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:

 

 

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.