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Does late payment justify terminating the contract? - How to Avoid a Breach

on Thursday, 02 February 2017.

When parties enter into a contract, everything is seemingly going well. Sometimes, things can go wrong. That is exactly why they have a written contract - to say what happens and what each party must do.

Often, a contract involves one party supplying products or services in return for the other party paying. Naturally, being paid is important, but does late payment give a right to terminate the contract?

This is the question that the Court of Appeal had to consider in the case of Grand China Logistics Holding (Group) Co Ltd v Spar Shipping AS.

The answer is, it all depends!

The court re-stated that there are different types of terms in a contract:

a condition, which justifies termination (no matter how apparently small the breach)a warranty, where termination is never justifiedinnominate terms, which cover the rest.

As to which clause is a condition, warranty or innominate term depends on contractual interpretation and the importance given to it in the contract.

The facts of this particular case involved a dispute in a shipping contract. The contract gave the owner the right to withdraw the ship if there was late payment. There were a series of late payments and vague promises over payments.

The High Court had found that the payers were unable and therefore unwilling to pay as required, and the Court of Appeal agreed, ruling against the payers. The interesting points are the reasoning that the Court of Appeal used in interpreting contract terms, and particularly when late payments are involved.

The Court confirmed as follows:

Most terms are innominate, unless the contract makes clear that there is a contrary intention. This is particularly the case where the effects of a term could vary from the trivial to the grave. A deadline can be made a condition by saying that "time is of the essence". Even if a breach gives an express right to terminate, that still does not necessarily classify it as a condition. It may just simply give one party the right to end the contract. Prompt payments are commercially important, but this does not mean that the slightest of delays would justify termination and damages - which would be the case if it was deemed to be a condition. Since payment times are generally not presumed to be a condition but an innominate term, the Court considered the payment situation and the facts of the case. It rejected the payer's argument that the delays affected only a small proportion of the total and a few instalments. Missing a few payments may not be severe enough to justify ending the whole contract, but in this case it felt the payer was unable and therefore unwilling to pay in the future and that was important enough to justify termination.

Comment

The courts are showing an increasing desire to classify terms as innominate. That gives flexibility to consider the impact of a breach rather than be tied to stating that a clause is either so serious that any breach could justify termination or that no breach could possibly lead to termination.

If someone wants a breach to be treated as fundamental and serious enough to justify termination, it should say so in the contract.

Similarly, if someone wants to avoid the serious nature of the slightest breach, then wording should not be used which could lead to such dramatic results. "Time is of the essence" is a common trap. Many people think this could simply mean that you will do what you can to deliver or pay on time. However, under English law, the effects of that phrase are more serious - it has the effect of treating every breach of time as a condition that justifies termination, regardless of how minor the consequences. If that is agreed, then fine, but often contracts are signed without appreciating the legal consequences of a phrase like this.

If you would like help with drafting or reviewing an agreement, please contact Paul Gershlick on 01923 919 320.

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