The preparation for next summer's World Cup in Brazil is now officially underway with the recent kick-off of the Confederations Cup. The excitement that is now building amongst football fans could be tempered somewhat by news stories that have been surfacing concerning the host nation's readiness for the tournament. Serious concerns have been raised not only about whether all the promised stadia will be in place in time for the scheduled kick-off but also regarding fan safety as England visited the Maracana Stadium in a friendly match before all the scheduled work to the Stadium had been completed. Needless to say, delay is a serious issue in construction contracts, particularly with something as high-profile and time critical as delivery of stadia for a major sporting tournament.
The recent decision from the Court of Appeal in Telford Homes (Creekside) Limited v Ampurius Nu Homes Holdings Limited has provided some guidance on when a contract can be terminated as a result of works falling behind schedule. The case highlights the importance of ensuring that this is clearly spelt out in your construction contract, as reliance on the common law principles of repudiatory breach will by no means provide a certain outcome. Getting your contract right from the outset, particularly in time critical projects, is absolutely essential.
Facts of the Case
Ampurius entered into a contract with Telford for the development of four separate office and residential blocks (referred to as A, B, C and D). Under a lease agreement Telford was to develop the blocks, then hand over use and possession to Ampurius for the 999 year term, using due diligence and reasonable endeavours to deliver these by the specified target dates. However, there was no express right to terminate should they fail to do so.
Blocks C and D were completed, but some months behind their original target date. In the meantime work was halted temporarily on Blocks A and B in March 2009 as Telford sought to resolve some cash flow and funding issues it was experiencing. Telford re-affirmed that they intended to be bound by the contract and were committed to delivering the project despite the temporary halt in progress. Ultimately, work was restarted on the blocks on 4 October 2010. But Ampurius (apparently not aware that work had restarted) purported to terminate the contract on 22 October 2010 as a result of the delay by Telford, alleging that the delay amounted to a serious enough breach that it entitled them to consider the contract at an end.
At first instance, the judge sided with Ampurius and ruled that there was a repudiatory breach. Telford appealed.
The appeal was allowed. The Court of Appeal sided with Telford and held that there was no repudiatory breach in this case. The test for deciding whether a breach amounts to a repudiatory breach is whether it goes to the root of the contract or "whether the breach has deprived the injured party of substantially the whole benefit of the contract".
This test was not met in this case, with the Court adopting the following reasoning :-
- The starting point is to consider the overall benefit the injured party was expecting to obtain from the contract. The ultimate benefit to Ampurius was the gain of a leasehold interest of the units for 999 years. A delay of around one year out of 999 cannot be said to be denying the injured party a substantial part of the benefit that they were intended to receive.
- There was no actual loss to Ampurius, a fact that was accepted by them. It would be a highly unusual case to say that a breach of contract that has caused no actual loss could be characterised as a repudiatory breach.
- The steps that the defaulting party have taken to remedy the breach were of significant weight, the fact that Telford made "strenuous" efforts to find the necessary funding and complete the project working considerably in their favour.
- The relevant date for considering whether a breach is in fact repudiatory is the date of termination. Ampurius sought to terminate on 22 October 2010, but by that time, Telford had restarted the works. At the time of termination, the uncertainty surrounding whether the project would be completed at all had been removed. This lessened the severity of the breach significantly as Telford could now argue that Ampurius were always going to receive the benefit of the contract. This approach looks to represent a departure from previous authorities which had suggested that a repudiatory breach was incapable of cure.
As is often the case, whether a default amounts to a repudiatory breach of contract is very much dependant on the facts of any particular case. For example, Ampurius would likely have had a much stronger argument that the delay went to the root of the contract if they had sought to terminate closer to the time of the original breach in 2009, when it was unclear whether the work would be completed at all. As it was, by restarting the works, Telford "cured" what could otherwise have been considered a repudiatory breach of contract.
Many would be surprised that there is no automatic right of termination for such a significant delay, but it is clear that careful drafting of a contract to include express rights of termination is critical. The construction contracts in Brazil will no doubt have a number of complex clauses that ensure as far as possible that the stadia will be delivered on time - there is after all no room for manoeuvre should these fall significantly behind schedule.