Summary and implications
Under English law different types of contractual breach attract different remedies. This article focuses on repudiatory breach and presents a case study that illustrates the different approaches that may be practically taken in the event of a suspected breach.
All breaches of contract entitle the aggrieved party to claim damages for any loss it suffers to put the party back in the position it would have been in had the breach not occurred. A repudiatory breach arises from a breach of a condition of the contract, an intermediate term or a refusal by a party to perform all, or substantially all, of its obligations under the contract (see Table 1 below). A repudiatory breach therefore allows the aggrieved party an additional remedy entitling them to terminate the contract and bring to an end any future obligation to perform under the contract, in addition to claiming damages. Alternatively, the aggrieved party may affirm the contract and continue to operate in accordance with its terms as if the breach had not occurred. This would not negate the aggrieved party's right to claim damages for any loss suffered but removes the right of termination.
A Practical Case Study – The Facts
An employer contracts with a contractor using a standard JCT construction contract for the performance of construction works on commercial property. The contract provides for stage payments, with four paymentmilestones, which cannot be invoiced without the sign off of the milestone by the project manager. The contract also contains provision for liquidated damages in the event of delay and a termination clause which can be triggered by a specific breach by either party to the contract.
Construction works commence on site and milestones 1 and 2 are met by the contractor. The employer makes the first two payments to the contractor, despite the fact that the projectmanager has not signed off on the works.
The employer then refuses to pay the contractor for milestone 3 because the project manager has not yet signed off on the relevant works. This article considers the factors the contractor should take into account in considering whether to do any of the following:
- claim repudiatory breach and walk off site; or
- terminate the contract pursuant to its terms; orc)
- affirm the repudiatory breach of contract and continue to work, relying on late payment provisions in the contract to claim damages.
A – Walk off site
The risk in taking option A, is that the contractor must be absolutely certain that the employer has committed a repudiatory breach of the contract by refusing to pay. Here the contractor should consider whether the non-payment is legitimate under the terms of the contract. In Multiplex Constructions (UK) Limited v Cleveland Bridge UK Ltd and another (2008) Mr Justice Jackson (as was) held that even if previous practice was established between the parties that was not in accordance with the terms set out in the contract, he could not hold one party in breach of the same contract for strictly complying with terms that had been agreed at the outset (subject to any waiver or rights of estoppel that had arisen). Arguably, payment has not fallen due under the contract by the employer as no project manager's sign-off has been issued, and given the Multiplex decision, the contractor risks being in repudiatory breach itself if it walks off site.
B – Terminate the contract
A party seeking to rely on a contractual termination clause to end the contractual relationship, will usually cease to carry out its own obligations under the contract as a result. Should the contractor take this option against the employer in this scenario, the contractor takes the same risk as with option A above, unless it is able to legitimately terminate in accordance with the contractual terms (i.e. that it can establish a specific breach under the contract that gives the right to termination). The risk with any form of termination, would be that if the right of termination has not in fact arisen under the contract and if the contractor ceases performing the works once notice of termination has been served it risks finding itself in repudiatory breach for showing an intention not to be bound by the terms of the contract. This would potentially leave the contractor open to a sizeable claim for damages, should the employer then opt to accept the contractor's potential repudiatory breach and hire a new contractor to complete the works. It is also worth noting that the contractor may still also be liable for liquidated damages for any resulting delay up until the point the employer accepts the breach.
C – Affirm the contract
The contractor could affirm the contract by giving the employer notice, which can be either express or implied. For example, if the contractor continued to carry out work until the fourth milestone, the employer could imply that the contractor has affirmed any alleged repudiatory breach of the contract at the time of the third milestone. This still leaves available any contract remedies for late payment such as interest (or option B above in a scenario where the project manager does go on to approve the works and the employer continues not to pay). This may be an issue with cash flow for the contractor, and other options such as adjudication may be of assistance in that instance.
1. Do not assume a breach only entitles the aggrieved party to consider their contractual rights of termination. Consider also if the breach is repudiatory and might entitle the aggrieved party to terminate for such.
2. Do not assume that deviation from previous behaviour between the parties is necessarily a breach.What does the contract actually oblige the parties to do? It is likely the parties will be held to this standard whether or not this is representative of their working relationship previously.
3. Be very careful before taking action on the basis another party is in repudiatory breach. This is a complicated area and the risks of getting your decision wrong are potentially serious. Parties should consider seeking legal advice in these circumstances.
4. Do not allow a potential repudiatory breach to continue unaddressed. Affirmation of such a breach may be implied and the right to terminate may fall away.
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.