SCL Meeting Report: ‘Termination Clauses and Repudiatory Breach: Contract Law Update’.

December 16, 2013

On 2 December 2013, Eversheds LLP hosted the latest session organised by the SCL. There was an excellent attendance. The session covered termination clauses and repudiatory breach of commercial contracts and was chaired by Mark Davenport, head of the Commercial Dispute Resolution team at Eversheds.  

The speaker was Clive Freedman, Barrister, Mediator and Arbitrator, who practises at 3 Verulam Buildings, Gray’s Inn. In recent years Clive’s main area of specialisation has been IT law, particularly contractual disputes arising from IT projects.  

Clive began by outlining typical causes of delay in commercial contracts such as:

·        the inability to set out specifications before contracting;

·        contract negotiators’ lack of technical knowledge;

·        the scope of the work changing post-contract;

·        a lack of co-operation between the parties; and

·        dependence on sub-contractors. 

The duty on the parties to co-operate with each other was discussed. There is generally an implied term that the customer will do all that is necessary on its part to bring about completion of the contract (Mackay v Dick (1881) 6 App Cas 251). The recent case of Compass Group UK and Ireland Ltd v Mid Essex Hospital [2013] EWCA Civ 200 was referred to. In that case, the court at first instance ([2012] EWHC 781 (QB) had held that a clause in the contract required the parties to co-operate in good faith in relation to the calculation of service deductions. However, the Court of Appeal held that the duty to co-operate in good faith contained in that clause was not a general obligation but was limited to certain specific situations. When drafting a contract, care must be taken not to narrow the obligation to co-operate unless this is actually intended. 

The talk then focused on time obligations. The time for completion referred to in the contract may be no more than a target rather than a binding contractual commitment.  Even if it is a binding contractual commitment, failure to complete by the date may not give the other party a right to terminate the contract. Even where a notice is served requiring completion by a specified reasonable date, this may not give an automatic right to terminate if that date is not achieved (Urban I (Blonk Street) Ltd v Aryes [2013] EWCA Civ 816).  

In the absence of a fixed delivery date, there is a duty to complete within a reasonable time, per the Supply of Goods and Services Act 1982, s 14. Clive also discussed the leading case of Hongkong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26. In the absence of an express contractual right to terminate, if the delay is not serious the customer’s only remedy is damages. But if the delay is so serious as to deprive the customer of substantially the whole benefit of the contract, the customer may terminate on the ground of the supplier’s repudiatory breach. Clive explained that the Hongkong Fir test can be difficult to apply to the facts and that the recent case of Playup Interactive Entertainment v Givemefootball ltd [2011] EWHC 1980 (Comm) provides guidance on factors to take into account in deciding whether the supplier’s breach deprives the customer of substantially the whole benefit of the contract. 

Clive also touched upon scenarios where delay is the fault of the customer. The supplier may say that the delay was caused by change requests from the customer. If the customer did cause delay, it cannot insist on completion by the original deadline (Trollope & Colls v NW Metropolitan Hospital Board [1973] 1 WLR 601).  

Clive went through a series of cases where there are express terms permitting termination. A clause that sets out termination in the event of ‘any breach’ is interpreted as being limited to a repudiatory breach or an accumulation of breaches that as a whole can be properly described as repudiatory (Dominion Corporate Trustees Ltd v Debenhams Properties Ltd [2010] EWHC 1193 (Ch)). Where a clause refers to termination in the event of a ‘material breach’, a breach may be material even if it is not repudiatory (see Crosstown Music Company 1 Llc v Rive Droite Music [2010] EWCA Civ 1222, a case which also provides guidance on assessing the materiality of a breach).  

Clive also explained that an innocent party must elect whether to accept the repudiation or to affirm the contract. But if the innocent party asks the other party to reconsider its position and recognise its obligation to perform the contract, the innocent party may not lose the right to treat the contract as discharged (Yukong Line v Rendsburg Investments Corp [1996]).  

Where there are express terms for termination in the contract, the termination letter must comply with the requirements of the express term, however it may not be necessary to specify the contract clause relied upon (Compass Group UK). In some circumstances the actual date of termination may be deferred to allow transitional arrangements to be implemented (Compass Group UK). The termination letter should make it clear whether termination is based on a contractual termination clause or common law repudiatory breach. 

The talk concluded by explaining the consequences of terminating the contract. Both parties are discharged from further performance of the contract. Claims for damages may depend on whether the termination was justified. If termination is based on a termination clause, the innocent party will not be able to recover the loss suffered as a result of the termination unless the breach amounts to a repudiatory breach at common law (Financings v Baldock [1963] 2 QB 104). If both the parties are entitled to terminate, they may be unable to recover post-termination losses (Compass Group UK). 

Daniel Prim is a trainee at Eversheds LLP.