Under English law, an innocent party faced with a serious breach of contract by its counterparty is in a difficult position. Whilst a reasonable time is allowed to decide whether to accept the breach, or terminate the contract and claim damages, it is not always clear what is a reasonable period for such decision-making. The answer often depends on the circumstances. Thus, a party weighing a termination for repudiatory breach must be alert to a number of potential pitfalls. It must not terminate prematurely, before the breach is serious enough to be considered repudiatory, or it may face a return allegation of a repudiatory breach causing damages. It must not postpone until it is too late, as it could lose the right to terminate on the basis of affirmation of the contract. Further, while the innocent party is making up its mind, the party in breach might cure it so that there is no longer a repudiatory breach to accept. A recent Court of Appeal ruling illustrates how complicated this decision can be.

Background

The Court of Appeal decision came in Telford Homes (Creekside) Limited v. Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577 (23 May 2013). In October 2008, Telford, as the property developer and anticipated landlord, entered into an agreement regarding a series of leases on four commercial units to be constructed in a property development with Ampurius as investor and intended tenant. The leases were proposed to run for 999 years from completion of each block, with a target completion date of 21 July 2010 for two of the commercial blocks, and the remaining two blocks to be completed by 28 February 2011. Telford was to use its reasonable endeavours to complete the work by the target completion dates "or as soon as reasonably possible thereafter" and to carry out the work on the property with due diligence. Telford commenced work promptly on the blocks. Then in June 2009 it suspended work on the two blocks with the later target completion date, allegedly as the result of cash flow issues. Despite the parties entering into extensive correspondence and negotiations to try and resolve the situation, it was not clear when Telford could or would recommence work on the latter two units. Nevertheless, Telford maintained that it would ultimately recommence the work in due course and that the blocks would be completed, although late. This led on 22 October 2010 to Ampurius’s purported acceptance of what it characterized as Telford's repudiatory breach of the agreement in delaying the work on the two blocks, and on that basis Ampurius terminated the agreement. However, unknown to Ampurius, Telford had actually restarted work on those two blocks on 4 October 2010. Telford then denied it was in repudiatory breach and alleged that Ampurius was in repudiatory breach as the result of outstanding payments it owed, and Telford sought to terminate the agreement on this basis.

The Initial Decision

In Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC 1820 (Ch) (04 July 2012) Mr. Justice Roth found in the High Court in favour of Ampurius. He held that by at least the end of 2009, after work on the two delayed blocks had been suspended for some five months, Telford's breach of contract in failing to progress the work with due diligence had become sufficiently serious to be considered repudiatory. He also found Telford in breach of its contractual obligation to use its reasonable endeavours to complete the work by the target completion dates or as soon as reasonably possible thereafter, and that the breach had become repudiatory by at least July 2010. He concluded that the parties' agreement had envisaged, in effect, a single project involving all four blocks, and that it would frustrate the commercial purpose of the agreement if Ampurius had to lease only two blocks while the rest of the development was put on hold. The judge considered Telford’s recommencement of work before Ampurius terminated to be irrelevant, as Ampurius was unaware that the work had restarted when it decided to terminate.

Telford then appealed, contending that its breaches of its reasonable endeavours and due diligence obligations were not repudiatory and did not entitle Ampurius to terminate the agreements.

The Court of Appeal Speaks

Telford's principal arguments on appeal were that:

1. the first-instance judge had not adequately analysed the benefit Ampurius was intended to receive under the agreement in order to decide whether the breaches had deprived it of at least a substantial part of that benefit;and
2. the judge had not focused on the right date in assessing when the breaches became repudiatory, which Telford argued should have been the date when Ampurius purported to terminate the lease agreement.

Lord Justice Lewison rendered the leading judgment allowing Telford’s appeal. He found the Court must look at the position of the parties and the facts on the date of the purported termination of the contract both as to actual breaches as well as anticipatory ones. In his opinion, Mr. Justice Roth had been wrong to consider whether Telford's breaches were repudiatory at an earlier date. Rather, the first-instance judge should have assessed the nature and seriousness of the breaches on the date when Ampurius acted to terminate the agreement. His Lordship went on to identify the following relevant factors for consideration in determining whether Telford’s breaches were sufficiently serious to be repudiatory:

1. the benefit Ampurius was intended to obtain from performance of the lease agreement; and
2. the effect of the breach on Ampurius, including any financial loss, how much of the intended benefit had already been received, whether an award of damages would adequately compensate for any losses, whether the breach was likely to be repeated, whether compliance with the obligations under the agreements could or would be resumed, and whether the breach fundamentally changed the value of any future performance of outstanding obligations.

Ultimately, in Lord Justice Lewison's view, the length of delay in the completion of the two blocks was insignificant in contrast to the 999-year commercial lease terms during which Ampurius would enjoy the rents and profits from the units. Thus, Telford’s breaches did not deprive Ampurius of a substantial part of the benefit it was intended to receive under the leases. According to his Lordship, absent a time of the essence provision, delay would only amount to a repudiatory breach if and when it becomes so prolonged as to frustrate the contract. For example, on the facts here, there was no evidence that the market value of the commercial units declined significantly during the period of delay. Furthermore, another important consideration was the fact that Telford had actually taken steps to cure its accrued breaches of contract before Ampurius attempted to accept the breaches and terminate. His Lordship concluded that Telford’s breaches were not repudiatory at the time Ampurius purported to terminate.

In a supporting judgment, Lord Justice Tomlinson noted that in his opinion the court did not even need to consider or decide whether Telford’s breaches of contract had ever become repudiatory. In his view, since the delayed work had been recommenced and Telford's breaches cured before Ampurius’s purported termination, "there was no repudiatory breach then available for acceptance".

The judicial disagreement in this case, as to whether admitted breaches of a commercial agreement were repudiatory, vividly illustrates the difficulty that an innocent party, even when aided by legal counsel, will face in deciding whether and when such breaches become sufficiently serious to justify the risk inherent in terminating the contract and seeking damages. The Court of Appeal's judgment nevertheless does provide some useful guidance on the English law of repudiatory breach, including examples of how to determine whether a breach is sufficiently serious, when the determination as to the nature and seriousness of the breach should be made, and whether and when a repudiatory breach can be cured.