Termination for breach of contract - Thomson Snell and Passmore

InformationJune 2011Termination for breach of contract:Don’t jump the gunHead Office3 Lonsdale GardensTunbridge WellsKent TN1 1NXT 01892 510000F 01892 540170Thames GatewayCorinthian HouseGalleon BoulevardCrossways Business ParkDartfordKent DA2 6QET 01322 623700F 01322 623701If party A contracts with party B for theprovision of goods or services to it over aperiod of years in return for payment, whatcircumstances would allow party A toterminate the contract?It is well established that minor breaches ofcontract allow a party to bring a claim fordamages. The courts have, however, beenanxious to ensure that termination is onlypermitted where the breach of contract issuch as to go to the very root of the contractso that failure to perform it would mean thatperformance of the remainder would resultin something substantially different fromwhat was initially contemplated.That in itself sounds fine but what is thesituation where the parties expressly agreein a written contract that the breach of anyobligation will allow one party to terminatethe contract?In the 2000 case of Rice (t/a GardenGuardian) -v- Great Yarmouth BoroughCouncil, that was precisely the point theCourt of Appeal was required to address.In that case the Council contracted withRice to provide it with leisure managementand grounds maintenance for a period offour years. It used a standard form ofcontract drafted by the Association ofMetropolitan Authorities and the clausedealing with termination stated “If thecontractor commits a breach of any of itsobligations under the contract …. theCouncil may, without prejudice to anyaccrued rights or remedies under thecontract, terminate the contractor’semployment …. by notice in writing havingimmediate effect.”Almost immediately after Rice firstcommenced work the Council served thefirst of numerous default notices regardingthe state of its sports pitches. A few monthslater, the Council terminated the contract inaccordance with the above clause.Despite the clear wording of the contractallowing the Council to terminate “if thecontractor commits a breach of any of itsobligations” the Court of Appeal held that aliteral interpretation of that clause flew in theface of commercial common sense and thata common sense, commercial interpretationhad to be applied.In deciding whether the cumulative effect ofthe various breaches which had taken placewas sufficiently serious as to justify theCouncil bringing the contract to an end theCourt should consider, looking at thecontractor’s performance over a period,whether those cumulative breaches weresuch as to justify an inference that thecontractor would continue to deliver a substandardperformance in the future suchthat the Council would thereby be deprivedof a substantial part of that for which it hadcontracted.This case illustrates the far morecommercial, rather than literal, approachtaken by the courts in the interpretation ofcommercial contracts and terminationclauses in particular. Under thecircumstances, even if you are able toextract very harsh termination provisionsfrom a contractor, enforcing them may notbe at all simple.In the case of Alan Auld Associates Ltd – v– Rick Pollard Associates Ltd [2008] theCourt of Appeal again considered thisquestion.Dr Pollard had worked as Consultant forAlan Auld Associates and throughout thiswww.ts-p.co.uk 1

June 2011Termination for breach of contract:Don’t jump the gun (continued)time, having issued 19 invoices between 31December 2004 and 30 April 2006, not oneof his invoices had been paid on, or indeedanywhere near on time, leading to the totalamount outstanding growing to £721,000.Dr Pollard withdrew his services andcontinued to work on the project throughanother consultant. Alan Auld Associatessought to bring a claim for their lost profitalleging that Dr Pollard had withdrawn hisservices in breach of the (implied) terms ofthe contract. Dr Pollard said that he hadaccepted Alan Auld Associates’ repudiatorybreach of contract arising from persistentlate payment “with every prospect ofcontinuing to do so in the future”.The Court of Appeal re-visited their decisionin the Rice case, confirming that thecumulative effect of breaches and likelihoodof future breaches may legitimately beconsidered in assessing whether a breachwas repudiatory and could be accepted tolawfully terminate the contract. In this case,by analogy to a contract of employment, theCourt said that the time for payment “lay atthe heart of the agreement” and, on thefacts, the “substantial, persistent andcynical” breaches were sufficient to amountto a repudiatory breach, which Dr Pollardhad been entitled to accept and therebyterminate the agreement.This information sheet has been prepared tohighlight some key issues relating totermination for breach of contract. It isintended to be for general guidance onlyand is not a substitute for specific advice. Itis based upon our understanding of thelegal position as at January 2009 and maybe affected by subsequent changes in thelaw.Should you require any specific legal adviceon the issues covered, please contactKamal Aggarwal on 01322 623700 or byemail at:kamal.aggarwal@ts-p.co.uk© Thomson Snell & Passmore LLP All Rights Reservedwww.ts-p.co.uk 2