Repudiatory breach and the importance of context when assessing impact

Summary: The Court of Appeal has overturned a High Court decision that delays by a developer in completing two blocks out of a total of four in a mixed residential and commercial development amounted to a repudiatory breach. Looking first at the intended benefit of the contract, and then at the effect of the breach, it was impossible to say that the high threshold for repudiation had been met. The purchase price was over £8m; the overall development cost exceeded £100m; and set against this background the scale of loss was nowhere near large enough to warrant termination. It was also relevant that work on the project had recommenced when notice was purportedly served. The respondent was therefore unable to treat the contract as at an end. Overall, this decision reinforces the need to view any breach in context and underlines the principle that, in the case of innominate terms, the court will look at the overall benefits the contract was intended to bring: Telford Homes (Creekside) Ltd -v- Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577.

Background: This appeal concerned a residential and commercial development known as Creekside Village West in London SE8 which comprised four blocks around a raised piazza. In October 2007, Telford and Ampurius entered into a contract for the construction and subsequent leasing of units in all four blocks. Post-Lehman, the property market collapsed and in March 2009 Telford stopped work on blocks A and B because of funding difficulties. Although work resumed in October 2010, Ampurius sought to terminate on 22 October 2010, before the development was complete. The High Court held that Telford had repudiated the contract. The Court of Appeal disagreed and commented as follows:

• Following Hongkong Fir -v- Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, the key test is whether breach of an "innominate term" (i.e, not classed as a condition or a warranty) is enough to deprive the non-breaching party of "substantially the whole benefit" of the contract. This was expressed in Decro-Wall International SA -v- Practitioners in Marketing Ltd [1971] 1 WLR 361 as "a substantial part of the benefit", a difference which was later described as representing a difference in contractual context and not a difference of principle; and
• In assessing this, the court must look at the position at the date of purported termination - and must take into account any steps taken by the breaching party to put matters right, together with likely future events, judged by reference to objective facts, as at that date.

"Not a loss of a scale of magnitude sufficient to warrant characterising it as repudiatory". Applying these principles:

• The starting point must be to assess the benefit which Ampurius was intended to obtain from the contract - which was essentially a leasehold interest of 999 years in the four blocks entitling it to possession and to obtain rents and profits from them;
• The next point to consider is the effect of the breach - the financial loss it causes, how much of the benefit of the contract has already passed, whether damages are an adequate remedy, and whether repeat breaches are likely. Merely depriving Ampuriius of, say, one year out of a 999 year lease could hardly deprive it of a "substantial part" of the benefit. The judge had taken the view that the delay on the two blocks would interfere with Ampurius's plans for marketing and subletting the whole development. In the Court of Appeal's view, this was not enough to satisfy the test. The handover of blocks A and B and blocks C and D would have been extended from the seven months specified in the contract to 13 months and the delay as at 22 October, when notice was served, had not caused Ampurius any actual loss, as Counsel accepted - and "it is to say the least unusual that a breach of contract that has caused no actual loss is...repudiatory”;
• Future loss amounted to around £100,000 of additional funding which Ampurius would have to incur. However, in context (an overall purchase price exceeding £8m and an overall development cost in excess of £100m) this was relatively minor; and
• The judge should have taken into account that on 15 September 2010 Telford gave notice that it was able to start work again, which it did. As Hongkong Fir shows, even a serious breach of contract may be capable of remedy and the situation must be assessed at the time notice was given. By 22 October 2010, work had been in progress for over two weeks. Telford was committed to building out the whole project and in fact had done a lot in terms of negotiations with banks to neutralise Ampurius's potential losses.

No repudiation, no renunciation. Although it was impossible to say that the delay had the effect of frustrating the contract, Lewison LJ accepted that delay does result in uncertainty, which in turn can lead to commercial problems. However, where - like here - time is not of the essence, delay will only become repudiatory when it is so prolonged as to amount to frustration, and "...we are a long way from that in this case". Similarly, it was impossible to hold that Telford had renounced the contract. Renunciation occurs when one party, either by words or conduct, declares that it will not (or will not be able to) perform its contractual obligations in some essential respect, either before or at the time fixed for performance, and entitles the other party to treat itself as discharged. In contrast, Telford repeatedly stated it was going to complete the work.

Please click on the links below for the other articles in the February 2010 commercial contracts newsletter:

• No exemplary damages awarded for breach of confidence
• Construction of confidentiality clauses: commercial agreements and employment contracts distinguished
• Exclusion and limitation clauses in professional services contracts held reasonable under UCTA
• Payment on contractual termination "not a penalty"
• Delay: make sure your contract provides a remedy
• Commercial Agents Regulations: meaning of "continuing authority to negotiate”