19.11.2020

My way or the highway: repudiation, cancellation and dispute resolution clauses

In Jade Residential Ltd v Paul, the Court of Appeal reviewed two issues which may arise in contractual disputes:

  • The right to cancel a contract for “partial” repudiation; and
  • Whether an aggrieved party must follow each step in a dispute resolution clause before cancelling a contract.

Background

In April 2015, Jade Residential Ltd contracted with Mr and Mrs Paul to build a house.    Payments were agreed to be made in instalments linked to construction milestones.  They also expressly agreed that the builder would maintain a continuous construction programme until completion.

The contract contained a dispute resolution clause, providing that the parties must meet promptly and use their best endeavours to resolve any dispute.  Failing resolution, a party could issue a Dispute Notice.  The dispute was then to be referred to mediation.  Neither party was to require arbitration or issue legal proceedings unless that party had first taken all reasonable steps to comply with the previous steps in the dispute resolution clause.

A dispute arose over two milestones: the “closed-in milestone” and the “lined milestone”.

Jade issued the closed-in milestone invoice in February 2016.  However, the milestone had not been achieved as the intended sub-contractor had been unable, due to health issues, to undertake the external plastering.  Jade found another sub-contractor for twice the price and claimed the difference from Mr and Mrs Paul.  The Pauls’ bank refused to advance funds to pay the closed-in invoice until the milestone was actually met.

Mr Paul tried to negotiate a compromise, but Jade insisted on full payment of the invoice.

Jade then proposed a formal variation of the contract to allow for the higher plastering quote.  At the same time, it issued the lined milestone invoice. 

Mr and Mrs Paul did not pay the two invoices.  Jade suspended work and locked the dwelling.

After Jade refused to recommence work, Mr and Mrs Pauls’ solicitors gave notice that the contract was cancelled.

Jade sued Mr and Mrs Paul in the District Court.  The District Court Judge found that Jade had not completed the contractual milestones.  However, the Pauls’ were not entitled to cancel the contract, as they had not first gone to mediation in accordance with the disputes resolution clause.  Jade was entitled to be paid for the actual work done.

Both parties appealed.  The High Court Judge allowed Mr and Mrs Paul’s appeal, holding that they were entitled to cancel the contract and validly did so.  She dismissed Jade’s cross-appeal, upholding the District Court Judge’s findings that the milestones had not been met.

Court of Appeal judgment

The Court of Appeal granted Jade leave to appeal on two questions:

  • Whether the High Court erred in finding that the dispute resolution clause “did not purport to bar anything other than the issue of court or arbitral proceedings” and did not bar or delay “the other rights of the parties under the contract”, including a right to cancel; and 
  • Whether the High Court erred in holding that the Pauls were entitled to, and did validly, cancel the contract.

The dispute resolution clause

The contract did not expressly provide the Pauls with any rights of termination.  The rights of cancellation under the Contract and Commercial Law Act 2017 (CCLA) accordingly applied.

Jade argued that the dispute resolution clause, correctly interpreted, suspended the exercise of any rights of cancellation under the CCLA until the dispute resolution process had been completed.  The Court of Appeal did not accept this submission confirming that “Express words or a very clear implication are needed to remove a remedy for breach of contract arising from operation of law.”This requirement was not met by the terms of the dispute resolution clause.

Cancellation of the contract

Partial repudiation

The High Court and the Court of Appeal accepted that repudiatory conduct may relate to the whole or part of the contract.  A party who intends to fulfil a contract, but only in a manner substantially inconsistent with his obligations and not in any other way, repudiates the contract.

Here, Jade made it clear it did not intend to complete the contract except on terms which were substantially different from those imposed by the contract.  It also refused to comply with a “continuous construction programme” term that was essential to Mr and Mrs Paul.  In the Court’s view, this conduct amounted to a partial repudiation, and the Pauls were entitled to cancel.

Cancellation for breach of an essential term

The Court of Appeal made the observation that the test for a partial repudiation under section 36(1) CCLA converges with the test for cancellation under section 37(2) of the CCLA.  Section 37 provides that a party to a contract may cancel if:

  • A term in the contract is breached by another party, or it is clear that a term will be breached by the other party; and
  • The parties have expressly or impliedly agreed that the performance of the tem is essential to the cancelling party; or
  • The effect of the breach substantially affects the benefit or burden of the contract to the cancelling party.

The building contract was a combination of a standard form contract prepared by Jade and amendments requested by Mr and Mrs Paul.  One of those amendments was the “continuous construction programme” clause, which they added because it was essential to them for the work to be completed within a reasonable time.  In the view of the Court of Appeal, Jade’s actual and threatened breaches of contract substantially reduced the benefit to Mr and Mrs Paul, and they were entitled to cancel.

Our comment

Jade Residential provides a useful summary of the legal principles that apply to partial repudiation.  Where a party states that that it will only perform a contract if additional terms are met, it may be found to have repudiated the contract.  The non-repudiating party will only be entitled to cancel the contract if the repudiation is of an essential term, or if the threatened breach will have a materially adverse affect on the cancelling party.

Parties faced with a repudiation need to carefully review their contract terms.  Parties retain their rights to cancel a contract under the CCLA, unless those rights are expressly excluded or modified by the contract.  Rights of cancellation must be exercised with care: a court will not lightly conclude that the contract has been repudiated, and a party who attempts to cancel without justification may itself commit a repudiatory breach of contract.

For advice or assistance with contractual disputes, please get in touch with our Disputes or Construction team, or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Kerry
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