An employer who wishes to terminate a deal had better not take the contract too literally, as sometimes its most important rule is an unwritten one
In the law school where I grew up, young lawyers were taught never to admit to feeling surprise, even though it was an emotion one experienced on a fairly constant basis, particularly in the field of litigation. Now, some years down the track, it is still possible to read a recent court decision that comes as a bit of a shock. Such was the case for this columnist with the Court of Appeal's offering in Rice vs Great Yarmouth Borough Council (30 June).

The case concerned the question of whether or not a local authority was entitled to terminate two contracts it had made with Mr Rice, a horticultural contractor. One was for the maintenance of its sports facilities, including cricket and football pitches; the other was for the maintenance of parks and the planting of summer flower beds to produce the sort of display expected in a town that regularly comes second in the Anglia in Bloom competition.

These were contracts designed to run for four years from January 1996. However, in May of that year, the council served the first of many default notices under the contracts. In June, a raft of default notices was served requiring Mr Rice to complete the summer bedding within five days, and complaining about the state of the cricket pitches and bowling greens.

In July, both contracts were terminated by the council.

The contracts in question contained a clause allowing the council to terminate the contractor's employment by notice in writing with immediate effect if the contractor "commits a breach of any of its obligations under the contract".

It was admitted by the defendant that a number of breaches of contract had occurred which, not being trivial, would seem to have justified the termination notice. However, the judge concluded, and the Court of Appeal agreed with him, that the terminations were invalid. How could this result have come about?

Was the cumulative effect of the breaches so serious as to justify the council bringing the contracts to a premature end?

The council, unsurprisingly, had argued that the contract should be applied literally so as to give it the right to terminate the contract for breach of any of its obligations other than the trivial. Why should the contract not mean exactly what it said? The Court of Appeal's answer was that 40 years ago in the ground-breaking 1962 case of Hong Kong Fir Shipping Company, Lord Diplock added an important gloss to the common law.

He stated that in some contracts, the test for termination should depend on the gravity of the consequences of the breach in question, as opposed to the old test of whether the term breached was a "condition" (yes, you could terminate) or a "warranty" (no, you could not). Contract terms might have to be classified as "intermediate or innominate terms" capable of operating as either conditions or warranties depending on the circumstances. This reasoning was a plea for flexibility and has been followed on many occasions.

In this case, the court held that the local authority's position was unreasonable and flew in the face of commercial common sense.

The court next considered whether the cumulative effect of the breaches of contracts was so serious as to justify the council bringing the contracts to a premature end. Cases on building contracts were compared with this maintenance contract and parallels were found, particularly in the number and variety of the obligations involved and the differing degrees of seriousness of the breaches that could be committed.

However, even accepting that there were cumulative and serious breaches, there was insufficient evidence that the council would be deprived of "substantially the whole benefit of its contract" by those breaches. In particular, the exceptionally dry summer of 1996 had led to drought conditions and it was these rather than any failings of the contractor that were responsible for a number of the difficulties.