Valilas v Januzaj

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Assessment CLR&I CASE NOTE Valilas v Januzaj [2014] EWCA Civ 436 Lady Justice Arden Lord Justice Underhill & Lord Justice Floyd In the Court of Appeal (Civil Division) On the Appeal from Worcester County Court His Honour Judge Hooper QC IUC69309 Between: IOANNIS VALILAS & VALDET JANUZAJ SRN=140326561 Introduction Ioannis Valilas v Valdet Januzaj[1] dealt with the issues regarding repudiation of a contract. The core as well as the legal issue was that whether a party has the right to terminate the contract if the other party breaches an innominate term or, as in this case, fails to make monthly payments on time. The judges highlighted the probable threats for the terminating parties in case of no express provisions in the contract and also displayed the analysis required in establishing what goes to the ‘root of the contract’ and how and when the damages caused deprive the party of substantially the whole benefit. Facts and Claims The claimant, Ioannis Valilas, a dentist, entered into a contract with the defendant, Valdet Januzaj, the principal of practice at Droitwich Spa (DSDP), which entitled him to use DSDP premises, equipment and the services of the practice staff and, in return, he was bound to pay 50% of his monthly receipts. It is worth mentioning that this agreement is not of an employer-employee nature and neither are the parties involved partners with each other[2]. A major portion of claimant’s income came from his contract with the Primary Care Trust (PCT). Under this contract, he was obligated to carry out a specified amount of ‘units of dental activity’ (UDA) per year for a fixed price per unit. In return, he was paid advance monthly instalments of £16,260 and was obliged to refund the overpayment in case he failed to carry out the total number of UDA required. This also gave him the right to get refund from the defendant as he then would’ve paid 50% of money other than his income. Their relationship started deteriorating which can be seen by defendant’s letter on the 15th of June, demanding the claimant to sign an associate agreement and the claimant’s subsequent refusal. After quite a bit of discussion, via several letters and a couple of meetings, the defendant and claimant reached an impasse following which the defendant terminated the contract in November after three months of non-payment. The claimant sued the defendant in Central London County Court for damages for breach of the contract. The defendant lodged a counter-claim for outstanding monthly payments which amounted to £17661.97 but the court held the decision in favour of the claimant and hence the consequent appeal by the defendant in the Court of Appeal.[3] Legal Reasoning The court of appealed held, by a majority of two to one, that the requirement to pay on time was an ‘innominate’ term and unless agreed by the parties, time of payment, generally, is not of the essence in a commercial contract. Moreover, it was established that the payment would’ve been made eventually and its delay didn’t result in grave consequences for the defendant. Therefore, considering all of this, the termination was groundless. Innominate Term One of the noteworthy applications in this case was that of an innominate term. This is the third type of contractual term, the former two being condition and warranty. This principle was instituted by the English law in the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962][4] where Lord Diplock differentiated between the three contractual terms. An innominate term differs from a condition because the breach of an innominate term doesn’t give rise to the right of termination to the aggrieved party. It also differs from a warranty because, in the event of a breach, the innocent party is not just limited to the remedy in damages.[5] Although Lord Justice Underhill was the dissenting judge but he too agreed upon the consideration that the claimant’s obligation to pay was not a strict condition of the contract but an innominate term. Repudiation of a Contract The law on repudiation of a contract is well established in English law but this case was surrounded by an aura of uncertainty concerning repudiation as it was difficult to conclude whether or not a delay in payment amounted to a breach of contract specially because there was no clear refusal by the claimant to pay the amounts outstanding. However eventually it was established, by a majority of judges, that the time of payment is generally not the heart of a commercial contract unless the parties have agreed that it should be which, in this case, they haven’t.[6] For a precise performance to be a condition of the contract it should be expressly written in the contract[7]. Additionally, the application of the test given by Lord Wilberforce in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. (The Nanfri[8]) laid particular emphasis on the fact that a breach must go to the ‘root of the contract’ a principle which is defined in the Australian case Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd[2007][9]. Lady Arden and Lord Floyd’s Premise Arden and Floyd L.J.J were of the view that the defendant was well aware that claimant’s actions will eventually lead to delayedpayment and was not a denial to make payment, a finding which Arden LJ termed as “the likelihood finding”. The only loss to the defendant was the use of the money, which could be compensated in interest. They also believed that non-payment by the claimant didn’t deprive the defendant of ‘substantially the whole benefit’[10]and the defendant himself failed to establish that there are serious consequences for him of this breach. Arden LJ made sure that this principle is not misconstrued by stating for it to be ‘fact-sensitive’ rather than prone to discretion. Both of the judges laid stress on the judgement established in Decro-Wall International SA v Practitioners in Marketing Ltd[11]. It was held that delay in payment did not justify the termination of contract as the loss was not substantial and could have been recovered as damages and specially because it was apparent that payment would ultimately be made. The judges also alluded to the fact that Withers v Reynolds[12] was wrongly applied by Lord Justice Underhill as the facts of that case were different from the case at hand and Salmon and Buckley L.J.J were of the same opinion in Decro-Wall International SA[13]. Floyd LJ also distinguished the present case from Alan Auld Associates Ltd v Rick Pollard Associates[14] (an authority quoted by Underhill LJ) by referring to the fact that the contract with the claimant was the only source of income for Dr. Pollard (the defendant in that case) and thus the termination because of delay in payment was justified but in the present case, monthly payments by the claimant are not the only source of income for the defendant. He also added that Alan Auld is an employment case and though the analogy is indeed close but even in employment cases there are instances where late payment has been held not to be repudiatory, by citing a passage from Cantor Fitzgerald v Callaghan & others[15]. Moreover, Floyd LJ held that although a difference between the agreed upon obligations and the obligations performed by a party may amount to repudiation[16], it should be assessed whether this irregularity goes to the ‘root of the contract’ or not. This gives immense comfort to the innocent party. The Disent: Lord Underhill Underhill LJ disagreed with the majority, holding that the claimant’s actions were repudiatory. In his view it was of particular significance that the claimant had deliberately chosen to depart from the agreed payment terms rather than payment being delayed as a result of a mistake or financial issues which left the defendant to continue bearing the costs of running the Practice in the meantime which are not at all ‘trivial’ amounts. Underhill LJ also warned against a possible misbelief, coming from the decision in Decro-Wall International SA v Practitioners in Marketing Ltd[17], that late payment could never be repudiatory if eventual payment was assured by stating that the facts of that case and the case at hand are ‘very different’. He believed that although defendant’s letter of 15th June 2010 was not a notice of termination, it was nevertheless ‘significant’ as it brought about the risk of the contract being terminated. Moreover, it was mutually agreed that the claimant’s failure to make monthly payments was a breach of the contract however Underhill LJ maintained, by relying upon Rice v Great Yarmouth Borough Council[18], that claimant’s failure to make three monthly payments prior to termination resulted in ‘cumulative effect’ and hence was a repudiatory breach and his proposed set-up in the letter dated 12 October 2010 was clearly, as Underhill LJ terms, “a complete departure from the contractual arrangement”. He strongly condemned claimant’s justification that he delayed the payment because of the fear of future refusal of reimbursement by the defendant if the former fails to complete the UDAs and therefore has to refund the overpayment to PCT. He stressed that such considerations should not be allowed to modify the otherwise well-understood rules about what constitutes repudiation as it would enable the parties to lawfully take law in their own hands when there are always other options available such as taking the party to court or signing a counter agreement pertaining to one’s own convenience. It is quite clear that Underhill LJ gave emphasis to claimant’s refusal to continue with the original arrangement than to the fact that the defendant would eventually be paid. In addition, he deduced, by referring to The Nanfri[19], that Lord Diplock’s reference/test of a breach depriving a party of ‘substantially the whole benefit’ in Hong Kong Fir[20] is not a principle that can be applied in every case. Conclusion The Court of Appeal (CA) unfurled many factors that can be relevant in deciding whether such a breach is repudiatory or not. These factors include the type of contract, type of relationship and type of term involved. Apart from this, determining the consequences of the breach was also held to be of particular importance. There were certain unclear issues within the law on repudiation - for instance, the issue at hand, termination because of delayed payment in an oral contract. Therefore, it can be rightfully concluded that this case further perfected the Law on repudiation and warned that parties should be careful before terminating the contract if there is a delay in payment and should instead give the other party an ultimatum which makes time of the essence an express term of the contract. Nevertheless, there still is a certain level of doubtfulness surrounding these issues and this can be seen from Lady Justice Arden’s statement in her judgement[21] in which she admits that no one rule can be used in such cases and from the fact that this case was appealed in the Supreme Court[22]. Moreover, although the formulation of the concept of innominate term gives a lot of remedial flexibility to the judges, it is still a cause of trouble for the parties involved as they can never know when they have the right to terminate the contract. Additionally, the word ‘substantial’ is open to interpretation and every individual would see it differently. The damages incurred by the defendant might not be ‘substantial’ for the majority of the judges but it might be more than that for the defendant himself, thus the judgement would be unfair for him. Another point that makes the decision doubtful is the fact that the CA was split on whether the breach was repudiatory or not. BIBLIOGRAPHY Primary Sources Case Law
  1. Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd[1962] 2 QB 26
  2. Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361
  3. Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. (The Nanfri)[1979] AC 757
  4. Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd[2007] HCA 61 (2007) 82 AJLR 345
  5. Withers v Reynolds(1831) 2 B & Ad 882
  6. Ross T. Smyth & Co. v Bailey, Son & Co[1940] 3 All E.R. 60(p.72)
  7. Rice v Great Yarmouth Borough Council[2001] LGLR 41
  8. Alan Auld AssociatesLtdv Rick Pollard Associates[2008]EWCA Civ 655; [2008] BLR 419
  9. Cantor Fitzgerald v Callaghan & others [1999] 2 All ER 411
Secondary Sources Books
  1. Contract Law by Ewan McKendrick
  2. Article by Fenwick Elliott Grace October 2010

[1] Valilas v Januzaj [2014] EWCA Civ 436 [2] Ibid(1) [3] Ibid(1) [4] Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd[1962] 2 QB 26 [5] Contract Law by Ewan McKendrick, 181 [6] Ibid(4) [7] Fenwick Elliott Grace October 2010 (Article) [8] Federal Commerce & Navigation Co Ltd v Molena Alpha Inc. (The Nanfri)[1979] AC 757 [9] “… a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party.” - Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd[2007] HCA 61 (2007) 82 AJLR 345 [10] The test introduced by Lord Diplock’s in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] [11] Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 [12] Withers v Reynolds(1831) 2 B & Ad 882 [13] Ibid(11) [14] Alan Auld AssociatesLtdv Rick Pollard Associates[2008]EWCA Civ 655; [2008] BLR 419 [15] Cantor FitzgeraldInternationalv Callaghan[1999]2 All ER 411 [16] Ross T. Smyth & Co. v Bailey, Son & Co[1940] 3 All E.R. 60(p.72) [17] Ibid(11) [18] Rice v Great Yarmouth Borough Council[2001] LGLR 41 [19] Ibid(8) [20] Ibid(4) [21] “….I do not consider that any satisfactory fixed rule could be formulated in this field” - Lady Justice Arden (Valilas v Januzaj [2014] EWCA Civ 436) [22] O’Reilly Stewart Solicitors’s Webpage – (www.oreillystewart.com/access-our-knowledge/commercial-contract/when-repudiatory-breach-not-breach)
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