Whether or not a breach is “material” is context specific, in particular by reference to the consequences flowing from the breach. In RiverRock v Harnack the High Court found that the dissolution of a consultant was not a material breach entitling RiverRock to terminate the consultancy contract.
Appointment of DREAM consultant?
The investment firm RiverRock appointed DREAM as its consultant for a fund. Mr Harnack was a fund manager who had guaranteed DREAM’s financial obligations. When difficulties arose in securing investors, RiverRock wanted to replace DREAM. RiverRock terminated the consultancy agreement on the basis that DREAM had been struck off the Register of Companies and dissolved. RiverRock sued Mr Harnack for repayment of fees paid to DREAM.
Was striking off DREAM, material?
The question for the court was whether the striking off and dissolution of DREAM constituted a material breach of the consultancy agreement. Drawing on previous authorities, the court identified a number of relevant factors in assessing materiality:
- the actual breach
- the consequences of the breach for the innocent party
- any explanation for the breach
- the breach in the context of the parties’ agreement
- the consequences of finding the breach material
- the consequences of finding the breach not material
On the facts, the court was not satisfied that the breach was material. The breach was the result of a mistake in failing to comply with Companies House requirements and was readily capable of remedy by restoring DREAM to the register. It also did not cause loss to the fund or any of its investors. RiverRock had already decided on replacing DREAM before its dissolution came to light, it was not in fact concerned by the dissolution.
Materiality is context specific
This case serves as a reminder for contracting parties to take a multifactorial approach when considering whether material breach is an appropriate trigger for termination rights. The risk to the asserting party is its potential liability for wrongful termination and repudiatory breach. Where the parties intend for a specific event to trigger termination rights, the contract should expressly say so.
Judgment: RiverRock v Harnack
