Once bitten, twice shy

Imagine the scenario. You have employed builders to carry out drainage works, but after a short period of time you discover the works are completely inadequate. You may consider the breach to be material and be so angry due to the standard of work that you do not want to allow the builders anywhere near your property again. However an aggrieved party is faced with a dilemma: do they immediately rescind the contract and claim damages, or give the contract breaker another opportunity to remedy their breach? It is a difficult question to answer, because legal opinion is divided and there are conflicting authorities on the right to cure a breach of contract.

The safest approach to take, in the scenario above, would be to allow the builders an opportunity to remedy the breach, and in the event that the breach is not resolved, proceed to raise a court action. However where the nature of the breach is such that the aggrieved party has lost trust and confidence in the other party, it may not be reasonable in such cases to require the aggrieved party to afford an opportunity to cure. It should also be borne in mind that further attempts to cure might result in serious inconvenience and further loss to the aggrieved party.

Commission position

The Scottish Law Commission identified the right to cure as being problematic in its Report on Breach of Contract Remedies, published in 1999. It took the view that the basic rule should be that the aggrieved party should be able to rescind the contract without giving the other party an opportunity to remedy the breach. In support of its stance, the Commission argued that although the right to cure is fashionable, it undermines the fundamental principle that the aggrieved party should not have to accept performance from the contract breaker.

However recent decisions on the issue have not on the whole agreed with the position taken by the Commission. In Magnet Ltd v John B Cape t/a Briggate Investments, Cupar Sheriff Court, 19 July 2007, it was held that if an aggrieved party fails to give the other party an opportunity to rectify the breach, they have disentitled themselves from treating the contract as rescinded and claiming damages. Sheriff Evans took this view on the basis that the opportunity to remedy the breach should be allowed if it remains a realistic possibility at the time of the breach.

In the Magnet case, all three expert reports stated that the deficiencies were remediable. It is clear that whether a breach is remediable depends partly on the contract and partly on the facts. If the breach cannot realistically be remedied, then it would seem from the judgment in Magnet that the aggrieved party can simply rescind the contract and claim damages.

Conflicting authorities

The Unidroit Principles of International Commercial Contracts 1994 (“UPIC 1994”) echo Sheriff Evans’ view by stating that for a right to cure to exist, the proposed cure must be likely to be a success and that the necessary delay to effect the cure must not be unreasonable. In addition the right to cure should not be allowed if a legitimate interest of the aggrieved party has arisen. A legitimate interest could be that a further attempt to cure would be likely to cause further damage to the aggrieved party’s property.

However legal opinion is divided on this issue, as is illustrated in the case of Charisma Properties v Grayling (1994) Ltd 1996 SC 556. Lord Sutherland said: “As a general rule, if there is a material breach of contract, the innocent party is entitled to rescind the contract forthwith.” The observation made in Charisma conflicts with the leading Scottish authority of Lindley Catering Investments Ltd v Hibernian Football Club Ltd 1975 SLT (Notes) 56, where there was a material breach of contract that could be remedied and it was held that the aggrieved party must give the party in breach an opportunity to remedy. Lord Thomson stated: “If the breach is such, by degree or circumstances, that it can be remedied so that the contract as a whole can be implemented, the innocent party is not entitled to treat the contract as rescinded without giving the other party an opportunity so to remedy the breach.”

Furthermore, in the more recent case of Strathclyde Regional Council v Border Engineering Contractors Ltd 1998 SLT 175, Lady Cosgrove observed: “It is clear however that it is a basic principle of the law of contract that if one party is in breach, the innocent party is not entitled to treat the contract as rescinded without giving the other party an opportunity to remedy the breach.”

Material breach?

In light of the conflicting authorities, it is not clear what approach should be followed, but it would seem sensible for an aggrieved party to give the contract breaker another opportunity unless the circumstances make such an opportunity unrealistic, as outlined in Magnet and UPIC 94.

An obstacle encountered by aggrieved parties prior to raising an action is to determine whether the breach is material or not. If the breach is not material and the contract is rescinded, the aggrieved party has breached the contract and is liable to the other party in damages. In many cases, it is unclear whether the breach is material or not. A method that can be used to turn a possible material breach into a material breach is to use the ultimatum procedure, which was set out in Rodger (Builders) Ltd v Fawdry 1950 SC 483. It is simply a notice that fixes a reasonable time for the defects to be remedied; on expiry of the ultimatum, non-performance will make the breach material. The effect of non-compliance with a reasonable notice is to allow the contract to be rescinded.

If the aggrieved party delays rescinding the contract and has not given a notice to perform or ultimatum, that party will lose his or her right to rescind the contract. Of course the loss of right to rescind does not mean the aggrieved party is deprived of remedies; the remedy of damages is still available.

It is this writer’s view that a right to cure could be abused by unscrupulous companies to delay non-performance indefinitely, and may alter the balance of power in favour of the contract breaker. Of course others may take a different view and argue that a right to cure would avoid unnecessary court actions and prevent aggrieved parties using draconian measures such as rescission.

Perhaps there is scope for a rule that strikes a balance between the interests of the aggrieved party and the contract breaker. The UPIC 1994 principles appear to achieve the necessary balance. The right to cure is allowed but subject to several conditions such as the following: the contract breaker must give immediate notice of the planned remedial work and a timescale; the cure must be appropriate in the circumstances and effected promptly; and finally the aggrieved party must have no legitimate interest in refusing the cure.

Unfortunately there is still no conclusive answer to the question of whether an aggrieved party must give the contract breaker an opportunity to remedy their breach. The Scottish Law Commission concluded that the existing Scottish law is in “a state of flux”, and one cannot really argue with that view, given the current uncertainty in the common law.

Neil Morrison is a litigation solicitor at Wright, Johnston & Mackenzie LLP P