Most of his receipts were from the NHS Primary Care Trust which paid him monthly instalments calculated on the basis that he carried out a certain minimum specified amount of work. If he failed to meet the agreed level of work he had to refund the payments to the NHS and, likewise, the defendant had to refund him the payments in the same proportion. The claimant, however, decided that the defendant was unlikely to refund him. So, he told the defendant that he would not be paying him 50 per cent per month but, rather, would pay him only for work actually undertaken. The defendant decided that this was not acceptable and so he terminated their agreement.
Before the Court of Appeal the claimant accepted that the failure to make the monthly payments timeously was a breach of contract. However, he submitted that payment was just late. Time was not of the essence in relation to the payments and the contract did not provide that it was. So, the question for the Court of Appeal was whether, notwithstanding that time was not of the essence, the defendant was entitled to terminate (or, in legal terminology, "repudiate") the contract as a consequence of the claimant's breach.
The Court of Appeal started by pointing out that time for payment was not generally of the essence of a commercial contract unless the parties have agreed (either expressly or impliedly) that it should be, and that was certainly not the case here. The term was simply an "innominate" one, meaning it didn't have a particular classification, and the test for whether an innominate term was repudiatory is found in the speech of Lord Wilberforce in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757 where it was said that there must be "…an intimation of an intention to abandon and altogether to refuse performance of the contract…" or that there is "evince[d] an intention no longer to be bound by the contract…".
Having agreed that the term for payment was innominate, however, the appellate Judges disagreed about the result. Floyd and Arden LJJ held that the breach was only capable of bringing the contract to an end if it passed the test outlined by Lord Diplock in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 in which the court had held that the breach must have deprived the defendant of "substantially the whole benefit which…he should obtain as consideration for performing his undertakings". That was not the case here as the claimant was simply delaying in payment pending his own payment by the NHS. Accordingly, the defendant would get what he was entitled to, just not on time. Underhill LJ disagreed. His position was that the claimant's breach justified termination because it was not what had been originally agreed between the parties.
This case is an English case but is certainly relevant to commercial business in Scotland. While it turns, to a certain extent, on the appellate Judges' interpretation of the contract it also shows the risks that one party takes when it terminates a contract due to delay in payment of performance of contractual obligations where that contract does not expressly provide that time is of the essence. The leading Scots authority on that question is Rodger (Builders) Limited v Fawdry 1950 SC 483 in which Lord Sorn explained in relation to a sale of land that "In a contract…where it is stipulated that the price is to be paid on a particular date, payment of the price on the appointed date is not, in general, an essential condition of the contract, and failure to pay on that date does not entitle the seller to rescind".
So, the innocent party should be careful before terminating the contract too quickly if his money doesn't arrive on time. The best advice is to give the party in default an ultimatum which expressly makes time of the essence. As Lord Sorn continued in Roger "If there is unnecessary or unjustifiable delay on the part of the purchaser in paying the price, the seller may limit a time within which payment must be made and, provided the time limit is a reasonable one in the circumstances, failure to pay within that time will be treated as breach of an essential condition entitling the seller to rescind". That advice has been followed in Scotland for years and solicitors and clients alike should continue to follow it to ensure that the sort of situation that arose in Valilas can be avoided.
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