The Court of Appeal recently held that a developer’s delay in carrying out works did not amount to a repudiatory breach of an agreement for lease: Telford Homes (Creekside) Limited v Ampurius NU Homes Holdings Limited [2013] EWCA Civ 577.

The court considered existing case law as to when a breach will allow the innocent party to terminate a contract, and noted a tension between different formulations of the test in different cases. The court expressed the view that, absent any attempt to make time of the essence, a delay will only become a repudiatory breach if and when it is so prolonged as to frustrate the contract.

This sets a high threshold and underlines the need for contracting parties to agree expressly upon the circumstances in which delay will give rise to a right to terminate. Gregg Rowan considers the case.

Background

A property developer (Telford Homes), acquired land in South London to develop four mixed blocks (A, B, C and D) comprising commercial units on the lower floors and residential flats above. It subsequently entered into an agreement for lease with an investor (Ampurius) in respect of the commercial units with the ultimate objective of granting to the investor four 999 year leases of the units.

Under the terms of the agreement, the developer was required to carry out the works with due diligence and use reasonable endeavours to procure completion by target dates of 21 July 2010 for blocks C and D and 28 February 2011 for blocks A and B. The developer fell behind schedule with blocks C and D and suspended work on blocks A and B due to funding difficulties. It indicated that it would resume work on blocks A and B after obtaining funding and this eventually happened on 4 October 2010. Little over two weeks later, on 22 October 2010, the investor served on the developer a notice of termination alleging that the delay was repudiatory and purporting to accept the repudiation and terminate the agreement.

At first instance, Mr Justice Roth held that the developer’s breach of its obligations to carry out the works with due diligence and use reasonable endeavours to procure completion by the target dates amounted to a repudiation of the agreement.

Decision

The Court of Appeal held that the breach was not so serious as to be repudiatory and overturned Roth J’s decision on this aspect. Giving the lead judgment, Lord Justice Lewison reviewed the authorities relating to when a breach will be repudiatory. He noted a tension between cases which state the test as, on the one hand, depriving the innocent party of “substantially the whole benefit” of the contract or “frustrating” the contract (such as Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26) and, on the other, depriving of “a substantial part of the benefit” (eg Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361).

In Lewison LJ’s view, whatever test was adopted, the starting point must be to consider what benefit the injured party was intended to obtain from performance of the contract. When this has been ascertained, consideration should then be given to the effect of the breach on the injured party, including the following questions:

  • What financial loss has the breach caused?
  • How much of the intended benefit under the contract has the injured party already received?
  • Can the injured party be adequately compensated by an award of damages?
  • Is the breach likely to be repeated?
  • Will the guilty party resume compliance with his obligations?
  • Has the breach fundamentally changed the value of future performance of the guilty party’s outstanding obligations?

These questions should be considered as at the date of the purported termination of the contract, not (as the developer contended) the date of the breach. The court must take account of any actions of the party in breach to remedy the breach, as well as likely future events, judged by reference to objective facts as at the date of the purported termination.

In the instant case, the benefit that the injured party was intended to obtain was a leasehold interest of 999 years in the four blocks. If, as things turned out, all four blocks were completed a year late, the investor would have acquired interests in all the blocks that it contracted for. On the face of it, depriving someone of one year out of 999 years would not deprive him of a substantial part of the benefit he was intended to receive, let alone substantially the whole benefit.

The evidence showed that, as at the date of purported termination, the delay had not caused the investor any loss at all. At worst, future loss would amount to £100,000 which, in the context of a contract price of £8.5 million, was not of sufficient magnitude to be repudiatory. It could have been compensated in damages or by way of set-off against the purchase price.

A further relevant factor was that, by the time the investor purported to terminate the agreement, work on blocks A and B had resumed. It could not therefore be said, as the judge had, that the cessation of work was indeterminate.

The developer’s delay was therefore not sufficient to amount to a repudiation. It was, in fact, the investor, by purporting to terminate the contract, that committed the repudiatory breach. Lewison LJ accepted that uncertainty caused by delay is a commercial problem, but said “it seems to me that (absent any attempt to make time of the essence) delay, even with its attendant uncertainties, will only become a repudiatory breach if and when the delay is so prolonged as to frustrate the contract”.

Comment

This decision emphasises the need to consider the benefit the injured party was intended to obtain from performance of a contract before assessing whether a breach is repudiatory. In this case, the Court of Appeal took the view that the first instance judge failed to give sufficient weight to the ultimate purpose of the contract, which was the grant of 999 year leases, and this led to the erroneous conclusion that the delay was repudiatory. The judgment contains practical guidance not only on the questions that are likely to be relevant to this issue, but also the point at which they should be considered – i.e. the date of purported termination, rather than the date of breach.

With the common law right to terminate for delay confined to those delays so prolonged as to frustrate the contract, it is important for contracting parties to agree expressly upon the circumstances in which delay gives rise to a right to terminate. This can be done by providing for time for the performance of an obligation to be of the essence or an express contractual right of termination for delays of specified duration by way of a “long-stop” date.