In a recent decision, the Court of Appeal held that the deliberate withholding of payments due under a contract, in circumstances where the counterparty could expect to receive payment eventually, did not amount to a repudiatory breach so as to entitle the counterparty to terminate the contract: Valilas v Januzaj [2014] EWCA Civ 436.

The court found that the time of payment was not a strict condition of the contract, so that any breach automatically entitled the other party to terminate, but rather an “innominate term” so that the right to terminate depended on the nature of the breach. Here, in the view of the majority, the breach was not sufficiently serious.

The case illustrates the difficulty of establishing that a breach of an innominate term is repudiatory where performance is still expected to happen, albeit later than agreed, and the parties have not made the time for performance of the essence of the contract. It follows the earlier, comparable decision of the Court of Appeal in Telford Homes (Creekside) Limited v Ampurius NU Homes Holdings Limited [2013] EWCA Civ 577 (see post) that a delay in carrying out works was not repudiatory on the facts of that case.

In light of these authorities, commercial parties may wish to seek an express right to terminate where there is a delay in performance of particular obligations. Where there is no express right, parties should always consider carefully before seeking to terminate on grounds of delay.

Background

The claimant dentist practised from the defendant’s dental practice under an oral agreement that he would pay 50% of his monthly receipts to the defendant for the right to do so. His receipts were largely from the local NHS Primary Care Trust (“PCT”), with which he had a separate contract to carry out a minimum amount of work each year. The PCT paid the claimant equal, monthly, up-front instalments that were calculated on the assumption that he would undertake the minimum amount of work annually. If he did less work, he was obliged to refund the excess payment to the PCT at the end of the year and (on his case) the defendant was in turn required to refund him the equivalent proportion of previously made payments. There was no agreement that the time for claimant’s monthly payments would be of the essence of the contract, such that the defendant would automatically be entitled to terminate if payment was late.

The claimant came to believe that he would undertake less than the minimum amount of work in a particular year such that he would have to make a repayment to the PCT and would be entitled to a refund from the defendant. However, he believed that the defendant would not refund him. On this basis, he gave notice to the defendant that he would no longer make his monthly 50% payments, albeit he indicated subsequently that he would be willing to make payments in respect of PCT work that he had actually undertaken. This proposal was not acceptable to the defendant, who responded by excluding him from the practice.

At first instance the judge held that, in withholding the monthly payments, the claimant breached an innominate term of the agreement, but that this was not repudiatory, and the defendant’s exclusion of the claimant from the practice was itself wrongful. The defendant appealed.

Decision

By a majority, the Court of Appeal dismissed the defendant’s appeal. All three appellate judges agreed that the claimant’s obligation to pay was not a strict condition of the contract but an innominate term. The time of payment is not generally of the essence of a commercial contract unless the parties have agreed that it should be.

Floyd and Arden LJJ, who together formed the majority, held that, for the breach to be repudiatory, the decisive question was whether it deprived the defendant of “substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain for performing [his] undertakings” (per Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26). This was not the case as, whilst the defendant would be deprived of the monthly payments, he would obtain the amount to which he was ultimately entitled in the end, albeit some payments would be late. There was no outright refusal to pay. The only loss to the defendant was the use of the money, which could be compensated in interest.

Underhill LJ disagreed with the majority, holding that the claimant’s actions were repudiatory. Of particular significance was that the claimant had deliberately chosen to depart from the agreed payment terms (rather than payment being delayed as a result of a mistake or cash flow issues). Underhill LJ also warned against elevating into a universal proposition that late payment could never be repudiatory if eventual payment was assured.

Comment

This decision illustrates the difficulty of establishing that delayed performance – in this case of a payment obligation – is a repudiatory breach. It also highlights the risk that an attempt to terminate on the basis of delay will itself be a repudiation, where the parties have not agreed that the time for performance of the obligation is of the essence of the contract. These difficulties are unlikely to arise where there is an outright refusal to perform at all, which in many cases will plainly be repudiatory.

The decision is also notable because the Court of Appeal gave guidance as to types of factors that can be relevant to whether such a breach is repudiatory. They include the nature of the contract, the nature of the relationship and the nature of the term, as well as the kind and degree of the breach and its consequences for the innocent party. This guidance is helpful but, perhaps inevitably, the factors are widely drawn and therefore only provide limited assistance to a party contemplating whether to try to terminate for delay. Indeed, the difficulties that party will face are underlined by the fact that the Court of Appeal was split on whether the breach was repudiatory in this case.