Take care when terminating for non-payment
DOMINION v DEBENHAMS [2010]
Following the Shell case, it is clear that taking care when purporting to terminate for breach is very important. This was a case involving termination for non-payment and again underlines the risk of being too hasty.
facts:
- As part of a letting arrangement to DB, D agreed to make certain payments which were effectively contributions to DB’s fit out costs for its shopping centre. D was obliged to pay a sum within 10 days of confirming that its building works had been completed so that DB could gain access to complete its store fit out.
- D failed to pay within the specified period and one day later DB served notice terminating the agreement claiming ‘time was of the essence’ (meaning any delay entitled it to terminate the contract and claim damages). As is fairly common, D claimed that DB’s purported termination was wrongful and amounted to what is called a ‘repudiatory breach’ (ie one which deprives the innocent party of substantially the whole of the benefit of the contract), entitling D to itself terminate and claim damages rather than vice versa.
- Clause 19 of the contract dealt with termination. It allowed either party to terminate “if either party shall in any respect fail or neglect to observe or perform any of the provisions of this Agreement” by notice in writing at any time after such occurrence (emphasis added). There was also an express right to interest if any payment was 14 or more days late.
decision:
- It was noted that the courts have historically shown some reluctance to interpret a termination clause in a complex contract as providing a party with a right to terminate for any breach however minor. The Court applied the same principle here. The agreement was said to contain a multitude of obligations, many of which were of minor importance and which could be broken in many different ways. DB’s ‘strict’ interpretation of the wording of the clause was said to flout business commonsense and termination under clause 19 was held to require a ‘repudiatory breach’.
- DB was unsuccessful in its argument that the failure to pay was a repudiatory breach because it maintained ‘time was of the essence’. It failed for several reasons:
- the contract was silent on time being of the essence;
- payment of the instalment was said to be not inextricably linked to DB starting its fit out work (even though in broad terms the payment was a contribution to the fit out costs);
- the failure to make payment punctually would not deprive DB of substantially the whole benefit of the contract; and
- interest was payable on late payments which provided an express remedy to DB.
- The judge seemed swayed by the fact that:
- D had indicated at various meetings and in correspondence that it remained committed to the project and would make payment, albeit that it might not be able to pay precisely on time;
- at no stage did DB seek to make ‘time of the essence’ by serving notice to that effect nor did it give D any warning of its intention to terminate.
points to note:
- Great care needs to be taken when purporting to terminate for non-payment. Giving a warning of your intention to terminate and a reasonable period within which to make payment may be necessary irrespective of what the strict wording of the contract says, particularly in the context of a complex, long term agreement.
- Perhaps of greatest concern is the apparent need for the payee to take account of the public pronouncements of the payer that ‘payment will eventually be forthcoming’. No doubt many companies have heard similar messages from debtors in the past and suffered adversely as a result of delaying action as a result of being too trusting. Clearly there is a need for a degree of caution even if the contract wording seems to be entirely clear cut.
- If you want time to be of the essence, you should state this expressly. Failure to do so could lead to uncertainty, leaving the court to impose its own position based on whether it considers timing was an essential part of the contract.