Case law: Contractual party could not take advantage of non-performance by another party if it caused the non-performance

Friday 17th July 2015

If a party to a contract cannot perform a contractual obligation because of the other party's action (or inaction), the first party may be entitled to ignore that obligation, a recent ruling has confirmed.

 

Under a contract, the parties had to refer certain disputes to an 'Engineer' retained by one of them (Party A) before the dispute could be referred to an arbitrator. The Engineer then had 84 days to issue a decision. One of the parties (Party B) referred a dispute to the Engineer. However, Party A had ended the Engineer's retainer. It was therefore clear that the Engineer could not make a decision on the dispute. Party B therefore tried to start arbitration proceedings. Party A argued it could not do so until the 84-day period had expired.

 

The Court ruled that the dispute could go straight to arbitration. Party A could not insist on Party B waiting 84 days for nothing, because it was Party A who had ended the Engineer's retainer.

 

The Court relied first on a long-standing legal principle that if a party entered into an arrangement which could only take effect by the continuance of a certain existing set of circumstances, "there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative".

 

It also relied on a more recent legal ruling saying that the question in such circumstances was "what the [contract], read as a whole against the relevant background, would reasonably be understood to mean".

 

Once it was absolutely clear that the Engineer was not going to make a decision, then the parties' choices were either to find another engineer or elect that the contract no longer bound them in this respect. Since Party A had not tried to find another Engineer, the requirement to go to the Engineer for a decision no longer applied.

 

Operative date

  • Now

Recommendation

  • If a party to a contract cannot perform an obligation under it because of the other party's action (or inaction) then the first party may be entitled to ignore that obligation.

Case ref: AL Waddan Hotel Ltd v Man Enterprise Sal (Offshore) [2014] EWHC 4796

 

 

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