Key points

  • A party to a contract will not normally be allowed to rely on his own breach of contract in order to bring the contract to an end
  • However, it is possible for the contract to provide to the contrary

A contract will be construed, so far as possible, so as not to permit one party to take advantage of its own wrong. Where a contract contains an express right for one or both parties to terminate in certain circumstances, the question may arise as to whether one of the parties can exercise their right to terminate if they are themselves in breach. Two recent cases have considered this issue and reached opposite conclusions.

Extra MSA Services Cobham Ltd v Accor UK Economy Hotels Limited

The first case involved an agreement for lease for a hotel at a motorway service station. The agreement was conditional on various planning and development consents, which the landlord agreed to use all reasonable endeavours to obtain.

If this condition was not satisfied by a long-stop date, then the agreement provided that either the landlord or the tenant could terminate by giving 10 working days' notice to the other. The agreement went on to provide that in this event neither party would have any further claim against the other, save in respect of antecedent breaches. The landlord served notice to terminate, contending that the requisite consents had not been obtained. The tenant argued that the landlord should not be able to rely on the termination provisions where it was in breach of its obligation to use all reasonable endeavours to obtain the relevant consents.

The court quoted from Chitty on Contract:

"as a matter of construction, unless the contract clearly provides to the contrary it will be presumed that it was not the intention of the parties that either should be entitled to rely on his own breach of duty to avoid the contract or bring it to an end or to obtain a benefit under it."

In the court's view, the fact that the parties had expressly preserved their right to claim for damages in the event that termination occurred did not point in one direction or the other. Equally, the court did not think that the landlord's right to waive the requirement to obtain the consents had any bearing on the issue.

The court thought that the purpose of the termination provision was to allow the parties to get out of the agreement if the consents proved impossible to obtain. However, it ruled that the parties would not have envisaged that one of them could ignore their obligations. There were no express pointers in the agreement showing that the landlord could "simply sit on their hands and then terminate". This would be inconsistent with the detailed provisions of the agreement and the natural intention of the parties that the agreement should result in the building of a hotel and the granting of a lease.

The court therefore held that the right to terminate was conditional on the landlord not having brought it about by its own breaches of any clause in the agreement (and in particular its obligation to use all reasonable endeavours to obtain the consents). The court had not been asked to consider (and so did not rule on) whether the landlord had in fact breached its obligations, or whether, if it had, those breaches caused the consents not to be obtained.

BDW Trading Ltd v JM Rowe Investments Ltd

It is however possible to draft a contract so as to permit a party who is (or may be) in breach to terminate it. This is what had been done in the second case.

The parties had entered into a development agreement incorporating a contract for sale and leaseback. Part of the premises to be redeveloped were subject to an existing occupational lease. The lease contained a landlord's break option. On exercise of the break the landlord had to pay a sum of £95,500 to the tenant.

Completion of the sale contract was conditional on satisfaction of a number of conditions, which were set out in clause 6.2. One condition was that the seller (who was the landlord of the occupational lease) had confirmed that the £95,500 had been paid to the tenant. A proviso to this clause stated that, if the conditions were not satisfied within a particular timeframe, either the buyer or the seller was entitled to rescind the agreement by serving notice on the other "save where the party purporting to serve such notice is in default of its obligations under this clause 6.2".

The seller did not make the payment to the tenant by the required date. This was because it had agreed with the tenant that payment should be deferred. However, it had not informed the buyer or sought its consent to this agreement.

The seller argued that the buyer was in breach of its obligations elsewhere in the agreement to provide certain documentation relating to the development by a particular date. As such, the seller contended, the buyer could not exercise the right to terminate in the proviso to clause 6.2.

The court found that any breaches of another part of the agreement were irrelevant. The only express limitation on the right to rescind in the agreement was where a party was in default of its obligations under clause 6.2. The court thought that the parties had therefore positively selected the breaches of contract which would debar them from being able to rescind. It was difficult to attribute to them an intention to include some wider provision. The express exclusion of the right to rescind in the event of a particular type of breach of contract was exhaustive, and no further term could be implied. The buyer was therefore entitled to terminate.

Things to consider

In a case where a party cannot terminate when it is in breach of its own obligations, it becomes necessary to consider whether that is only the case where the breach complained of caused the non-satisfaction of the condition which would otherwise trigger the right to rescind. The landlord in the BDW Trading case accepted that such a causal link was necessary. The landlord in Extra MSA Services took the point, but it was sidestepped by the court. The question could be put beyond doubt by drafting in the agreement.