The Court of Appeal has reviewed the law relating to repudiatory and anticipated breach of an innominate (or intermediate) term. It held that, in assessing whether the breach was repudiatory, the consequences of the breach and the parties’ knowledge of the consequences were key.

Whilst the Court of Appeal’s reasoning may be sound, it makes the task of deciding in real time whether a breach or anticipated breach is repudiatory all the harder. In this article we review the relevant law and the facts of the case in question.

A repudiatory breach gives the innocent party the right to choose either to end the contract or to affirm it (with or without also claiming damages). It entitles the innocent party to treat itself as discharged from performing any further obligations under the contract.

Repudiatory breach of an innominate term

Terms of a contract fall into three categories – conditions, warranties and innominate (also known as intermediate) terms. A condition is often described as a fundamental term of the contract and breach of a condition will normally be repudiatory. Warranties, on the other hand, are the less important terms of a contract that give only a right to damages if breached.

Innominate terms are the tricky ones that can sometimes be classed as conditions and sometimes as warranties depending upon factors such as the nature of the contract and the circumstances surrounding the breach. The concept of innominate terms was introduced in the landmark case of Hong Kong Fir Shipping –v- Kawasaki Kisen Kaisha [1962] 2 QB 26 in which the Court held that there were some terms in a contract that should only be treated as a condition if the breach has deprived the innocent party of substantially the whole benefit of the contract. In determining whether a repudiation has occurred, all of the circumstances of the case will be taken into account.

Valilas v Januzaj [2014] EWCA Civ 436

This recent case raised the issue of breach of an innominate term. Messrs Valilas and Januzaj are dentists. They entered into an oral contract whereby Mr Valilas practiced from Mr Januzaj’s premises, utilising support staff and equipment, in return for paying 50% of his income each month to Mr Januzaj.

Mr Valilas held an NHS contract that paid him in advance in equal monthly instalments for anticipated annual Units of Dental Activity (UDAs). Part of this payment was paid directly to Mr Januzaj each month by the PCT. If Mr Valilas did not perform the anticipated number of UDAs by the end of the year then he was obliged to make a refund to the PCT and it was uncertain whether Mr Januzaj would be similarly obliged to refund his share of the overpayment. The partial payment to Mr Januzaj was made predominantly for administrative reasons and Mr Valilas appeared to be contractually liable for that portion also. In the past, this had not been an issue as Mr Valilas had always exceeded his UDAs.

In 2010 cracks began to appear in the relationship between Mr Valilas and Mr Januzaj. Mr Valilas did not make payment to Mr Januzaj in August and in September he wrote to Mr Januzaj stating that he was stopping the 50% monthly payments as he was running short on his UDAs due to the stress of the situation between them and he considered that a refund to the PCT was likely. He stated that there was a lack of trust between them and he was not confident that Mr Januzaj would refund the portion of any overpayment that he had received. Mr Valilas continued that he would be prepared to agree to a modified contract if there was a change in the working environment and a rebuilding of the relationship between them. He later proposed that he pay Mr Januzaj on a performed UDAs basis going forward, meaning that payments would be less than the contracted amount if he was behind on the number of UDAs he had performed.

No agreement was reached and in November 2010 Mr Januzaj gave just over a week’s notice to Mr Valilas that he was terminating the contract and excluding Mr Valilas from the premises for withholding payments.

Mr Valilas brought a claim for damages for wrongful termination of the contract. Mr Januzaj counterclaimed for damages for the withheld payments and alleging that termination was lawful because adequate notice was given. In the alternative, Mr Valilas’ breach of contract (by withholding payments) amounted to repudiatory breach entitling him to treat the contract as terminated.

The Court’s decision

The trial judge held that Mr Valilas’ actions did not amount to a repudiatory breach of contract and that Mr Januzaj had wrongfully terminated the contract. Mr Januzaj appealed. In his appeal he alleged that Mr Valilas’ obligations to make monthly payments should be treated as a condition of the contract, thereby entitling him to automatically terminate for non-payment. Alternatively, if the requirement to make payments was an innominate term, Mr Valilas’ failure to make payments between August and October 2010 amounted to a persistent and deliberate refusal to perform his primary obligation under the contract, entitling Mr Januzaj to terminate.

Mr Januzaj’s argument that the requirement to make monthly payments was a condition was rejected. The Court said that the effect of the past and threatened future breaches could not be said to deprive Mr Januzaj of substantially the whole benefit of the contract. Under the existing law, a requirement to make monthly payments on time was an innominate term in the absence of express (or necessarily implied) agreement to the contrary.

In Hong Kong Fir the Court had made it clear that the Judge should evaluate all of the relevant circumstances in deciding whether the innocent party had been deprived of substantially the whole benefit of the contract. In the current case, the Court considered that the consequences of the breach and evidence of the parties’ knowledge of the consequences were key. The Court stated that “the effect of a breach is important because one of the circumstances the court may take into account is the relationship between the promised performance and the performance which in fact occurs. The parties' knowledge about the likely effect of a breach will be important evidence."

In this case, the likely consequences of the breaches (and the evidence of the parties’ knowledge of those consequences) was that Mr Januzaj would receive payment, albeit late. In particular, the Court took into account the correspondence from Mr Valilas to Mr Januzaj offering solutions departing from the contract under which Mr Januzaj would receive the payments that he was entitled to. As such, Mr Valilas’ breaches could not be described as depriving Mr Januzaj of substantially the whole of the benefit of the contract.

Comment

Repudiatory breach of contract is notoriously tricky to deal with. If a party claims repudiatory breach and, in reliance, ceases to perform their obligations under the contract they run the risk that they will actually be the ones in repudiatory breach if they are found to have wrongfully terminated. The “innocent party” becomes the one facing a claim for damages for wrongful termination.

One of the reasons that repudiatory breach is so difficult to call is this requirement to consider all of the relevant circumstances and, in particular, the likely effect of the breach of an innominate term. Other factors will also be relevant, such as any steps taken by the offending party to cure the breach and any delay by the innocent party in declaring the contract as repudiated.

We recommend that you should only terminate for repudiatory breach if you are 110% sure of your entitlement to do so and even then only with considerable care!