Termination under contract
Most contracts contain carefully worded termination procedures. These will normally set out the grounds, means and consequences of termination. The specified steps and procedures must be closely followed otherwise the termination is likely to be found to be invalid and ineffective. In that situation, the party attempting to terminate is likely to find itself on the end of a wrongful termination claim, whereby the other party claims loss of profits for the wrongful ending of the contract. The courts have often reiterated the need for rigorous adherence to the specified contractual termination procedure, for the termination to be valid.
Termination at common law
Unless a contract excludes common law rights, it is likely that these remain available to the parties alongside their specified contractual rights. Therefore, a right to terminate a contract at common law may well be available in addition to the specified contractual rights of termination. The recent case of Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm) considered whether a contracting party exercising its common law right of termination must at the same time comply with the contractual termination provisions.
Background
The facts were:
- Richmond Mercantile FZC (defendant) entered into a long term agreement to supply bitumen to Vinergy International (PVT) Limited (plaintiff). This agreement required Vinergy to buy its entire requirements from Richmond.
- After four years, Richmond discovered that Vinergy had purchased supplies from a third party. Richmond therefore sought to terminate the agreement on common law grounds based on the breach of the exclusivity clause. Richmond also sought to terminate on common law grounds based on Vinergy's non-payment of an invoice and other charges. These breaches were said to be repudiatory breaches, that is, breaches of a material nature entitling the other party to bring the contract to an end at common law.
- Under the contractual termination procedure Richmond would have been required to give Vinergy an opportunity to remedy its breaches before being able to terminate the contract. Because Richmond was purporting to terminate the contract at common law, it did not follow this procedure.
- Vinergy argued that Richmond's failure to give it an opportunity to remedy the alleged breaches in accordance with the contractual termination clause was unlawful amounting to wrongful termination. The contractual termination clause provided: “Either party may terminate this Agreement immediately upon: (i) failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days;…"
- Under the agreement parties sought to resolve their dispute by way of arbitration.
- The arbitration tribunal found in Richmond's favour. Vinergy appealed to the High Court.
High Court Judgment
Mr Justice Teare in the High Court summarised the question before the court as: "Whether Richmond was able to rely on an unhindered common law right to terminate the [agreement] by reason of a repudiatory breach so as to completely bypass the notice and remedy requirements in the termination clause”.
In summary the High Court upheld the arbitrator's decision and dismissed the appeal. The judgement discussed two main points: (i) the termination clause notice procedure did not apply to repudiatory breaches under common law principles; and (ii) the breaches were not capable of being remedied and so were outwith the scope of the contractual termination clause anyway. The comments below focus on the first of these points.
The High Court disagreed that the contractual termination procedure would also automatically apply when a party sought to terminate at common law. Whether a termination at common law had to comply with the contractual requirements is a matter of interpretation of the particular provisions in the contract.
In this case, the relevant provisions gave the parties an express right to terminate, whether or not a repudiatory breach had occurred, subject to the proviso that the other party had failed to observe "any of the terms" of the agreement and then failed to remedy that failure within a specified period of 20 days. As the clause did not refer to repudiatory breach expressly, the court had to decide whether it should be implied into the contract. The court found that it could see no justification for implying a term into the contract that specifically covered repudiatory breach. Firstly, the existing clause dealt with breaches which were both minor and serious, and it was not therefore specifically directed at repudiatory breaches. Secondly, the termination clause was part of a wider clause which granted an immediate right to terminate in other situations, and these procedures did not require a notice or a cure period. Therefore, it was held that the contractual notice and cure period was only relevant to a contractual termination, where there had been a failure to observe "any of the terms" of the agreement, as opposed to the other contractual grounds of termination, or any grounds of termination at common law.
Lessons learned
When deciding whether to terminate a contract at common law there are already a number of factors to consider, the most significant of which is whether the breach is ‘material’. Whether or not there is a requirement at the same time to comply with the contractual termination provisions is an additional consideration. A cautious approach would be to comply with the contractual procedure even when terminating at common law, whilst making it clear that the termination is at common law. Also, the current position under Scots law, specifically, is that a party in material breach should be given a “second chance” (Strathclyde R.C. v Border Engineering Contractors Ltd 1998 SLT 175). This means that generally where a breach is capable of being remedied, an opportunity to do so should be given prior to a contract being terminated at common law. In summary, it pays to take a cautious and exacting approach when terminating a contract, regardless of whether this is at common law, or under a contractual mechanism.