Introduction

Whether to terminate of a complex agreement for material and/or repudiatory breach is a common and yet difficult decision to make as a business (and to advise on as a lawyer). And, given the unpredictability of the outcome, most termination disputes settle well before trial, meaning there is limited guidance from the courts as to exactly what amounts to a material breach in any particular circumstance.

The recent decision of the Commercial Court in Digital Capital Ltd v Genesis Mining Iceland EHF [2021] EWHC 2462 (Comm) should not therefore go under the radar. The court considered in detail the relationship between contractual rights of termination and repudiatory breach in the context of a cryptocurrency platform services contract and provided some very welcome guidance.

What happened

The dispute arose out of an agreement for the development and maintenance of a cryptocurrency platform, intended to facilitate the spending of crypto assets in commercial transactions via instantaneous conversion into traditional fiat currencies. A classic termination scenario developed: the target go-live date for the project was missed. Genesis stopped paying Digital Capital on the basis that it had not provided the system it was contracted to provide and was either unwilling or unable to do so. Genesis asserted a right to immediate termination for Digital Capital’s irremediable material breach and/or that Digital Capital was in repudiatory breach. Digital Capital claimed for unpaid invoices and asserted that the position Genesis had adopted itself amounted to a repudiatory breach.

The relationship between contractual and common law rights of termination

The factual position illustrates the pitfalls for parties seeking to terminate. There may have been breaches, but the response by the “wronged” party must be in line with the contractual provisions. Here, the agreement included a standard contractual right to terminate in the event of “material” breach, following service of a notice to remedy. Genesis failed to serve the notice so was forced to frame its argument on the basis that the breaches were more than merely material, and in fact repudiatory, pushing its rights beyond the contract and into a right to terminate at common law. Fortunately for Genesis, the contract expressly preserved ‘any other right or remedy of either party in respect of the breach concerned.’ The court noted in obiter comments that without that clause, it might have decided that Genesis’ failure to serve the contractual notice to remedy may equally have rendered the termination for a repudiatory breach unlawful.

Did Digital Capital commit a material or repudiatory breach of the agreement?

Given the failure to serve the required notice for material breach, Genesis was required to show that the breaches by Digital Capital did amount to repudiatory breaches. The arguments here were case-specific, technical, and required close analysis of the functionality of the system. Overall, the court found that the failures by Digital Capital were not so serious as to amount to a repudiatory breach of contract. Whilst Digital Capital had committed a material breach of contract by failing to provide certain functionalities, there was no evidence that it was unwilling or unable to perform its obligations. Therefore Genesis had not been entitled to terminate the agreement.

Comment

Delays and functionality issues are common in IT contracts. When projects cannot be rescued, the rights and wrongs of issue of termination frequently arise. Whilst this case makes clear that each case will need to be decided on its own facts, and on the wording of the contract itself, it is also evident that each party’s behaviour when attempting to terminate can have a significant (often detrimental) effect on the overall legal outcome.

The safer termination strategy will usually be to –fully– adhere to any contractually agreed procedure. If that procedure is unavailable or undesirable for any reason, the common law right to terminate for repudiatory breach may present an option, albeit one that involves a high threshold. However, this case shows that the question of whether a contractual code for termination has circumscribed the common law right to terminate for repudiatory breach will be a matter of contractual construction in each case.

Notably, the judge in this case also commented on the limited weight that he was able to place on the witness evidence due to the witnesses not being involved in the day-to-day detail of the project, the unclear memories of a number of the witnesses and the lack of consistency between the witness evidence and the contemporaneous documents. This is a stark reminder that during any complex IT projects, those involved should be recording issues that arise in writing, whether it be by way of minutes of project and/or other meetings, internal emails or emails with the other party.