REUTERS | Yuriko Nakao

It’s not me, it’s you: terminating English law contracts

Terminating any relationship can be painful. For contractual parties, an incorrect or even careless termination may result in costly legal consequences. Two recent cases highlight the development around this body of law and serve as an aide-mémoire of the principles underpinning termination under English law:

  • Bains v Arunvill Capital Ltd reminds parties committing remediable breaches, those which are deemed cured if remedied within a specific time period, that a mere expression of an intention to carry out (as opposed to the actual performance of) contractual obligations (and where those obligations are so apparent) will not be enough to remedy a material breach.
  • Attorney General of the Virgin Islands v Global Water Associates Ltd reminds parties seeking to terminate and recover “lost profit” damages of the requirement for such losses not to be too remote. In such cases, courts will look particularly at the parties’ specific knowledge and expectations at the time of formation of the specific contract.

Breaking the heart of the contract and payback

Repudiatory breaches

In some instances, a contract will not make provision for termination, leaving common law principles of repudiation to come into play. A repudiatory breach is one which is serious and goes to the heart of the contract such that once committed, the innocent party may be entitled to walk away without being liable to the other party for damages. Examples of repudiatory breaches include renunciation of the contract (a clear refusal to perform obligations); breach of a condition; or a sufficiently serious breach of an intermediate term (that is, neither a condition nor a warranty).

It is well-established in English law that the innocent party facing repudiatory breach is met with a fork in the road and has a choice: to affirm the contract or accept the contract-breaker’s repudiation and terminate, entitling it to seek damages for breach of contract. If the innocent party wants to prevent a breached contract from continuing, it should take care not inadvertently to affirm the contract through conduct. Indeed, a delay in responding to a breach could be seen as affirmation (see Stocznia Gdanska SA v Latvian Shipping Co (Repudiation)). However, the innocent party is entitled to reserve its position as to whether to affirm or terminate as a result of the other party’s breach, and it is out of the wrongdoer’s hands as to whether the contract continues (see Bournemouth University Higher Education Corpn v Buckland).

On the recoverability of damages, as a matter of common law, a party may be able to claim “loss of bargain” damages to reflect the lost opportunity of performance of the contract as a result of early termination (see Lombard North Central plc v Butterworth) but will need to ensure that the damages are not too remote. Similarly, “lost profits” are capable of being recovered, although this is fact dependent. To determine whether such losses are recoverable, courts will look particularly at the parties’ specific knowledge and expectations at the time of formation of the specific contract.

In a recent Privy Council decision, Attorney General of the Virgin Islands v Global Water Associates Ltd, a breach of the first design build agreement (DBA) for the construction of a water plant was so serious that the second interrelated management, operation and maintenance agreement (MOMA) for the plant was ineffective. The British Virgin Islands (BVI) government’s failure to provide a site for the plant in accordance with contractual terms resulted in Global validly terminating the DBA and seeking damages in respect of the profits it would have earned under the MOMA, but for the government’s repudiatory breach of first the DBA. The government argued that such losses were too remote to recover.

The Privy Council disagreed. It held that Global was entitled to recover losses of profits under the MOMA, as these were clearly within the reasonable contemplation of the parties when the first DBA for the construction of the plant was formed. In particular:

  • The specific knowledge of the parties was relevant: both contracts were entered into by the same parties on the same day in connection with the same plant. Additionally, the documents incorporated into both contracts were the same.
  • As to the parties’ expectations, the BVI government entered into the DBA, knowing and intending that performance of its obligations under that contract would culminate in the start of the MOMA.
  • There was no term (express or implied) limiting the government’s liability under the DBA.

Words matter, but actions can matter too

The express wording of a breach clause will determine the scope and effect of termination rights. These express rights operate in tandem with common law rights unless specifically excluded, and can include rights dealing with:

  • Serious or material breaches (which are more than trivial but need not be repudiatory, a court will classify a breach as such by considering the effect of the breach on the innocent party).
  • Curable breaches (which will not result in termination if remedied within a prescribed grace period set out in the contract).
  • Any breach (which can result in termination simply based on a literal reading of the contract).

With respect to curable breaches, where a contract contains an express stipulated grace-period (for example, 21 days) and the nature and terms of the obligations are so clear, a mere statement by the party in breach that it intends to “cure” the breach will not be sufficient as a remedy, if the breach is in actual fact not remedied within the prescribed period. Rather (and unsurprisingly), to be absolved from being in breach and the consequences of termination, the contract-breaker would have to perform the contract before the prescribed (21-day) period lapsed. This happened in Bains v Arunvill Capital Ltd.

The contract in question provided that any material breach could be remedied within 21 days after the service of written notice from the innocent party requiring the same to be remedied. In response to the written notice of breach from Arunvill to Bains for a failure to perform consultancy services, Bains expressed his intention to perform the contract and asserted that any breach should therefore be considered remedied by virtue of this statement. However, Bains still failed to provide the relevant services after 21 days. Arunvill terminated the contract and Bains issued proceedings for the six months of remuneration that would have been due to him, but for the termination. In the County Court, Arunvill was successful and no remuneration was due. Bains appealed.

The Court of Appeal agreed with the County Court and applied a two-step test to determine whether Arunvill was entitled to summarily terminate the contract: it is necessary to (1) identify the specified “material breach”, and (2) determine whether that breach has been cured. A mere statement of an intention to cure is not enough to remedy the breach. Accordingly, Arunvill was entitled to terminate the agreement summarily. Indeed, and as acknowledged by Moylan LJ, this decision does not raise any issues of principle as to the interpretation of material breach clauses. But it serves as a useful reminder to parties in breach that, in cases where the nature of the obligations (provide services) and the terms of the contract (within 21 days) are so clear, the actual act of performing the obligations will be necessary to cure the breach, and a mere expression of an intention to perform will not be enough.

Ending gracefully

Parties seeking to terminate need to be alive to key practical issues, not least to avoid claims of wrongful termination against them arising or having valuable claims struck out. These include:

  • Being alert to grace periods under curable breaches and notifying deadlines to remedy the breach in accordance with the terms of the contract.
  • Remembering to mitigate any losses and consider whether any damages claimed are too remote to be recovered.
  • Communicating a clear intention to terminate through written notice to the other party.
  • Setting out the clear and detailed grounds for termination in the notice and whether the termination is pursuant to a common law or express (or implied) contractual right. On this point, it is vital that the “innocent” party actually has the right to terminate, as terminating without a right to do so could result in its own repudiatory breach, which the would be contract-breaker could accept and use as a basis upon which to sue for damages.
  • Following the clear language of the contract as to timing of the termination notice, how it can be served and what medium can be used (email, post or fax, and so on).

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: