Bristows’ SnippITs: Can a repudiatory breach be capable of remedy? Kulkarni v Gwent Holdings

This post is the latest in the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

Terminating contracts for cause can be a risky move and Kulkarni v Gwent highlights some of the potential pitfalls that can arise when parties conflate or confuse their common law and contractual rights.

Key takeaways

1. Repudiatory breaches – capable of remedy? (yes and no!): A repudiatory breach gives the innocent party the right at common law to accept the repudiation and terminate the contract. In this sense, repudiatory breaches are irremediable as the termination right arises automatically without any cure period. However, if the innocent party instead relies on a contractual provision (e.g. a clause allowing termination for material breach) that is triggered by the same breach, the breach may be capable of remedy for the purpose of termination under that clause.
2. Consider all termination rights and act consistently: Often a party seeking to terminate its agreement for cause will have a number of options available to it, both under the contract or at common law. Parties in this situation should assess all potential rights before proceeding and, once they do, act consistently with the right they are exercising (including in relation to any cure period).
3. Don’t jump the gun - allow a remediation period: where the contract states that you must give the breaching party a defined period of time to remedy the breach before terminating, make sure you give them this period and signpost it clearly (complying with any notice provisions). Even where a breach has already had a significant impact or where you do not believe it is possible for the breaching party to remedy, it is often best to err on the side of caution and wait the full contractual cure period before acting, given the courts take a broad non-technical view as to what breaches are remediable.

Background

The dispute arose from a shareholders’ agreement between a company and its two shareholders, Kulkarni and Gwent. The shareholders’ agreement included:

• A compulsory transfer provision requiring a shareholder to offer its shares to the other shareholder if a “defaulting event” occurred, in which case the defaulting shareholder was deemed to have served a transfer notice immediately before the defaulting event.
• “defaulting events” included “the Shareholder committing a material or persistent breach of [the] agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy…”

Following a breakdown in relations, Kulkarni alleged that Gwent had committed four separate breaches of the shareholder agreement, including wrongfully procuring that the company allot and register certain shares to Gwent (rather than Kulkarni) and wrongfully purporting to terminate the shareholders’ agreement. Kulkarni claimed that, in consequence, a defaulting event had occurred and Gwent was deemed to have served a transfer notice pursuant to the compulsory transfer provision.

At first instance, the court found that Gwent had committed four material and persistent breaches of the shareholders’ agreement. Two of those breaches were also repudiatory. However, the High Court also found that all four breaches (even the repudiatory ones) were capable of being remedied and, indeed, had been remedied. No notice to remedy had been served and the “10 Business Days” to remedy had never started running and thus never expired. Therefore, no transfer notice was deemed to have been given.

Kulkarni appealed to the Court of Appeal, arguing that a repudiatory breach of contract can never be remedied.

Court of Appeal decision

The Court of Appeal dismissed the appeal, finding that a breach of contract is not incapable of remedy merely because it is repudiatory.

The Court distinguished the issue of whether a breach is “capable of remedy” under a contractual provision (or a comparable statutory one) from the impact of repudiatory breach at common law. At common law, “a repudiatory breach of contract, once it has happened, cannot be ‘cured’ by the contract breaker” and the innocent party has a right to either affirm the contract or accept the repudiation and terminate. This does not impact upon whether a breach is “capable of remedy” within the meaning of a contractual provision. The Court noted that, had the parties intended repudiatory breaches to be considered irremediable, they could have stated this - but they had not done so. In fact, the word “repudiatory” was not used at all.

In determining whether a particular breach of contract is capable of being remedied, the Court said that a “practical rather than technical” approach should usually be adopted, noting also that the concept of remedy is generally forward-looking i.e. whether the matter can be “put right for the future” (rather than considering prejudice looking back). So, for example, where a tenant who has agreed to paint a room every five years and fails to do so in year five, the breach can be remedied by painting the room in year six.

In the Kulkarni case, all four breaches were remediable and had been remedied - the allotment and issue of shares could be reversed and the purported termination had not had any effect. As the High Court noted, “[i]t was not so much a question of putting the genie back in the bottle; the genie never truly left”.

Consequently, the Court of Appeal agreed with the High Court that no transfer notice was deemed served.