United States: Exercising Termination Rights - As Always, Approach With Caution

Introduction

Against the current backdrop of depressed oil prices, companies operating in the oil and gas industry are taking measures to adapt to a new 'normal', such as streamlining their portfolios to focus resources on core business units or jurisdictions. That may in turn necessitate withdrawals from certain contracts that are no longer economically viable or profitable.

Companies wishing to bring a contractual agreement to an end generally have two options available to them: (i) terminating in accordance with any express contractual provisions; or (ii) exercising a right to terminate at common law in response to a breach that is sufficiently serious so as to be 'repudiatory'.  The recent decision in Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC [2016] EWHC 525 (Comm) highlights the interplay between contractual and common law termination rights, in particular as regards whether it is necessary to give notice of termination under a contractual provision and give the contract-breaker time for the breach to be remedied, where there has been a repudiatory breach.  

Parallel termination rights

Express termination clauses tend to be the innocent party's first port of call. However, they may very well not be a complete code, if they do not displace the common law consequences of a 'repudiatory breach of contract' - a fundamental breach which deprives a party of substantially the whole benefit of the contract, such as a refusal to perform any contractual obligations. In the event of such a serious breach, the injured party may be entitled to exercise a parallel right to terminate at common law.  

The right to terminate for repudiatory breach must be excluded expressly through clear words. It is not just deemed to have been abandoned because there is an express termination clause that the parties adopted. In Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, the Court of Appeal noted that the parties to any contract:

"... enter into negotiations in the expectation that if one of them commits a breach which goes to the root of the contract in the sense just described, the other will be entitled to recover damages for the loss of his bargain. The parties may, of course, agree to depart from that position, but that is the point from which they start."

Whether the common law right of termination has been excluded will depend on the particular contract. To bring a contract to an end at common law, the innocent party must 'accept' the repudiation.  That requires an overt act that is plainly inconsistent with the contract continuing in force. There is no requirement that accepting a repudiation must be done in writing, though it is of course safest to do so.  The innocent party must make a choice: if it does not accept the repudiation, it may be taken to have affirmed the contract, thus waiving the breach. But once a repudiatory breach has been accepted, the contract comes to an end with immediate effect. 

Do contractual notice requirements apply to termination rights at common law?

Vinergy v Richmond was an appeal against an arbitration award, as the parties had not excluded the right to appeal on a point of law in the circumstances permitted by Section 69 of the Arbitration Act 1996.

The High Court was called upon to determine whether a buyer's repudiatory breach of a master service agreement allowed the supplier to terminate the contract at common law, and in doing so bypass the clauses in the contract requiring it to give notice to the breaching party as well as an opportunity to cure the breach.

The arbitral tribunal found that three repudiatory breaches had been committed by the buyer:  a breach of the exclusivity provisions of the agreement and two breaches of payment obligations. Each of these breaches permitted the supplier to lawfully terminate the agreement at common law.

Clause 17.1.1 was at the heart of the dispute. It stated that:

"... failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days".

Richmond had terminated without giving notice under that provision. Vinergy had not, therefore, been given the opportunity to remedy the breaches that the contract seemed to envisage.

In the High Court, Vinergy argued that Clause 17.1.1 and the requirement for serving notice showed that the parties had intended that breaches would only be sufficiently serious if they had not been cured after a notice had been served.  Moreover, the clause said that it applied to a failure "... to observe any of the terms ...", which might cover a repudiatory breach as well.  In support of that contention, Vinergy relied on a statement by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC)

"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."

Vinergy also relied on a Court of Appeal decision relating to a construction contract, Lockland Builders v Rickwood (1995) 46 Con LR 92 (CA). In that case, the contract entitled the employer to terminate for delay or defective materials by serving notice and complying with a contractual procedure. The employer did not do that, and instead sought to terminate for repudiatory breach. The Court of Appeal noted that:

"[the clause requiring notice] did impliedly preclude [the employer] from terminating the contract on the facts of the present case otherwise than by the exercise of his rights under [the clause] since the complaints made fell squarely within the scope of [the clause], i.e. complaints as to the quality of materials and workmanship. However, [the clause] would not have done so in relation to breaches outside the ambit of [the clause], e.g. by [the contractor] walking off the site when the works were still substantially incomplete."

The High Court upheld the arbitral tribunal's decision and disagreed with Vinergy.  Teare J approached the construction of Clause 17.1.1 differently.  He found that the provision did not expressly extend to repudiatory breaches. The parties had simply said that a breach of any of the provisions of the contract that had not been remedied within a period of 20 days from the relevant notice gave rise to a termination right (under that particular provision). Clause 17.1.1 could only extend to repudiatory breaches if a term to that effect could be implied. He decided against implying this, for a number of reasons:

- Clause 17.1.1 could apply to minor breaches. There was no reason why a requirement that applied to breaches that did not have serious consequences should also be made to apply to serious, repudiatory breaches.

- Clause 17 as a whole also created a termination right in respect of five other specific breaches - including insolvency. The cure period of 20 days did not apply to any of the other five grounds, so there was no reason to think that the parties had intended for it to operate 'across the board', including to repudiatory breaches. 

No term could therefore be implied. The judge found that as drafted, this provision applied only to breaches which were in fact capable of being remedied. The two failures to pay were remediable, but the breach of the exclusivity provision (caused by the buyer secretly contracting with a different supplier for the supply of cargoes) was not, as the arbitrators had decided. It was this breach that permitted the supplier to avail itself of its common law termination rights.

Discussion

Teare J decided the matter on a point of interpretation, by determining which types of breaches the clause requiring notice and a cure period applied to based on the contract wording. He did not think that any of the authorities laid down a legal principle, but if he was wrong and there was a legal principle after all, it would be that "... a clause requiring notice to remedy applies to breaches within the scope of the clause." Repudiatory breaches are not, therefore, immune from being caught by notice or cure period provisions. 

Difficulties could arise where a contract requires a specific notice or a cure period for termination following a 'material' or substantial breach. 

In Crane Co v Wittenborg A/S [1999] All ER(D) 1487, the Court of Appeal considered a clause that read:

"B. Either party shall be entitled forthwith to terminate this Agreement by written notice to the other if that other party commits any substantial breach of any of the provisions of this Agreement and in the case of breach capable of remedy fails to remedy the same within 90 days of receipt of a written notice giving full particulars of the breach and requiring it to be remedied."

The Court of Appeal found that substantial meant the same as repudiatory:

"'Substantial' deprivation of the intended contractual benefit is after all one way in which the test of repudiatory breach is often expressed.  ... I therefore consider that substantial should be read as equivalent to repudiatory."

It might well follow that, where the contract includes a similar clause, a repudiatory breach would be caught by a requirement for a cure period if it were remediable. Whether a repudiatory breach is remediable is a question which (as so many others) depends on the facts of the case.  For instance, even an outright refusal to perform any further obligations under the contract (a good example of a repudiatory breach in the form of a renunciation) might be remedied if the contract breaker changes their mind and resumes performance following a contractual notice. So while the common law right to terminate is very frequently present, it provides no guarantee for risk free and immediate termination even where it has arisen. The contractual termination provisions still have to be reviewed carefully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.