Most contracts provide some mechanism for ending the contract if a party is in breach of the contract. Indeed, English law can imply such a right where there is a breach of a particularly important term or breach has particularly important consequences. But increasingly, parties agree “termination for convenience” that is, a right to bring the contract to an end even if the other party has fully performed its obligations to date.
The Commercial Court has recently decided that such a clause will operate in effect as an exclusion of liability preventing a claim against the party entitled to terminate under the clause even it has not operated the clause.
In Comau UK Ltd v Lotus Lightweight Structures Ltd
To that extent, the decision is uncontroversial, but it is a clear warning to parties agreeing such a clause that its effect may go beyond a simple entitlement to terminate.
A more controversial aspect of decision was that the Deputy Judge decided that the clause would have this effect even though it could not in fact be operated to terminate the contract. The clause provided expressly that the right to terminate could only be exercised for convenience if the terminating party was not then in breach of its payment obligations. In fact, it was in breach of its payment obligations. The innocent party accepted that as a repudiatory breach of the contract thereby bringing the contract to an end. It then sued for damages measured by the profits that would have been earned if the contract had run its full course.
The Deputy Judge rejected this, holding that the breach did not prevent the clause acting as an exclusion of a claim for lost profits.
It is by no means clear that he was right to reject the claim on that basis. His reasoning is terse. He simply said “the fact… that [the defendant] was only entitled to invoke [the termination for convenience clause] if it was not in breach, does not appear to be relevant because the assessment looks at what [the defendant] would do if they had not been a breach”.
It may be that the Deputy Judge had in mind the dictum of Diplock LJ in Laverack v Woods of Colchester [1967] 1 QB 278 (which was quoted in the Court of Appeal decision cited earlier by the Deputy Judge – Durham Tees Valley Airport v BMI Baby Ltd [2011] 1 All ER (Comm) 731) that “where there is an anticipatory breach by wrongful repudiation…it involves assuming that what has not occurred and never will occur has occurred and will occur, i.e., that the defendant since the breach performed his legal obligations under the contract”.
However, whilst this does indeed, in one sense, require breach by the wrongdoer to be ignored, it is only for a narrow purpose, namely making the assumption that the contract would have continued in operation strictly in accordance with its terms. The position in Comau was surely different: if it was assumed that henceforth the contract would be operated strictly in accordance with its terms, the wrongdoer had no right to terminate because its right to terminate had been eliminated by its failure to make payment.
Whether a Court would or should be prepared to make the further assumption in favour of the wrongdoer that it would have cured its payment breach and thereby reacquired a right to terminate is unclear, but that is not what the Deputy judge in Comau said he was doing. This was a summary judgment application that failed and it is possible that the point may be reconsidered at trial.
In the meantime, however, it follows that both parties need to be wary of the operation of a termination for convenience clause as an exclusion of liability: the party who has conferred such a right on the other needs to be aware of the possibility that it may operate as an exclusion, but the wrongdoer should not rely on that if there is a risk that it could be said that breach had eliminated the right altogether.
