In Valilas v Januzaj(1) the Court of Appeal considered whether the actual and threatened breach by a dentist of a term in his contract with his practice principal, which required payments for use of the practice to be made monthly, was a repudiation of that contract.
The appellant, Mr Januzaj, was the principal at a dental practice in Droitwich Spa. The respondent, Mr Valilas, worked as a dentist at the practice under the terms of an oral contract between the parties. Valilas was neither a partner nor an employee of Januzaj. In summary, the arrangement was that in return for the use of the premises, equipment and support staff, Valilas would pay Januzaj 50% of his receipts each month.
Most of Valilas's earnings came from his contract with the local primary care trust (PCT). Valilas had an annual contract with the PCT (running from April 1 to March 31) to carry out a specified number of 'units of dental activity' (UDAs), for which he was to be paid around £195,200 in equal monthly instalments of £16,260. The UDAs did not have to be spread evenly throughout the year. However, if the contracted UDAs had not all been completed by March 31, the overpayment would have to be refunded to the PCT.
In 2010 the relationship between the parties deteriorated and a dispute arose about the terms under which Valilas worked. In September (ie, halfway through that year's PCT contract), Valilas sent Januzaj a letter which stated that:
- unless certain changes were made, he would be forced to leave the practice at an unspecified time before the end of the PCT contract;
- if he left the practice, it was unlikely that he would be able to complete his UDAs for that year (with which he was already running significantly behind);
- if he did not complete his UDAs and had to refund the PCT, he did not trust Januzaj to refund the proportion of the overpayment which he would have received; and
- he would therefore withhold further payments to Januzaj of 50% of his monthly receipts until further notice (and he had already failed to make the August payment).
The following month, Valilas made clear that he would be happy to continue to make monthly payments to Januzaj, but only on the basis of the UDAs actually performed (so that there was no question of any refund being due from Januzaj in relation to the months to follow). This did not conform with the contractual agreement and was not acceptable to Januzaj. Following final attempts to resolve matters, Valilas was excluded from the premises from November 11.
Valilas commenced proceedings, claiming damages for breach of contract by its summary termination. Januzaj counterclaimed for the outstanding monthly payments.
It was common ground that by failing to make the monthly payments, Valilas had breached the contract. The issue was whether that breach – together with the expressed intention to commit further breaches by withholding future payments – repudiated the contract, so that Januzaj was entitled to accept that repudiation and terminate the contact without notice.
The judge at first instance held that Valilas had not committed a repudiatory breach of the contract and that Januzaj's termination was therefore unlawful. He directed Januzaj to make an interim payment to Valilas of £100,000, pending an assessment of damages.
Notably, the judge found (or at least the Court of Appeal was later satisfied that he had found, notwithstanding a lack of clarity in his judgment) that but for the termination, Valilas would have completed his UDAs and Januzaj would therefore have received the amounts to which he was entitled, albeit some of it late. The judge also found that Januzaj would have known at the time of termination that this was the likely outcome. Moreover, in the absence of any evidence from Januzaj on the issue, the judge made no findings about the effect of the late payment on Januzaj or the practice.
The Court of Appeal swiftly rejected Januzaj's primary case that it was a condition of the contract that Valilas make his monthly payments on time, noting that the time for payment is generally not of the essence in a commercial contract, in the absence of agreement. It instead proceeded on the basis that the relevant term was 'innominate' or 'intermediate' – in other words, whether the actual or threatened breach repudiated the contract depended on the nature and effect of that breach.
As the Court of Appeal noted, there have been various formulations of the test to apply in determining this question. For example, in the leading authority, The Nanfri,(2) the House of Lords stated that "to amount to repudiation a breach must go to the root of the contract", but also approved the earlier formulation in The Hongkong Fir,(3) in which the Court of Appeal stated that the relevant question was whether the past and threatened breaches would deprive the victim of "substantially the whole benefit" of the contract.
In the present case, the Court of Appeal was not concerned with the potential differences in these formulations, noting that this was not a field suitable for a satisfactory fixed rule. It also cited the (more straightforward) formulation from Decro-Wall(4) (a decision relating to late payment), in which the Court of Appeal said that the question was simply: "Will the consequences of the breach be such that it would be unfair to the injured party to hold him to contract and leave him to his remedy in damages?"
The Court of Appeal also stated that, in applying any of these formulations of the principle, it was important to take into account the parties' knowledge about the likely effect of the breach, as well as its actual effect.
The Court of Appeal held, by a majority of two to one, that the judge at first instance had been correct to find that Valilas's breach was not repudiatory, and therefore that Januzaj's termination was unlawful.
The majority of the court focused on the evidence which had been available at first instance and the specific factual findings made by the judge – in particular, the finding that it was likely (and would have been known by Januzaj to be likely) that but for the termination, Valilas would have completed his UDAs and Januzaj therefore would have eventually been paid in full.
In the light of that, the court held that it was:
"clear that Mr Januzaj was not deprived of substantially the whole benefit of the contract. The only likely loss was the loss of the use the money in the meantime. True, Mr Valilas did not offer to pay him interest but it was unlikely to be a significant amount."
The Court of Appeal also observed that the judge at first instance:
"was better placed… to evaluate the impact of the [Valilas's] breach and threatened further breaches on [Januzaj], and weigh the other factors relevant to an assessment of whether [Valilas's] breach went to the root of the contract."
The dissenting judge, who considered that there had been a repudiatory breach, conceded that he had placed less weight on the factual findings at first instance, and more on "the fact that [Valilas] deliberately declared that he would not, for an indefinite period, comply with" what the judge considered to be his "primary obligation" under the contract.
In the light of the specific factual findings made by the first-instance judge, and the absence of any factual findings (or any new evidence) in relation to the effect of Valilas's breaches, it is unsurprising that the majority of the court reached the conclusion that it did. This decision therefore reinforces that a party claiming repudiation by the actual or threatened breach of an innominate term must adduce clear evidence of the actual and anticipated effects of the breach.
However, it is unfortunate that the two judgments of the majority of the court did not fully engage with the thrust of the dissenting judgment, which was that it was not fair that Valilas could deliberately cease to comply – and state his intention to continue not to comply – with what was, on any view, an important term of the contract, leaving Januzaj only with a remedy in damages. Although this is not without force, it is not entirely clear that it is unfair that Januzaj should be held to the contract, given the finding that the only effect of the breach was the loss of use of the monthly payments.
For further information on this topic please contact Geraldine Elliott or Daniel Hemming at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1)  EWCA Civ 436.
(2) Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri)  AC 757.
(3) Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kasha Ltd (The Hongkong Fir)  2 QB 26.
(4) Decro-Wall International SA v Practitioners in Marketing Ltd  2 All ER 216.