UK: Shoulda, Woulda, Coulda: Rights Of Termination For Unknown Breaches Of Contract

Last Updated: 16 April 2012
Article by Aidan Steensma and Victoria Pecket

The termination of contracts for breach is a notoriously complex area of the law. Parties seeking to terminate can easily find themselves subject to an allegation that their attempts were flawed, with the result that they themselves are in breach of contract and subject to rights of termination exercisable by the other party. The hunter becomes the hunted. In such cases, there is a longstanding rule that a party attempting to terminate is permitted to justify its termination on any grounds available to it at the time, even if those grounds were not yet known to it or mentioned in its notice of termination. A High Court decision last month has found that a party relying on this rule, whilst being able to justify its termination, may not be entitled to recover damages. This is a potentially controversial decision and should be carefully taken into account by parties considering rights of termination.

Lonsdale Sports Limited ("Lonsdale") is the owner of the "Lonsdale" trademark used in connection with various clothing and leisure goods. Lonsdale granted Leofelis S.A. an exclusive licence to use the trademark within certain European countries. Subsequently, in September 2007, Leofelis claimed that Lonsdale had repudiated the licence agreement and purported to terminate and claim damages for loss of profit for the period remaining under the agreement.

Lonsdale disputed the validity of Leofelis' termination and was successful in showing that Leofelis' original allegation of repudiation was unfounded. Leofelis then sought to rely on alternative grounds of termination not known to it at the time of its original notice in September 2007. In particular, evidence submitted by Lonsdale showed that it had granted a licence to use the trademark to a Latvian company. Leofelis alleged that the circumstances surrounding the granting of this licence amounted to a repudiation of its contract with Lonsdale and thereby provided a separate justification for its original notice in September 2007.

The court accepted that the circumstances surrounding Lonsdale's agreement with the Latvian company were capable of justifying Leofelis' original notice of termination, but ruled out any claim for losses flowing from termination. As the agreement with the Latvian company was not known to Leofelis' at the time of its original notice, Roth J held that, "the alleged breach, although its nature met the test for a repudiatory breach, cannot be the cause of the termination and thus of the loss that flowed from the termination." .

The court acknowledged that the issue had not previously been decided and the decision may therefore be open to challenge in the future. In particular:

  • The causation analysis carried out by Roth J would not appear to take into account the fact that the unknown repudiation, whilst not causing Leofelis to give its original notice of termination, was nonetheless the cause for why the notice was effective. Had the unknown repudiation not occurred, the notice would have been invalid. 
  • It may be open to question whether a causation analysis such as that undertaken by Roth J is applicable to the assessment of damages flowing from termination for repudiatory breach. Other cases may suggest that such damages flow from the fact that the contract has been validly terminated, rather than from any causation analysis of the repudiatory breach which led to termination.

It remains to be seen how this decision will be received in subsequent cases. For the time being, parties considering the termination of contracts should consider carefully whether any other grounds for termination may exist beyond those specifically relied upon. In a construction context, parties would be well advised to consider whether repudiatory breaches of contract exist alongside any contractual right to terminate. Where possible, both grounds should be given effect to by the terms of the notice of termination with a view to avoiding an impression that one particular ground is the true cause of the decision to terminate. Whenever one ground is able to be characterised as the true cause of a party's decision to terminate, the reasoning in Leofelis v Lonsdale Sports poses a risk that the party's right to damages will depend on that ground alone and that other grounds, whilst potentially available to justify the validity of the termination, will not sustain a claim for damages.

References: Leofelis v Lonsdale Sports [2012] EWHC 485 (Ch).

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Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 04/04/2012.

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