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Which breaches of contract result in a right to terminate?

Most commercial contracts, including property contracts, include a right to terminate for one or both parties in the event of breach. As the ultimate recourse for an aggrieved party, courts are often asked to interpret termination rights.

Property contracts with extensive positive obligations, such as development agreements, options and planning promotion agreements, can be expected to include termination provisions. Every breach of contract gives rise to the possibility of a claim for damages by a party that has suffered loss, but not every type of breach will entitle that party to bring the contract to an end. 

At common law, termination is reserved for the most serious of breaches - known as repudiatory breaches -  but contractually, it is open to parties to define the sort of breach that will entitle the aggrieved party to terminate. 

It is rarely possible for the parties to agree an exhaustive definition of terminating breach.  It is for those reasons that parties will often refer to a right to terminate being triggered by ‘material’, ‘substantial’ or even ‘any’ breach. But what is the court’s interpretation of these phrases? 

Material breach

In Phoenix Media v Cobweb Information Limited [2000] 5 WLUK 424 the court stated that whether or not a breach was ‘material’ would involve consideration of:

‘the actual breaches, the consequences of the breaches…the explanation for the breaches, the breaches in the context of the agreement, the consequences of holding the agreement determined, and the consequences of holding the agreement continues.’

The court in Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2013] EWCA Civ 200 held that a material breach ‘…is more than trivial, but need not be repudiatory’.

Substantial breach

The court in Crane Co v Wittenborg [1999] 12 WLUK 675stated that a substantial breach was no different from a repudiatory breach. 

A repudiatory breach is the most serious type of breach which is generally incapable of being remedied and which permits the aggrieved party to terminate immediately. The termination clause in Crane Co afforded the party in breach an opportunity to remedy it. Logically that would suggest that a substantial breach capable of remedy cannot be equivalent to a repudiatory breach (which generally is incapable of remedy), but that did not affect the court’s assessment that the threshold for each was equivalent.

The picture that emerges from the case law is that a substantial breach is a more serious type of breach than a material breach.

Any breach

What about a contract that provides for termination for any breach? The caselaw suggests that the courts are unwilling to give effect to the literal interpretation of ‘all’.

Two cases in particular, Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191and Rice (t/a The Garden Guardian v Great Yarmouth Borough Council [2000] 6 WLUK 829,decided that a repudiatory breach would be required in order to permit termination because it did not make commercial sense for a party to be entitled to terminate for ‘any’ breach, despite that being what the contract said. Termination would be too draconian for trivial minor breaches of contract. If a party did want such a broad right to terminate, then the contract would need to make this absolutely clear.

Practical advice

It is helpful to look to caselaw for guidance but this is not definitive, and a breach will always be assessed by the court in all the relevant circumstances.

In negotiating a termination clause, the parties should ensure that the clause provides reasonable opportunity to remedy the breach complained of, or to dispute that there is a breach. The contract should set this out clearly and provide for dispute resolution.  

It is preferable for parties to set out explicitly the events that will (or will not) entitle termination where this is possible. However, as it is rarely possible to define every set of events that will afford the right to terminate, a combination of a list of specific events, together with reference to other ‘material’ or ‘substantial’ breaches, may be the best choice for parties seeking a greater degree of certainty.

Any party seeking to terminate pursuant to a contractual termination right should ensure that they follow strictly the procedure set out in the contract, otherwise they could find that the opportunity to terminate is lost.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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