When is a breach a material breach?
In RiverRock European Capital Partners LLP v Harnack  EWHC 3270 (Comm) the High Court denied the claimant relief on the basis that, while certain events might have constituted breaches of contract, none were material.
The claimant was an investment firm supervised by the FCA. It appointed a UK company to manage one of its investment funds. The two individual defendants had undertaken (among other things) to meet certain financial obligations of the UK company in the event of certain agreements being terminated.
Difficulties were encountered by the fund in sourcing investors and opportunities for the fund to invest in. This led to the claimant considering a change to the management. The Claimant anticipated that this would lead to a dispute with the UK company and began to consider how it could terminate its agreement with the UK company.
In the meantime, the UK company omitted to file a confirmation statement with Companies House and ultimately the Registrar of Companies struck the fund manager off the companies register and it was dissolved. Although the claimant mentioned the issue in a meeting it was only later that the claimant described the issue as being serious in nature and notified to the FCA. The claimant terminated its agreements with the UK company and claimed from the defendants repayment of fees that had been paid to the UK company. It did so on the basis of alleged material breaches arising from the strike off and dissolution of the corporate entity.
The court was not convinced that there had been a material breach. It began by considering the existing case law and noted that the concept of a material breach is difficult to define with its meaning dependent on context and the consequences that would flow from the alleged material breach.
Citing previous authorities, the court highlighted that, where the consequences of a material breach are significant (i.e. resulting in termination of a contract that had required significant time and resources) then materiality would require that the breach was “something substantial, meaning serious rather than…of little consequence”, although it should be noted that the breach need not be repudiatory in nature.
The court carried out a fact-sensitive exercise in order to assess materiality before determining that it was “no means convinced” that there had been any material breach. The court had particular regard to matters including that the dissolution had been due to an oversight and was readily capable of remedy. The court also found, on the evidence before it, that the claimant had not in fact been concerned by the dissolution, and that the only practical consequence of the dissolution, namely, the replacement of the defendants as fund managers, had already been intended by the claimant. Accordingly, the claimant was not entitled to the sums it had sought from the defendants.
The decision is a reminder that a materiality threshold can make a real difference, including in determining whether rights to terminate or obtain financial recovery are available. It also provides a helpful illustration of the fact-sensitive exercise the court will carry out to assess whether any alleged breach has been ‘material’, including where there appear to have been collateral reasons driving a party’s assertion of a material breach.
Before asserting a ‘material breach’, a party will want to think carefully about how the breach can be shown to be material, and whether an explanation should be sought from the counter party. Without a valid basis for asserting not just the breach but also its materiality, the asserting party risks its own exposure, for example for wrongful termination and/or breach of its own obligations.
Finally, given the legal effect of dissolution on a company (loss of legal personality and capacity, and passing of assets to the Crown), parties may want to ensure this sort of dissolution of a company involved in a transaction is clearly covered as a trigger entitling a party to terminate or recover payments.
Posted on 01/27/2023 by Ortolan