Court Clarifies When It Is Justifiable To Terminate Contracts Immediately And Not Give Notice

Parties to contracts will welcome clarification on whether a contract can be terminated immediately for repudiatory breach, even if one of the reasons is not disclosed until after termination; and when an agreement can exclude the right to terminate for such breaches.

A business handled motor insurance claims for an insurance company client. It failed to hand over files for audit by the insurance company. The insurance company treated this as a repudiatory breach and immediately terminated the contract between them.

The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party, looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform, the contract. If there is a repudiatory breach the contract terminates immediately.

After it had terminated the contract, the insurance company claimed there had also been another repudiatory breach – the business’s poor performance under the contract.

The business claimed compensation for wrongful termination. One of its arguments was that the contract required the insurance company to give 30 days’ notice of any material breach, to allow the business time to remedy it. The business argued that this meant any breach capable of being remedied could not be a repudiatory breach (with the consequence that the contract was immediately terminated), because the requirement for the insurance company to give the requisite 30 days’ notice showed a contrary intention.

The High Court said it was possible to expressly say in a contract that certain breaches would not be treated as repudiatory and the courts would take note of this. However, it ruled that the provision in this contract notice to be given before terminating for a material breach did not expressly say certain breaches were not repudiatory. They did not therefore prevent the insurance company from terminating on grounds of a material breach immediately, if the breach was serious enough.

Another argument was that the insurance company could not rely on a repudiatory breach raised afterwards, to justify an immediate termination.

The Court said it is permissible to rely on a repudiatory breach which had not been raised at the time, and even if the other party was unaware of it, to justify an immediate termination. There was an exception if matters could have been put right – ie steps could have been taken to avoid the breach altogether, or the obligations could have been performed in good time in some different way – if they had been pointed out at the time of the termination.

The business claimed that its alleged poor performance could have been remedied if it had been raised at the time. The court rejected this argument – the exception only applied if matters could be put right before the breach occurred. In this case, the poor performance was the breach and, by definition, once it had occurred it could not be remedied.

Operative date

• Now

Recommendations

• Contractual parties should be aware that they can rely on repudiatory breaches to justify immediate termination of the contract, even if they did not raise that breach until after the termination, provided the breach could not have been remedied at the time
• Contractual parties can expressly say in the contract that certain breaches are not to be treated as repudiatory. However, if a contract merely requires a party wishing to terminate it because of a material breach to give the other a period to first remedy that breach, that does not imply that material breaches can never be repudiatory – the first party can still terminate immediately if there is a repudiatory breach.

Case ref: Case ref: C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757

29 February 2016