Late Payment and Material Breach

Recent guidance has been given by the High Court on what constitutes a ‘material breach’ of a contract and the circumstances necessary for late payment to be regarded as serious enough to justify the termination of a contract.

The dispute arose between two companies, one of which (Dalkia) was contracted to build a combined heat and power plant for a paper mill belonging to the other (Celltech). It was agreed that Celltech would pay 174 monthly instalments under the contract and that in the event of non-payment, Dalkia would be entitled to £3m for the termination of the contract. Celltech failed to pay the last three instalments because of financial problems. Dalkia regarded this as a termination of the contract and went to court to obtain the £3m.

In assessing the claim, the High Court considered that the following were of significance in deciding if a breach of contract was material:

• the impact of the breach on the innocent party compared with the position it would be in had the contract been fully performed;
• whether the breach was intentional and not due to a misunderstanding or administrative error;
• whether the amount involved was neither minimal nor trivial; and
• the circumstances in which the breach occurred.

In the Court’s view, the circumstances were such that Dalkia could terminate the contract on the grounds of material breach and was thus entitled to the £3m. In this case, Dalkia could have terminated the contract on the grounds of ‘repudiation’ by Celltech, but since the contract was specific as to the circumstances under which the £3m would be payable, it could not have sought the whole sum had that course been chosen. The Court also confirmed that where the innocent victim of breach of contract has a choice of approaches, it is entitled to choose the most advantageous one to pursue.

In a recent case, a firm which continually paid one of its subcontractors late was considered to have breached its contract with the subcontractor.