When is a breach not a breach?

If a contract is not specific about what constitutes a breach, how bad do things need to get to justify termination?

Some construction projects never make it to completion. Employer and contractor fall out over time and money issues and, after the two sides have hurled accusations at each other, one of them terminates the agreement. Both make claims for their losses suffered.

At that stage, the dispute comes down to whether the party that gave the notice of termination was entitled to do so. That depends on whether the breach of contract being alleged was sufficiently serious. Serious breaches that justify a termination are termed “repudiatory breaches”. Most standard form contracts give examples, though there may be room for debate as to whether the “guilty” party’s conduct falls within the definition.

The dispute comes down to whether the party that gave the notice of termination was entitled to do so. That depends on whether the breach of contract being alleged was sufficiently serious.

The written contract in a case heard in the Technology and Construction Court earlier this year, Sanderson Ltd vs Simton Food Products Ltd, was a simple two-page form. It said nothing about what might count as a repudiatory breach.

Sanderson was to supply software and related IT services to a family business that manufactured cooking sauces and pickles. After the agreement was signed, it duly set about reviewing the manufacturer’s business. It prepared a draft implementation plan. It also held workshops with the manufacturer’s employees to discuss matters such as training in the use of the proposed software.

However, as the judge found, the manufacturer’s input to all of this was half-hearted. It did not commit sufficient resources. Its employees sometimes did not attend the workshops when required, or they left early.

Consultants and contractors faced with uncooperative behaviour or delaying tactics may need to decide whether they have grounds to terminate.

After some 15 months, the project was fizzling out. The parties agreed to call a halt and restart around a year later. But things did not improve. Sanderson concluded that the manufacturer was still not really committed. On the advice of its solicitors, it terminated the contract, alleging a repudiatory breach.

The judge started by holding that it was an implied term of this contract that the parties would co-operate with each other – how otherwise could a contract of this type possibly work? Since the contract gave no examples of the sort of acts that might justify a termination, the next question was whether the manufacturer’s lack of co-operation was sufficiently serious to justify Sanderson’s ending things. The question, said the judge, was whether, by its words or conduct, the manufacturer evinced or showed an intention to refuse to perform its obligations under the contract. That legal test has been applied in many cases involving termination.

The judge held that the manufacturer’s behaviour showed precisely that it did not intend to perform its side of the bargain. In particular, it had adopted an uncooperative attitude after the restart. It had made no arrangements for the proposed restart meeting, and instead had bombarded Sanderson with various questions, most of which could have been dealt with at the meeting itself. Sanderson was therefore quite entitled to infer that the manufacturer was not committed to the contract, and therefore to terminate. One issue that can arise (though it did not here) is whether a party that terminates a contract based upon an honest but mistaken belief as to its legal position has thereby demonstrated a refusal to perform its obligations – so putting it in repudiatory breach itself. Probably the best answer is that a mistaken belief about the law will not usually excuse a party that incorrectly terminates a contract. But much may depend on the precise facts.

The Sanderson case concerned a contract for the supply of IT services, but this sort of scenario can arise in construction-related contracts for the provision of professional services. In the last industry recession some 10 years ago, many employers wanted to stall projects for a while, awaiting an upturn. If they were under no specific time constraints themselves, it was possible to string the consultant along and buy some time.

A similar position can arise where a contractor is carrying out work under two-stage tender arrangements and where there may be a good deal of slack in the timetable for the employer to make decisions about design, for example. If things drift on, a time may come when it may be possible to say the employer has shown an intention no longer to perform its side of the contract.

In the circumstances above, consultants and contractors faced with uncooperative behaviour or delaying tactics may need to decide whether they have grounds to terminate. Sanderson is a useful example of the application of the legal principles in such cases.

This article first appeared in “Building” magazine on 11 October.