What makes terminating for breach of contract difficult – and risky – is this:
- It is not always clear from the facts or the terms of the contract whether the term is a condition or an innominate term.
- When it’s an innominate term, you often can’t tell with real certainty that the consequences of the breach are so serious that it would be considered by a court to be a repudiatory breach.
When it’s not
Let’s say you terminate a contract. You say there has been a repudiatory breach.
Then let’s say that it turns out that it wasn’t a repudiatory breach at all…
Here’s the Message:
By attempting to terminate the contract for a repudiatory breach – which isn’t – is itself a repudiatory breach in contract law.
So as we say, terminating a contract before its time is a serious business.
Oh, and then the defaulting party will of course say…
“We weren’t in repudiatory breach and you are in repudiatory breach yourself.
We’re entitled to terminate and claim damages and if you don’t within [a short space of time] [do this], [we’ll do this legally unpleasant thing] …”
What they’re doing is setting up a counterclaim – a court claim to make against you, if you make a court claim against them.
The better way is to be sure of your ground. Do the job properly. Avoid the counterclaim arguments. Or minimise your business’s exposure so much that the counterclaim arguments sound unreal and far-fetched. Sometimes, that’s a “win” in the law.
You should to be sure of your ground before you start making allegations of repudiatory breach. Or have good reason to take the risk.
Consequences of Termination in Contract Law
Breaches of contract usually result in loss of money, property or services to the innocent party.
But just because a contract terminates doesn’t mean the entire legal relationship is at an end.
It actually continues in part.
When a contract is terminated for repudiatory breach:
- Each party’s legal right to have the contract performed by the other party comes to an end. Neither the innocent party or the defaulting party is required to perform contractual obligations which remain unperformed.
For example, a buyer is not required to accept goods which a supplier tries to continue to supply. If the buyer does accept the goods, the goods would probably be accepted under a fresh contract (of undetermined terms).
- Neither party is obligated to do anything specified in the contract, with minor exceptions.
In business contracts, “Survival of Terms clauses” state which provisions continue in force after the contract ends. These usually express the intention that confidential information, indemnities, limitations of liability, amongst others, are to continue to force.
The general law applies to continue terms of the contract which would be reasonably supposed to continue after termination: such as rights to payment accrued during the contract (ie before termination).
- The legal right to performance (which ends on termination) transforms into a right to sue for damages.
Damages is the right to recover monetary compensation for financial caused to the innocent party by the breach of contract.
At termination, there is no legal right to have the contract performed, because it has ended.
The transformation of the legal right from performance to damages means that the innocent party can recover what they expected to receive under the terms of the contract.
What is the measure of damages? How do you calculate it?
In short form: it’s the amount that the innocent party is worse off, than it would have been, if the defaulting party had carried out the contract properly
- The innocent party can chose between two remedies: a claim damages or an account of profits as the measure compensation to be paid.
An account of profits is calculated differently to damages. Damages are usually the greater sum, due to the rules of law involved.
- Unconditional Rights continue: The legal rights under the contract which were acquired “unconditionally” during the contract continue.
For example, if ownership in say, a car was transferred as part of the contract – the car remains the property of the party which received ownership. That part of the transaction is not “undone”.
But then, the terms and conditions of the contract can have a real impact on the consequences which follow from a breach.
What about late payments in business contracts?
Late Payments: Employment Contracts
The truth is that late payment is not always a repudiatory breach of contract. Even in contracts of employment.
Payment clauses are in commercial contracts by default innominate terms, unless the contract says otherwise.
Whether it is or not depends on the seriousness of the breaches on the particular facts of the case.
But then, payments under employment contracts have elevated importance in contrast to business-to-business contracts: Cantor Fitzgerald v Callaghan & Others  ICR.
Whether the failure to pay salary or wages is a repudiatory breach depends on a series of factors. They include whether:
- it is a temporary fault, say failure of IT systems, an accounting mistake, due to illness, accident or other unexpected events.
- late payment is deliberate
- the failure or delay in payment were repeated, persistent, or unexplained, or worse: cynical.
Courts examine the impact of the breaches in the context of the transaction as a whole in order to decide whether breaches are repudiatory.
When will a term be a condition of a contract?
In a time-honoured judgment, Bentsen v. Taylor, Sons & Co. (No.2)  2 QB 274, it was said:
There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one’s mind whether the intention of the parties, as gathered from the contract itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability
It’s in effect a value judgment about the commercial significance of the term in question.
According to C21 London Estates Limited v Maurice Macneill Iona (2017), a term will be a condition of a contract when:
- legislation states that the term will be a condition
- case law says that the type of term will be a “condition”
- the contract itself describes it as a “condition”, on a correct reading of the contract
- the innocent party may terminate the contract for breach of the term, no matter what the factual consequences
- it’s intended to operate as a condition as a matter of interpretation of the contract.
They’re the main ones.
But there are other potential factors too, such as:
- whether the innocent party thought the term would be strictly complied with
- the interplay between the term and the other provisions of the contract
- the likely effects of breach of the term
- whether the innocent party would be adequately compensated for breach of the term
- the nature of the contract in question
- the nature of the subject matter of the contract
- the nature of the term and the obligation which it creates.
Sound complicated? That’s because it is….
Alternatives to Repudiatory Breach
You might encounter different phases in business contracts:
- “material breach”
- “fundamental breach”
- “substantial breach”
- “serious breach”
And then you have contract which say parties may terminate for “any breach of contract”.
Why does it matter?
These phrases may operate to change the standard of breach required to terminate contracts. The alternative wording appears in clauses such as this:
Either party may terminate this Agreement without liability to the other immediately on giving notice to the other if the other party commits a [repudiatory / material / fundamental / substantial / serious / any] breach of any of the terms of this Agreement and (if such a breach is remediable) fails to remedy that breach within 30 days of that party being notified in writing of the breach.
Contracts are read on their own terms. If the contract says “material”, “fundamental” or “substantial”, that’s what’s required to amount to a breach of contract.
So how is this alternative wording interpreted?
What is a “Material Breach” of Contract?
“Material breach” is usually interpreted as something more serious than a breach of warranty, so it’s a “substantial” breach of contract. However, it’s less serious than a repudiatory breach: Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland  EWCA Civ 200.
To assess whether a breach is material, relevant factors include:
- the breaches that have taken place in the case
- how the innocent party was affected by the breach
- the contracting partner’s explanation of the breaches
- the express and implied terms of the agreement
- the consequences of holding the agreement:
- as ended, or
- as continuing.
A range of factors are taken into account by a court to decide whether a business agreement has been materially breached.
What is “Fundamental Breach” of Contract?
The term “fundamental breach” is a hangover from the law as it used to be.
“Fundamental breach” is usually read as a reference to a repudiatory breach of contract unless the contract expresses a different intention: Suisse Atlanique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale (1967).
So the breach must “go to the effect root of the contract”. If not, it must at least affect the very substance of the contract, or frustrate the commercial purpose of the deal agreed in the contract.
- the surrounding circumstances of the contract, and
- how the term in question affects the transaction that the contract was intended to carry out.
What is a “Substantial Breach”?
A reference to a substantial breach of contract is likely to be taken as a reference to a repudiatory breach: Crane Co v Wittenborg A/S  All ER(D) 1487, or depending on the interpretation of the contract in the case something slightly less than a repudiatory breach.
What is a “Serious Breach”?
When judges refer to “serious breach” in the case law, their use of the term equates it to a repudiatory breach.
There’s no question that there will be blue sky between a breach of warranty and a serious breach.
It will be required to be a significant breach of contract, and at least as significant as a material breach or a substantial breach.
What about “any breach” of contract?
Take a deep breath.
Historically, references to “any breach” have been interpreted as references to repudiatory breaches.
However subsequent decisions have found that “any breach” meant exactly that: ie a reference to a warranty or an innominate term (with regard for the effect of the breach of the innominate term).
How do you decide?
Business contracts are interpreted with business commonsense.
It usually doesn’t make commercial sense for a party to terminate a contract for any breach, no matter how trivial: University of Wales v London College of Business Ltd  EWHC 1280.
It has been said “any breach” is less likely to literally mean “any breach” where:
- it’s the sort of contract where a wide variety of minor breaches are likely
- the duration of the contract runs for many years
- the contract is for a high value over its term
- the consequences of many types of breaches are likely to be trivial
- commercial commonsense requires the contract to be understood as giving a right to terminate only for a serious breach
- there is an opportunity to remedy the “any breach”
- the consequences of reading the contract in that way results in an unreasonable, uncommercial and in total contradiction to the whole purpose of the contract.
Contracts are not read to have commercially unrealistic outcomes. They are interpreted so as not to defeat the commercial purpose of the contract.
But these days, Courts give contracts their literal meaning, provided that words used are unambiguous. If that approach to interpretation is adopted that means the words “any breach” in a contract will be read as literally, “any breach” and a reference to a warranty or innominate term.
What if there’s no termination clause at all?
Don’t be fooled.
Just because a contract doesn’t contain a termination clause doesn’t necessarily prevent a party terminating the contract under the general law for repudiatory breach.
It is likely to require clear words to prevent a party from exercising their general law rights to terminate for repudiatory breach. That’s an application of the clear words principle.