Legal Update: Termination for ‘Irremediable Material Breach’

A well-drafted contract will therefore set out the circumstances in which a contract can be terminated, which will usually include if one party is in material breach of the contract. What breaches of a contract amount to a ‘material’ breach can also be open to debate, and if no guidance is given in the contract itself then according to the courts it can be a breach anywhere between “not trivial” and the equivalent of a repudiatory breach.

But, undeterred by these considerations, the contract drafter will typically go on to distinguish between those breaches which are capable of remedy and those breaches which are ‘irremediable’ breaches, with an irremediable material breach of contract giving the innocent party the right to terminate the contract forthwith and a remediable breach granting the party in breach an agreed period to remedy that breach before the contract terminates.

So the right to terminate for an irremediable material breach can be a powerful weapon, particularly when what amounts to a material breach may simply mean a breach which is more than ‘trivial’: one day you have a contract and the next you don’t. By contrast a remediable material breach gives the party in breach the opportunity to try to fix the problem over an agreed time period which hopefully will prove sufficient for that purpose.

Given the potentially stark contrast between the consequences of these two types of breach, this briefing reviews what breaches are considered by the courts to be capable of remedy following the case of Stobart Capital -v- Esken in May 2022.

In this case the parties entered into a management agreement under which Stobart Capital was paid to introduce new business opportunities to Esken and to provide related services, and around a year later Esken purported to terminate the contract on the basis that Stobart Capital had failed to do so. The contract gave Esken the right to terminate the contract for material breach and provided a 28 days remedial period only where ‘such breach is capable of remedy’ – so a fairly classic structuring of a termination for material breach provision.

As might be expected, there were the usual arguments as to whether Stobart Capital was in breach of contract at all, or, if it was in breach, whether the breach amounted to a material breach; but for our purposes we focus on the claim by Esken that a failure by Stobart Capital to introduce business opportunities was a failure that could not be remedied because those opportunities were gone forever and accordingly is was entitled to terminate the contract forthwith.

The court disagreed. ‘Remedy’ does not mean to obviate or nullify the effect of a breach so that any damage already done is in some way made good. ‘Remedy’ means to cure so that matters are put right for the future. Consider a disease or ailment being cured, said the court, where the curing of the disease could normally be said to mean that it was ‘remedied’ although no cure can remove the past effect or result of the disease before the cure took place.

But whether a breach of contract can be ‘put right for the future’ remains a key question that must be answered in each case. The question is “whether the harm that has been done … by the relevant breach is for practical purposes capable of being retrieved”; and the court identified, and agreed with, breaches of contract which had previously been considered by the courts not to be capable of remedy, including:

• The disclosure of confidential information in breach of contract, which could not be said to be remedied by a promise not to do it again (Schuler -v- Wickman Machine Tool Sales, 1974)
• A Formula 1 team changing its car’s livery to remove its association with a sponsor in order to temporarily promote the brand of a competitor to that sponsor in breach of its sponsorship agreement (Force India F1 Team -v- Etihad Airways, [date]).

These cases can be contrasted with, for example, a delay in the performance of an ongoing obligation where it may well be possible for the delay to be made up by faster performance (Telford Homes -v- Ampurius Nu Homes, 2013), or a failure to pay money which can normally be cured by late payment plus interest (Kason Kek-Gardner -v- Process Components, 2017).

The Stobart Capital case is a helpful confirmation of ‘can be put right for the future’ as the correct meaning of a remediable breach and also a useful review of some of the previous cases in which breaches have, and have not, been considered capable of remedy.

The Stobart Capital case also serves as a strong warning to the aggrieved party that the manner in which it seeks to terminate the contract must be handled with considerable care. If Esken had given a notice providing 28 days for Stobart Capital to remedy the breach before the contract terminated then one can only speculate as to whether or not Stobart Capital would have been able to do so; but by serving its notice to terminate the contract forthwith Esken introduced the additional hurdle of establishing that the breach was not capable of remedy which it was then not able to overcome.

Author: Jonathan Riley, jonathan.riley@memerycrystal.com