Can your school terminate a commercial contract for material breach?

The recent case RiverRock European Capital Partner LLP v Harnack [2022] heard in the High Court has set out when a termination right, which is triggered by a ‘material breach’, will be effective.

Material breach

‘Material breach’ does not have a formal definition, meaning that the context and particular circumstances of each matter must be assessed to decide whether a breach by a party is deemed to be ’material’. We would recommend that schools take advice before entering into commercial contracts to ensure that you are adequately protected by the termination provisions.  The contract may set out the specific circumstances, taking into account the nature of the relationship between the parties, which would amount to ‘material breach’.

Where there has been a material breach, it usually follows that if the school is the innocent party but has suffered owing to the other party’s breach, it may choose to terminate the agreement.

The case

RiverRock had entered into a consultancy agreement with Deutsche Real Estate Asset Management Limited (“DREAM”) whereby DREAM was appointed to provide FCA-regulated activities related to an investment fund which launched in 2016. As part of this relationship, two individuals (Mr Harnack and Mr Mörsdorf) managed the day-to-day operation of the investment fund.

In November 2017 DREAM was struck off and dissolved having not filed a confirmation statement with Companies House. As a result, the consultancy agreement between RiverRock and DREAM was terminated by RiverRock.  In its claim against Mr Harnack and Mr Mörsdorf, RiverRock claimed that various terms of the agreement between RiverRock and DREAM had been breached because of the striking off and dissolution of DREAM. The claim pursued four streams:

• material breach of the agreement
• breaches of FCA rules
• acting in such a way as to bring the parties and the investment fund into disrepute
• breach of implied terms

In considering whether there had been a material breach of the consultancy agreement, it was recognised by the High Court that it had to consider the breaches and their consequence on RiverRock as the innocent party, the reason for the breaches, and the breaches in the context of the consultancy agreement continuing or concluding. It found that the consultancy agreement was expected to continue for not an insignificant period of time, and early termination would mean a great deal of work by Mr Harnack and Mr Mörsdorf would go to waste.

Was there a ‘material’ breach?

The High Court had to find a substantial breach with serious consequences for RiverRock which it found did not exist because:

• Owing to moving home, one defendant did not receive the notification relating to the confirmation statement, meaning that the breach was a result of mistake.
• DREAM could have been restored to the register with little difficulty, meaning that remedy was available.
• Evidence submitted demonstrated that the investment fund was underperforming and RiverRock sought its end prior to becoming aware of the dissolution. Therefore, the dissolution was considered to have been used to justify terminating the relationship.
• Neither the investment fund nor its investors suffered loss, and RiverRock received no complaints or claims because of the breach, or action or penalty by the FCA.

Practical steps

If you have a relationship with a third-party which is intended to be long-lasting and has been invested into in terms of time and effort, you should keep in mind that, in accordance with the position set out by the High Court in this case, the breach of contract will need to be more significant if termination of the agreement is to be justified.

You should also be cautious of seeking to find a material breach as a means of terminating an agreement which you have already decided you would like to end early. This may be looked upon poorly by the courts.

We are often asked to advise on termination rights once a contract has already been entered into, and frequently find that the school’s options can be limited by the drafting of the contract. We would always recommend that you seek legal advice when entering into contracts to ensure that any breaches which may have a significant impact on your school are explicitly stated to be ‘material’.

If you have any queries in respect of preparing a commercial contract, or terminating an existing contract, please get in touch with our team.