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To notify or not to notify: the impact of contact terms on common law rights to terminate

In Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC, Teare J held that the notice requirements contained in the termination provisions of a master supply agreement (MSA) did not apply to an innocent party’s exercise of its common law right to terminate the agreement by accepting the other party’s repudiatory breach.

Background

The appellant, Vinergy, appealed an arbitral tribunal’s decision that its repudiatory breach of contract had been validly accepted by the respondent, RML, as bringing the contract to an end and thereby entitling RML to damages. Vinergy argued that as RML had not used the contractual termination provisions contained in the MSA, the termination was not lawful and was in fact a wrongful repudiation of the MSA.

Clause 17.1.1 of the MSA provided that either party was entitled to terminate the agreement immediately upon the failure of the other party to observe any of the contract terms and to remedy the same where it was capable of being remedied within the period specified in a default notice, which was to provide the party in breach with not less than 20 days to remedy its breach.

Clause 18 stated that termination of the agreement, would not prejudice the rights of action or remedy of Vinergy or RML in respect of any antecedent breach by the other party of any of such party’s obligations under the MSA.

Vinergy argued that as the breaches of contract of which RML complained fell within clause 17, it should have served the notices required by the RML. RML’s failure to comply with the notice provisions meant that its purported termination of the MSA was invalid.

Whilst RML made submissions that it had complied with clause 17, it argued that it did not have to follow clause 17 when terminating the contract pursuant to its common law right to accept a repudiatory breach by Vinergy as bringing the contract to an end.

The tribunal found that RML had not validly exercised the notice requirements in clause 17, but stated that this was of limited relevance. RML also had common law rights to terminate on the ground of a repudiatory breach and these rights were expressly preserved by Clause 18 of the MSA.

Vinergy’s appeal

Vinergy submitted that the parties’ common law rights to accept a repudiatory breach as terminating the MSA were limited to the extent of the relevant termination provisions in the contract. Vinergy accepted that the MSA did not exclude the common law right to terminate for repudiatory breach, but submitted that such right had to be exercised in the manner prescribed by clause 17. Vinergy argued that where a contract provides that a breach of a particular gravity gives rise to a right to terminate, then such term will be taken into account when determining whether the breach was repudiatory.

Teare J found that the appeal did not include considering what amounted to a repudiatory breach. The only question before the court was whether, on the true construction of the MSA, the notice provision in clause 17.1.1 was intended to apply when a party sought to exercise its common law right to accept a repudiatory breach as terminating the MSA.

The judge held that there was nothing in the MSA which expressly referred to the right of a party to accept a repudiatory breach and there was no scope for implying such a requirement.

First, there was no mention in clause 17.1.1 of the common law right to accept a repudiatory breach. The express right to terminate was dependent upon the failure to observe any of the terms of the contract; such failure could be major or minor in terms of seriousness.

Secondly, clause 17 provided six contractual rights to terminate; the right to terminate for breach of a term of the MSA was just one. It was only in respect of this right that the notice provisions applied. Consequently, it was to be inferred that the requirement to serve notices was intended to apply only to the specific right to terminate found in clause 17.1.1.

Thirdly, clause 18 dealt with the effect of termination. In particular, clause 18.2 made clear that, however the MSA was terminated, rights of action in respect of any prior breach remained unaffected by the termination. This was consistent with the position at common law. Nothing in clause 18 touched on the question of whether notice of remedy was required before a party could accept a repudiatory breach.

Accordingly, Teare J concluded that clause 17 did not apply when the innocent party sought to exercise his right at common law to accept a repudiatory breach as terminating the MSA.

Teare J went on to hold that even if his conclusion was wrong and the notice provisions did apply to the common law right to terminate, clause 17.1.1 only applied to breaches which were capable of remedy. Therefore, the notice provision would also only apply to such breaches. The arbitral tribunal found that at least one of the breaches it identified was incapable of remedy. This finding could not be challenged in the appeal, nor did the breach fall within clause 17.1.1. Accordingly, the notice provisions did not have to be followed.

Comment

The case is of interest in its analysis of the relationship between a contractual right to terminate and the common law right to terminate for repudiatory breach and the extent to which contractual notice provisions may or may not apply to the common law right to terminate. In this case the notice provisions did not apply to the common law right to terminate.

However, it is important to note that the notice provisions are likely to be relevant as to whether the breach relied on to exercise the common law right to terminate was repudiatory. Despite the fact that this was not an issue on the appeal, Vinergy sought to argue that the breaches could not constitute repudiatory breaches in circumstances where the parties had expressly provided for notice of such breaches to be given. They also advocated for an opportunity to remedy to be provided before such breaches would entitle the innocent party to terminate.

This proposition is supported by the judgment of Ramsey J in BSkyB v HP Enterprise Services UK Ltd (relied upon by Vinergy in its submissions).

A party’s ability to treat breaches of contract as repudiatory will depend on the terms of the contract and any notice provisions in respect of particular breaches will be relevant to this determination. For example, in a standard JCT contract, an employer is required to serve a default notice on the contractor in respect of its unlawful suspension of the works or its failure to proceed regularly and diligently. If an employer attempts to terminate the contract on one of these grounds pursuant to its common law right to terminate and without serving a default notice, a contractor will likely submit that such breaches cannot be repudiatory in circumstances where no default notice has been served by the employer.

Similarly, if the employer fails to make a payment in accordance with the contract or interferes with the issue of any certificate, the contractor is unlikely to succeed in arguing that such breaches are repudiatory if a default notice has not been served. If the breaches are not repudiatory, then the contractor will have wrongly purported to terminate and the employer will then be able to argue that the contractor’s wrongful termination was itself a repudiatory breach, which the employer is entitled to accept to bring the contract to an end. The contractor’s repudiatory breach will not fall within termination provisions of the contract requiring the service of notices and, therefore, the employer will likely succeed in establishing its entitlement to terminate and to claim damages accordingly.

Parties often seek to protect their position by serving the required contractual notices as well as asserting common law rights to terminate. Whilst this is the cautious approach, the difficulty with doing this is the tension which may be caused by, on the one hand, relying on the terms of the contract to terminate and, on the other, seeking to treat the contract as an end as a result of the other party’s repudiatory breach. The terms of the contract will determine whether this is possible, for example by preserving all “other” legal and equitable rights to those provided in the agreement. Where both contractual and common law rights are relied on, termination notices must be drafted carefully to identify clearly the bases upon which the contract is being.

Therefore, when providing advice in respect of termination of any contract, attention must be paid to the termination provisions in the agreement even when such provisions are not expressly being relied upon, as the contractual termination provisions may have an impact on whether a common law right to terminate for repudiatory breach will be effective.

Hardwicke Catherine Piercy

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