Terminating a contract is never an easy call to make, and it could have a strong impact on later damages payments should you act too hastily, as these cases demonstrate

Lindy Patterson

There has been a number of termination cases through the courts in the past year. Two of the big issues around termination are when a breach of contract justifies termination and if it’s found to have been justified, what rights to damages survive the end of the relationship.

In looking at what behaviour justifies termination, the simplest cases are those where the termination clause specifically refers to a particular ground that the party terminating is relying on. The difficulty comes where the ground that is relied on is broad and general such as “material breach” or “default” or where the common law right of termination for material breach is relied upon. In one of the latest judgments concerning termination, Comau UK Limited v Lotus Lightweight Structures Limited 27 June 2014 (Commercial Court, unreported), Comau supplied services relating to the installation of Lotus’ new production line at its car factory. Lotus was to follow a staged payment schedule and failed to pay two of the invoices due on 31 December 2011. Comau suspended performance having given seven days notice as required. Lotus paid one of the invoices in March 2012 and 10% of the second invoice in April 2012 (leaving just over £530,000 outstanding). Comau gave Lotus a notice requiring it to remedy the breach in August 2012 and terminated in October 2012 .

In an application for summary judgment by Comau for the sum outstanding, the judge found that it was likely Lotus would be able to resist having been found to be in repudiatory breach of contract (justifying termination). He considered the payment of one invoice and a part payment of a second was unlikely to be enough to show Lotus was in “repudiatory breach” i.e. where one party by its actions makes clear it does not intend to perform its obligations under the contract. This decision is not helpful for parties on the wrong end of a late payment regime and suggests the need for more specific drafting on what constitutes a basis for termination.

In quantifying damages arising as a result of termination, contract terms which exclude consequental loss and loss of profit will limit the extent of damages recoverable

Comau also looked at the extent of recoverable damages in a termination situation.

The types of damages recoverable post termination can be separated into those rights which existed pre-termination (accrued rights), if the termination had not happened, and those which arise as a result of the termination.

In Bluewater Energy v Mercon Steel Structures [2014] EWHC 2132 the court found that the right to liquidated damages for failing to meet certain milestones prior to termination survived the termination itself. They were accrued rights. This would also be the case with liquidated damages for delay in achieving completion of the works or parts of the works by the completion dates, provided the dates had already been exceeded at termination. This is because termination puts an end to the ongoing obligation to complete by a certain date so the right to liquidated damages must have crystallised at the point of termination. In Bluewater it was found that the right to liquidated damages for failing to achieve the final milestone had not crystallised, but earlier ones had.

In quantifying damages arising as a result of termination, contract terms which exclude consequential loss and loss of profit will limit the extent of damages recoverable. This is also the case where there are caps on liability. In Comau the issue was the impact of a “no fault” termination clause on the extent of recoverable damages. These clauses are also called termination “for convenience” or termination “at will” clauses. One of the disputes which came before the court was the extent to which Comau could recover for loss of profit on the basis that, if it had not terminated because of breach, Comau would have been entitled to complete the whole of the contract. Lotus argued it had no liability for this head of damages due to the existence of the “no fault” termination clause. Lotus argued that as it would have been entitled to terminate the contract at any time regardless of fault and that , as it was evident from the facts here, it would have done so to mitigate its losses, Comau could not claim damages over the whole life of the contract.

Lotus argued that sums were payable at the start of each phase of the project and that the court should assess damages on the basis that it would have exercised that right to terminate before the next stage was reached. This was applying the principle that where a party is faced with two possible routes to performing its contractual obligations it will select the one which will cost it the least. The court agreed with Lotus and found that even if Comau proved liability it would be unlikely to recover more than nominal damages.

Termination is not an easy one to call. These decisions illustrate some of the reasons why.

Lindy Patterson QC is a partner and solicitor advocate in the construction team of CMS Cameron Mckenna