Breaking up is hard to do – Can a breach of contract always be remedied?

From Grandma buying her weekly shop, to listed companies being traded on the stock exchange, contracts govern our commercial lives … and they get broken all the time.

Where one party breaches a contract, the law will provide a remedy for the innocent party. The nature of that remedy depends on the nature and severity of the breach.

Parties to a contract can create some certainty as to the remedy for a particular kind of breach by making express provisions in the contract. However, this is not necessarily the end of the matter.

Background

In Mr Rohit Kulkarni v (1) Gwent Holdings Limited and (2) St Joseph’s Independent Hospital Limited [2024] EWHC 1357 (Ch D), the Court was asked to consider whether it was possible for a party to remedy persistent, material and repudiatory breaches of a Shareholders’ Agreement, governing the ownership a private hospital in South Wales (the Company). Mr Kulkarni was a minority shareholder in the Company whilst Gwent was the majority shareholder with day-to-day control over its management.

The Hospital went into administration in 2019. Mr Kulkarni was an orthopaedic consultant surgeon who had been heavily involved in the management of the Hospital’s business up to the point of its failure. Eager to save the Hospital, he introduced Gwent as a potential buyer.

In early 2020, an agreement was reached for the Hospital’s assets to be acquired by a phoenix company, the Company. It was intended that Mr Kulkarni would subscribe for 24% of the Company’s shares (for £80,000) with Gwent having 25% (for a £2.5m investment).

The relationship between the shareholders was governed by the Shareholders’ Agreement, which provided, amongst other things, for Gwent to have control over all board decisions and shareholders’ votes.

Mr Kulkarni initially failed to pay for his shares, which set off a course of action resulting in the following steps being taken in breach of the Shareholders’ Agreement:

• The allotment of the shares that were intended for Mr Kulkarni to Gwent.
• A separate allotment of B shares to Gwent.
• Gwent purporting to unilaterally terminate the Shareholders’ Agreement.
• The Company’s delay in appointing Mr Kulkarni’s nominated director, pursuant to his rights under the Shareholders’ Agreement.

Mr Kulkarni alleged that these breaches amounted to a material breach of the Shareholders Agreement, such that the following compulsory transfer provision applied:

“A Shareholder is deemed to have served a Transfer Notice under clause 6.4 immediately before any of the following events:

(d) the Shareholder committing a material or persistent breach of this agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent).”

The board neither served nor requested a notice to remedy from Mr Kulkarni.

On taking legal advice, both Gwent and the Company accepted that the Shareholders’ Agreement had been breached. They therefore arranged to remedy the breach by procuring that:

• Gwent return the shares to the Company, who would then issue them to Mr Kulkarni on receipt of payment of the original subscription price.
• Gwent return the B shares to the Company, which were to be held in treasury.
• The Company appoint Mr Shelim Hussain as a director.

Mr Kulkarni initially declined to pay for the A shares but eventually paid for them. The shares were issued to him and he was subsequently registered on the Company’s list of members. Mr Kulkarni affirmed the Contract but maintained that the breaches were so serious as to have been incapable of remedy.

Mr Kulkarni issued proceedings to, amongst other remedies sought, enforce his purported rights under the Clause and so to acquire all of Gwent’s shares for the subscription price of £80,000 (the Hospital was by this time worth several £million).

Both the Hospital and Gwent admitted that some of breaches of the Shareholders Agreement had been material, persistent and repudiatory in nature.  However, they maintained that those breaches had been remedied for purpose of the Clause, such that the claim for the compulsory transfer must fail.

The Court had to determine whether material and repudiatory breaches of the Shareholders’ Agreement were capable of remedy within the meaning of the clause and if they had been remedied.

It is well-established law that a repudiatory breach of contract (i.e. the most serious) entitles the innocent party to elect to affirm or terminate the contract and claim damages.

Further, more recent case law has suggested that the wrongdoer cannot take unilateral steps to cure that breach, such as to deprive the innocent party of their rights.  Put another way, the genie cannot just be stuffed back into the bottle.  However, none of those cases concerned a situation where the parties who committed the breach were under common control.

Mr Kulkarni argued that the terms of the Shareholders’ Agreement operated to deprive him of his common law right to terminate the contract altogether in the event of a breach, such that his rights were limited to those contained in the Clause. He said that it would therefore be unfair if a material breach could be unilaterally remedied so as to deny him his common law rights.

Case outcome

The Court did not agree and found against Mr Kulkarni.

In reaching its decision, the Court considered previous authorities and determined that the test to apply is a practical, forward-looking one.  It is only on rare occasions that remediation can cure an historic breach, however it may be able to put matters right in the future. Although each case will turn on its own facts, generally speaking the more serious the breach, or where a third party becomes involved, the more difficult it is to achieve remediation.

The Court observed that this was a unique case because Gwent could at all times control both the genie and the bottle. It controlled the Company and so could procure the return of the shares and the subsequent issuance to Mr Kulkarni. By doing so, Mr Kulkarni was placed back in the position that he would have been had he paid for his shares at the outset, and so the breach had been cured.

This is an important judgment because it shows that even the most serious breach may be capable of remedy and will not necessarily entitle the innocent party to tear up a contract in its entirety.

Speak to an expert litigator

If you have a contractual dispute, you should therefore take legal advice as early as possible so that you can properly understand your position and make an informed decision about how to proceed. Contact a member of our team on 0800 652 8025 or send an enquiry.