England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT
(MS RECORDER SHERWIN)

		Royal Courts of Justice Strand, London, WC2A 2LL
		15th May 2008

Lord Justice Tuckey:

1. This is an appeal from the judgment of Recorder Deborah Sherwin given  in  the York County Court, in which she dismissed the claimant's  claim  and  gave  judgment for the defendants on their counterclaim  for  £11,250.19  plus  interest and compensation under the Late Payment of Commercial Debt (Interest) Act 1998. The question raised by the appeal is whether, by its persistent late and non-payment of amounts due to the defendants under an engineering sub-consultancy agreement, the claimant repudiated the agreement.
2. Dr Alan Auld and the second defendant, Dr Pollard, are chartered engineers and respectively the principals of the claimant company and the first defendant firm. Dr Auld and Dr Pollard were friends and had worked together on a number of projects before 2004. In June 2004 the claimant was asked by the United Kingdom Atomic Energy Authority to tender for a consultancy to advise the authority about an aspect of a project to remove radioactive waste from a shaft at the Dounreay Power Station. To isolate the shaft it had to be sealed by grouting to protect it against the ingress of groundwater. Advising on such projects was Dr Pollard's speciality. Although he is the principal of the first defendant and both he and his firm are named as defendants in the proceedings, I will refer to them collectively (since they are effectively one and the same) as "Dr Pollard".
3. The claimant's successful tender contemplated that the grouting advisory work would be carried out by Dr Pollard. The claimant's involvement was only necessary to provide him with managerial support and professional indemnity insurance. The tender rate for providing this independent technical advice to the authority was £70 per hour plus expenses.
4. The oral agreement between the claimant and Dr Pollard was similar to earlier agreements between them. He was to be paid £50 per hour plus expenses. There were issues at trial as to when Dr Pollard was to be paid, but it was common ground that he would invoice the claimant at the end of each month with the number of hours he had worked and his expenses, which would then enable the claimant to invoice the authority. The authority were prompt payers -- the evidence was that they paid within three to five weeks of invoice. The judge found that it was an implied term of the agreement that the claimant would pay Dr Pollard immediately it received payment from the authority. She also found that through Dr Auld the claimant knew the following facts:

"16. a) That at the relevant time Dr Pollard was partially retired

b) That the only work he was performing was for the Claimant under this agreement

c) This was his only source of earned income and therefore his sole means of support beyond the use of savings and therefore a matter of considerable importance to him

d) He was paying his expenses out of his own pocket ahead of being reimbursed with them"

5. Despite all this the claimant manifestly failed to meet its payment obligations to Dr Pollard. None of his nineteen invoices, issued between 31 December 2004 and 30 April 2006, were paid on time. A schedule produced by Dr Pollard, on the generous basis that payment should have been made to him eight weeks after the date of his invoice, showed substantial and increasing periods of delay ranging between one and nine months with more than half of the invoices paid over four months late. By the end of May 2006 he was owed £21,000. Dr Pollard's evidence which the judge accepted was that he had repeatedly complained to Dr Auld face to face, over the telephone and in emails about late payment. Despite promises to the contrary the position had deteriorated. The only reason ever given by Dr Auld for the late payment was that the claimant had no money due to late payment of its invoices by clients other than the authority. In June 2005 Dr Pollard had complained about this saying:

"I can understand a delay if we have a client who hasn't paid you on time, but I do know that the UKAEA are prompt payers and you're now using me as a free overdraft facility, which we both know isn't fair!"

He had asked for interest several times, but was told by Dr Auld that if he did so he would not be working for him much longer. The judge held:

"14. …there was no good reason within the terms of the contract why [Dr Pollard] should not have been paid promptly… It is clear to me from the evidence that the reason why he was not promptly paid was because of cash flow problems that the Claimant was experiencing because of other fields of their business. I suspect that they saw [Dr Pollard] as a soft target who did not have the clout to complain about being paid on time."

6. By mid 2006 Dr Pollard was understandably fed up with the way he was being treated. He did no work on the project in May 2006. On 7 June Dr Auld phoned him to ask where his May invoice was, no doubt to get it paid promptly by the authority, but with no intention of passing on the part due to Dr Pollard straight away. By this time, as I have said, Dr Pollard was owed £21,000, which included expenses which he had had to bear himself. Dr Pollard's evidence, which the judge accepted, was that on being asked for his May invoice he replied that he could not afford to invoice through the claimant anymore to which he had, as he noted in his diary, the "usual platitudes from him! Another couple of months…"
7. Now at the trial there was argument about what Dr Pollard meant when he said that he was not going to invoice through the claimant anymore. But the judge concluded that he must have meant that he would not continue to provide services to the claimant and indeed that is how both parties proceeded following this telephone conversation. The judge said she was satisfied that "he expressed those words to Dr Auld and that Dr Auld understood them to be a termination of the contract."
8. After 7 June, Dr Pollard continued to provide advice to the authority through another consultant, URS, who had also been retained to provide independent technical advice to the authority for the project. This lead the claimant to start these proceedings, in which it claimed the £20 per hour which it had lost for the remainder of the project because of Dr Pollard's defection to URS which it alleged was in breach of implied terms of mutual trust, confidence and loyalty in the agreement between them. Dr Pollard's response was that the agreement with the claimant had been terminated on 7 June 2006 by his acceptance of the claimant's repudiatory breach of its terms by persistently paying late and with every prospect of continuing to do so in the future.
9. Another possible line of defence for Dr Pollard had been suggested by the claimant's solicitor advocate, Mr O'Reilly, which was to the effect that time was or had become of the essence of the obligation to pay. Needless to say, this was a possibility which he said should be rejected but, as I shall explain, although this point was put by him as the devil's advocate, it obviously appealed to the judge. In paragraph 15 of her judgment, having inevitably found that the claimant had been in breach of contract for late payment, the judge said:

"15. The question then arises as to what [Dr Pollard] was entitled to do as a result of that breach. Was he entitled to

a) Regard the contract as having been repudiated by the Claimant?

b) Treat the breach as being fundamental and end the contract himself?

c) Give notice and end the contract?

d) Continue with the contract but seek damages for the breach?"

10. She went on to conclude that time was or became of the essence of the contract in this case. Under the heading "Conclusions" at the end of her judgment, after saying that the agreement required payment to Dr Pollard upon receipt by the claimant of payment from the authority, she said:

"22. This term went to the heart of the agreement between the parties.

23. There were repeated breaches of this term by the Claimant entitling [Dr Pollard] to terminate the agreement.

24. In any event [Dr Pollard] made time of the essence of the contract after 31 July 2005. Thereafter the Claimant continued to be in breach of the contract. By this breach the Claimant repudiated the contract entitling [Dr Pollard] to view the contract as being at an end.

25. [Dr Pollard] communicated this to the Claimant through Dr Auld on 7^th June 2006."

11. Relating these conclusions to the alternatives which the judge had set out in paragraph 15 of her judgment it seems to me that paragraphs 22 and 23, although very succinctly expressed, are findings that the contract had been repudiated by the claimant -- that is to say, the alternative set out by the judge in paragraph 15a). Her alternative conclusion "in any event" in paragraph 24 is based upon her finding at paragraph 17 that time was or had become of the essence in the agreement.
12. The claimant's Notice of Appeal attacked the alternative conclusion and the finding upon which it was based. By reference to well-known principles, it was argued that, absent express agreement, time for performance was not generally of the essence in a contract of this kind and that Dr Pollard had not made it so. I need not elaborate upon this because – rightly in my view -- Dr Pollard, through Mr Derek Sweeting QC, does not seek to support the judge's decision on this basis. He relies on the case which he put before the judge, which is succinctly summarised in the respondent's notice as follows:

"The repeated breaches of contract by the Claimant constituted repudiatory breach of contract by the Claimant, which [Dr Pollard] was entitled to accept on 7 June 2006."

13. Now, in what circumstances will such conduct be repudiatory? Chitty considers the question under the heading of renunciation. At paragraph 24-018 of the 29^th edition the editors say:

"A renunciation of the contract occurs when one party by words or conduct evinces an intention not to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect… An absolute refusal by one party to perform his side of the contract will entitle the other party to treat himself as discharged, as will also a clear and unambiguous assertion by one party that he will be unable to perform when the time for performance should arise. Short of such express refusal or declaration, however, the test is to ascertain whether the action or actions of the party in default are such as to lead a reasonable person to conclude that he no longer intends to be bound by its provisions. The renunciation is then evidenced by conduct. Also the party in default may intend in fact to fulfil (the contract) but may be determined to do so only in a manner substantially inconsistent with his obligations… In such a case, there is little difficulty in holding that the contract has been renounced. Nevertheless, not every intimation of an intention not to perform or of an inability to perform some part of the contract will amount to a renunciation. Even a deliberate breach, actual or threatened, will not necessarily entitle the innocent party to treat himself as discharged, since it may sometimes be that such a breach can appropriately be sanctioned in damages…

"It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his side of the contract.' If one party evinces an intention not to perform or declares his inability to perform some, but not all, of his obligations under the contract, then the right of the other party to treat himself as discharged depends on whether the non-performance of those obligations will amount to a breach of a condition of the contract or deprive him of substantially the whole benefit which it was the intention of the parties that he should obtain from the obligations of the parties under the contract then remaining unperformed. Words or conduct which do not amount to a renunciation will not justify a discharge."

14. It is not suggested that persistent late or non-payment can never be repudiatory where time for payment is not of the essence or a fundamental term of the agreement, but Mr O'Reilly argues, by reference to a number of cases, that such repudiatory conduct is very difficult to show. He referred us to Decro-Wall SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 and Dalkia Utilities Services plc v Celtech. International Ltd [2006] EWHC 63 (Comm), in which the courts had rejected arguments that late payments were repudiatory. I do not need to refer to Dalkia, but in Decro-Wall the plaintiff sought to contend that the defendants who had contracted to market their goods in England were in repudiatory breach because of short delays in the payment of bills of exchange which they had accepted to pay for the goods supplied to them by the plaintiffs. This court upheld the trial judge's conclusion that these breaches were not repudiatory. However, the judgments make it clear that, where the terms of the contract itself do not provide the answer, the court must examine the impact of the breaches in the context of the transaction as a whole in order to decide whether they are repudiatory (see the passages at pages 368D, 374F and 380C). At page 369F Salmon LJ said:

"So far as the plaintiffs were concerned it is clear from facts stated earlier in this judgment that the only effect of the late payments was that the plaintiffs 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. The case would have been quite different if the defendants' breaches had been such as reasonably to shatter the plaintiffs' confidence in the defendants' ability to pay for the goods with which the plaintiffs supplied them. I think that, in such circumstances, the consequences of the breach could properly have been regarded as most serious, indeed fundamental, and going to the root of the contract so that the plaintiffs would have been entitled to refuse to continue doing business with the defendants."

15. We were also referred to Rice (T/A The Garden Guardian) v Great Yarmouth Borough Council [2000] All ER (D) 902, an unreported decision of this court given on 30 June 2000 in which the leading judgment was given by Hale LJ with which the other two members of the court agreed. That was a case in which it was held that the claimant had repudiated its maintenance contracts with the council for a variety of breaches of those contracts. At paragraph 35 Hale LJ said:

"The question for the court (and indeed the contracting parties) in a case like this is whether the cumulative effect of the breaches of contract complained of is so serious as to justify the innocent party bringing the contract to a premature end. The technical term is 'repudiatory' but that is just a label to describe the consequence which may flow. It is not always an entirely satisfactory label, if it implies that the conduct itself must always be such as to demonstrate an intention to abandon contractual obligations: while this will sometimes be so it is not an invariable requirement. As the judge indicated there are in effect three categories: (1) those cases in which the parties have agreed either that the term is so important that any breach will justify termination or that the particular breach is so important that it will justify termination; (2) those contractors who simply walk away from their obligations thus clearly indicating their intention no longer to be bound"

I interpolate our case is not in either of these two categories, but it is in the third category which she defined as:

"those cases in which the cumulative effect of the breaches which have taken place is sufficiently serious to justify the innocent party in bringing the contract to a premature end. It is clear that the test of what is sufficiently serious to bring the case within the third of these categories is severe."

16. Dealing with the facts of that case, at paragraph 38 she said:

"These contracts are like building contracts in that the accumulation of past breaches is relevant, not only for its own sake, but also for what it shows about the future. In my view, the judge was right to ask himself whether the cumulative breaches were such as to justify an inference that the contractor would continue to deliver a substandard performance."

This last passage indicates, as indeed the authorities show, that when asking the question whether one party has evinced an intention no longer to be bound by an agreement, it is legitimate to draw inferences from past breaches as well as taking account of the prospect of future breaches.

17. Finally at paragraph 39, Hale LJ emphasised that the trial judge was best placed to evaluate the true importance of the proven breaches in the context of the contracts as a whole and all the circumstances of the case. The court said that the judge was entitled to reach the conclusion he did in that case because he had had the advantage of assessing the seriousness of the course of the breaching in the trial. Provided the judge properly directs himself this court should not interfere with such an assessment.
18. Mr Sweeting submitted that this case was analogous to an employment contract. He referred to what this court said in Cantor Fitzgerald International v Callaghan and Ors [1999] ICR. Judge LJ, who gave the leading judgment with which the other two judges agreed, said at page 419-420:

"In reality it is difficult to exaggerate the crucial importance of pay in any contract of employment. In simple terms the employee offers his skills and efforts in exchange for his pay: that is the understanding at the heart of the contractual arrangement between him and his employers…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… 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."

This case shows the importance which the courts attach to payment terms in contracts of employment. Dr Pollard's contract was a contract for services but I think the analogy's apt.

19. Mr Reilly submits that the evidence in this case did not justify a finding that the claimant had repudiated the agreement. Despite the delay £70,000 had been paid to Dr Pollard by the end of May 2006 and there was no evidence that there was any risk, actual or perceived, that he would not be paid at all. The breaches were not sufficiently grave or severe and did not deprive Dr Pollard of a substantial benefit under the agreement. He had not complained loudly enough or made it clear that if the claimant did not pay on time the agreement would be terminated. Such a warning would have tested whether the claimant was really evincing an intention not to be bound by the agreement.
20. I do not accept these submissions. The context in which the breaches in this case occurred is important. This was not a transaction in which the parties had a raft of mutual obligations to perform. Dr Pollard was to do the work for the authority through the claimant and the claimant was to pay him for it. It was Dr Pollard's only source of earned income. Although this was not a contract of employment, the analogy is a close one. The judge found that the term as to the time for payment lay at the heart of the agreement. The breaches of this term were substantial, persistent and cynical. Not one payment was made in time; most were made inordinately late; by the end of May 2006 over £21,000 was owing. These breaches occurred against a background of repeated complaints by Dr Pollard and broken promises by the claimant. Dr Pollard was entitled to assume that he would be treated in the same way for the remainder of the project which still had a year or so to run. As Dr Pollard said he was being used to fund the claimant's business. The judge suspected that this was because he was seen as a soft target. In these circumstances, I think the judge was perfectly entitled on the facts as she found them, to conclude that the claimant was in repudiatory breach of the agreement, which entitled Dr Pollard to bring it to an end, as he did on 7 June 2006. For those reasons I would dismiss this appeal.

Lord Justice Longmore:

21. I agree and there is nothing I can usefully add.

Lord Justice Toulson:

22. I also agree.

Order: Appeal dismissed