Posts Tagged ‘repudiatory breach’

Suspending performance v repudiatory breach

October 21, 2010

When there is no other choice – wrongful suspension: the consequences of repudiatory breach

Contractors need to be careful that they suspend performance of their works on proper grounds and ensure that they do so in the correct procedural way. A timely reminder as to the consequences of getting it wrong can be found in the recent case of Mayhaven v DAB [2010].

The question facing the court was whether the effect of the contractor wrongfully suspending its works amounted to a repudiatory breach of contract. This would entitle the employer to terminate the contract and sue the contractor for damages or, alternatively, force the contractor to perform its services. In this case, the court decided that wrongful suspension did not automatically constitute a repudiatory breach. Why is that the case? Because it is only fair that a party be penalised when the breach is sufficiently serious so that he “so acts or so expresses himself as to show that he does not mean to accept the obligations of a contract any further”.

The court did not accept Mayhaven’s submission that a wrongful suspension, which gave rise to a failure to proceed regularly and diligently under an express term of the contract, would necessarily amount to a breach of a condition or fundamental term so that every such breach would amount to a repudiatory breach of contract. It would be a matter of considering the seriousness of the breach and the facts and circumstances of the case. DAB’s mistake as to its legal entitlement to suspend the contract was merely one of several factors to consider when determining whether the suspension amounted to repudiation.

Unless there is an express refusal to operate the terms of the contract, the court will ask itself whether the defaulting party’s actions were such as to lead a reasonable person to conclude that it no longer intended to be bound by the contract in the circumstances. A breach of contract will be considered repudiatory where:

1. the parties have agreed that any breach of a particular contractual provision will entitle the other party to end the contract; or

2. where there has been a fundamental breach of contract so that the innocent party is denied a substantial amount of the benefit of the contract. The right to suspend at common law is limited to very narrow circumstances, such as when the employer pays consistently late or not does not pay at all without good reason.

There may be some other unacceptable past conduct by an employer which may indicate that it has no intention of honouring contractual terms in the future. In most scenarios, and in the current economic climate, the contractor will delay treating the employer’s conduct as repudiatory in the interests of keeping the work flowing and in the hope that they get paid at some point in the future. It really is seen as a weapon of last resort by many and rightly so.

Generally speaking, suspending performance is fraught with risk unless done pursuant to a s112 notice or by operating prescribed, contractual provisions which provide the contractor with more security as to the outcome.