contract ever became repudiatory because the delayed work had recommenced and T's breaches had been cured before A purported to terminate the lease agreement and "there was no repudiatory breach then available for acceptance" .

The Court of Appeal therefore allowed T's appeal.

Comment

Under English law, a contracting party that is faced with a serious breach of contract by its counterparty is allowed a reasonable time to decide whether or not it should accept that breach, terminate the contract and claim damages, if any. What is a reasonable period of time for the innocent party to consider what it wants to do will depend on the circumstances in each particular case. The party considering whether to terminate for repudiatory breach should, however, be alert to a number of potential pitfalls. First, it must not terminate prematurely, for example before the breach of contract is sufficiently serious as to be considered repudiatory, otherwise it will itself face an allegation of repudiatory breach and a claim for damages. Second, it must not leave acceptance of the breach and termination too late, in case it loses the right to terminate because the delay amounts to affirmation of the contract. Third, it should keep in mind that, while it is making up its mind whether or not to accept the repudiatory breach and terminate, the party in breach might cure the breach so that there is no longer any repudiatory breach to accept. Accordingly, as this case illustrates, it is important to seek to ensure, before giving notice of termination of the contract, that the party in breach has not taken sufficient steps to rectify its breach such that, taking all the relevant factors into account (including, in particular, the conduct of the party in breach), the breach concerned is no longer repudiatory.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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