In an increasingly difficult financial climate the temptation to delay paying suppliers of goods or services as long as possible and waiting for the letter demanding payment can be fairly strong and tempting.
A recent Court of Appeal case has held that persistent late payments under an agreement for services can amount to a repudiatory breach of contract in certain circumstances allowing the innocent party to terminate the contract.
In general, unless the contract specifically refers to the importance as to the timing of payments, i.e. the timing of payment being of the essence, or it can be implied from surrounding circumstances, it has been established for some time that late payments are unlikely to constitute a repudiatory breach.
The case in question involved a relatively common arrangement. A contracted with B for services and in turn B entered into an agreement with C to perform advisory work to B in order for B to fulfil its obligations to A. A paid B promptly; B fell into substantial arrears with C. Eventually C stopped providing Services to B who sued C for breach of contract. C argued that B had no grounds to bring the case as the agreement was terminated due to the breach by B, being a breach capable of repudiating the contract.
There were no express terms regarding payment but the judge found an implied term that B would pay C immediately upon receipt of payment by A. A factor in this was the reliance by C on the payments being made by B. The judge implied a "time of the essence" term on the obligation to pay. The Court of Appeal rejected the appeal by B and upheld the decision of the judge.
It is clear that context is important in determining the applicability of this case to other cases of late payment and it is also clear that late payment generally will not allow a party to "rip up" a binding agreement. However, it is worth considering what you would do, and how it would affect your business, if suppliers stopped supplying goods and/or services relying on this case as a precedent for terminating the agreement. It is always better to be clear up front as to the contractual importance of payment being made on time and in many contracts there are a number of clauses dealing with rights and remedies in relation to the timings of payments and this can be a tricky area of negotiation.