Valilas v Januzaj

This is an appeal, brought with the permission of Beatson LJ, against a decision of His Honour Judge Hooper QC, sitting in the Worcester County Court. The Appellant, the Defendant below, is represented by Mr Simon Clegg and the Respondent, the Claimant below, by Mr Jonathan Cohen. Both counsel also appeared before the Judge.

The primary facts are not in issue and can be stated fairly shortly.

Both parties are dentists. The Defendant was the principal of a practice in Droitwich Spa – the Droitwich Spa Dental Practice (“DSDP” for short). The dentists who practised at DSDP included the Claimant. He was not an employee or a partner of the Defendant. He practised under an oral agreement which was described by the Judge as “the facilities contract”. In essence, the arrangement was that in return for the right to make use of the premises and equipment and the services of the dental nurses and other staff he would pay the Defendant each month 50% of his receipts.

The great majority of the Claimant’s earnings from his practice at DSDP came from his contract with the local Primary Care Trust (“the PCT”). He was contracted to carry out a specified number of “Units of Dental Activity” (“UDAs”) for NHS patients over a year running from April to March, for a fixed price per unit. There was a dispute, which the Judge did not find it necessary to resolve, as to both the number and the price of the UDAs required under the contract. The argument proceeded before us on the basis that the total annual sum payable by the PCT was, in round figures, £195,200. That amount was paid, in advance, in equal monthly instalments of some £16,260. The greater part of each instalment was paid direct to the Claimant himself, though part (in respect of so-called “non-exempt patients”) was paid, for essentially administrative reasons, through DSDP: the amounts that he received himself seem to have been about £12,000 per month.

It is an important feature of the case that the work under the PCT contract did not have to be spread evenly through the year; but if the Claimant did not achieve the full number of units by the end of the year he was obliged to refund the consequent overpayment to the PCT. It is the Claimant’s case that in that event the Defendant would in turn be obliged to refund to him the equivalent proportion of what had been received in monthly payments during the year. I will assume that that is correct (though see para. 27 below).

Those arrangements had been in place since 2007, though initially with the Defendant’s predecessor as owner of the practice. In each of the first three years the Claimant achieved the requisite number of units under his PCT contract, and no question of a refund arose.

In the early part of 2010 the relationship between the Claimant and Defendant deteriorated. On 15 June there was a meeting between them. Following the meeting the Defendant wrote to the Claimant recording various criticisms which he had raised. Among them was the fact that the Claimant had declined to sign a standard-form “associate agreement”. The letter said:

“You have been informed during that meeting that, not signing the associate agreement and continuing to Practice at Droitwich Spa Dental Practice is not an option, I hope you will reconsider signing, otherwise consider this letter as an intention to give you notice to complete your undergoing treatments before leaving.”

(The spelling and punctuation are as in the original: English is not the first language of either party.) To anticipate, the Judge held – and it is common ground before us – that that letter did not constitute notice to terminate the facilities contract but only a threat or warning that the Defendant would do so if the Claimant did not sign the agreement.

It is not clear what happened in response to that letter, but the Defendant wrote again on 6 September repeating his complaints in more detail. He did not repeat the threat contained in his letter of 15 June, but nor did he withdraw it.

The Claimant responded to the letter of 6 September on 21 September. He dealt at considerable length with the Defendant’s criticisms. His letter concludes by saying that he would be happy to continue working at the DSDP if a constructive relationship could be restored, which would involve the Defendant making a written apology to him, but that otherwise the Defendant should “consider this letter my final notice to you”. There is then a postscript in the following terms:

“IMPORTANT NOTE:

Until the above matter is clear, either by you agreeing to change the working environment with the way proposed above or me leaving the DSDP, I have been advised by my solicitor to stop any further payment to you. The reason for this, as I am sure you are aware, is that I am running behind with my UDAs and this is purely because of the stress you have caused me, hence a rebate to the PCT maybe necessary from both DSDP and myself. If this letter is taken as my final notice it is unclear how many UDAs I will be able to complete at the DSDP and since there is now a total lack of trust between us I cannot be confident that your component of what is to be paid back to the PCT will be settled. Contractually this payment remains my responsibility as such I need to take steps to protect my position.”

No further payments were made after that date; and in fact the Claimant had already failed to make the payment due in August.

That postscript is reasonably self-explanatory, but I should perhaps spell out what the Claimant was saying. If the Defendant did not accept his conditions, the letter should be treated as a “final notice”. In that eventuality, the facilities contract would terminate at some (albeit unspecified) point short of the full period of the PCT contract – i.e. before the end of March. In that case the Claimant would be unable to complete the PCT contract, and an assessment would have to be made of whether he had at that point performed sufficient UDAs to cover the monthly payments already received. Because he was running behind, that would probably not be the case and he would have to make a repayment to the PCT; and he would by the same token be entitled to a proportionate repayment from the Defendant of what he had paid to him. The point being made in the letter is that he did not trust the Defendant to make that repayment (if it proved necessary); and he was accordingly withholding payment as a precaution until it became clear whether that situation would arise.

I should say that the question of why the Claimant was behind with his UDAs was contentious as between him and the Defendant. His explanation was, as appears from the postscript, that it was the result of the “stress” which the Defendant was causing him. The Defendant believed that it was because the Claimant had taken too much holiday and was spending too much time in London, where he had a separate part-time practice. The Judge did not find it necessary to resolve that issue.

On 21 September 2010 the Defendant wrote to the Claimant complaining of his failure to make the August payment. He said:

“However you continue to use the practice, and as a practice we have bills to be paid. If you continue to withhold payment I may find it necessary to consult a third party with this matter.”

(That letter does not appear to be intended as a response to the Claimant’s letter of the same date: it seems that the two crossed.)

On 5 October 2010 the Defendant wrote at some length in response to the Claimant’s letter of 21 September. He referred among other things to the fact that the Claimant was falling behind with the number of UDAs required to perform his obligations to the PCT (as of course the Claimant had already acknowledged). Towards the end of the letter he said:

“In order to avoid any inconvenience to patients and ourselves I would like to ask you to reconsider your decisions regarding the agreements and payments due to the Practice:

1.

Sign an agreement with the Practice, regulating your position and all the arrangements with the Practice.

2.

Continue with regular payments due to the Practice.

3.

Propose a credible plan how you are going to increase your availability to our patients and this way increase the activity benefiting patients but also perform the number of UDAs you are due, all this in accordance with the GDS Contract between you and the PCT and the new agreement to be signed.

A little further down he said:

“I regret to say, but if you continue with the position you have taking, it will not be possible to continue working together, and any day you may be prevented from entering the premises.

Surely you realise that if you use the Practice you need to pay. Payments can be regulated by the agreement so that in case you have to refund money to the PCT, you would only refund your share.”

On 12 October 2010 the Claimant wrote to the Defendant recording a conversation which he had had earlier that day with the Practice Manager. He said that he understood that the Defendant was intending to cancel his diary for the following week and thereafter. As to that he said:

“1.

I never said that I would not sign an agreement with you. I simply said that I would not sign the Associate Agreement that you have given to me back in June. …

2.

I also made clear to your practice manager this morning that I am more than happy to carry on working at DSDP but we will have to arrange a payment based on the performance of the UDAs. I asked your practice manager to calculate, based on the monthly statements starting from April 2010, how many UDAs I have performed and how much money I have paid to you in advance ! My understanding is that I do not owe you money. Unfortunately it is you that owe money back to me for UDAs which have been paid to both of us from PCT and they have not been performed.”

He went on to say that if the Defendant was not happy “with my option of payment based on performed UDAs” he would like to know in writing where he stood.

Again, it is perhaps worth spelling out what the Claimant was saying. He wanted to move from the current arrangement under which he paid the Defendant each month half of what he received from the PCT, with the prospect of an adjustment at the end of the year (or earlier termination of the PCT contract), to one where he paid the Defendant each month only such part of his PCT payment as was covered by UDAs which he had actually performed; that way he would avoid the need for any adjustment at the year-end if he underperformed and the risk of non-payment by the Defendant at that point. That might be a reasonable proposal from his point of view, but it represented a clear departure from the contractual arrangement.

On 13 October 2010 the Claimant wrote again at length to the Defendant referring to a conversation which they had had earlier that day, in which he said that the Defendant had made it clear “that you do not want me to carry on working at DSDP anymore as a performed-UDA payment is not an option for you”.

There appears to have been some last-minute discussion of the Defendant having three months’ notice to enable him to catch up with his outstanding UDAs, but agreement proved impossible. On 2 November 2010 the Defendant e-mailed the Claimant as follows:

“You have not paid for the last 3 months but continue to practice from Droitwich Spa Dental Practice. I will make a court claim in the coming days.

You last working day at the Practice will have to be 10 November. You can not expect the Practice to allow you to continue working from here indefinitely and continue withholding payments.”

The result was that from 11 November the Claimant was excluded from the premises.

The Claimant commenced proceedings in the Central London County Court for damages for breach of the facilities contract by its summary termination. The Defendant lodged a Defence and Counterclaim, the counterclaim being for the outstanding monthly payments, which were quantified at £17,661.97. The essence of the defence was that the Defendant had given adequate notice of termination by the letter of 15 June 2010; alternatively that he was entitled to terminate the contract summarily by reason of various breaches, including the Claimant’s failure to pay the sums due for August, September and October. I need not rehearse the terms of the pleadings in any detail, since the issues as they crystallised at trial did not precisely correspond to the pleaded cases.

The proceedings were transferred to the Worcester County Court. The trial took place on 31 October and 1 November 2012. The Judge handed down his judgment on 11 March 2013. He identified the issues as follows:

“(a)

Was there a notice term in the facilities contract, and, if so, how long was the period of notice to which the claimant was entitled ?

(b)

Was the claimant in fact given notice of termination ?

(c)

If the claimant was not given notice of termination, did he renounce the facilities contract, or was he in repudiatory breach of the facilities contract, so that the defendant was entitled to accept that breach and terminate the facilities contract without notice, and did the defendant do this ?

(d)

If the defendant was in breach of the facilities contract, what are the remedial consequences?”

I take his findings on those issues in turn.

As to issue (a), he found that the Claimant was entitled to six months’ notice of termination. That finding is not challenged on this appeal, and I say no more about it.

As to issue (b), he held that the letter of 15 June 2010 could not be construed as giving immediate notice of termination. Again, that finding is not challenged.

It will be noted that issue (c) as formulated distinguishes between a case of renunciation and a case of repudiatory breach, and the Judge dealt with them separately. I will return to whether that was really a substantial distinction on the facts of this particular case, but I should at this stage follow the Judge’s approach. The relevant part of his judgment can be summarised as follows:

It followed from those findings that the Defendant’s summary termination of the agreement was wrongful. As to issue (d), the Judge found that the termination of the agreements caused the loss to the Claimant of his contract with the PCT. He directed an assessment of damages, with the Defendant to make an interim payment of £100,000. His order did not explicitly deal with the counterclaim; I assume that it was understood that it would be brought into account on the assessment of damages.

The Judge then proceeded to summarise the applicable legal principles which he had applied in reaching those conclusions. He said, at para. 34:

“Renunciation can only apply where the opposite party asserts total non-performance, including, in the terminology and circumstances of the present case, a refusal to attend the practice. That is not this case. In the absence of an express term to the contract, which many such agreements in written form contain, the claimant’s obligation as to payment was an innominate term, breach of which could not, as a matter of law, amount to renunciation or repudiation. … I accept the claimant’s argument that, as to the defendant’s argument that payment was the claimant’s only obligation under the facilities contract, so that failure of payment went to the root of the contract, the simple answer is that payment was not the claimant’s only such obligation. There was a suite of obligations, including attendance, supporting the reputation of the practice, whose patients taken as a whole may not have understood the subtleties of these PCT and facilities arrangements, and the general public interest in the provision of these dental services.”

At para. 35 he referred to the decisions of this Court in Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 and Rice v Great Yarmouth Borough Council [2001] LGLR 41.

The Notice of Appeal pleads a large number of points, but Mr Clegg’s argument before us was more focused. His essential submission was that the non-payment for August to October, on the basis announced in the Claimant’s letter of 21 September, constituted both a repudiatory breach and a renunciation. His primary case was that the obligation to make the monthly payments on the due date should be classified as, in the traditional terminology, a condition of the contract – that is, an obligation the breach of which automatically entitles the other party to terminate. But he submitted that even if the Judge was right to characterise it as an innominate term, the breaches in question were plainly repudiatory in character because they involved a deliberate and persistent refusal to perform the Claimant’s primary obligation under the contract.

Mr Cohen submitted that the Judge’s core reasoning was essentially correct. He acknowledged that the withholding of the monthly payments was a breach; but he submitted that this was simply a case of late payment. It was axiomatic that time of payment is not a condition unless the contract expressly so provides. The agreement that payment would be made each month was, as the Judge had said, an innominate term; and its breach in these circumstances did not evince any intention not to be bound by the contract. In particular, it was important to appreciate the Claimant’s explanation for his non-payment, as given in the postscript to the letter of 21 September: see paras. 9 and 10 above. For the reasons there explained, it was legitimate for him to wish to withhold payment pending a final accounting; and the Judge had held that the Defendant should have accepted that he would be paid in full in due course.

It was an implicit premise of the Claimant’s explanation for withholding the monthly payments that he would be entitled to claim back from the Defendant 50% of any refund that he had to make to the PCT in the event of a shortfall in his UDAs: cf. para. 5 above. The Judge appears to have found that this was indeed the case: that is what I understand from his reference to the Defendant realising “that this was a 50/50 sharing agreement” (see para. 22 (6) above). There was some discussion in the submissions before us about whether the Claimant should have expressly pleaded such an obligation and of whether in any event there was evidence to justify his finding. It does not seem to have been suggested at the trial that the issue had ever been discussed between the parties: I do not in fact suppose that either contemplated, until it actually looked like happening, that the Claimant might fail to achieve his UDAs. On that basis the obligation would have to depend on an implied term. I am bound to say that it seems to me by no means self-evident that the Defendant should be taken to have been agreeing to such a clawback, and thereby take the risk of the Claimant failing to meet his contractual obligations to the PCT, whether venially (e.g. as a result of illness) or otherwise (e.g. as a result of idleness or over-commitment elsewhere). The Claimant was, as he insisted, not an employee, and one might have thought that the risk more appropriately lay with him. But this point was not clearly raised in the Notice of Appeal, and since the appeal does not on my analysis turn on it I am content to proceed on the basis of the Judge’s finding.

In the circumstances of the present case the distinction between the Defendant’s case based on renunciation and his case based on repudiatory breach seems to me insubstantial. The renunciation alleged consists of the Claimant’s declaration in the postscript to his letter of 21 September that he intended to commit the very breaches – that is, the withholding of the monthly payments as they fell due – which are relied on as repudiatory; and in deciding whether those breaches are repudiatory a crucial circumstance must be what the Claimant said about them in that letter. Repudiatory breach and renunciation are thus two sides of the same coin, and in what follows I will use the language of repudiatory breach. Whichever way one looks at it, the essential issue is the nature and effect of the breaches which the Claimant both committed and declared that he was going to commit.

I cannot, with all respect to Mr Clegg, accept that it was a condition of the contract, in the formal sense defined above, that the Defendant should make his monthly payments on time – or, to put the same thing another way, where time of payment was of the essence. Time of payment is not generally of the essence of a commercial contract unless the parties have agreed (either expressly or by necessary implication) that it should be; and that was not the case here. The requirement to pay on time was indeed, as the Judge held – adopting the familiar terminology deriving from the judgment of Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 – an “innominate term”.

The most authoritative modern statement of the test to be applied in deciding whether a given breach, or threatened breach, of an innominate term is repudiatory appears in the speech of Lord Wilberforce in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. (The Nanfri) [1979] AC 757, at pp. 778-9. He said:

“Was this breach, or threatened breach, repudiatory or not? I shall not set out at any length the numerous authorities on anticipatory breach: this is one of the more perspicuous branches of the law of contract and the modern position is clear. The form of the critical question may differ slightly as it is put in relation to varying situations:

‘… an intimation of an intention to abandon and altogether to refuse performance of the contract …’ or ‘evince an intention no longer to be bound by the contract …’ (Freeth v. Burr (1874)  L.R. 9 C.P. 208, 213, per Lord Coleridge C.J.)

‘I do not say that it is necessary to show that the party alleged to have repudiated should have an actual intention not to fulfil the contract. He may intend in fact to fulfil it, but may be determined to do so only in a manner substantially inconsistent with his obligations, and not in any other way’ (Ross T. Smyth & Co. Ltd. v. T. D. Bailey, Son & Co.[1940] 3 All E.R.  60, 72, per Lord Wright)

such as to deprive ‘the charterers of substantially the whole benefit which it was the intention of the parties …. that the charterers should obtain from the further performance of their own contractual undertakings’ (Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 Q.B.  26, 72, per Diplock L.J.).

‘To constitute repudiation, the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract …. Will the consequences of the breach be such that it would be unfair to the injured party to hold him to the contract and leave him to his remedy in damages …?’ (Decro-Wall International S.A. v. Practitioners in Marketing Ltd. [1971] 1 W.L.R. 361, 380, per Buckley L.J.).

The difference in expression between these two last formulations does not, in my opinion, reflect a divergence of principle, but arises from and is related to the particular contract under consideration: they represent, in other words, applications to different contracts, of the common principle that, to amount to repudiation a breach must go to the root of the contract.”

It has, however, more than once been pointed out that the reference to breaches “going to the root of the contract” is not a particularly helpful formulation. In Telford Homes (Creekside) Ltd v Ampurius Nu Home Holdings [2013] EWCA Civ 577, Lewison LJ, after citing Lord Wilberforce’s speech in The Nanfri, said, at para. 50:

“The trouble with expressing important propositions of English law in metaphorical terms is that it is difficult to be sure what they mean. As the High Court of Australia majority judgment pointed out in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61 (2007) 82 AJLR 345 at [54] to describe a breach as "going to the root of the contract" is:

‘… a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party.’”

Likewise in Rice v Great Yarmouth (see para. 24 above), Hale LJ said, at para. 35 (p. 50):

“The question for the court … in any case like this is whether the cumulative effect of the breaches of contract complained of is so serious as to justify the innocent party in bringing the contract to an end. The technical label is ‘repudiatory’ but that is just a label to describe the consequence which may flow.”

The essential question is whether the breach or breaches are such as to justify the summary termination of the contract by the other party, having regard to all the circumstances: those circumstances will in principle include all the matters identified by the High Court of Australia in the passage quoted by Lewison LJ in Telford Homes.

Consistently with that general approach, the authorities concerned with cases of late payment include both cases where late payment has been held to be repudiatory and cases where it has not. The best-known example of the latter is Decro-Wall (see para. 24 above). An example of the former is the decision of this Court in Alan Auld Associates Ltd v Rick Pollard Associates [2008] EWCA Civ 655, [2008] BLR 419. The different outcomes reflect the different assessment of the Court of the seriousness of the breaches on the particular facts of the case. In Decro-Wall there had been a series of late payments by purchasers to their suppliers; but the delays were very short (averaging eight days), had occasioned only minimal (and recoverable) losses, and occurred for reasons which were venial, which the suppliers well understood and which gave no reason to doubt that they would receive payment in full, albeit a few days late. In Alan Auld, by contrast, the late payments were, as Tuckey LJ described them, “substantial, persistent and cynical”.

In my view the circumstances of the present case were such that the Judge should have found that the Claimant’s failure to make the August, September and October payments, taken cumulatively, constituted a repudiatory breach. The essential point to my mind is that this was not a case of payments being missed by mistake or as a result of some temporary or unexpected shortage of funds. The Claimant made a deliberate choice to depart from the agreed arrangements as regards his primary obligation under the contract. Under those arrangements he had to pay the Defendant 50% of his actual receipts month by month; and if as a result of underperformance on the PCT contract at the year-end (or on its earlier termination) he had to make a repayment to the PCT any consequential clawback from the Defendant would occur at that point. Both parties would share the benefit of the PCT payments being made on a regular upfront basis. By contrast, the stance which he adopted in September meant that he would retain the full PCT payments and pay nothing to the Defendant until a final accounting occurred, whenever that might be; and even on his modified proposal made in October the Defendant would only receive a reduced amount – possibly in fact still nothing – in anticipation of a repayment having to be made to the PCT. That no doubt protected the Claimant from a possible future default by the Defendant, but it was a complete departure from the contractual arrangement. I would add that the sums involved were not trivial. By the time of the termination of the facilities contract they apparently amounted to over £17,000. As he protested more than once, the Defendant had to go on bearing the running costs of the practice; and the amount outstanding would increase with each month that passed.

Thus although the Judge said – see para. 22 (3) above – that in his communications between September and October 2010 the Claimant was continuing to “affirm” the contract, he was in truth departing from it. It is well established that a declared intention by a party to fulfil a contract “but in a manner substantially inconsistent with his obligations and not in any other way” is a repudiation: see per Lord Wright in the passage from Ross T Smyth quoted by Lord Wilberforce in The Nanfri, as set out above. The Judge may have been misled in this regard by his understanding that as a matter of law renunciation “can only apply where the opposite party asserts total non-performance” (see para. 24 above), which led him to think that the Defendant was not entitled to terminate, because the Claimant was not refusing to attend the practice or to comply with other aspects of the “suite of obligations” to which he referred. As appears from the passage from The Nanfri which I have set out, that is not the law: Lord Wilberforce was there at pains to point out that Diplock LJ’s reference in Hongkong Fir to the victim of the breach being deprived of “substantially the whole benefit” of the contract does not represent a statement of principle applicable in every case, and he endorsed also Buckley LJ’s reference in Decro-Wall to the victim being deprived of “a substantial part of the benefit to which he is entitled under the contract”.

There seems to me in fact to be some analogy – though I do not suggest the cases are identical – between the present case and the old case of Withers v Reynolds (1831) 2 B & Ad 882. In that case a buyer of straw who had agreed to pay cash on delivery announced that for the future he would only pay for one load on delivery of the next. The Court of King’s Bench held (though they did not use the modern terminology) that that went to the root of the contract and constituted a repudiation. The buyer was seeking to convert a cash transaction into a credit transaction, and that altered what Parke J called “the substance of the agreement”. In Decro-Wall both Salmon LJ, at p. 368 G-H, and Buckley LJ, at p. 380 G-H, accepted that Withers v Reynolds was correctly decided, though they thought it was distinguishable from the case before them.

However, the Judge’s principal reason, supported by Mr Cohen, for holding that the non-payments were not repudiatory relied on the “explanation” of his conduct which the Claimant gave in the postscript to his letter of 21 September. As I read his judgment, there are two strands to the Judge’s reasoning on this point. The first is that the Defendant should reasonably have appreciated from the Claimant’s explanation that he would receive payment in full, albeit late. The second is that the breach was in some sense justified by the Defendant’s threat in his letter of 15 June to terminate the facilities contract: though it was too unspecific to constitute notice, that threat had created a risk that the Claimant would be left out of pocket. The latter element is not spelt out in paras. 28 or 29 of the judgment, but they need to be read with what the Judge says in para. 27 (see para. 22 (1) above). The Judge does not use the language of justification, but Mr Cohen did so in his submissions to us, and it seems to me a fair label: what is being said is that a breach which would otherwise be repudiatory should not be treated as such because it was a reasonable response to the Defendant’s conduct. I take those two strands in turn.

As to the first strand, I do not believe that the fact that the Defendant should have been confident that he would be paid in the end is in any way decisive. The importance which the Judge attached to it may have been based on a passage in Decro-Wall where Salmon LJ made the point that the sellers had given express evidence that they had no doubt that they would be paid, albeit late (see pp. 366H and 369 C-D). But that cannot be elevated into a universal proposition that late payment cannot be repudiatory if eventual payment is assured. The conclusion of the Court in Decro-Wall was based on a number of circumstances, of which the certainty of eventual payment was only one. The circumstances of the present case are, for the reasons given at para. 33 above, very different.

I turn to the second strand in the Judge’s reliance on the Claimant’s explanation – that is, that he was justified in acting as he did in order to protect himself against the risk that the agreement would be terminated prior to the end of the PCT contract and that the Defendant would not then reimburse him for his share of any consequent liability to make a repayment to the PCT. It is worth noting that the essential point in the argument is not as such the Claimant’s fear that the Defendant would terminate the facilities contract without adequate notice. Rather, the risk that the Claimant was saying in the postscript to his letter of 21 September that he needed to protect himself against was the risk that the Defendant would not, in the event of such early termination, pay his 50% share of any refund that might have to be made to the PCT. (Indeed the postscript does not in fact contemplate termination by the Defendant: rather, what it is concerned with is the situation if the conditional notice given by the Claimant himself were effective. That point is not, however, of real significance since no doubt the Claimant would in those circumstances have said that he was responding to repudiatory conduct by the Defendant.) His argument is that his breach of the agreement should not be regarded as repudiatory because he was acting to protect himself against a feared future breach by the Defendant.

In my view that argument is heterodox. It is one thing if a party has made it clear that he will, when the time comes, refuse to comply with his contractual obligations. That is a renunciation, or anticipatory breach, and the other party is entitled to jump first. But it is neither pleaded nor argued by the Claimant in this case that the Defendant had, as at 21 September, done or said anything that amounted to a renunciation. Even if the Claimant’s fear that he might in the end not pay his share of any future refund to the PCT was reasonable, that is not enough. If that happened he could take him to Court at that point. Or he could try to bring matters to a head earlier by getting the Defendant to give an unequivocal assurance that he would pay his share, and claim that there had been a renunciation if no such assurance was forthcoming. But otherwise it was his duty to go on performing his obligations under the facilities contract unless and until the Defendant did something that entitled him to bring it to an end. I appreciate of course that Mr Cohen is not contending that the Claimant was not in breach but only that the “justification” meant that his breach was not repudiatory. But in my view it would be wrong in principle, and would conduce to uncertainty, if considerations of this kind were allowed to modify the otherwise well-understood rules about what constitutes repudiation.

For those reasons I believe that the Judge should have held that the Claimant’s withholding of the August, September and October payments, understood in the light of his contemporary statements of his intentions, constituted a repudiatory and/or a renunciation of the facilities contract, which the Defendant plainly accepted by his e-mail of 2 November. I would thus for my part have allowed the appeal. However, Arden and Floyd LJJ take a different view. As I see it, the essential difference between us is that they attach less importance than I do to the fact that the Claimant deliberately declared that he would not, for an indefinite period, comply with the contract and more importance to the fact that the Defendant would be paid eventually and that there was no evidence that the delay would cause serious damage. I have considered whether, since the decision requires the balancing of various factors, I should treat the Judge’s assessment as legitimate even if I might myself have reached the opposite conclusion; but after careful reflection I still think that the factors to which I attach importance are such that his decision should indeed be regarded as wrong.

I am grateful to Underhill LJ for his very clear exposition of the facts and of the judgment of HHJ Hooper QC at paragraphs 2 to 24 above. I agree, as Underhill LJ holds in paragraph 29, that the requirement for the Claimant to make monthly payments on time could not be described as a condition of the contract, and that it was an innominate or intermediate term. It follows that it would not be every breach of the obligation to make payments which would entitle the Defendant to treat the contract as discharged. Whether he was entitled to do so would depend on the nature and consequences of the breach. On this issue I have reached a different conclusion from Underhill LJ. I agree with the judgment of Arden LJ which I have read in draft.

The Claimant’s initial stance was that, although he would be prepared to perform a modified contract, pursuant to which payments were deferred until a reconciliation at the year end or an earlier termination, he would no longer make (and had already ceased making) the payments when they fell due. Later he offered monthly payments on a “performed UDA” basis, which would have still have represented a lower payment than the contract provided for if he was behind on his UDAs. The breaches were therefore partly historic and partly anticipatory.

The effect of these past and threatened future breaches could not on any view be said to deprive the Defendant of “substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing [his] undertakings”, the test propounded by Diplock LJ in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. Although he would be deprived of monthly payments, he would, as the judge held, obtain that to which he was entitled in the end. In the meantime he would no doubt be out of pocket, his cash-flow might be affected and he could, in theory at least, find himself paying interest on money borrowed to replace the Claimant’s missed or reduced payments. The position is to be contrasted with one, clearly repudiatory, in which the Claimant refused to perform his side of the bargain altogether, by refusing to pay at all.

In Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 2 All ER 216 the defendants had assumed an obligation to pay for goods by bills of exchange due 90 days from the date of the claimants’ invoice. The defendants were consistently between 2 and 20 days late in respect of payment, although no more than one bill was outstanding at any one time. It was likely that this state of affairs would continue as the defendants were paying for goods delivered from the receipts made by their onward sale. The Court of Appeal held that these breaches did not give the claimants the right to be relieved of further performance of the contract. Salmon LJ held that where the contract itself does not stipulate expressly or by implication what is to be the result of the breach of its terms:

“the courts must look to the practical results of the breach in order to decide whether it goes to the root of the contract.”

Salmon LJ distinguished Withers v Reynolds (1831) 2 B & Ad 882, considered by Underhill LJ at paragraph 35 above, on the grounds that in that case the parties had made time of the essence, or alternatively that the buyer was seeking to alter the nature of the transaction by turning a cash into a credit transaction. He went on to explain that the practical consequence of the breaches in that case was only that the claimants:

“may have incurred liability to their bank for a comparatively insignificant sum by way of extra interest which in any event they could have recovered from the defendants”

Sachs LJ also applied the “root of the contract” test. He said that applying it in this case:

“involves assessing the defaults of the defendants and their effect in relation to the nature and scope of the business transactions between the parties as a whole.”

Buckley LJ put the matter in this way:

“…it is said on behalf of the plaintiffs that, if one party to a contract manifests an intention not to perform in accordance with the contract some part of his unperformed obligations thereunder throughout the remainder of the subsistence of the contract, the other party is entitled to treat this as a repudiation of the contract. This, it is said, is so however insubstantial the threatened departure from due performance of the contract may be. I cannot accept this contention.”

Having considered Millars' Karri and Jarrah Co (1902) v Weddel, Turner & Co ((1908) 100 LT 128 at 129), Buckley LJ continued:

“Each party to an agreement is entitled to performance of the contract according to its terms in every particular, and any breach, however slight, which causes damage to the other party will afford a cause of action for damages; but not every breach, even if its continuance is threatened throughout the contract or the remainder of its subsistence, will amount to a repudiation. To constitute repudiation, the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract. The measure of the necessary degree of substantiality has been expressed in a variety of ways in the cases. It has been said that the breach must be of an essential term, or of a fundamental term of the contract, or that it must go to the root of the contract. Various tests have been suggested … I venture to put the test in my own words as follows: will the consequences of the breach be such that it would be unfair to the injured party to hold him to the contract and leave him to the remedy in damages as and when a breach or breaches may occur? If this would be so, then a repudiation has taken place.

Buckley LJ distinguished Withers v Reynolds (above) on the ground that:

“under the agreement there under consideration the plaintiff was to pay for the loads of straw as they were delivered and that this was an essential term of the contract.”

In Alan Auld Associates v Rick Pollard Associates and another [2008] EWCA Civ 655 the claimant was obliged to pay Dr Pollard for his services immediately upon the claimant being paid by the United Kingdom Atomic Energy Authority for Dr Pollard’s work. None of Dr Pollard’s invoices was paid on time: delays ranged from one to nine months and more than half were over four months late. Tuckey LJ, with whom Longmore and Toulson LJJ agreed, drew assistance from employment cases in which late performance of the obligation to pay the employee can be treated as repudiatory, at least where it is repeated, persistent and perhaps unexplained. On the facts Tuckey LJ held it to be material that the income from the claimant was Dr Pollard's only source of earned income and thus the analogy to a contract of employment was a close one. The time for payment lay at the heart of the agreement. The breaches of this term were substantial, persistent and cynical. It is not difficult to see why, in the context of that relationship, it would be unfair to leave the employee to a remedy in damages.

Even in the employment field, it is not the case that any late payment of wages will be treated as repudiatory. If there is a reason for it, it may not be. In Cantor Fitzgerald v Callaghan & others [1999] 2 All ER 411 (in a passage cited by Tuckey LJ in Alan Auld (above)), Judge LJ said:

“In my judgment the question whether non-payment of agreed wages, or interference by an employer with a salary package, is or is not fundamental to the continued existence of a contract of employment, depends on the critical distinction to be drawn between an employer's failure to pay, or delay in paying, agreed remuneration, and his deliberate refusal to do so. Where the failure or delay constitutes a breach of contract, depending on the circumstances, this may represent no more than a temporary fault in the employer's technology, an accounting error or simple mistake, or illness, or accident, or unexpected events (see eg Adams v Charles Zub Associates Ltd [1978] IRLR 551). If so it would be open to the court to conclude that the breach did not go to the root of the contract. On the other hand if the failure or delay in payment were repeated and persistent, perhaps also unexplained, the court might be driven to conclude that the breach or breaches were indeed repudiatory.”

It is of course in general correct that a declared intention by a party to perform a contract in a manner which is substantially inconsistent with his obligations may amount to a renunciation of it: see per Lord Wright in Ross T. Smyth & Co. v T.D. Bailey, Son & Co [1940] 3 All E.R. 60 at 72. However this is not a special rule applicable to deviations from contractual performance, making every such deviation give rise to a right in the opposite party to terminate. The breach involved must be analysed by the same standard to determine whether it has that consequence or not.

Whether a breach or threatened breach does give rise to a right to terminate involves a multi-factorial assessment involving the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach and the consequences of the breach for the injured party: see the passage from the majority decision of the High Court of Australia in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61 (2007) 82 AJLR 345 at [54] cited by Lewison LJ in Telford Homes (Creekside) Ltd v Ampurius Nu Holdings [2013] EWCA Civ 577 at [50].

The judge held at paragraph 29 of his judgment that it “would and should have been entirely obvious to the defendant that … the defendant would receive everything to which he was entitled, albeit some of it late”. He went on to say that the claimant’s letter of 21 September 2010 represented an assurance to the defendant of satisfaction of his due entitlements arising from the PCT contract. His conclusion that the Claimant had not acted in renunciation or repudiation of the facilities contract was, he said, plain on the facts.

The nature of the relationship in the present case was an essentially commercial one, and thus very different from an employment contract. The payment from the Claimant was not the only source of income of the Defendant or the DSDP. Apart from the size of the ultimate indebtedness which would be built up before a final reconciliation was possible, Mr Clegg did not draw our attention to any consequences that the non-payment would have on the Defendant. It is true that the Defendant complained of the fact that he was continuing to pay the outgoings on the practice, but that was not something which I would necessarily infer was causing the Defendant significant harm.

The absence of any evidence about the consequences for the Defendant of the late payments from the Claimant may be explained by his insistence that the term as to time of payment was a condition, such that any breach entitled him to terminate the contract, whatever its consequences. Be that as it may, if the Defendant wished to establish that it involved serious consequences for him and his practice, the burden fell on him to establish it. It is clear that the judge considered that he had failed to do so.

The judge was better placed than we are to evaluate the impact of the Claimant’s breach and threatened further breaches on the Defendant, and weigh the other factors relevant to an assessment of whether the Claimant’s breach went to the root of the contract. For my part I would not disturb the judge’s conclusions that the Claimant was not in repudiatory breach of contract, and that the Defendant’s action in excluding the Claimant from the practice was wrongful. I would therefore dismiss the appeal.

I am indebted to Underhill LJ for his clear and comprehensive judgment. However, I have reached the contrary conclusion for the reasons given below. I adopt the abbreviations used by Underhill LJ. I proceed on the basis that there were no provisions in the contract which would have enabled Mr Januzaj to terminate it in the events which happened irrespective of the seriousness of the breach. There were no such terms found by the judge.

The common law adopts open-textured expressions for the principle used to identify the cases in which one contracting party (“the victim”) can claim that the actions of the other contracting party justify the termination of the contract. I will use the formulation that asks whether the victim has been deprived of substantially the whole of the benefit of the contract. The expression “going to the root of the contract” conveys the same point: the failure must be compared with the whole of the consideration of the contract and not just a part of it. There are other similar expressions. I do not myself criticise the vagueness of these expressions of the principle since I do not consider that any satisfactory fixed rule could be formulated in this field.

Whether the victim is deprived of substantially the whole of the benefit of the contract is a question to be determined by evaluating all the relevant circumstances. It is not a question of discretion. It is fact-sensitive.

Crucially the court takes into account the nature and effect of the breach. The effect of a breach is important because one of the circumstances the court may take into account is the relationship between the promised performance and the performance which in fact occurs. The parties’ knowledge about the likely effect of a breach will be important evidence. That knowledge may come from a variety of possible sources. For example, the other party may have given the victim some assurances.

In the present case, in my judgment, the judge attached considerable importance to the parties’ knowledge of the likely effect of the breach. Importantly, he made an important finding (“the likelihood finding”) that Mr Januzaj knew that the likely result of Mr Valilas’ actions was delayed payment, not a refusal to make payment. This finding is made and amplified in paragraph 29 of the judge’s judgment:

“29… in the context of his explanation of why he was paying it would and should in my judgment have been entirely obvious to the defendant that the UDAs could and should have been completed by 31 March 2011, so the defendant would receive everything to which he was entitled, albeit some of it late. As to the defendant’s suggestion that there was no evidence that the claimant would catch up and complete, I accept the claimant’s evidence, and the defendant does not contradict it, that the claimant had been with this practice since 2005, in its other ownership prior to its acquisition by the defendant, and had held a PCT contract since 2006, and had always completed his UDA’s, and understood the imperative of completion as is the essence of the argument he put forward in his letter of 21 September 2010. The claimant believed that, if allowed to continue, he could and would catch up with his UDAs by 31 March. There is no evidence that in such circumstances he could not and would not catch up by 31 March, and the probabilities are that he could and would catch up 31 March.”

In other words, the judge was clear that, had Mr Valilas been permitted to complete a full year, the PCT would have had no claim to the return of any part of the £195,000, and that moreover both parties knew this. So, it would have been known in November when Mr Januzaj purported to terminate the contract that the only loss likely to be caused by Mr Valilas’s actions was that the payments due for August and the following months would be late. He made no ruling on the interesting question whether Mr Valilas was entitled to any contribution from Mr Januzaj to any payment he had to make to the PCT. The judge may have been reluctant to decide this point on the unsatisfactory evidence before him or simply thought it unnecessary to do so. In my judgment it was unnecessary for him to do so because of the likelihood finding.

Where the victim knows that he is not likely to be deprived of substantially the whole of the benefit of the contract, that will without more lend substantial weight to the conclusion that the victim was not justified in terminating the contract on the grounds that he had been or would be deprived of substantially the whole of the benefit of the contract.

As I have explained, Mr Valilas made it clear he would work to clear the shortfall in UDAs and to pay what was due when that was established. On the evidence this would be shortly after the year end. Mr Januzaj knew that it was likely he could complete the required number of UDAs. There is no suggestion that he should not have accepted Mr Valilas’s promise to pay what was due.

There are other relevant factors in this case. Remarkably, Mr Januzaj did not assert at the time that Mr Valilas had fundamentally departed from the contract: what he did was to try to give notice under the contract to terminate it: on that basis he did not even purport to accept any repudiation. This fact confirms that prompt payment was not such an important element of the contract as to deprive Mr Januzaj of substantially the whole of the benefit of the contract.

Furthermore, the refusal of non-performance was not unconditional: Mr Valilas’s concern was that he would not be paid if there was a shortfall, and that concern would fall away if there was no such shortfall.

Another relevant factor is that Mr Valilas was raising a dispute on the interpretation of the contract which could not be described as unreasonable for him to raise. Mr Valilas clearly thought that Mr Januzaj would breach what Mr Valilas contended was Mr Januzaj’s side of the bargain by refusing to contribute to any repayment that might be required to the PCT. The fact that Mr Valilas was concerned about this shows that he was concerned about performing the contract, not with distancing himself from it.

In the circumstances, I consider that the judge was entitled to come to his conclusion. Especially when the likelihood finding is taken into account, it is in my judgment clear that Mr Januzaj was not deprived of substantially the whole of the benefit of the contract. The only likely loss was the loss of the use of the money in the meantime. True, Mr Valilas did not offer to pay him interest but it was unlikely to be a significant amount. Moreover, if Mr Januzaj wanted interest, he could have taken out proceedings and sought summary judgment. He would then have received interest.

I base my reasoning on two cases cited to us, Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 and Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361. In the former case, the charterers of a ship, which was delayed at various ports due to the incompetence of its crew and the defects in the ship, were held not justified in terminating the charter because the judge found on consideration of all the circumstances that they were not deprived of substantially the whole of the benefit of the charter. Diplock LJ set out the test I have used and made it clear that the application of the test depended on the judge’s evaluation of all the relevant circumstances.

In the latter case, a distributor was persistently late in making contractual payments to its supplier but this did not justify the supplier terminating the agreement. The damage caused was a loss of interest which was not substantial and which could be quantified and recovered as damages for breach of contract. The supplier was not in any doubt that payment would ultimately be made. Withers v Reynolds (1831) 2 B & Ad 882 was distinguished on its facts.

Since writing my judgment, I have read the judgment of Floyd LJ, with which I agree. I too would dismiss this appeal.