Dalkia Utilities Services Plc v Celtech International Ltd

A contractual right to terminate for a material payment breach may extend beyond repudiatory breach. Materiality depends on the contract, the breach, its circumstances and commercial significance.

A court may correct drafting by construction where the instrument contains an obvious mistake and the required correction is clear. An accelerated capital repayment is not penal where it secures repayment of financed expenditure and the payer receives the financed asset. A demand for unearned operational charges would be penal.

A contractual termination notice may also accept a repudiation, but its effect depends on its wording and context. Where contractual and common law termination would produce incompatible consequences, an expressly contractual notice ordinarily operates only under the identified clause.

Dalkia financed, installed and operated a combined heat and power plant for Celtech under a long-term energy-services agreement. After Celtech failed to pay three monthly invoices and reported serious financial difficulty, Dalkia suspended performance and then terminated immediately under clause 14.4 for material breach of Celtech’s payment obligations.

The parties’ second amendment contained drafting which, read literally, made the termination sum little more than outstanding interest while apparently accelerating all future charges, including unearned operational charges. Dalkia claimed that the drafting could be corrected by construction. Celtech disputed material breach, alleged that the accelerated sum was penal and contended that Dalkia’s notice was itself a repudiation.

The principal issues were whether Dalkia validly terminated, how the amended payment provisions should be construed, whether the resulting obligation was penal, and whether either party had repudiated the agreement at common law.

1. Dalkia validly terminated the agreement under clause 14.4. Celtech’s failure to pay three complete instalments was material when assessed in its commercial setting. The sums were substantial, the defaults formed a continuing series, and Celtech had explained that it lacked the resources to pay while facing insolvency and seeking a six-month moratorium. Material breach was not synonymous with repudiatory breach. The primary focus was the character and circumstances of the default, although the contractual consequences of termination were relevant.

2. Clause 15.7 governed contractual terminations under clause 14. It lacked sufficiently clear language to exclude the parties’ common law right to accept repudiation and recover damages. Contractual remedies were therefore not a complete code for accepted repudiation.

3. The second amendment contained obvious drafting mistakes capable of correction by construction. Its manifest purpose was to reschedule financial charges, not to permit Celtech to retain the plant for nominal outstanding interest or to require payment for operational services never supplied. The termination sum was therefore the financial charges described in clause 9A.8—the Original Charge and Part 1 and Part 2 Charges—less unaccrued interest. It excluded the operational element.

4. That termination sum was not penal. It accelerated repayment of capital effectively advanced by Dalkia, while Celtech became entitled to keep the plant. A provision accelerating the full charges including unearned operational charges would, however, have been penal and could not have been saved merely by claiming a lesser amount.

5. Clause 9A.8 did not confer a freestanding right exercisable after termination. Any declaration under it had to precede termination or be included in the termination notice before that notice took effect. Clause 15.8 ended contractual obligations which were not expressly preserved.

6. Celtech had not repudiated the agreement. Time for payment was not of the essence, the short final notice did not reasonably make it so, and Celtech’s defaults and mixed statements did not clearly show an intention or inability to perform so as to deprive Dalkia of substantially the whole remaining benefit.

7. A contractual termination notice may also accept repudiation. Here, however, clause 14.4 termination and common law termination produced incompatible consequences concerning the plant and the termination sum. Dalkia’s notice expressly invoked clause 14.4 and therefore operated only on that contractual basis. Celtech was obliged to pay the termination sum and the other sums recoverable under clause 15.4, subject to later proof of quantum, and would then be entitled to keep the plant.

The judgment was given at first instance. It records earlier Chancery Division proceedings in which Celtech sought to restrain presentation of a winding-up petition. Richards J held that Dalkia could withdraw an unsupported concession extending time for one invoice, rejected the contention that the statutory demand extended the contractual payment date, and regarded material breach as arguable. The present court respectfully agreed with his conclusions on the extension and statutory demand.