Irremediable Mistakes

It is common for contracts to contain termination provisions that only allow for termination for a remediable breach if notice of the breach is given and the breaching party is allowed time to remedy it. For a party considering the application of such a clause, an obvious question is: what breaches do the courts consider capable of remedy? The High Court of England and Wales recently considered this in Stobart Capital Ltd v Esken Ltd[1]. While not making new law, the case is a good reminder that the answer is maybe more than you think.

Background

The claimant, Stobart Capital Ltd (‘SCL’), was founded by Andrew Tinkler, the former chief executive officer of the defendant, Esken Ltd, formerly Stobart Group Ltd. SCL and Esken entered into a management agreement, under which SCL was required to (among other things) introduce and develop new business opportunities for Esken. The agreement contained the following termination provision: ‘This Agreement may be terminated by either Party … if … the other Party has committed a material breach of its obligations under this Agreement and (where such breach is capable of remedy) fails to remedy such breach within 28 days after receiving notice requiring the same to be remedied.’ (Emphasis added).

There followed a widely publicised breakdown in the relationship between the parties, precipitated by the removal of Mr Tinkler as a director of Esken. A little under a year later, Esken served a notice on SCL purporting to terminate the management agreement on the basis that SCL was in material breach for failing to introduce and develop new business opportunities as required under the terms of the agreement.

The dispute

SCL brought proceedings for £4.6 million it claimed was due and payable by Esken by way of retainer, transaction and management fees. It was SCL’s case that Esken’s purported termination of the management agreement was invalid and that the retainer and fees had therefore continued to accrue.

SCL submitted that the purported termination was invalid on the basis that SCL was not in breach of the requirement to introduce and develop new business opportunities and, even if it was, that the termination provisions in the management agreement required Esken to give it 28 days to remedy any such breach. Esken countered that SCL could not have remedied its failure to introduce business opportunities because those missed opportunities were gone forever. Accordingly, Esken argued, it did not need to give notice of the breaches or allow SCL 28 days to remedy them.

The High Court’s judgment

The Court held that SCL had not been in material breach in respect of its obligation to introduce and develop business opportunities. It nevertheless went on to consider the question of whether, had such breaches occurred, they would have been capable of remedy.

The Court first considered the judgment in L Schuler AG v Wickman Machine Tool Sales[2], on which SCL relied heavily, specifically the following passage from the judgment of Lord Justice Reid: ‘[Remedy] could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning. The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place.’ (Emphasis added).

It was noted that Lord Reid went on to acknowledge that ‘there are cases where it would seem a misuse of language to say that a breach can be remedied. For example, a breach by … disclosure of confidential information could not be said to be remedied by a promise not to do it again.’ (Emphasis added).

The Court then considered the more recent Court of Appeal judgment in Force India Formula One Team Ltd v Etihad Airways PJSC[3], which concerned a claim that Etihad’s sponsorship of the formula one team had been irreparably damaged by the team’s temporary promotion of a rival airline. Lord Justice Rix commented in that case that ‘these were not remediable breaches. The closest analogies are with the publication of confidential information or the publishing of advertising matter not containing a party’s name: one releases information which should be kept confidential, the other broadcasts a product in an inappropriate way. Looking at the matter pragmatically and not technically, I think that a proper marketing campaign is, generally speaking, all of a piece.’(Emphasis added).

The Court concluded that any breaches of the performance obligations owed under the management agreement would not have been analogous to the sponsor’s obligations in Force India and ‘all of a piece’, but rather would have fallen squarely within the usual interpretation identified by Lord Reid in L Schuler. ‘The better view is that such breaches would potentially have been capable of remedy on the basis that the key consideration is whether matters could have been put right for the future, rather than necessarily being obviated or nullified.’ (Emphasis added)

Takeaway

Failing to follow contractual termination provisions precisely can result in the once innocent party inadvertently committing a repudiatory breach of the contract. One might sympathise with the view Esken took that future performance could not recover (and therefore remedy) the opportunities previously missed but, in light of the L Schuler judgment, this was a glaring legal error. Given the vital importance of getting it right, parties considering termination of a contract should always seek legal advice on their proposed course of action.


[1] [2022] EWHC 1036 (Ch)

[2] [1974] AC 235

[3] [2010] EWCA Civ 1051

Contributors

Alex Radcliffe