Breaking it off: getting contractual termination right

Written on 3 May 2016

Terminating a contract can be difficult, and the consequences of getting it wrong can be serious. Two recent cases clarify some of the more difficult issues that can arise from the interaction between contractual and common law rights.

These cases clarify that very clear wording is needed if the parties wish to exclude common law termination rights. In the absence of such wording, requirements to give notice or the opportunity to remedy before terminating under a contractual right will not extend to termination under common law rights. Those rights may even be invoked after the event to justify termination if the reasons given for termination at the time are found to be inadequate.

What rights does a party have to terminate a contract?

Where one party commits a fundamental (or, ‘repudiatory’) breach of contract, an innocent party has a common law right to terminate the contract as a result of that breach.

Contracts also typically provide the parties with express rights to terminate the contract in certain circumstances: for example, for ‘material breach’ of the contract terms. These might not be so serious as to be repudiatory. These contractual termination rights will usually be subject to giving the party in breach a period of notice, and often also the chance to remedy that breach (if it is capable of remedy).

The interaction between contractual and common law rights frequently causes difficulties for parties looking to terminate contracts. The two recent cases of C&S Associates v Enterprise Insurance and Vinergy International v Richmond Merchantile provide guidance on some of the more difficult issues that can arise.

C&S v Enterprise

The contract in C&S v Enterprise provided a contractual right to terminate where the other party committed a material breach, but only if that breach had not been remedied within 30 days of notice having been given of that breach.

Enterprise purported to terminate in reliance of this contractual right, relating to an alleged failure to provide information that it was entitled to. When this was challenged, Enterprise raised an alternative argument that, if it had not been entitled to terminate under this ground, it was alternatively entitled to have terminated on the basis of defective performance by C&S, which constituted a repudiatory breach.

C&S argued that Enterprise could not rely on the alleged defective performance as a ground for terminating the contract because (amongst other things):

  • it did not rely on this ground when it purported to terminate the contract; and
  • it did not give C&S the opportunity to remedy its alleged defective performance.

Could a party justify termination by relying on a ground that it did not raise at the time?

As a general principle, a party who refuses to perform a contract, but who gives a wrong or inadequate reason at the time, may later rely on other grounds that would have been open to it at that time.

This principle does not apply, however, if the ground that is later relied on could have been “put right” if it had been raised at the time. C&S argued that this meant that it should have been given the opportunity to remedy its defective performance.

The judge disagreed. After reviewing the case law, he held that a party is only entitled to “put right” an anticipatory breach. Once a breach has occurred, the party in breach is not entitled to the opportunity to save the contract by righting their wrong.

Had contractual termination rights excluded or modified a party’s common law termination rights?

C&S accepted that Enterprise’s contractual termination rights were in addition to its common law right to terminate for a repudiatory breach. C&S argued, however, that the termination clause amounted to an agreement that a material breach which was capable of remedy would not be treated as repudiatory.

The judge again disagreed with C&S. He observed that the test for establishing a repudiatory breach was a demanding one, but held that, where it could be satisfied, the innocent party should be able to treat the contract as being discharged. This was separate from a contractual right of termination. For one thing, as is often the case, the remedies available to Enterprise were different depending on whether it terminated under its contractual or its common law rights.

The judge found that parties could exclude or modify common law termination rights, but this would require clear wording. In this case, he held that a clause providing for termination for a material breach of contract did not prevent a sufficiently serious breach from also being repudiatory, and allowing the innocent party to terminate under its common law rights.

Vinergy v Richmond

The contract in Vinergy International v Richmond Merchantile also provided a contractual termination right. In this case, either party was able to terminate for any breach by the other party, provided the party in breach had been given notice and at least 20 days to remedy the breach (if it were capable of remedy).

Richmond terminated the contract but did not provide a notice to remedy. Richmond argued that as Vinergy had committed a repudiatory breach, it was entitled to terminate the contract under common law. As C&S had accepted in its case, Vinergy accepted that the contractual termination rights did not exclude Richmond’s common law termination right. It argued, however, that this right had to be exercised in accordance with the contractual termination regime. This meant giving Vinergy the opportunity to remedy its breach.

Was a party terminating for a repudiatory breach required to follow the contractual termination regime?

The judge found that Richmond was not required to give Vinergy the opportunity to remedy its breach. Reviewing the same case law referred to in C&S v Enterprise, and coming to a similar conclusion, he found that there was no general principle that a contractual termination regime would operate to qualify common law termination rights. Whether the common law rights were modified would depend in each case on the wording of the relevant termination clause.

In this case, he held that the relevant clause did not qualify Richmond’s common law termination rights because:

  • the relevant clause made no mention of common law termination rights; and
  • the contract also contained other termination rights, for example on the occurrence of insolvency, which did not require the provision of notice or the opportunity to remedy.

The requirement to provide a notice to remedy therefore only applied to the specific termination rights set out in this clause, not to any other contractual or common law termination rights.

Practice points

  • Contractual termination rights should be well-defined. How serious must a breach be to allow the other party to terminate the contract? If the clause refers to a ‘material’ breach, what does this mean?
  • It is possible to exclude or qualify a party’s common law right to terminate for repudiatory breach (for example, by giving the other party a right to remedy). If this is what both parties intend, make this clear in the contract.
  • If you are considering terminating a contract, check both the grounds for termination and the consequences of termination under the contract and common law. Make it clear which ground you are relying on.
  • Consider the contractual termination regime. Failure to give the other party the required notice or the chance to remedy can render a termination unlawful. Although there is no general rule that common law termination will be subject to the contractual regime, this might be the case, depending on the wording of the contract. The safest option to avoid termination being deemed unlawful will be to provide notice.

Terminating a contract often involves difficult, tactical decisions, and commercial or practical factors can be as important as the legal considerations. With the consequences of getting it wrong potentially disastrous, however, it is important to make sure that you get it right.