Understanding Contract Termination: Law, Clauses, and Consequences

TERMINATION OF CONTRACT MICHAEL FEALY QC www.oeclaw.co.uk www.oeclaw.co.uk

TERMINATION OF CONTRACT Summary: What do I mean by termination of a contract? Termination at common law Express termination clauses Potential pitfalls in relying upon express termination clauses Route map www.oeclaw.co.uk

EXPRESS TERMINATION CLAUSE A FALSE FRIEND? A party may terminate the contract by written notice where the other party is in material breach Is there a right to claim loss of bargain damages? How to exercise this right? Unintended consequences of exercise www.oeclaw.co.uk

WHAT DO I MEAN BY TERMINATION OF CONTRACT? A contract is terminated when one party elects to exercise a right to bring the contract to an end That right arises: (i) at common law or (ii) by the express terms of the contract www.oeclaw.co.uk

EFFECT OF TERMINATION Primary obligations to be performed in the future cease to exist Accrued rights not affected At common law, innocent party entitled to claim loss of bargain damages www.oeclaw.co.uk

LOSS OF BARGAIN DAMAGES Innocent party s remedy in damages not limited to loss caused by breach Innocent party also entitled to recover damages for loss caused by termination In law, that loss regarded as caused by contract breaker s breach, not innocent party s decision to terminate in response So, potentially drastic consequences for party in breach at common law www.oeclaw.co.uk

THREE BROAD COMMON THEMES Judicial bias against termination Tension between certainty and justice Termination is not automatic - requires decision by the innocent party that is communicated to party in breach www.oeclaw.co.uk

TERMINATION AT COMMON LAW Damages are primary remedy Innocent party may terminate for breach if: Term breached is classified as a condition, or Where the consequences of the breach deprives the innocent party of substantially the whole benefit that he was to received under the contract Grand China Shipping v Spar Shipping [2016] EWCA Civ 982 www.oeclaw.co.uk

BREACH GOING TO THE ROOT OF THE CONTRACT Lack of certainty Fact-sensitive inquiry, focused on the consequences of the breach: prejudice suffered? Can breach be remedied? If so, has party in breach had a reasonable opportunity to remedy? Or made an offer to remedy? Past breaches? Or likely future breaches? Value of defective performance? Adequacy of damages? www.oeclaw.co.uk

BREACH OF CONDITION Certainty achieved But contract may be terminated regardless of gravity of breach Whether term is a condition is a matter of construction, with the court leaning against construing a term as a condition Time of performance is of the essence Sale of Goods Act 1979 www.oeclaw.co.uk

ANTICIPATORY BREACH Renunciation Has a party evinced an intention not to perform the contract Clear and absolute refusal If carried out would justify termination By party s own act or omission is it wholly and finally disabled from performing? Wrongful termination notice www.oeclaw.co.uk

THE EXPRESS TERMINATION CLAUSE Express provision permitting termination material breach substantial breach Event other than breach, eg insolvency (but see s.233B of the Insolvency Act 1986) May permit termination where no right of termination at common law Effect of exercise is to release parties from future performance www.oeclaw.co.uk

LOSS OF BARGAIN DAMAGES? Damages for past breach recoverable Loss of bargain damages not recoverable unless the contract has also been terminated for breach at common law Financings Limited v Baldock [1963] 2 QB 104 Lombard North Central v Butterworth [1987] 1 QB 527 www.oeclaw.co.uk

CLAIMING LOSS OF BARGAIN DAMAGES Has right to terminate at common law been excluded by express termination clause? Exercising the express termination clause Contractual requirements Clear and unambiguous notice of termination must be given so that a reasonable recipient is in no reasonable doubt that a contractual right of termination is being exercised. Geys v Societe Generale [2013] 1 AC 523 at 546 to 547 www.oeclaw.co.uk

TERMINATION AT COMMON LAW Communication or conduct clearly and unequivocally conveys to repudiating party that aggrieved party is treated the contract as at an end. Vitol v Norelf [1996] AC 800 at 810. www.oeclaw.co.uk

CLAIMING LOSS OF BARGAIN DAMAGES Overlapping termination rights Termination permitted under express termination clause only where termination is permitted at common law, or Express termination clause sets a lower threshold for termination than common law, but the facts justify termination under express termination clause and at common law www.oeclaw.co.uk

THE TERMINATION PARADOX? Consequences of termination under the contract inconsistent with right to claim loss of bargain damages at common law? Dalkia Utilities Services v Celtech [2006] 1 Lloyd s LR 599 Termination for material or substantial breach Phones 4U v EE [2018] Bus LR 574 Newland Shipping and Forwarding Limited v Toba Trading [2014] EWHC 661 (Comm) www.oeclaw.co.uk

ROUTE MAP Does contract provide for consequences of termination pursuant to express power? If not, then termination letter should be expressed as accepting repudiatory breach and, in the alternative, relying on express power Facts relied upon should be set out www.oeclaw.co.uk

ROUTE MAP (II) If contract does provide for consequences of termination, are they inconsistent with rights arising on termination at common law? If inconsistent, then choice needs to be expressly made between termination under contract or at common law: only one ground should be relied upon as basis for termination www.oeclaw.co.uk