Repudiatory breach of contract: Once more unto the breach

Last year I wrote about the case of Ampurius NU Homes Holdings Ltd vs Telford Homes (Creekside) Ltd and the question of repudiatory breach of contract - that is, the sort of breach that entitles the injured party to bring the contract to an end.

I concluded by warning that care has to be taken in treating a breach of contract as repudiatory, in case it is later decided by the court that the breach was not repudiatory. This is exactly what has happened in the case in question: when I wrote last year, a High Court judge had just ruled that the breach was repudiatory but, on 23 May this year, the Court of Appeal ruled otherwise.

The case involved a contract entered into for the development by the defendant of a property comprising units for commercial use on the lower floors and residential apartments above. The claimant agreed to purchase, on completion, 999-year leases in the commercial units.

Under the contract, the developer agreed to carry out the works with due diligence and to use reasonable endeavours to complete them by target dates. The development was divided into four blocks: the target date for blocks C and D was 21 July 2010 and for blocks A and B 28 February 2011.

A repudiatory breach by the other side allows you to terminate a contract. But you will need to be sure it is such a breach if you don’t want the courts to put you right

While the works were proceeding, the developer had funding problems. Work on blocks A and B was halted in June 2009. In June 2010, the claimant was told that the developer was expecting the necessary funding which would enable the work to re-commence in January 2011. In fact, the work recommenced on 4 October 2010 (it seems that the claimant did not know this). On 22 October, the claimant’s solicitors wrote to the developer’s solicitors purporting to terminate the contract.

Thereafter, the developer continued with the development. The commercial units in block C were completed on 19 January 2011 and those in block D on 4 April 2011, about nine months later than the target date. The purported termination of the contract in itself caused some further delay to blocks A and B but the trial judge held that, but for this, block A would have been completed on 1 May 2012 and block B on 20 February 2012, so the target date for these two blocks would have been exceeded by 15 months.

The developer accepted in the Court of Appeal that, in relation to blocks A and B, it had been in breach of the two obligations referred to. But did either breach amount to a repudiatory breach?

The trial judge’s view was that the developer’s ongoing breach of its due diligence obligation had become repudiatory, at least by the end of 2009, if not before. The work on blocks A and B had been halted by then for over five months, and the developer could not say when it would resume.

The Court of Appeal said that the test for repudiatory breach is whether the breach has deprived the injured party of substantially the whole benefit of the contract or, possibly, a substantial part of the benefit. The first test, in particular, sets the bar high.

The claimant was intended to obtain, first and foremost, a leasehold interest of 999 years duration in four blocks. The claimant was not in a position where it was never going to obtain that interest. If (hypothetically) it had received all four blocks one year late, it would still have got the interests that it contracted for, and getting them one year late would not have deprived it of a substantial part of the benefit, let alone substantially the whole benefit.

The next thing to consider was that at the time it purported to terminate the contract, it had suffered no actual loss. It was concerned that the delay would interfere with its marketing programme. It might also have to bear for longer the cost of funding its original deposit and the balance of the purchase price for blocks C and D. Such matters, which could be compensated by payment of damages, were not sufficient to establish a repudiatory breach.

The court also held that the question of whether a breach is repudiatory must be judged at the date when the injured party purports to terminate the contract. A breach that is not repudiatory initially may become so as the consequences of that breach worsen but the reverse may also be true.

Here, the uncertainty at the end of 2009 to which the judge attached significance had diminished in October 2010, when the claimants purported to terminate, because the work on blocks A and B had by then resumed.

An injured party wishing to terminate the contract must be careful neither to strike too soon nor leave it too late. In this case, however, the court was doubtful whether at any stage a repudiatory breach had been established.

These issues need not arise, of course, if the contract sets out expressly the circumstances in which a party may terminate the contract, as most building contracts do.

Rachel Barnes is a consultant at solicitor Beale & Company