Contract: material breach and termination

Mountwest 838 Limited v Backmuir Trading Limited: termination of contract following material breach

A recent Scottish case provides guidance on termination following material breach of contract.

Background

Backmuir Trading Ltd (“Backmuir”) entered into an agreement with Mountwest 838 Ltd (“Mountwest”) granting them an option to develop a wind farm (the “Agreement”) on an area of land owned by them. In terms of the Agreement, Mountwest were obliged to provide Backmuir with copies of proposed planning applications for comment before submission to the planning authority. Mountwest were obliged to use “all reasonable endeavours” to take into account Backmuir’s representations.

Mountwest failed to provide a copy of a planning application to Backmuir before it was submitted. Backmuir sought to engage the termination provisions of the Agreement. The termination provisions allowed Backmuir to terminate if Mountwest failed materially to perform its obligations and: (i) any such failure was incapable of being remedied; or (ii) it was capable of remedy but Mountwest had failed to do so. If the breach complained of was capable of remedy, the Agreement provided that Backmuir must serve a written notice on Mountwest specifying the failure and requiring it to be remedied within a reasonable time (which time was to be specified in the notice). Only if Mountwest failed to timeously remedy the breach could the contract be terminated.

On 9 August 2011, Backmuir wrote to Mountwest requiring them to remedy their failure “if it is capable of being remedied” and to provide a copy of the planning documents within 21 days. Mountwest provided the documentation within the specified 21 days. Some weeks later, Backmuir’s solicitors served a formal notice of termination contending that Mountwest had failed to remedy the breach on the basis that the planning documents were provided after the planning application had been submitted. Mountwest raised proceedings asking the court to declare that the termination of the Agreement was not valid.

Decision

Three questions faced the Court: (i) was Mountwest’s failure to provide planning documentation before submitting the application a material breach?; (ii) could the material breach be remedied?; and (iii) had it in fact been remedied?

The court held that Mountwest’s failure constituted a material breach of contract but that this particular breach was remediable. The court held that if Backmuir’s letter of 9 August was intended to constitute a notice of termination (on the basis that the breach was not capable of remedy) it should have been clearer. Instead, it provided Mountwest with 21 days in which to supply the planning documentation. The objective (but informed) interpretation of Backmuir’s 9 August letter was that the provision of the documents within that period would remedy the breach. The documents were provided within that timescale and, as a result, the breach was remedied “in accordance with the express wishes” of Backmuir. The court also held it to be relevant that any mischief caused by the breach had been cured by provision of the documents.

Comment

This case provides valuable guidance to parties seeking to terminate a contract subsequent to a material breach. Ordinarily, the innocent party would be entitled to rescind (and potentially seek damages). However, the court held that the clause which had been breached in this case had an “essential equity” underlying it. Therefore, even where a party is deemed to be in material breach, a court may still look to other factors in interpreting the validity of a purported termination.

Further reading: Mountwest 838 Ltd v Backmuir Trading Ltd [2012] CSOH 131