Date 20 July 2010
No project is complete without some problem or another rearing its head when you least expect it. One of the skills of managing a successful contract is knowing what you can or can’t do when the going gets tough. Here are some thoughts on three questions which often arise in contractual disputes which may help as a guide. As you will see, whilst they cover different situations, the critical issue of repudiatory breach of contract (which is explained in the first question) runs through all of them:-
I’ve Not Been Paid – Must I Carry On Working?
The key question here is whether or not the contract allows you to down tools. If it does not, there is no general right to suspend work for non-payment and by stopping work you run the risk of committing what is known as a “repudiatory breach” and potentially giving your counterparty the right to terminate the agreement and sue you for damages.
In short, a repudiatory breach of contract is one which is so serious that it gives the innocent party the right to terminate a contract immediately and to be compensated for the losses it suffers as a result of that termination. Repudiatory conduct is generally held to be that which shows that the party in question has no intention of performing, or completing the performance, of its contractual obligations.
Because of the fact sensitive nature of this aspect of contract law you have to consider carefully what steps you take when faced with non-payment, particularly where there has only been a single instance of this, as one late or missed payment on its own will probably not constitute a sufficiently serious breach to enable you to suspend your own performance in the absence of an express right to do this. However, if there are a number of late or missed payments the position may change and you might then be able to argue that these amount to a repudiatory breach which entitles you to terminate the agreement and seek compensation for your own loss as well as your unpaid invoices.
Because of the risks of inadvertently placing yourself in breach of contract you should always try to negotiate express terms to cover what will happen in the event of non-payment, especially where your pre-contract investigations show that your customer has a weak credit rating.
If you are faced with a non-payment the first step to take is to review the contract and see what, if any, rights you may have and then to seek advice if there are none or these are unclear before you either stop work or threaten to do this.
Can I Set-Off Money I’m Owed Against What I Owe?
Again, the first thing to do is to check the terms of your contract before you do anything. The starting point with set-offs is that it may be possible to set sums off against each other where “the claim and cross claim are so closely connected that it would be manifestly unjust to enforce one without taking account of the other”. So said Lord Justice Rix in Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667 which has clarified the law in this area. The facts in this case are worth looking at because they show what can happen if you do not consider properly the potential legal consequences of what might seem like a good commercial idea at the time.
In the case Simon Carves was the main contractor for the building of a bio-ethanol plant. As a part of this project it needed to purchase pressure vessels and have some storage tanks installed. Simon Carves entered into a supply contract with Geldof for the pressure vessels which entitled it to set-off any sums “lawfully due from [Geldof] to [Simon Carves] whether under this Purchase Order or otherwise”. In due course Geldof issued an invoice for the 30% of the purchase price due to it under the supply contract when the pressure vessels were delivered.
Meanwhile, and as a part of a separate tender process, Simon Carves placed a second, installation, contract with Geldof in respect of the storage tanks. Save for the fact that both of the contracts in question were for components for the same plant, the agreements were otherwise unconnected.
As the project moved forward Simon Carves alleged that Geldof had breached the installation contract because it had not proceeded with the speed required of it. Geldof’s invoice under the supply contract also went unpaid and Geldof refused to re-start its works at the plant under the installation contract until payment was received. Needless to say Simon Carves issued a notice of termination under the installation contract on the basis of what it said was repudiatory conduct on Geldof’s part.
Geldof then sued for what it claimed it was owed under the supply contract and Simon Carves counterclaimed for damages for the repudiation of the installation contract. It relied on various set-off arguments in respect of its unquantified damages claim (which it put at £5.3 million) but the judge found against it and awarded Geldof €1,329,437.55 under the supply agreement. Simon Carves appealed.
The Court of Appeal allowed the appeal on the basis that by Geldof insisting on payment under the supply contract as a pre-condition of returning to work under the installation contract it had bought the two agreements in to “an intimate relationship with one another, even if unjustifiably, and that relationship became inseparable and irrevocable when Simon Carves bought the installation contract to an end…in reliance on Geldof’s poor performance under the installation contract coupled with its insistence on prior payment”.
As a result, and as a direct consequence of Geldof’s actions, Simon Carves was entitled to set-off its damages claim under the installation contract which should have extinguished its liability to pay Geldof’s judgment debt.
The lesson from this tale is therefore to think about the bigger picture and take account of all of the contracts which might impact on this to avoid making the kind of mistake Geldof did.
The Other Side is in Breach - What if I Do Nothing?
As a result of people’s preference for taking the path of least resistance, the “do nothing” option is often the choice taken when difficult issues arise during the life of the contract. Parties hope that short term difficulties will be smoothed over and everyone will get back on the right track soon. Whilst some issues are capable of resolution in this way others are not and, as you may have gathered, threats of repudiatory breach of contract are commonly raised in contractual disputes. If you are faced with potentially repudiatory contract it is important to realise that you have a choice. You can:
- elect to accept the breach, bring the contract to an end and pursue your losses (or, as is often the case in the current economic climate, use it to get out of an unprofitable deal); or
- Waive the breach, affirm the contract and carry on as if the breach had not happened.
If you go for the latter you have to bear in mind that your choice can be made by conduct, such as continuing to perform your part of the deal once you know about the breach, and is irrevocable. In an attempt to get round this many contracts contain “no-waiver clauses” which attempt to preserve an innocent party’s rights in the event that they delay, neglect or grant forbearance in enforcing (in whole or part) any of their rights under the contract in the face of a breach. The Court of Appeal considered the operation of such a clause in Tele2 International Card Company SA & Others v Post Office Limited [2009] EWCA Civ 9. On the facts of this case the Court of Appeal held that a no-waiver clause did not preserve the Post Office’s right to terminate for a breach where it had affirmed the contract by continuing to perform its own obligations under it after the breach.
Under the contract Tele2 agreed to provide pre-paid phone cards to the Post Office so the Post Office could sell them in its shops. Tele2 also agreed to provide the Post Office with a guarantee from its parent company on 24 December each year which confirmed that its parent would supply Tele2 with sufficient capital to enable it to perform its obligations under the contract for the next 12 months. The Post Office was entitled to terminate the contract on written notice at any time if the guarantee was not provided.
Tele2 failed to provide the guarantee when it fell due one year but, notwithstanding this, the Post Office continued to perform its part of the contract for over 11 months without eithertaking issue with the breach or reserving its rights in respect of it. When the Post Office eventually notified Tele2 of the breach it gave it five months’ notice of termination and subsequently ceased to perform its part of the contract when the notice expired.
In response Tele2 claimed that by continuing to perform its obligations the Post Office had affirmed the contract and lost the right to terminate it. It also argued that as a result of this the Post Office had committed a repudiatory breach of its own by wrongfully terminating the agreement when it had no grounds so to do. The Post Office countered by relying on the contract’s no-waiver provision and claimed that this had preserved its right to terminate.
When the Court of Appeal reviewed the dispute it agreed with Tele2 and found that by continuing to perform the contract for nearly a year without either protesting or reserving its rights in respect of the failure to deliver the required guarantee, the Post Office had affirmed the contract and abandoned its right to terminate for Tele2’s breach. It also held that the no-waiver clause did not cover the issue of electing to affirm the contract and therefore the clause could not save the Post Office which, it also found, was in repudiatory breach itself and therefore liable to Tele2 in damages for wrongfully terminating the contract.
This case confirms that the standard no-waiver provisions which are commonly seen in commercial contracts will not preserve termination rights once a contract has been affirmed. It also highlights the importance of addressing breaches of contract promptly, deciding how to treat them and communicating that decision. If you are faced with a breach of any kind the safest course of action is to:
- make a clear and unambiguous reservation of all of your rights in respect of the circumstances which give rise to the breach and your right to damages and/or terminate to avoid any arguments as to whether or not you have affirmed the contract; and
- seek urgent advice on your options.
If you would like more information or advice on contractual issues or disputes, please contact Simon Walsh on 01727 798085 or by email at simon.walsh@salaw.com
© SA LAW 2010
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.