The recent case of Stobart Capital Ltd v Esken Ltd considered the validity of a termination notice served by Esken on Stobart Capital as a result of its failure to carry out the contracted services. This case serves as a useful reminder about the difficulties in terminating an agreement for material breach due to poor performance, as well as determining whether breach of such an ongoing obligation is capable of remedy.
The case, heard before the High Court last month, concerned a management agreement between Esken and its former CEO, Mr Tinkler. Mr Tinkler contracted with Esken through the newly-incorporated company Stobart Capital to continue to provide his skills and investment advice. Under the management agreement, Stobart Capital was required to provide services including identifying new deals, leading on negotiations and implementing new strategy.
The relationship did not run smoothly and on 12 March 2019, Esken served a termination notice on Stobart Capital, relying on a number of heads of termination under the management agreement, including its ability to terminate under clause 8.2.3:
8.2 This Agreement may be terminated by either Party with immediate effect from the time at which such notice is given if:
8.2.3 the other Party has committed a material breach of its obligations under this Agreement (whether or not, for the avoidance of doubt, such breach would otherwise be a repudiatory breach) and (where such breach is capable of remedy) fails to remedy such breach within 28 days after receiving notice requiring the same to be remedied.
Esken claimed Stobart Capital had failed to do any meaningful work under the management agreement and that this allowed it to terminate under clause 8.2.3 for material breach of its obligations (including its obligation to perform the services under the management agreement and exercise all due skill, care and diligence in accordance with good market practice).
Stobart Capital disputed the validity of the termination notice. The court was therefore asked to consider whether Esken had validly terminated the management agreement under any of the heads of its termination notice, including clause 8.2.3.
The court held that the management agreement had been validly and effectively terminated by Esken’s termination notice, but solely on the basis of its reliance on a separate head of termination (allowing for Esken to terminate where Stobart Capital had ceased, or had threatened to cease, to carry on its business or substantially the whole of its business).
The other heads of termination relied on by Esken failed, including termination for material breach under clause 8.2.3. The reasons given by the court for this, particularly its comments on assessing whether a breach is capable of remedy, draw out some useful lessons.
Materiality and Breaches Capable of Remedy
The court noted that Esken had never served a notice requiring any breach to be remedied, and so, when relying on clause 8.2.3, Esken was required to demonstrate, first, that the breach was material and, second, that it was incapable of remedy:
- On this first requirement, the court determined Stobart Capital’s actions had not amounted to a material breach. This meant that Esken’s termination on the basis of clause 8.2.3 was invalid.
- The court accepted that a failure by one party contemporaneously to notify the other of the matters complained of may count against that party when assessing the materiality of such matters.
- The court also held that, even if materiality had been established, Stobart Capital’s poor performance was capable of remedy.
- For a breach to be capable of remedy a party should be able to put matters right for the future, rather than necessarily be able to nullify the effect of the breach so that any damage already done was somehow made good.
- The court considered the leading authority of L Schuler AG v Wickman Machine Tool Sales, where a failure to visit car manufacturers at least once per week was held to be capable of remedy, notwithstanding the damage already done by the failure to visit.
- This could be contrasted with breaches that were incapable of remedy, such as the improper publication of confidential information, or in the case of Force India Formula One Team Ltd v Etihad Airways, the changing of a racing car's livery to remove the association with a sponsor.
The court’s comments and findings in relation to Esken’s attempted termination under clause 8.2.3 highlight the importance of careful planning and consideration before hitting the “termination button”. This includes ensuring that the impact and alleged materiality of the breach is well documented ahead of any action to terminate.
When separate notice periods apply to breaches capable and incapable of remedy, it will also often be prudent to allow the poor performing party time to remedy its breach(es). This may be appropriate even where the terminating party does not consider such breaches can be easily remedied, particularly where the breach relates to an ongoing obligation over an extended period.
It was clear in this case that, prior to serving its termination notice, had Esken served an earlier notice giving the period of 28 days for Stobart Capital to remedy its poor performance, it would not have been required to meet the second threshold of the breach also being irremediable.
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