Delays frequently occur in construction projects. Therefore, many construction contracts make delay, or rather a failure to proceed regularly and diligently, a default event giving rise to the right to terminate. However, what happens when there is no express right and the project falls into serious delay? Does the injured party have a right at common law to treat the delay as a repudiatory breach of contract and terminate?
The Court of Appeal considered this question in Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd.
Telford Homes v Ampurius
Telford Homes (the developer) was under an obligation to build four blocks consisting of commercial units and residential flats. The parties’ agreement for lease obliged it to use due diligence and reasonable endeavours to procure completion by certain target dates:
- 21 July 2010 for blocks C and D.
- 28 February 2011 for blocks A and B.
Blocks C and D were completed, although late, on 4 April 2011. Due to the developer’s financial problems, work on blocks A and B was suspended for a year. The developer assured Ampurius Nu Homes Holdings (the investor and future tenant of the commerical units) that it would restart the works and was committed to the project. Work restarted on 4 October 2010. However by this time, the investor had lost patience and terminated the contract for a repudiatory breach on 22 October 2010.
At first instance
At first instance, the judge agreed with the investor that the developer had committed a repudiatory breach, entitling the investor to terminate the developer’s contract.
The developer appealed.
Test for repudiatory breach
The test for a repudiatory breach is based on Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, which states the breach must go to the root of the contract or substantially deprive the innocent party of the benefit of the contract. Diplock LJ stated that it was the event and not the fact of default that gave rise to the right to terminate. As a result the court should look at:
- The position as at the date of the purported termination.
- Any steps that the guilty party has taken at that date to remedy the breach.
- The likely future events judged by reference to the objective facts as at the date of the purported termination.
It should be noted that where time is not of the essence, it will be difficult to prove a repudiatory breach, if the guilty party is making an effort to perform the contract (Shawton Engineering Ltd v DGP International Ltd).
In the Court of Appeal
The question for the Court of Appeal was whether the developer was in repudiatory breach. Lewison LJ gave the leading judgment.
In deciding whether the injured party has been deprived of “substantially the whole benefit” of the contract or even “a substantial part of the benefit” of the contract (Buckley LJ in Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361), the Court of Appeal had to look at the practical effects of the breach to decide whether the breach went to the root of the contract.
The Court of Appeal noted that Diplock LJ in Hong Kong Fir set the bar higher than Buckley LJ in Decro-Wall. In this case, the investors were due to receive a 999 year lease of four blocks (and the rents that would be derived from them), but they would take the blocks in pairs with a seven-month gap.
The court therefore had to consider:
- The effect of the breach and what financial loss has been caused.
- What benefit had already been obtained?
- Could damages amount to adequate compensation?
- Was the breach likely to be repeated?
- Whether the breach fundamentally changed the value of future performances of the guilty party’s outstanding obligations?
Here, the investor had already received two blocks and there was nothing to suggest it was not going to receive the remaining two blocks. They were still in the pipeline. Having ascertained that it was likely that handover of blocks A and B would be delayed by just over 12 months beyond their target date, the court asked whether a delay of one year (for the fully completed development) would deprive the investor of a substantial part of the benefit of ownership of a 999-year lease of four blocks?
Insufficient to amount to repudiatory breach
The Court of Appeal did not consider that the facts of this case were sufficient to amount to a repudiatory breach. At first instance, the judge:
- Had focused too much on the problems that may be caused by marketing the first two blocks, while construction work was continuing on the incomplete two blocks. However, the project had provided for a gap of seven months between completion of the two sets of blocks. The additional delay would leave a gap of 13 months between completion of the two sets of blocks.
- Did not find that marketing the first two blocks would be impossible, just that it would be interfered with.
The investor also acknowledged that, as at the date of termination, it had suffered no actual loss. The Court of Appeal considered that it was, “to say the least unusual” for a breach that caused no actual loss to amount to a repudiatory breach. Indeed, the Court of Appeal considered that the additional costs of funding the development would have been in the region of £100,000. This sum could be set off against a purchase price of £8.4 million. Further, the whole development would cost over £100 million. Clearly a future loss of £100,000 did not warrant the breach being characterised as repudiatory.
It is clear that while the court should consider the position as at the date of the purported termination (including the history to date), later events are relevant to the extent they are judged by the objective facts known at the date of termination. Here the question was: had the investor “struck too soon?”, as asked by Diplock LJ in Hong Kong Fir.
The effect on the investor of the delay in restarting works to blocks A and B was:
- The delay that occurred had caused no loss.
- Future delay was likely to result in the investor having to fund blocks C and D for longer than it expected. However, the developer had offered to delay completion of the sale of blocks C and D, which would have neutralised much of that loss.
- The developer had been making strenuous efforts to find additional funding to continue the development.
- The developer was committed to completing the project.
The bottom line was that the 999-year lease was shortened by one year. Clearly this was trivial in the context of a 999-year lease.
The Court of Appeal found that the developer’s delay and the actual and foreseeable effects of the delay could not be said to deprive the investor of a substantial part and certainly not “substantially the whole benefit” of the contract. Clearly the delay caused a commercial problem for the investor but, absent making time of the essence, the delay could only be said to be repudiatory when it was so prolonged that it frustrated the contract. Additionally, given that the developer repeatedly asserted that it intended to complete the project, it could not be said that it had renounced the contract.
Finally, looking at the developer’s other acts of default, the Court of Appeal considered the words of Lord Wilberforce in Woodar Investment Development Ltd v Wimpey Construction UK Ltd:
“Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations.”
So, the appeal succeeded. The developer had not committed a repudiatory breach. As a result, the investor was wrong to terminate the contract.
“You cannot be serious”
One can almost hear the investor coming out of court after hearing the Court of Appeal deciding that the delay was not so serious as to amount to a repudiatory breach and screaming that old John McEnroe phrase “You cannot be serious”. Its lawyer would have had the unenviable task of explaining to the unsuspecting investor the horrible consequences that now lay in wait for him, particularly as, only earlier that morning, he had considered himself the injured party …
