When is a Breach of Contract Serious Enough to Warrant Repudiation?

In the recent case of Leopardstown Club Ltd v Templeville Developments Ltd and Philip Smyth [2013] IEHC 526, Charleton J. at the High Court dealt with a key practical issue in relation to termination of a contract, namely, how serious must a breach of contract be to warrant repudiation? 

The decision shows that the ability to terminate a contract for what is perceived by one party to be a breach, even a serious one, should never be taken for granted.

The decision also usefully considers what constitutes a "mistake" giving rise to a right of termination; the enforceability of "no set-off" clauses; when adverse inferences may be drawn by the court for failure to call relevant witnesses; the circumstances warranting forfeiture of a lease; and the importance of proper corporate governance.

The Facts

This case arose out of a dispute between Leopardstown Club Ltd, the owner of Leopardstown racecourse, and Templeville Developments Ltd, and its principal, Philip Smyth (the defendants), who operated Westwood Fitness Club, located on land adjacent to the racecourse, and leased by Templeville from Leopardstown under a lease entered into in 1998.  Templeville, despite being a limited liability company, and having four directors, was (as the Court found) totally controlled by Philip Smyth, who was also the guarantor on the lease.

The parties did not get along, and entered into a mediation settlement agreement in October 2011, with a view to putting certain matters behind them.  Leopardstown claimed that rent and service charges due under the mediation agreement had not been paid, and sought termination of the lease.  They further argued that the conduct of the defendants had been so wrong that they were unworthy of equitable relief against forfeiture because, according to Leopardstown, Templeville, under the direction of Philip Smyth, had been continually uncooperative and had deliberately breached the mediation agreement by withholding rent.

The defendants, in defence, claimed that the mediation agreement was brought to an end by the conduct of the Leopardstown.  They asserted that there had been a fundamental breach of the mediation agreement by Leopardstown, which was so serious that it terminated the rights and obligations of the defendants as innocent parties, returning them to the position that no such agreement existed.  The defendants also claimed that by virtue of misrepresentation, and/or because of a mistake central to the mediation process as to the site of a major electricity cable, which was allegedly exploited by Leopardstown, the mediation agreement was void from its inception.  The defendants further claimed that if the mediation agreement was valid, they had been grievously wronged under its terms, and counterclaimed for damages.

The Decision

The High Court held that payment obligations under the settlement agreement had been deliberately breached by both Templeville and Philip Smyth, and judgment was made against them in the amounts of €2,188,793.11, and €1.5 million, respectively.

No set-off

Charleton J. noted that prior to the mediation agreement, many of the problems between the parties stemmed from the fact that when something went wrong, the defendants withheld rent.  In order to provide security of rent and service charge to Leopardstown, the mediation agreement contained a "no-set off" clause.  In regard to the effect of the "no-set off" clause, Charleton J. stated: "Construing this agreement in accordance with its plain language, even a serious breach of contract would not entitle Templeville to withhold rent or service charge."  Instead, the defendants would have to resort to legal proceedings, or invoke any entitlement to arbitration that they might have in the contract.

The defendants claimed the right of set-off against the many alleged wrongs of Leopardstown.  The Court refused to second-guess the arrangements reached as a consensus between the parties, as had been asked by the defendants, and instead held that it must give the agreement such business efficacy as would bring its plain terms into effect.  Accordingly, the Court upheld the "no set-off" clause, and ruled that there was no basis for the defendants to withhold rent.

Failure to call evidence in respect of misrepresentation claim

The defendants claimed that they had been surprised to discover a second ESB cable in June 2012, and alleged Leopardstown were guilty of misrepresentation in relation to the existence and site of this cable.  The map attached to the mediation agreement, which had been drawn up quickly by an engineer engaged by Leopardstown, had shown only one, rather than two ESB cables.  The defendants' claim in this respect was that, in effect, the existence of this second cable adversely affected plans for new tennis courts, that they were unaware of this cable, and that the mediation agreement was undermined by misrepresentation by Leopardstown about its existence. 

The evidence, however, showed that in 2007, a representative of the defendants had engaged with the ESB, regarding the second ESB cable traversing the site, as the defendants had sought planning permission to build seven tennis courts.  The Court therefore rejected the defendants' contention that it had no knowledge of the ESB cable.  Charleton J. found that the absence of this representative as a witness was fatal to the defendant's claim of surprise and misrepresentation. 

Charleton J. held that the making of an adverse inference on the basis of the failure of a party to call readily available and important evidence “should only be engaged in sparingly". He noted that Laffoy J. had analysed this matter in Fyffes Plc v DCC Plc & Ors [2009] 2 I.R. 417.   In that case, Laffoy J. stated that the principles outlined by the UK Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] Lloyd’s Reports Med. 223 were helpful guidelines for the court. 

These principles include:

  1. In certain circumstances the court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.
  2. If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call witnesses.
  3. There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.
  4. If the reason for the witness’s absence or silence satisfied the court, then no such adverse inference may be drawn.  If, on the other hand, there is some credible explanation given, even if it not wholly satisfactory, the potentially detrimental effect if his/her absence or silence may be reduced or nullified.”

MistakeIt followed, in the view of the Court, that the law of mistake and misrepresentation did not require detailed analysis.  However, Charleton J. gave a brief overview of the law of mistake, and followed the traditional analysis, dividing mistakes into three broad categories, including:

  1. A common mistake where both parties to an agreement have the same mistaken perception. If the mistake was a fundamental one, then the consent of the parties to the contract may be nullified.
  2. Mutual Mistake where both parties are mistaken but they do not share the same mistake; thus the issue is as to whether or not they have reached the necessary consensus for an enforceable agreement.  Where parties to a contract mutually mistake the subject matter of what they are agreeing in a way that is fundamental so that its nature, and not merely one of its characteristics, is altered, a consensus of minds is avoided.  The judge noted that this was not the case here.
  3. A unilateral mistake may occur where one of the parties is mistaken as to some element of the agreement.  This does not automatically render an agreement void: much more is needed, such as an exploitation of that mistake by the other party. 

Charleton J. held that there was no basis in evidence upon which he could hold that there was either misrepresentation or mistake in this case.  The site of the ESB cable was known to the defendants, which had negotiated with both the planning authority and ESB about it.

Fundamental Breach of Contract

Charleton J. highlighted that it does not follow that because one party is guilty of a breach of contract that the other party may treat himself as discharged from obligation further to perform the contract.  He considered the modern law as to how serious a breach of contract must be to justify the innocent party bringing an agreement to an end and seeking damages.  He noted that comments of Costello J. on this issue, in Irish Telephone Rentals v ICS Building Society [1992] 2 I.R. 525, are instructive.  Costello J. stated:

“There may be many cases in which the court…may be required to consider whether the term which was broken was ‘a condition’ or a ‘warranty’ or, a ‘fundamental term’ of the contract but as the frequently cited case of Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Limited [1962] 1 Q.B. 26 shows, this is by no means a necessary exercise to be undertaken in every case…I think the approach suggested by… Diplock L.J…is appropriate…he said:- “where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties form further performance of his undertakings…the test [is]: does theoccurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?”

Charleton J. noted that a similar analysis was engaged in by Clarke J. in Parol Limited and Carroll Village (Retail) Management v Friends First Pension Funds Limited and Superquin [2010] IEHC 498 (Unreported, High Court, Clarke J., 8 October 2010).  In that case, the lessor and lessee disputed whether breaches of the lessor's maintenance obligations, in regard to common parts of a shopping centre, could have deprived the lessee of substantially the whole benefit of the lease.  The Court held that the breaches by the lessor did not have any such effect, and hence did not entitle the lessee to repudiate the lease.

Applying this test to the present case, Charleton J. found that there had not been a breach of obligation by Leopardstown which was so serious as to entitle the defendants to bring the mediation agreement to an end.  He found most of the problems that had arisen between the parties could have been easily sorted out.  Instead, however, the defendants had stirred up “resentment in the misplaced belief it could provide evidence of a serious breach of contract in a later legal case.”

Accordingly, Charleton J. concluded that it was clear that the defendants “had not been deprived of the substantial benefit of the mediation settlement agreement.”

Forfeiture and Corporate Governance

Charleton J. held that Templeville was a dysfunctional company.  Although it had four directors, he found that Philip Smyth, who was one of the directors, told the others what to do.  The judge stated that: "the code of corporate governance cannot be overcome through internal reordering of a company.  No company can legitimately offer corporate protection on the one hand and be, on the other, the alter ego of an individual director."  He therefore ordered Templeville to be restructured, and at least two new directors to be brought in from outside the sphere of influence of Philip Smyth.

Charleton J. noted that the Court would have no hesitation in ordering forfeiture of the 1998 lease in this case were only Philip Smyth involved as lessee.  He found the actions of Philip Smyth showed an attitude of non-cooperation and the seeking out of grievances, which was not an attitude that would enable any agreement to work.  However, Philip Smyth was not lessee, but rather guarantor on the lease and on the mediation agreement.  Accordingly, the Court granted relief against forfeiture, on the condition that Templeville gave an undertaking that it would be restructured in order to function as a company subject to the rule of law.

Commentary

Although this decision contains no new law, it is important because it confirms the approach of the High Court in regard to how serious a breach of contract must be to justify an innocent party bringing it to an end and seeking damages.  It also highlights the relevance of the conduct of the parties when considering this question.

The decision confirms that the starting-point, when considering whether a party may terminate a contract for breach by the other party, is the terms of the particular contract.  In many cases, there will be an express right to terminate for breach of contract.  In some cases, the contract will spell out what circumstances will give rise to a right for one or both parties to terminate.  However, as Charleton J. highlighted, no matter how scrupulous the parties and their lawyers are, it is unlikely that they will think of every foreseeable event and provide for what is to happen should one come to pass.

Therefore, when an event occurs, the occurrence of which neither party has expressly stated will discharge one of the parties from further performance of his undertakings, it will be for the court to decide whether the right of termination may be exercised.  In considering whether or not a party may terminate the agreement, the question for the court will be: "Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?"

It would be prudent, if one party wishes to have a right to bring a contract to an end where the other party commits any default whatsoever, to spell this out very clearly in the agreement, for example by referring to specific obligations or provisions of the agreement, and clarifying that the right to terminate will arise even if the breach of those provisions is minor in nature and/or could be remedied by the defaulting party.  It may also be appropriate in some cases to classify particular terms of the agreement as conditions, a breach of which will give rise to a termination right if not remedied within a certain period of time to the satisfaction of the innocent party.

The decision further serves as a warning to commercial organisations and their lawyers, to give important consideration to termination issues, and to recognise that, in many cases, getting out of a contract, however valuable it was originally considered to be, can be as important as entering into it.