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Termination for Repudiatory Breach

October 16, 2012 | Construction Contracts, Dispute Resolution

What is a repudiatory breach of contract?
How do you know if a breach is serious enough to be repudiatory?

Contracting parties usually have an implied common law right to terminate the contract which exists alongside their express contractual termination rights. The common law right to terminate arises when a repudiatory breach of contract has been committed.

What is a repudiatory breach?

A repudiatory breach of contract is a breach which is so serious that it effectively renders the contract useless and therefore gives the innocent party the option to terminate. An obvious example of this would be an employer preventing a contractor from entering the site.

However, identifying a repudiatory breach of contract is often very difficult. For example, a generally poor standard of workmanship might have serious consequences, but it is unlikely to be classed as a repudiatory breach. Occasional late payments could cause major cash-flow problems for the payee, but they will probably not amount to repudiatory breaches, particularly if past experience shows that payment is always made eventually.

Identifying a repudiatory breach

The recent case of Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd provides an example of when a breach of contract is sufficiently serious to be classed as repudiatory.

Telford, a property development company, entered into a contract with Ampurius pursuant to which Telford was to construct a development in Greenwich consisting of 4 blocks of commercial and residential units (known as Blocks A, B, C and D) and grant a long lease of the completed development to Ampurius. Finance for the development was obtained from RBS, on the condition that funds for the construction of Blocks A and B would only be released if 85 residential units were pre-sold.

The contract required Telford to carry out the construction works with due diligence and use its reasonable endeavours to procure completion of the work by the target completion date. The target completion date for Blocks C and D was July 2010. Blocks A and B were due to be completed in February 2011.

Work on site commenced in August 2008. However, the global recession resulted in Telford failing to pre-sell the required number of flats. Telford was unable to secure further funds from RBS and efforts to obtain funding from other sources were unsuccessful.

In June 2009, Telford suspended the work to Blocks A and B. Ampurius then refused to pay further deposits to Telford relating to Blocks C and D. Throughout late 2009 and much of 2010 the parties were engaged in negotiations in an attempt to settle their differences. Eventually, on 22 October 2010, Ampurius wrote to Telford alleging that Telford was in repudiatory breach of contract for failing to progress the works to Blocks A and B.

However, unknown to Ampurius, work on Blocks A and B had recommenced on 4 October 2010. Telford pointed this out to Ampurius and demanded payment of further deposit money. Ampurius refused to pay, so on 9 November 2010 Telford purported to terminate the contract on the grounds of non-payment.

Was Telford in repudiatory breach?

Ampurius argued that Telford’s suspension of the works for an apparently indefinite period constituted a failure to proceed with “due diligence” and use “reasonable endeavours to procure completion” by the target date. They argued that this was a repudiatory breach of the contract.

The Court agreed that deliberately suspending work on 2 of the 4 blocks was a clear breach of requirements of the contract. However, in order to determine whether this was a repudiatory breach, the Court had to consider the nature and seriousness of the breaches.

The Court explained that there are various legal tests which can be used to determine whether a repudiatory breach has occurred, including:

  • Does the breach go to the root of the contract?
  • Does the breach frustrate the commercial purpose of the venture?
  • Does the occurrence of the event deprive the innocent party of substantially the whole benefit which it was intended he would obtain?

However, the Judge admitted that he did not consider any of these tests to be particularly easy to apply.

The Court confirmed that an ongoing breach of contract may at the outset not be a repudiation, but can become repudiatory as time goes on. It held held that by the end of 2009, Telford’s ongoing failure to progress the works had become sufficiently serious to be classed as repudiatory. By this stage, work had been suspended for more than 5 months and Telford had not been able to say when it might be able to secure sufficient funding to resume construction. The fact that Telford was still proceeding with Blocks C and D did not improve the situation, because Ampurius had entered into a contract to receive a lease of a development consisting of 4 completed blocks. To receive only half of this would substantially deprive Ampurius of a significant part of the contract.

Does a repudiatory breach automatically result in termination?

In short, no. The innocent party may choose to accept the repudiation (thereby bringing the contract to an end) or affirm the contract (allowing it to continue). Whether the contract is terminated or affirmed, the innocent party will be entitled to claim damages for the breach.

If the innocent party wishes to accept the repudiation, he must do so quickly. He must also avoid acting in a way which suggests he intends the contract to continue, as this may cause him to lose his right to accept the repudiatory breach.

Had Ampurius affirmed the contract?

Telford argued that because Ampurius did not allege repudiatory breach until October 2010, over a year after the work to Blocks A and B were suspended, Ampurius had affirmed the contract and lost the right to terminate. Telford also argued that as it had actually recommenced the works 2 weeks prior to Ampurius’ termination letter, Ampurius’ right to terminate had ceased.

The Court stated that it must not adopt an unduly technical approach to deciding whether the innocent party has affirmed the contract. The innocent party should only be held to have affirmed where there is very clear evidence that he intended to proceed with the contract.

This was not a case where Telford had committed a single, one-off breach and Ampurius had taken 15 months to decide whether to accept it or not; Telford’s breach was an ongoing one which had become more serious as time passed. Ampurius could not be said to have affirmed just because it had engaged in negotiations with Telford. Ampurius had made it clear that the negotiations were without prejudice to its contention that it would be entitled to terminate the contract if no solution could be reached. Accordingly, Ampurius had not lost its right to accept the repudiation.

The Court also disagreed that Ampurius had lost the right to terminate because the termination letter was issued after the works had re-started. Ampurius had not known that Telford had recommenced the works to Blocks A and B.

Analysis

Repudiatory breach of contract is a very complex area of law. If you terminate a contract alleging repudiatory breach and it turns out that the guilty party’s breach was not actually repudiatory, you could be treated as being in repudiatory breach of contract yourself. Whilst there are numerous legal tests which have been developed over the years to assist in identifying a repudiatory breach, the Judge in this case acknowledged that these tests are not easy to apply in practice.

If you consider that you are the victim of a serious breach of contract, it is essential to seek legal advice in order to determine whether or not that breach may be repudiatory. This must be done without delay, because the longer you wait to terminate, the greater the risk that you may impliedly affirm the contract.

 

This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.

Wakefield Office

17 Navigation Court
Calder Park
Wakefield
West Yorkshire
WF2 7BJ
Tel: 01924 258719
Fax: 01924 257666
enquiries@hklegal.co.uk

London Office

28 Queen Street
London
EC4R 1BB
enquiries@hklegal.co.uk