High Court decision illustrates the need to be sure of your ground before terminating for repudiatory breach

In a recent decision, the High Court found that a claimant's letter purporting to terminate a contract for the defendant's repudiatory breach could not take effect as a notice of termination under the relevant contractual provisions. As the court found that the defendant was not in repudiatory breach as alleged, the claimant's letter itself amounted to a repudiation of the contract: Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC).

The decision highlights the important distinctions between contractual termination provisions and the common law doctrine of repudiation. Where a party purports to terminate for repudiatory breach and gets it wrong, it cannot necessarily rely on a contractual right of termination to save it from itself being in repudiatory breach.

Where a party wishes to be able to rely on a contractual right to terminate, it is best to say so expressly and ensure any contractual machinery is followed.

James Farrell, a partner, and Michael Barron, an associate in our dispute resolution team, consider the decision further below.

Background

In December 2012 the claimant entered into an Agreement with the defendant, a specialist engineering piping manufacturer, to install piping and steelwork at the claimant's new paint manufacturing facility. The Agreement was an amended version of the NEC3 Engineering and Construction Contract, Third Edition, Main Option "A".

Clause 90 entitled either party to terminate the Agreement on notice, provided that the termination was a consequence of one of a prescribed list of "reasons" contained in clause 91. Certain reasons could only be relied on by one or other party, and the financial consequences for the parties differed depending on which reason had triggered the contractual termination mechanism.

Following cost overruns and delays to the project, relations between the parties broke down. In a letter dated 17 February 2015, the claimant alleged that the defendant had fundamentally breached the terms of the Agreement and had therefore repudiated the Agreement. The claimant said that it accepted the defendant's repudiation as bringing the Agreement to an end immediately.

In its particulars of claim, the claimant identified five separate categories of breach that were said to have been committed by defendant that demonstrated an intention not to be bound by the Agreement, ie that amounted to repudiatory breaches: (i) failure to produce requested documents; (ii) wrongfully removing project documentation; (iii) failure to produce an adequate plan for further testing/rectification of defective welding; (iv) failure to produce evidence of welders' qualifications; and (v) refusing the project manager access to the fabrication shop.

The claimant argued, in the alternative, that its letter of 17 February 2015 was a valid contractual termination in accordance with clause 90 of the Agreement.

Decision

The High Court (Fraser J) found that the defendant was not in repudiatory breach, and that the claimant's letter of 17 February 2015 itself amounted to a repudiation of the Agreement.

The claimant sought to rely on comments made by the Court of Appeal in Stocznia Gdynia SA v Gearbulk Holdings [2009] EWCA Civ 75 to argue that a contractual right of termination should be equated with acceptance of a repudiatory breach and that, as a consequence, the 17 February letter primarily took effect as a contractual termination in accordance with the terms of the Agreement.

In Gearbulk, the defendant terminated a series of shipbuilding contracts. The Court of Appeal found that, by exercising its contractual right to terminate, the defendant was not precluded from relying on its right to treat the contracts as repudiated and to claim damages on that basis. In a passage relied on particularly by the claimant in the present case, Moore-Bick LJ stated:

"In those circumstances the right to terminate the contract cannot sensibly be understood as anything other than embodying the parties' agreement that Gearbulk has the right to treat the contract as repudiated."

Fraser J said that, although this passage might superficially be interpreted as stating that a right of termination is the equivalent of acceptance of repudiatory breach, other passages of the decision in Gearbulk emphasise that there is no hard and fast rule on this point. The answer will turn on the language of the clause in question, understood in the context of the contract as a whole and its commercial background.

On the facts, it was clear that the termination provisions in the Agreement were distinguishable to those in Gearbulk. Clauses 90 and 91 contemplated termination for different reasons with different consequences to the parties in terms of financial entitlement. Indeed, it was possible on the terms of the Agreement for a termination to occur without any breach of contract. In addition, there was a scheme set out for contractual termination in the Agreement, which the claimant had not complied with, and which would be rendered redundant by equating the termination provisions to acceptance of repudiation.

In light of his findings that the defendant was not in repudiatory breach as alleged, and that the 17 February letter did not amount to a contractual termination, Fraser J concluded that the 17 February letter was itself a repudiation of the Agreement.

Although the parties were freed from further performance, the parties' existing rights under the Agreement remained in existence. The claimant was therefore entitled to recover any overpayments made to the defendant, to which it was entitled as at the date of termination.