Failure to stick to the precise procedural requirements of termination clauses in commercial contracts can have dire legal consequences. What can you do to reduce the risk ?
Judge Bowsher's decision last month in the case of Ellis Tylin Ltd vs Co-Operative Retail Services Ltd provides a salutary reminder of the importance of observing the strict formal and procedural requirements laid down in termination clauses in commercial contracts. Although perhaps not an everyday occurrence, all of us at some time or another end up advising on contractual rights to determine.

The textbooks are unequivocal. To quote Hudson's Building and Engineering Contracts: "Exact and meticulous compliance by the determining party with any formal or procedural requirements laid down in the termination clause, for example, as to notices or time limits, will usually be required if a contractual termination is to be successful."

The textbooks then warn about the dire consequences of getting it wrong: the party that fails to comply strictly with the termination clause is in repudiatory breach of contract, which can be accepted by the other party. That party is entitled to damages. The textbooks cite terrifying examples where a notice has been given a few hours early and as a result a purported termination has been found by the House of Lords to be invalid.

These were the sort of arguments that Co-Operative Retail Services used in its dispute with its maintenance contractor for mechanical and electrical plant. The contract contained a provision that "after the expiry of 10 months" from the commencement date – 5 February 1996 – either party might propose an alteration to the amount of the fees, to take effect not earlier than two months after the date of its proposal.

The provision continued: "If the amount of the proposed alteration is not agreed between the parties on or before the last day of the two-month period … this agreement may be terminated … by the Contractor giving to CRS three months' notice in writing."

The first argument advanced by CRS was that Ellis Tylin's letter proposing an alteration to the fees was dated 26 November 1996, less than 10 months from the commencement date, and was therefore invalid. The judge rejected this argument: "There was no doubt in the mind of either party and there was no attempt to shorten the period for negotiation, rather, it was lengthened … it would be contrary to all business common sense and justice to allow CRS to say, a substantial time after the event, that the process … never started because the notice … was given too early."

Counsel for CRS then argued that the termination notice was given on the wrong day. The negotiations would need to end on 4 February 1997 but notice was given on 3 February so, on the face of it, it was premature. The judge discounted this technical point, too: the period from the date of the letter was more than three months, but that did not cause the notices to be defeated.

Again, looking at the commercial purpose of the clause, the judge stated: "It is understandable that a party in the position of CRS might wish to insist on receiving the whole of the three months' notice, because to receive any less would deprive them of a valuable right to have their equipment serviced. But I cannot conceive that the parties to the agreement can have intended that the notice given should be not a day more than three months."

  • Failure to comply strictly with a termination clause will land you in breach of contract
  • The other party can claim damages
  • But the courts take a common sense approach

In fact, counsel for CRS had no need to advance these technical arguments. The judge found that, after the notice, the parties had in fact reached agreement during the notice period on the adjustment to the contract fee. Accordingly, by ceasing to work on 4 May 1997, after the notice had been withdrawn by agreement, Ellis Tylin repudiated the contract.

The case reinforced the common sense approach to interpretation adopted by the courts: "if detailed semantic … analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." But the risks are also reinforced: no one wants to go to court to test the extent to which courts will apply common sense to overcome technical failures. So:

  • Check the conditions to be fulfilled before notice of determination can be issued.

  • Issue the notice using, so far as possible, the contract's precise words. Do not add frills.

  • Check time limits at least three times. New definitions of "days" following the Housing Grants, Construction and Regeneration Act 1996 may affect the calculation of periods of time in termination clauses.

  • Check provisions for service of notices. Even if are none in the termination clause, there may well be elsewhere in the contract.