To notify or not to notify: the impact of contact terms on common law rights to terminate

A shorter version of this article was first published in the Practical Law Dispute Resolution Blog.

Introduction

In Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC [2016] EWHC 525 (Comm), Teare J held that the notice requirements contained in the termination provisions of a master supply agreement (the MSA) did not apply to an innocent party’s exercise of its common law right to terminate the agreement by accepting the other party’s repudiatory breach. 

Background

The appellant, Vinergy, appealed an arbitral tribunal’s decision that its repudiatory breach of contract had been validly accepted by the respondent, RML, as bringing the contract to an end and thereby entitling RML to damages. Vinergy argued that as RML had not used the contractual termination provisions contained in the MSA, the termination was not lawful and was in fact a wrongful repudiation of the MSA.

The relevant provisions of the MSA were as follows:

• Clause 17.1.1 provided that either party was entitled to terminate the agreement immediately upon the failure of the other party to observe any of the contract terms and to remedy the same where it was capable of being remedied within the period specified in a default notice, which was to provide the party in breach with not less than 20 days to remedy its breach.
• Clause 18 stated that termination of the agreement, including but not limited to termination in accordance with clause 17, would not prejudice the rights of action or remedy of Vinergy or RML in respect of any antecedent breach by the other party of any of such party's obligations under the MSA. 

Vinergy argued that as the breaches of contract of which RML complained fell within clause 17, it should have served the notices required by the RML. RML’s failure to comply with the notice provisions meant that its purported termination of the MSA was invalid. 

Whilst RML made submissions that it had, in fact, complied with clause 17, its primary case was that it did not have to follow clause 17 when terminating the contract pursuant to its common law right to accept a repudiatory breach by Vinergy as bringing the contract to an end. 

The tribunal found that RML had not validly exercised the notice requirements in clause 17, but stated that this was of limited relevance since RML also had common law rights to terminate on the ground of a repudiatory breach and these rights (and rights in respect of antecedent breaches generally) were expressly preserved by Clause 18 of the MSA.

Vinergy’s appeal

In the appeal Vinergy submitted that the parties' common law rights to accept a repudiatory breach as terminating the MSA were limited to the extent of the relevant termination provisions in the contract. Vinergy accepted that the MSA did not exclude the common law right to terminate for repudiatory breach, but submitted that such right, if exercised, had to be exercised in the manner prescribed by clause 17. The basis of Vinergy’s submission was the proposition that where a contract provides that a breach of a particular gravity gives rise to a right to terminate the contract, then such term will be taken into account when determining whether the breach was repudiatory.

In support of its submissions, Vinergy relied on Moore-Bick LJ’s conclusion in Stocznia Gydinia SA v Gearbulk Holdings Ltd [2010] QB 27 that:

“…it is wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. In those cases where the contract gives a right of termination they are in effect one and the same.”

Vinergy also relied on the judgment of Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC), and, in particular, that:

“… the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach.”

Tear J. found that the appeal was not concerned with what amounted to a repudiatory breach, which was the issue in the above cases. The only question before the Court was whether, on the true construction of the MSA, the notice provision in clause 17.1.1 of the MSA was intended to apply when a party sought to exercise its common law right to accept a repudiatory breach as terminating the MSA.

The judge held that there was nothing in clause 17 which expressly referred to the right of a party to accept a repudiatory breach as terminating the MSA and there was no scope for implying such a requirement for three main reasons:

• First. there was no mention in clause 17.1.1 of the common law right to accept a repudiatory breach as terminating the MSA. The express right to terminate was dependent upon the failure to observe any of the terms of the contract and such a failure could be major or minor in terms of seriousness.
• Secondly, clause 17 provided six contractual rights to terminate; the right to terminate for breach of a term of the MSA was just one. It was only in respect of this right that the notice provisions applied. Consequently, it was to be inferred that the requirement to serve notices was intended to apply only to the specific right to terminate found in clause 17.1.1. and not to any of the other express rights to terminate in clause 17 or to the right at common law to accept a repudiatory breach as terminating the contract.
• Thirdly, clause 18 dealt with the effect of termination. In particular, clause 18.2 made clear that, however the MSA was terminated, rights of action in respect of any prior breach remained unaffected by the termination. This was consistent with the position at common law. Nothing in clause 18 touched on the question of whether notice of remedy was required before a party could accept a repudiatory breach.

Accordingly, Tear J. concluded that clause 17 did not apply when the innocent party sought to exercise his right at common law to accept a repudiatory breach as terminating the MSA.
Tear J. went on to hold that even if his conclusion was wrong and the notice provisions did apply to the common law right to terminate, clause 17.1.1 only applied to breaches which were capable of remedy.  Therefore, the notice provision would also only apply to such breaches.  As the arbitral tribunal found that at least one of the breaches it identified was not capable of remedy and this finding could not be challenged in the appeal, this breach did not fall within clause 17.1.1. Accordingly, the notice provisions did not have to be followed.

Comment

The case is of interest in its analysis of the relationship between a contractual right to terminate and the common law right to terminate for repudiatory breach and the extent to which contractual notice provisions may or may not apply to the common law right to terminate. In this case, as is commonly the position, the notice provisions did not apply to the common law right to terminate. 

However, it is important to note that the notice provisions are likely to be relevant as to whether or not the breach relied on to exercise the common law right to terminate was repudiatory.  Despite the fact that this was not an issue on the appeal, Vinergy sought to argue that the breaches could not constitute repudiatory breaches in circumstances where the parties had expressly provided for notice of such breaches to be given. They also advocated for an opportunity to remedy to be provided before such breaches would entitle the innocent party to terminate. 

As set out above, this proposition is supported by the judgment of Ramsey J. in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC):

“In deciding whether by its conduct a party evinces an intention not to be bound by the terms of the contract, the way in which parties agreed to treat breaches within the terms of their contract must be a factor to take into account. In particular, if a breach of a term had to reach a degree of seriousness before a contractual termination clause could be applied, it is unlikely that a breach which was less serious would, by itself, amount to a repudiatory breach. Equally, the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach."

Therefore, a party’s ability to treat breaches of contract as repudiatory will depend on the terms of the contract and any notice provisions in respect of particular breaches will be relevant to this determination.  For example, in a standard JCT contract, an employer is required to serve a default notice on the contractor in respect of its unlawful suspension of the works or its failure to proceed regularly and diligently.  If an employer attempts to terminate the contract on one of these grounds pursuant to its common law right to terminate and without serving a default notice, a contractor will likely submit that such breaches cannot be repudiatory in circumstances where no default notice has been served by the employer. 

Similarly, if the employer fails to make a payment in accordance with the contract or interferes with the issue of any certificate, the contractor is unlikely to succeed in arguing that such breaches are repudiatory if a default notice has not been served.  If the breaches are not repudiatory, then the contractor will have wrongly purported to terminate and the employer will then be able to argue that the contractor’s wrongful termination was itself a repudiatory breach, which the employer is entitled to accept to bring the contract to an end.  The contractor’s repudiatory breach will not fall within termination provisions of the contract requiring the service of notices and, therefore, the employer will likely succeed in establishing its entitlement to terminate and to claim damages accordingly. 

Therefore, when providing advice in respect of termination of any contract, attention must be paid to the termination provisions in the agreement even when such provisions are not expressly being relied upon, as the contractual termination provisions may have an impact on whether a common law right to terminate for repudiatory breach will be effective. 

Cat has provided a note on termination issues in construction contracts along with Brenna Conroy of Hardwicke. View Cat and Brenna's article.

Cat has also recently recorded a webinar on termination of contracts with Mark Job of Pinsent Masons which can be viewed here.