Legal Q&A
Legal Q&A: Termination
Anita Crozier, Associate, CMS Cameron McKenna Nabarro Olswang
How much will it cost?
THE very recent case of Dalton Group Limited v City of Edinburgh Council (2023) CSOH 4 dealt with the thorny issues of repudiation and liability around termination. A party to a contract can easily find itself in a situation where the other party indicates that it is not going to perform its obligations. Such a refusal to perform plainly goes to the root of the contract and is generally considered to be a repudiation of the contract. However, repudiation does not terminate the ‘innocent’ party’s obligations automatically. Instead, it gives the innocent party a choice (1) to accept the repudiation and treat therefore the contract is terminated; or (2) to affirm the contract and insist upon performance.
Here, faced with a repudiatory breach, the claiming party said it had affirmed the contract so as to keep it on foot. Whereas the defending party said the contract had been lawfully terminated and it wanted to rely on a termination for convenience clause to provide a limit on its liability, but this defence was rejected. The case is discussed below.
The facts
Dalton Group was the exclusive purchaser of Edinburgh City Council’s scrap metal. A dispute arose regarding the degree of contamination of the scrap being purchased – with Dalton alleging numerous incidents of hazardous gas pressurised cannisters being present in the scrap. There was an email exchange between the parties, following which Dalton claimed deliveries of scrap stopped (whilst the council claimed Dalton refused to accept the scrap). However Dalton said this wrongful repudiation was not accepted by it and that the contract continued.
Before the court heard evidence to determine the issues, the council raised a preliminary issue concerning the effect of a termination for convenience clause, allowing the council to terminate at any time by giving three months’ notice. Given the council had this right to terminate, it argued that any damages should be assessed by the least burdensome method of lawful termination and therefore limited to three months’ worth of loss of profit, rather than loss of profit for the time left to run of the contract.
The decision
It can often be difficult to establish if a party has repudiated a contract as opposed to merely breaching it. Each case turns on its own facts, circumstances and precise terms of the contract when determining the effect of termination rights.The court rehearsed the well-established position that in an action for damages for breach of contract, the claiming party is entitled to recover damages which would put it in the position that it would have been in had the defending party fulfilled its contractual obligations.
Where, therefore, the breach of contract consists of a wrongful termination, the claiming party’s damages will be assessed on the basis that the defending party would have lawfully terminated the contract.
Here, the court acknowledged Dalton’s position was that the contract had never been terminated (whether lawfully or unlawfully), given Dalton had never accepted the council’s wrongful repudiation.
It further acknowledged that the council could have exercised the termination provisions of the contract, but it chose not to.
The court therefore concluded that “in these circumstances [where the contract has not been terminated] there is simply no room for the principle contended for by [the council], that damages fall to be assessed by reference to the lease burdensome method of lawful termination”.
As a result, the council faced a full claim for loss of profit, not limited to the period of three months within the termination for convenience clause.
The conclusion
It can often be difficult to establish if a party has repudiated a contract as opposed to merely breaching it. Each case turns on its own facts, circumstances and precise terms of the contract when determining the effect of termination rights. A party needs to be aware that its actions or inactions may innocently or carelessly terminate a contract, opening it up to potentially costly legal consequences.
If a party is looking to terminate its contract early, it needs to be alive to key practical issues and clearly communicate its intention to terminate (in line with the contract provisions). Furthermore, if the party wants to prevent a breached contract from continuing, it needs to be careful not inadvertently to affirm the contract through conduct.
This case is also an example of when a termination for convenience clause did not provide a limit on liability for wrongful termination and allowed a large claim for damages to be taken.
However, parties should also be aware of the competing approaches taken by the courts and the possibly limiting effect that termination for convenience clauses may have on the recoverability of losses arising on termination. For example in Comau v Lotus Lightweight (2014) EWHC 2122, where the mere existence of a termination for convenience clause was sufficient to eliminate a right to claim for loss of profit. Suffice to say the law in this area may see further development in decisions to come.
Anita Crozier, Associate, CMS Cameron McKenna Nabarro Olswang