Breaking up is hard to do – terminating agreements for breach

Breaking up is hard to do – terminating agreements for breach

Where a party breaches an agreement you might think that termination and any accompanying remedy easily follows but, as a number of recent first instance decisions have demonstrated, exiting with that clean break is sometimes hard to achieve.

Bluewater - Is the purported remedy good enough?

Bluewater Energy Services BV v Mercon Steel Structures BV and others [2014] EWHC 2132 (TCC) (Ramsey J) [para 41 et seq] The agreement provided that where Mercon was in default, Bluewater could serve a notice of default requiring Mercon to undertake action to remedy the default. Any remedial action had to be to Bluewater’s satisfaction. Having served such a notice, Bluewater declared that the remedial works were not to its satisfaction and terminated the agreement. The court determined that whilst the question of what was ‘satisfactory’ was a matter for  Bluewater’s subjective view, this was subject to the implied limitation that where a decision is left to the subjective view of one of the parties to the contract then concepts of honesty, good faith and genuineness are relevant as well as a need for the absence of arbitrariness, capriciousness, perversity and irrationality (Socimer International Bank v Standard Bank [2008] EWCA Civ 116).

Lesson to be learnt

Where one party is to exercise a discretion under an agreement, the exercise can be challenged if it can be shown that the exercise was motivated by malice or was irrational, even where such exercise concerns the adequacy or otherwise of remedial works following a breach by the other party. Subscribers to LexisPSL can see our report: Termination and liquidated damages dispute costs subcontractor €1m

Newland Shipping – have you terminated on the right ground?

Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm) (Leggatt J) Newland Shipping had agreed to supply oil to Toba. The agreement provided a deadline for payment. A failure to pay for a further five day period after the deadline entitled Newland to terminate the agreement. Toba delayed in paying and sought to introduce new conditions prior to it being prepared to make payment. When the deadline for payment passed, Newland issued a notice requiring payment within five days in the absence of which it would terminate the agreement.  When the five day period expired without payment Newland served a termination notice. In so doing it relied upon both its contractual right to terminate under the express provision of the agreement and, in addition, on Toba’s conduct which it said amounted to a repudiatory breach of the agreement which Newland accepted.

Lesson to be learnt:

In reaching its decision in favour of Newland as regards the termination, the court observed:

  • Where the contract contains a period for remedy provision, then this is inconsistent with a ‘time is of the essence’ provision in respect of the same obligation, ie if you are prepared to allow more time to remedy, then time cannot have been of the essence at least in relation to the original breach
  • In this case Newland had both a contractual right and a right under the general law of repudiation to terminate the contract, however, you do need to exercise care in such instances, particularly if the consequences of termination on the two grounds conflict (Dalkia Utilities Services v Seltech International [2006] EWHC 63 (Comm)
  • If intending to assert the other party is in repudiatory breach which may be accepted thus terminating the agreement, ensure that you have the evidence to support such a position. If not, your termination will be unlawful and you could be liable in damages

Subscribers to LexisPSL can see our report: Getting termination right  and our Practice Notes:  Termination for breach of contract 

Virulite – re-asserting a right to terminate post waiver of breach

Virulite LLC v Virulite Distribution Ltd [2014] EWHC 366, [2-14] All ER (D) 37 (Mar) [Stuart-Smith j] LLC had a Distribution Licensing Agreement (DLA) to distribute VDL’s device. The DLA required LLC to make various ‘consideration payments’. One such payment of £25,000 was due in 2008 but was not paid by LLC. At the time there were issues in VDL obtaining FDA authorisation of the device. In November 2010 VDL gave notice to LLC of its intention to terminate the DLA, on grounds that the debt of £25,000 had been overdue for in excess of 30 days, and thus VDL would terminate the DLA unless it received the payment from LLC within 60 days of the notice. LLC argued that either the parties had agreed to vary the DLA in 2009 such that the £25,000 payment would only become due once FDA authorisation had been achieved and/or that VDL had waived or was estopped by its subsequent conduct from terminating the DLA on the grounds of non-payment prior to such authorisation. LLC argued therefore that the termination was wrongful and claimed loss of profits for the lost opportunity of distributing VDL’s device. LLC succeeded. The decision confirmed that where there is no contractual ‘time of the essence’ provision then a party can make time of the essence on giving reasonable notice (Behzadi v Shaftesbury Hotels Ltd [1991] 2 All ER 477). However, if there are contractual mechanisms for dealing with delay which have been suspended (eg by waiver or estoppel) then whilst a notice can be served which brings that suspension to an end, the notice cannot vary the contractual provisions for dealing with delay. In this case, the contract provided that VDL could only serve a termination notice for non-payment if 90 days had elapsed between its giving notice of its intention to terminate for non-payment and the termination. Therefore the 60 day period whilst, in other circumstances, might be considered reasonable notice (per Behzadi) in this case, given the contractual provisions requiring a 90 day remedy period, the termination notice was invalid. VDL’s purported termination amounted to a repudiatory breach of the DLA which LLC were entitled to accept and claim damages for their lost opportunity to distribute the device. Note, it was also clear from this decision that the reasonable, or in this case, contractual period required after notice and before termination was calculated by reference to the date of the notice of intention to terminate and not the date of the original breach (Charles Rickards v Oppenhaim [1950] 1 All ER 420).

Lesson to be learnt:

  • if a breach occurs where there are no contractual termination provisions, you can make time of the essence by giving notice requiring compliance within a reasonable period of time from the date of the notice (not the earlier breach)
  • if a breach occurs for which there are termination provisions which have been waived/estopped by conduct, ensure that any notice requiring subsequent compliance adheres to the contractual notice provisions as regards remedy periods and that such period is calculated from the date of the notice (not the earlier breach)

Subscribers to LexisPSL can see our report: Agreeing to the impossibleClick here for a free one week trial of Lexis®PSL

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About the author:
Ruth specialises in general corporate and commercial dispute resolution with particular experience in shareholder disputes, fraud and warranty claims. Ruth trained and qualified at Berwin Leighton Paisner LLP (now Bryan Cave Leighton Paisner LLP) where she remained in practice for ten years. Her work has involved project managing large-scale cases to trial in the chancery and commercial courts. Ruth was actively involved in in-house training with a particular focus on all aspects of evidence gathering and production, including authoring a user-manual on E-disclosure. She is also a contributor to the New Law Journal.