Remedying a Repudiatory Contract Breach – The Court of Appeal in Kulkarni v Gwent Holdings Ltd
In the recent multi-million-pound shareholders’ dispute in the case of Kulkarni v Gwent Holdings Ltd, the Court of Appeal considered whether a repudiatory breach can be remedied, and what this means for damages. We consider the case and its impact below.
What is a Repudiatory Breach?
A repudiatory breach is a serious breach of contract that undermines the foundation of an agreement. In practice, the breach would be so significant as to justify terminating the contract.
In circumstances where such a breach occurs, the non-breaching party may:
- Terminate the contract; or
- Continue or ‘affirm’ the contract; and/or
- Claim damages.
If there is any dispute as to the nature of the breach, in particular whether it is truly serious enough to be considered a repudiatory breach, the court will decide. It is important to note that, should you choose to continue the contract, you may still retain the right to claim damages.
The Background
The case involved a breakdown in the relationship between two shareholders, Gwent Holdings Ltd, the majority shareholder, (“Gwent”) and Dr Kulkarni, a minority shareholder and former medical director, (“Kulkarni”), following the buy-out of a private hospital.
Kulkarni argued that Gwent had committed several breaches of the Shareholders’ Agreement (“SHA”), including the improper allocation of shares to itself which belonged to Kulkarni, wrongfully asserting the SHA had been terminated and refusing to recognise Kulkarni’s nominee as a director. The dispute centred on a clause within the SHA which stated that: “A shareholder is deemed to have served a Transfer Notice of its shares…immediately before any of the following events:
(d) the Shareholder committing a material or persistent breach of this agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent)." (“the Transfer Clause”)
Kulkarni's Argument
Dr Kulkarni argued that The Transfer Clause had been triggered by the above-mentioned breaches, which were by their nature, incapable of remedy. Thus, he demanded the compulsory transfer of Gwent’s shares.
Importantly, Gwent admitted that the breaches were repudiatory in nature. However, the key issue before the Court of Appeal was the interpretation and legal effect of the phrase ‘capable of remedy’ within the SHA.
Kulkarni argued that as a matter of law a repudiatory breach can never be ‘capable of remedy’ and relied on the 2010 decision in Bournemouth University v Buckland which held that once a repudiatory breach occurred, the party in breach cannot simply cure the breach to remove the innocent party’s right to terminate.
The Court of Appeal's decision
Ultimately, the Court of Appeal found that a repudiatory breach of the SHA was not automatically incapable of being remedied.
The Court of Appeal considered the earlier decision in Buckland, which considered whether a repudiatory breach could be ‘cured’ to prevent the innocent party exercising their right to terminate and clarified that this principle does not automatically apply to contractual provisions that use the phrase ‘capable of remedy’. The Court of Appeal made clear that the question of whether a breach is capable of remedy for the purposes of a contractual provision requires a practical rather than technical approach. Since no notice to remedy was served in this case, it was held that the breaches were capable of remedy (and had been remedied). The fact that deliberate, serious breaches and motive might influence whether a breach is remediable, they do not automatically make the breaches incapable of remedy (unless significant lasting damage was caused).
Similarly, it was held that the fact it took in excess of 10 business days to remedy the breaches, was immaterial because the 10 day period only runs from the date a formal notice to remedy is served, which had not occurred.
Thus, the Court of Appeal rejected Kulkarni’s appeal and his argument that he was entitled to trigger the Transfer Clause.
What does it mean?
If you are dealing with a repudiatory breach of contract, it is vital that you take a practical rather than technical approach to the breach. Not every breach will be capable of remedy, however, the key question is whether the breach can be remedied going forward, as it may indeed be possible to treat the breach even if it was serious. Similarly, another factor to consider is whether any remedial steps have already been taken and whether the contract requires a formal notice to be served.
This blog was co-authored by Lucy Ayoubi and Lucy Barrow.
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