01 June 2011

Negotiating ploy in contract disputes could cost dearly if it amounts to ‘repudiatory breach’

An IT supplier that suspended work under a contract after trying to make significant changes to the basis upon which it was paid has found itself liable to pay damages to the other party because its action amounted to a repudiatory breach bringing the contract to an end.

A dispute arose between an IT supplier carrying out a major project for its client on a fixed-price basis after the supplier asked for more money than originally agreed for the project in the contract between them. The supplier claimed that lack of co-operation by the client, and ‘scope creep’ – ie that the client was asking it to do work above and beyond what it was originally asked to do – justified asking for extra payment. However, it was asking for a further £4.6m over the original £2.9m price, and saying it should now be calculated on a ‘time and materials’ basis rather than as a fixed-price project.

Discussions began with the client, who withheld payment of £320,000 due for work carried out. The court found that the supplier had met its obligations to date under the contract, so that the withholding of payment was simply to put pressure on the supplier. However, other actions by the client showed that it was still willing to proceed with the project and fulfil its contractual obligations.

As a result of the client’s actions, the supplier stopped work on the project. The client treated this as a repudiatory breach that ended the contract between them. It therefore set about finding an alternative supplier and claimed damages for breach of the contract.

The supplier argued that it was the client’s actions that amounted to a repudiatory breach, so it was the client that had ended the contract. It said it was therefore justified in stopping work on it, and claiming damages from the client.

The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party, looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform, the contract.

The court decided that the client’s actions were not a repudiatory breach because the withholding of payment in these circumstances did not show a clear intention to abandon the contract. It was simply a negotiating ploy. Other relevant factors included that the client had agreed to reschedule the times at which work was to be carried out, which showed an intention to carry on with the contract rather than repudiate it.

The supplier, on the other hand had not shown an intention to carry on with the contract. The court noted that the supplier had the right, under the contract, to suspend work if not paid, and could give notice to the client if it thought there had been a material breach of the contract (such as non-payment of sums due) entitling it to terminate the contract if the breach was not put right within 30 days. It had not done so.

Also, by trying to replace the fixed-price payment with significantly different payment terms based on time and materials, resulting in such a major increase in price, the supplier was effectively saying it wanted to do the work under a new contract. This was consistent with repudiatory breach of the old contract. The supplier’s argument that its actions showed it wanted to continue with the work, and therefore with the original contract, did not help it. Wanting to continue with the work was not the same as wanting to continue with the original contract.

Recommendation

  • Suppliers and clients on any project, not just IT projects, such as withholding payment, should ensure that action they take in the event of a dispute cannot, in all the circumstances, be interpreted as a repudiatory breach, or they may find themselves liable to pay damages.
  • Particularly, suspending work and attempting to negotiate a new price and/or other terms can amount to a repudiatory breach if the changes being put forward are so significant that they can be read as abandoning the original contract and trying to negotiate a new one (even if they indicate a willingness to continue with the work envisaged by the original contract on those new terms).
  • Always take advice before taking action in significant disputes, to avoid inadvertently commit a repudiatory breach.

For more information on this topic, contact Mark Lumley on 0113 297 7727 or at mlumley@shulmans.co.uk

Case ref:

De Beers UK v Atos Origin IT Services UK Ltd [2010] EWHC 3276