EARLY TERMINATION OF RESOURCE, ENERGY AND

Transcription

1 EARLY TERMINATION OF RESOURCE, ENERGY AND OTHER LONG-TERM CONTRACTS John Randall QC St Philips Chambers 1 Termination at Common Law 1 : some revision 1.1 Conventional (post Hong Kong Fir) tri-partite categorisation of contractual terms Conditions in the strict sense As Treitel 2 puts it (at ): If a contractual term relates to a substantial ingredient in the identity of the thing sold, it will be classified as a condition, and its breach will entitle the victim to terminate, on the basis that it would be unjust to require him to accept and pay for something which differed in an important way from that for which he contracted. theoretically possible re minor matters: o Bettini v Gye (1876) 1 QBD 183 per Blackburn J at 187: Parties may think some matter, apparently of very little importance, essential; and if they sufficiently express an intention to make the literal fulfillment of such a thing a condition precedent, it will be one o Gumland Property Holdings v Duffy Brothers [2008] HCA 10 at [53] & [58]: very clear words are required, but under [general] contractual principles it is possible by express provision in the contract to make a term a condition, even if it would not be so in the absence of such a provision not only in order to support a power to terminate the contract but also to support a power to recover loss of bargain damages o Lombard North Central v Butterworth [1987] QB 527 per Mustill LJ at (by making time essential) discussed by Furmston 3 at 7.43, and Opeskin (1990) 106 LQR 293 at Judicial reluctance so to construe a contractual provision: 1 This talk is based on English and Australian law save where otherwise stated 2 Treitel, The Law of Contract, 13 th edn (2011) 3 The Law of Contract, ed Furmston, 4 th edn (2010) 1

2 1.1.2 Mere warranties o Wickman v Schuler [1974] AC Innominate or intermediate terms (Hong Kong Fir v Kawasaki [1962] 2 QB 26 4 ) General judicial preference (but not always: cf Bunge v Tradax [1981] 1 WLR 711 at 715E Lord Wilberforce) Wide variety of verbal formulations of test for whether a breach is sufficiently serious to justify termination, often by reference to doctrine of repudiation (Furmston op cit, 7.15 at fn 7) because repudiation often implied from actual breach(es) o o o o Substantially the whole benefit (older cases) Going to the root of the contract To constitute repudiation, the threatened breach must be such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract Decro-Wall International v Practitioners in Marketing [1971] 1 WLR 361 at 380A per Buckley LJ 5 A substantial part of the totality (Rice v Great Yarmouth BC [2001] 3 LGLR 4 (p41) CA at [38]) Treitel (op cit at ) well summarises the position with regard to the law s judgment as to when a failure to perform / a breach is substantial : The question when a failure in performance is sufficiently serious to entitle the injured party to terminate gives rise to very great difficulty. The frequent references in the cases to breaches which substantially deprive a party of what he bargained for, or go to the root of a contract, or which frustrate his purpose in making the contract are not particularly helpful in analysing the law or in predicting the course of future decisions. the courts generally classify a failure in performance with an eye on the consequences If, on balancing [the need to protect the injured party and the prejudice caused to the other by termination]... they conclude that the injured party should be allowed to terminate, they will classify the failure in performance as substantial in order to produce the desired result 4 Confirmed as also reflecting Australian law by the High Court of Australia in Koomphatoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61, 233 CLR Notwithstanding the opinion expressed by Lord Wilberforce in Federal Commerce and Navigation Co. Ltd. v Molena Alpha Inc. (The Nanfri) [1979] AC 757 at 779C-D that there is no divergence of principle between this formulation and that of Buckley L.J. in Decro-Wall International cited above, it is suggested that the older formulation clearly presented a higher threshold for the innocent party to overcome, a view apparently supported by Lewison L.J. in Ampurius Nu Homes Holdings Ltd. v Telford Homes (Creekside) Ltd. [2013] EWCA Civ 577, [2013] 4 All E.R. 377 at [48] 2

3 o The learned author goes on (at to ) to identify the various factors which will influence the Court s crucial judgment on this question in any given case. These include adequacy of damages as a remedy for the innocent party, the ratio of failure to the performance undertaken, uncertainty as to future performance, and ulterior motives on the part of the terminating party (generally, seeking to get a better bargain following movements in the market). 1.2 In addition to actual breaches, anticipatory breach It will be recalled that either an unequivocal and communicated refusal (or assertion of inability) of performance when due in the future (a.k.a. a renunciation), or a clearly established inability to perform (a.k.a. impossibility), entitle (but do not oblige 6 ) the innocent party to terminate, without waiting for the date on which actual performance is due to arrive. However, as was famously observed by Asquith LJ in Howard v Pickford Tool Co Ltd [1951] 1 KB 417 at 421: an unaccepted repudiation is a thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind (emphasis added). It follows that unless and until the anticipatory breach is accepted by the innocent party, it is the other party s right (as it may be expressed) to change his attitude and become willing to perform or (as the case may be) remedy his inability to perform when the due time arrive (though may result in an estoppel: viz Peter Turnbull v Mundus Trading [1954] HCA 25, 90 CLR 235). 1.3 For a different 3 part analysis (to similar ultimate effect): see Rice v Great Yarmouth BC supra at [35]-[36] per Hale LJ: (1) Term breached is equivalent to a strict Condition (2) Renunciation However (though not mentioned in Rice supra): Clearly goes beyond simply walking away (Rice [35]); Furmston op cit at 7.20 refers to an intimation that [the promisor] will perform the contract in a manner which is substantially different from that required as amounting to a renunciation; Lord Wright in Ross T Smyth v Bailey [1940] 3 All ER 60 at 72B: 6 A principle recently reaffirmed by the UK Supreme Court in Société Generale v Geys [2012] UKSC 63, [2013] 1 AC 523 3

4 the party alleged to have repudiated may intend in fact to fulfil [the contract], but may be determined to do so only in a manner substantially inconsistent with his obligations, and not in any other way Fullagar J in Carr v JA Berriman Pty Ltd [1953] HCA 31, 89 CLR 327 said, with reference to the facts of that case (at 351): "A reasonable man could hardly draw any other inference than that the [other party] does not intend to take the contract seriously, that he is prepared to carry out his part of the contract only if and when it suits him In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23, 166 CLR 623 Mason CJ said : [22] There is a difference between evincing an intention to carry out a contract only if and when it suits the party to do so and evincing an intention to carry out a contract as and when it suits the party to do so. In the first case the party intends not to carry out the contract at all in the event that it does not suit him. In the second case the party intends to carry out the contract, but only to carry it out as and when it suits him. It is much easier to say of the first than of the second case that the party has evinced an intention no longer to be bound by the contract or to fulfill it only in a manner substantially inconsistent with his obligations and not in any other way. But the outcome in the second case will depend upon its particular circumstances, including the terms of the contract. In some situations the intention to carry out the contract as and when it suits the party maybe taken to such lengths that it amounts to an intention to fulfil the contract only in a manner substantially inconsistent with the party's obligations and not in any other way In assessing whether a party s words and conduct are such as to found an inference of repudiation, the (objectively inferred 7 ) risk of repetition of breaches in the future is an important consideration (Chitty on Contracts 8 at citing Maple Flock v Universal Furniture [1934] 1 KB 148; and see also Rice v Great Yarmouth BC supra at [38]); (3) Cumulative breaches: the test is severe (Rice v Great Yarmouth BC supra at [36]). 1.4 Provided the termination is communicated clearly and unequivocally, no particular form of communication is required: 7 See Furmston op cit at st edn. (2012) 4

5 1.4.1 Normally will be express, or by clear implication; Exceptionally, silence (really conduct/absence thereof 9 ): Vitol SA v Norelf Ltd (The Samta Clara) [1996] AC 800 at per Lord Steyn (cited in Shell Egypt v Dana Gas [2010] EWHC 465 (Comm) at [31(i)]; summarised in Furmston op cit at 7.29). 2 Express Termination Clauses (ETCs) 2.1 Purpose for inclusion ETCs are of particular practical importance where the contract is intended to operate over a long period of time, which is true of many resource and energy contracts. It is no coincidence that several of the leading cases in this area concern long-term contracts. The purposes for which ETCs may be included in a contract are many and various The principal one, to which Treitel op cit draws attention (at ) is to prevent disputes from arising as to the often difficult question whether the failure in performance is sufficiently serious to justify termination; and they take effect even though there is no substantial failure. The event entitling a party to terminate may not even constitute a breach at all, although generally it will. Certainty is served by making consideration of Treitel s question of very great difficulty unnecessary, at least for the initial purpose of deciding whether or not there is a right lawfully to terminate the contract. However, as is discussed below this certainty may come at a price to the terminating party, and the difficult question may still have to be addressed subsequently Another, less high-minded, purpose for which an ETC is often included in a contract is to entitle the party with its benefit to terminate in circumstances where it is unlikely that it would be so entitled at common law. However, the counterpoint to this is a judicial tendency to construe such clauses narrowly, and (where they are nevertheless held operable) so as to limit the extent of the benefit which they confer (see e.g. 2.2 above and 7 below). 2.2 Wording of the termination clause: Judicial reluctance to construe an ETC as entitling termination for a minor breach (similar to reluctance to construe an express term as rendering a minor obligation a strict Condition see above, citing Wickman v Schuler): 9 More specifically, the failure of Norelf to take any further step to perform the contract which was apparent to Vitol, and from which Vitol knew that Norelf was treating the contract as at an end 5

6 Antaios Cia Naviera SA v Salen Rederierna AB [1985] AC In failing punctual and regular payment of the hire or on any breach the words underlined (by me) were construed as meaning or on any repudiatory breach Rice v Great Yarmouth BC supra, where If the Contractor.. commits a breach of any of its obligations under the Contract (giving rise to a contractual right to terminate) was held to mean... commits a repudiatory breach of Similarly Dominion Corporate Trustees Ltd v Debenhams Properties [2010] EWHC 1193 (Ch), Kitchin J a literal construction of a clause in an agreement for lease whereby any breach of the agreement entitled the innocent party to terminate was rejected as flouting business common sense See discussion in Furmston op cit at The exact wording of the clause must be satisfied before an ETC will be held to have become operable. In MMP v Antal [2011] EWHC 1120 (Comm), the contract provided that MMP should not at any time, do anything to affect adversely [Antal s] name, Trade Marks or other Intellectual property. An ETC gave Antal a right of immediate termination for breach of this clause. Flaux J held (at [77]) that conduct giving rise to a (reasonable) fear that Antal s name or intellectual property would be damaged was not sufficient, and that only proof of actual damage would suffice. 2.3 Effect of termination under an ETC: Chitty 10 rightly doubts the decision in Laing Management v Aegon Insurance (1998) 86 BLR 70 insofar as HHJ Lloyd QC held that after a termination pursuant to an ETC which did not also amount to acceptance of a repudiatory breach the contract remained alive for the benefit of both parties. 11 Surely the true position is that : in both cases [the party terminating] is electing to terminate the contract for the future (i.e. to bring to an end the primary obligations of the parties remaining unperformed) Termination is capable of meaning both a termination pursuant to [an ETC] and the acceptance 10 Op cit at See at 110H-I. In Stocznia v Gearbulk supra, dicta apparently to like effect in the earlier case of UDT v Ennis [1968] 1 QB 54 (CA) was dismissed by Moore-Bick LJ at [28]-[35] as not altogether easy to understand particularly in the light of more recent expositions of the principles governing the law on repudiation and the doctrine of election It should be borne in mind that these were ex tempore judgments delivered at a time when the principles of discharge by breach had not received the detailed analysis and exposition provided in the more recent authorities 6

7 of a repudiation (Dalkia Utitlites v Celtech [2006] EWHC 63 (Comm), [2006] 1 Lloyd s Rep 599 at [143] per Christopher Clarke J), but Some non-primary clauses (e.g. classically arbitration clauses 12 ) are (or are conventionally construed as) intended to survive the termination (in the sense described in the previous bullet point) of the contract which contains them A sounder approach is that of Moore-Bick LJ in Stocznia v Gearbulk [2009] EWCA Civ 75, [2010] QB 27, at [34]: it is impossible for a party to terminate a contract, in the sense of discharging both parties from further performance, whether by invoking a term which entitles him to do so or by exercising his rights under the general law, and at the same time treat it as continuing, since the two are inconsistent. Either the primary obligations remain for performance, or they do not However an earlier dictum in the same judgment (at [20]) is less clear: In my view it is wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. In those cases where the contract gives a right of termination they are in effect one and the same. The intended scope of this dictum is open to debate, and Edwin Peel writing in the Law Quarterly Review 13 questions whether this can be said of cases where (unlike Stocznia v Gearbulk itself) the breach giving rise to a right to terminate under an ETC is not sufficiently serious to give rise to a right to terminate at common law. Issues which arise are considered further below, under Changing Horses/Second Thoughts and Consequences. 2.4 Strict compliance necessary? Chitty op cit suggests that (contrary to some well-known older cases 14, and the position adopted by Treitel 15 ) Strict or precise compliance with the termination clause may no longer be a necessary pre-requisite to a valid termination Heyman v Darwins [1942] AC Affirmation by Termination, (2009) 125 LQR 378 at Including The Mihalis Angelos infra; Madorf Peach & Co v Attica Sea Carriers [1977] AC Op cit at ; also at fn 227. See to similar effect Carter, Termination Clauses (1990) 3 Journal of Contract Law 90, at 101, and the (Australian) authorities there cited 7

8 Consistent with modern approach to notices in context of leases: Mannai Investment v Eagle Star [1997] AC 749 Ellis Tylin v Co-operative Retail Services [1999] BLR 205 per HHJ Bowsher QC at Pan Foods v ANZ Banking Group [2000] HCA 20, 170 ALR 579 per Kirby J at [24] See also Furmston op cit at 7.29: substance of the notice is what matters But in practice, this more liberal approach to the need for strict compliance is seldom in evidence However, so far as time provisions are concerned, the right to give notice of termination under an ETC must not be anticipated, and such a notice given even slightly prematurely is of no effect: The Mihalis Angelos [1971] 1 QB 164 (CA); Afovos Shipping v Pagnan [1983] 1 WLR 195 (HL); Chitty op cit at ; Furmston op cit at In contrast to the common law position, in the recent UK Supreme Court case of Société Generale v Geys 17 Lady Hale SCJ, giving the leading judgment on this issue, stressed the importance of the other party being notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised, and how and when it is intended to operate. 18 This observation was not limited to employment contracts, for she added These are general requirements applicable to notices of all kinds 19 The communication particularly relied on by the bank, which had previously told Mr. Geys that it had decided to terminate [his] employment with immediate effect, 20 was its conduct in making a payment into Mr. Geys bank account amounting to his full entitlement to salary and other allowances under the ETC relied on. This was rejected as insufficient, Lady Hale stating that It is necessary that the employee not only receive his pay in lieu of notice, but that he receive notification in clear and unambiguous terms, that such a payment has been made and in the exercise of the contractual right to terminate with immediate effect. 21 Lord Carnwath SCJ, agreeing after some hesitation, acknowledged that this may seem somewhat formalistic and that Mr. Geys could no doubt readily infer the purpose of the payment 17 Concerning the attempted operation of an ETC in an employment contract 18 [2012] UKSC 63, [2013] 1 AC 523 at [57] 19 Ibid, loc. cit. 20 See ibid at [9] per Lord Hope DPSC 21 Ibid at [58] 8

9 once he became aware of it (which the trial judge found was probably before the crucial date 22 ) Moreover, under many ETCs a notice giving the contract breaker the opportunity to remedy the default 23 within a specified period is required prior to a notice of termination, in which case the prescribed procedure must be strictly followed. 24 In particular: The principle at above is of particular significance The opportunity to remedy must be clearly stated: Western Bulk Carriers v Li Hai Maritime [2005] EWHC 735 (Comm), [2005] 2 Lloyd s Rep 389 per Jonathan Hirst QC as a DHCJ at 406-7, and By parity of reasoning with that in Afovos Shipping v Pagnan supra, the full contractual period for remedy must be allowed before any termination in reliance on it will be valid CASE STUDIES: compare - VITOL SA v NORELF LTD (common law), with SOCIÉTÉ GENERALE v GEYS (E.T.C.) 2.5 Acting reasonably or in good faith necessary? Under English law it is not necessary for a party exercising an ETC to do so reasonably or in good faith: Anson s Law of Contract 25 ; Carter op cit at 103. The position in Australian law may not now be the same: see Renard Constructions v. Minister for Public Works per Priestley JA 26 ; Burger King v. Hungry Jack s 27 ; Paterson, Robertson & Duke, Principles of Contract Law Changing Horses/Second Thoughts 3.1 The general rule is that a promisee may rely on any available ground for termination whether or not known at [the] time of the election to terminate. Thus, the promisee is not usually required to justify an election to terminate on any ground given at the time of the election (Furmston, op cit, at 7.28) 29. See 22 Ibid at [10] per Lord Hope 23 For a valuable discussion as to what amounts to remedying a default in the context of a commercial contract, see Wickman v Schuler [1974] AC Furmston op cit 7.29 at fn 12. See further the discussion of Lockland Builders v Rickwood at 4.2 below th edn (2010), (1992) 26 NSWLR 234 (NSWCA) at [2001] NSWCA 187, 69 NSWLR th edn (2012), Contrast cases where the recipient of a termination notice has sought to argue that the notice must be treated as an election to operate a provision of the contract markedly disadvantageous to the notice giver, although the notice giver neither said nor intended as much: Bridge v Campbell Discount [1962] AC 600; Walkinshaw v Diniz [2001] 1 Lloyd s Rep 632 9

10 British & Beningtons Ltd v North Western Cachar Tea [1923] AC 48 at per Lord Sumner, 30 cited by Lord Denning MR in The Mihalis Angelos supra at 193B, and in the High Court of Australia by Dixon J in Shepherd v Felt and Textiles of Australia [1931] HCA 21, 45 CLR 359. The relevant part of the latter case was approved and succinctly summarised by Latham CJ near the end of his judgment in the leading Australian case of Tramways Advertising v Luna Park [1938] HCA 66, 61 CLR 286 thus: the defendant can justify the repudiation of the contract upon any ground which in fact existed whether or not such a ground was previously relied upon by him. 3.2 Facts known or unknown As has recently been pointed out by Lloyd LJ, although this principle is often used in relation to facts of which the terminating party was unaware until later, there is no reason why it should not be used in relation to facts which were known to that party at the time Exception (1) where an election is involved A recent example of the exceptional position where a party which has served notice of termination under an ETC is thereby treated as bound by an election not to terminate at common law for repudiatory breach is afforded by Shell Egypt v Dana Gas [2010] EWHC 465 (Comm), Tomlinson J. He applied passages from a similar 2006 case, Dalkia Utilities v Celtech supra, where Christopher Clarke J, having recognised that prima facie an innocent party can rely on both a contractual right to terminate and a common law entitlement to accept a repudiatory breach, went on to state that if a notice makes explicit reference to a particular contractual clause, and nothing else, that may, in context, show that the giver of the notice was not intending to accept the repudiation and was only relying on the contractual clause; for instance if the claim made under the notice of termination is inconsistent with, and not simply less than, that which arises on acceptance of a repudiation In the present case markedly different consequences would arise according to whether or not there was a termination under [the ETC] or an acceptance of a repudiation The same notice cannot operate to produce two diametrically opposing consequences. In those 30 Also Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 at 352, 364; Glencore BV v Lebanese [1997] 1 All ER 514 (CA) at 526f; Stocznia v Latco (No 2) [2002] EWCA Civ 889, [2002] 2 Lloyd s Rep 436 at [32], cited with approval in Stocznia v Gearbulk supra at [44] 31 Reinwood v L Brown & Sons [2008] EWCA Civ 1090, [2009] BLR 37, at [51] 10

11 circumstances it should take effect in, and only in accordance with its express terms, namely as a determination under [the ETC] (at [143]-[144]); Again, the judgment of Moore-Bick LJ in Stocznia v Gearbulk supra (in which no such inconsistency was found, leaving the general rule applicable see at [39]-[42]) succinctly summarises the position: If the contract and the general law provide the injured party with alternative rights which have different consequences he will necessarily have to elect between them and the precise terms in which he informs the other party of his decision will be significant, but where the contract provides a right to terminate which corresponds to a right under the general law (because the breach goes to the root of the contract or the parties have agreed that it should be treated as doing so) no election is necessary. In such cases it is sufficient for the injured party simply to make it clear that he is treating the contract as discharged If he gives a bad reason for doing so, his action is nonetheless effective if the circumstances support it (at [44], my underlining). CASE STUDY: Shell Egypt v Dana Gas 3.4 Exception (2) - estoppel/waiver In principle, the ordinary doctrines of estoppel/waiver are available, if on the facts it can be shown (unusually) that the terminating party has made an unequivocal representation (whether by words or conduct) on which the other party has acted to its detriment: Glencore BV v Lebanese [1997] 1 All ER 514 (CA) at 527h-j, 530j. In this context at least, the doctrines come to much the same thing, given that waiver can only apply to qualify the general principle in cases of, in effect, estoppel 32 ; Despite earlier authority apparently to the contrary, 33 in English law there is no wider doctrine whereby termination notices may be held invalid on the ground that reliance on them would be unfair or unjust: Glencore BV v Lebanese supra at 529a-531c. 34 Consequences of ETCs (1) Loss of common law rights? 4 In general, contractual rights of termination are treated as additional rights, not given in substitution for common law rights (Furmston 35 ). Examples of cases applying or recognising this principle abound, and include Union Transport Finance v British Car Auctions [1978] 2 32 per Lloyd LJ in Reinwood v L Brown & Sons [2008] EWCA Civ 1090, [2009] BLR 37, at [51] 33 Panchaud Frères v Etablissements General [1970] 1 Lloyd s Rep 53 (CA) 34 Though as to the less certain position under Australian law see 2.5 above 35 Op cit, at 7.7 (and repeated at 7.29) 11

12 All ER 385 (CA), 36 Afovos Shipping v Pagnan [1983] 1 WLR 195 (HL), 37 and Lombard v Butterworth [1987] QB 527 (CA) Exceptionally, however, express provision in a contract can expressly or impliedly exclude a common law right to terminate in respect of a breach falling within the scope of that provision: Whether the procedure laid down for termination in the contract excludes, expressly or impliedly, the common law right to terminate further performance of the contract in respect of a breach which falls within the scope of the clause is a question of construction of the contract. When interpreting [such a termination clause] the court will have regard to the commercial purpose which is served by the termination clause and interpret it in the light of that purpose examples where implied exclusion of the common law right in respect of actual breaches was, exceptionally, found: Lockland Builders v Rickwood (1996) 77 BLR 38 (CA), the example cited in Chitty op cit at fn 210, from which the following points may be noted: o The building owner s reliance on the common law right was, in effect, an attempt to avoid the opportunity given to the builder by the ETC to rectify its breaches within a specified period of a notice before a termination notice could be served 40 o The ETC was not expressed to be without prejudice to the owner s rights at common law 41 o The ETC was not construed as excluding all rights to terminate at common law, but only rights to terminate in respect of a breach falling within the scope of the ETC o Both Russell and Hirst LJJ noted that the clause would not have been construed as having impliedly excluded the right to terminate if the contract breaker had evinced a clear intention not to be bound by the terms of the contract, 42 in other words a repudation by renunciation 36 See at 392a-b per Bridge LJ 37 See at 201 per Lord Hailsham LC 38 See at 543C-545F per Nicholls LJ 39 Chitty op cit at As to which note BSkyB v HP Enterprise [2010] EWHC 86 (TCC), Ramsey J at [1366], final sentence. Schuler v Wickman supra can be viewed as another such case, given the presence of the ETC in clause 11(a) of the contract there under consideration (see at 249C-G, 252A-C (& 264A-B), 260A-B and 271C-H. 41 And compare Schuler v Wickman supra per Lord Morris at 259G-H 42 See at 46 and 50 respectively 12

13 rather than simply actual breaches (as to which see the discussion at above) Crane and Co v Wittenborg (CA, unreported, 21 December 1999), where it was held that a provision in a charterparty which expressly dealt with what the parties were entitled to do in the event of any substantial breach terminate immediately by notice in the case of a non-remediable substantial breach and give notice triggering a period for remedy where the breach was remediable did provide a complete code for the parties rights in the event of a repudiatory breach. This was because (per Mance LJ at [21]) the Court found doubted whether there is any distinction to be drawn between a substantial breach required by the clause and a breach of condition or repudiatory breach. The majority decision on this point in the Federal Court of Australia in Amman Aviation v Commonwealth [1990] FCA per Davies J at [11]- [15] & Sheppard J at [2]-[15]. 4.3 An ETC may also operate so as, in effect, to set a minimum level of seriousness required before a breach of an innominate or intermediate term may be relied on as justifying termination at common law: circumstances otherwise within the scope of the [ETC] but falling short of the precise terms would in my judgment not give rise to the right to terminate at common law to justify termination at common law something worse or not addressed by those provisions would be required per Langley J in Amoco (UK) Exploration v British American Offshore [2001] All ER (D) 244 (Nov) at [104] if a breach of a term had to reach a degree of seriousness before [an ETC] could be applied, it is unlikely that a breach which was less serious would, by itself, amount to a repudiatory breach per Ramsey J in BSkyB v HP Enterprise [2010] EWHC 86 (TCC), at [1366]. CASE STUDY: Amoco (UK) Exploration v British American Offshore 4.4 The general presumption, however, is, reflecting the opening paragraph 4 above, that an ETC does not exclude the parties common law right to accept a repudiatory breach of contract unless there are clear words to that effect: Dalkia Utilities v Celtech supra at [21], and compare e.g. South Oxon DC v SITA 43 A case better known for the subsequent appeal to the High Court of Australia on issues relating to damages and remedies [1991] HCA 54, 174 CLR 64 13

14 [2007] Env LR 13 at [174]-[178] per David Steel J (insufficient indication that the ETCs in that case contained a complete code for termination in the relevant area). CASE STUDY: Dalkia Utilities Services v Celtech International Consequences of ETCs (2) Need the termination be immediate? 5 Hitherto, 44 the conventional view of the position at common law has been that termination by acceptance of a repudiation has to be with immediate effect upon communication of that acceptance, even though in some circumstances this may seriously detract from the commercial value of the right for the innocent party. In some contracts (e.g. for the longterm provision of a service, which the promisee itself owes a legal obligation to others to provide that same service) it is not practically possible to give notice of acceptance of a repudiatory breach so that the contract terminates immediately. The taking of preparatory steps for the service to be provided by another in advance of an acceptance (with immediate effect) of the repudiatory breach would involve the innocent party itself running the risk of being accused of repudiating the contract, and losing its potentially important right to loss of bargain damages. In contrast, an ETC may well provide for the right to terminate being exercisable or taking effect upon the expiration of a specified period of notice or at a specified future date: Anson op cit at ; compare e.g. the ETC in Walkinshaw v Diniz [2001] 1 Lloyd s Rep 635, which the driver Mr Diniz sought to exercise Unlike an anticipatory breach (as to which see 1.2 above), an actual breach does have immediate legal effects, if only to give rise to a cause of action for damages. If the breach is serious enough, or of a Condition, it may also give rise to a right to terminate at common law. In this situation, although it has been said that there is no via media for the innocent party, who must elect between affirmation and termination, the law does give the innocent party a reasonable time before he has to make up his mind between these inconsistent courses. As Rix LJ put it in Stocznia v Latco No 2) [2002] EWCA Civ 889, [2002] 2 Lloyds Rep 436 at [87]: there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to 44 But see now at 5.7 below 45 See headnote at 632 for clauses 7.1, 9.2(b) and 9.4, and the judgment of Tomlinson J at [46] for the exercise of the ETC, and at [106] for the judge s conclusion (decision upheld on appeal (without these points being challenged) at [2002] EWCA Civ 180, [2002] 2 Lloyd's Rep 165). See further at 5.5 below 14

15 treat it as repudiated if his contract partner persists in his repudiation he has not yet elected In the case of an actual breach of contract, it is the proper construction of the communication (here, an express written communication) that determines whether the innocent party has clearly and unequivocally communicated its intention either to treat the contract as at an end or, as the case may be, to affirm. In Yukong Line v Rendsburg Investments [1996] 2 Lloyd s Rep 604 at 608 Moore-Bick J took the view that the Court should not adopt an unduly technical approach to deciding whether the injured party has affirmed the contract and should not be willing to hold that the contract has been affirmed without very clear evidence that the injured party has chosen to go on with the contract notwithstanding the other party s breach. 5.3 In order to amount to an affirmation, the communication in question must have been an unequivocal representation to the effect that the innocent party was unreservedly electing to continue with the contract, made either expressly or by implication from actions, or statements of an intention to act in a manner, inconsistent with accepting the breach as discharging it from further performance see Yukong Line v Rendsburg Investments supra at 608 and Cobec Brazilian Trading & Warehousing Corpn v Alfred C Toepfer [1983] 2 Lloyd s Rep 386, 393 (CA). 5.4 In Harrison v Norwest Holst Group Administration Ltd [1985] ICR 668 CA an employee complained of unfair dismissal based upon an anticipatory repudiation in the form of a demotion to take effect from a specified future date, communicated to him by his employer. However, although the employer had been in anticipatory repudiatory breach, it was held that the employee had not (in the letter he relied on) unequivocally accepted such repudiation before the breach had been remedied by the employer withdrawing the demotion (which it did before the specified future date had arrived). Hence the following passage from the judgment of Sir Denys Buckley at 683, though important, was clearly obiter: 46 Here again, the law s flexibility produces uncertainty for the resolution of any given case (cp the citation from Treitel at above). As the Law Commission has recently put it in the context of Sale of Goods, The flexibility of the factual approach to a reasonable period allows a great number of factors to influence the court, helping it to achieve a fair result in the individual case. However, this flexibility means that it is often not possible to predict whether the reasonable period has expired in a given case (Consultation Paper No 188 (October 2008), Consumer Remedies for Faulty Goods, Part 3, The Right to Reject in UK Law, at 3.2) 15

16 The effect of an acceptance of an anticipatory repudiation must, in my view, be the immediate termination of the contract. By accepting a repudiation, the innocent party elects to treat the contract as abrogated at the moment when he exercises his election. He cannot, in my judgment, affirm the contract for a limited time down to some future date and treat it as abrogated only from that future date This dictum was applied by Tomlinson J in Walkinshaw v Diniz supra at [51]. This was a case brought by a Formula 1 racing driver, Mr Diniz, against (in effect) the Arrows team. The defendant unsuccessfully argued that the driver s (allegedly ineffective) notice to terminate under an ETC at the end of the calendar year was itself a repudiatory breach, which the employer had accepted as terminating the contract not immediately but after the last race of the F1 season. One of the grounds on which this argument was rejected was that, in accordance with the above dictum of Sir Denys Buckley, an acceptance postponed so as to take effect on a future date was not possible in law. 5.6 An argument that the law s requirement that an acceptance must be with immediate effect is limited to cases of anticipatory breach was rejected in South Oxon DC v SITA supra at [168], David Steel J holding that there was no relevant distinction in this regard between actual breaches and anticipatory breach. 5.7 ETCs therefore have a distinct advantage over the common law right for the injured party in such cases. However there are early signs that there may be a judicial willingness to develop the common law in this regard. In Shell Egypt v Dana Gas supra Tomlinson J (now LJ), having acknowledged that he himself had applied the principle formulated by Sir Deny Buckley in Harrison v Norwest Holst (set out in 5.4 above) in Walkinshaw v Diniz supra, intriguingly continued (at [27]): There must I think be limits to that principle, which did not need to be explored in either of those two cases. It would perhaps be surprising if there were an inflexible rule that an acceptance of a repudiation can only be effective if it purports to bring about immediate termination in circumstances where the contract calls for no performance from either party in the interval 47 To similar effect, in one of the leading Australian judgments on the termination of contracts at common law, Jordan C.J. (N.S.W.) said that such a termination when communicated is at once operative : Tramways Advertising v Luna Park (1938) 38 S.R. (N.S.W.) 632,

17 before termination is expressed to take effect. In such circumstances there would surely be no affirmation. Consequences of ETCs (3): Can the right to terminate be exercised in advance of the time when the relevant performance becomes due? 6 By contrast, in this respect the common law affords greater flexibility to the innocent party. 6.1 In the case of an anticipatory breach (of either type mentioned at 1.2 above), there is a common law right to terminate with immediate effect, and without waiting for the time when actual performance is due to arrive; 6.2 By contrast, the wording of most ETCs links the right to terminate to actual breaches (see above), and, as explained at above, the right to give notice of termination under an ETC must not be anticipated, and such a notice given even slightly prematurely is of no effect. Consequences of ETCs (4) Measure of damages 7 By loss of bargain damages, I mean compensation for loss of the benefit of the other party s future performance. Given the notorious volatility of world energy prices over the years, in a long-term contract the sums at stake can be huge. 7.1 Are loss of bargain damages only recoverable on a termination at common law? Where a contract is terminated by acceptance of a repudiation of the contract, the innocent party can ordinarily recover loss of bargain damages. That may well apply even where other remedies are also available to, and claimed by, the innocent party (for example, an express right to recover an instalment already paid, as in Stocznia v Gearbulk, supra), provided its recovery is not inherently inconsistent with a claim for loss of bargain damages (for example, a claim for the recovery of wasted expenditure) As to the position where the termination takes place pursuant to an ETC on grounds which do not also amount to a common law repudiation, Chitty puts it thus: [W]here a contracting party terminates further performance of the contract pursuant to a term of the contract, and the breach which it has caused it to exercise that power is not a repudiatory breach, the party exercising the right to terminate may only be entitled to recover damages in respect of the loss which it has suffered at the date of termination and 48 For a more detailed discussion of the issues raised see Randall, Express Termination Clauses in Contracts [2014] CLJ 112,

18 not for loss of bargain damages 49 (emphasis added). I would suggest that in Australian law (see Shevill v Builders Licensing Board infra), and (at least until recently 50 ) English law too, 51 the position is more clear cut, and absent an express contractual provision for the recovery of loss of bargain damages alongside the ETC, they are not recoverable As Chitty notes, 52 the highest appellate courts in Commonwealth jurisdictions have taken different views on the point In giving the judgment of the Supreme Court of Canada in Keneric Tractor Sales v Langille (1987) 43 DLR (4 th ) 171, Wilson J opined (at paragraph [25]): damages should be assessed in the same way in both cases. Repudiation may be triggered by either the inability or the unwillingness of a party to perform his contractual obligations. The same is true of a breach of contract that gives rise to a right to terminate; it may be the result of inability or unwillingness to perform. The breach and the repudiation are merely subdivisions within a general category of conduct, i.e., conduct which gives the innocent party the right to treat the contract as terminated. Thus, there is no conceptual difference between a breach of contract that gives the innocent party the right to terminate and the repudiation of a contract so as to justify a different assessment of damages when termination flows from the former rather than the latter. General contract principles should be applied in both instances. By contrast, in Shevill v Builders Licensing Board [1992] HCA 47, 149 CLR 620 the High Court of Australia held that where a contract is terminated pursuant to an ETC on grounds which do not also amount to a common law repudiation, prima facie loss of bargain damages are not recoverable. As Gibbs CJ observed at [8], it does not follow from the fact that the contract gave the [innocent party] the right to terminate the contract that it conferred on it the further right to recover damages as compensation for the loss it will sustain as a result of the failure of the [other party s performance] for the rest of the [contractual] term Of course, the contract may include alongside an ETC an express provision entitling the party terminating under the ETC also to recover damages for 49 Op cit, at Though see now Kuwait Rocks Co. v AMN Bulkcarriers Inc. (The Astra) [2013] EWHC 865 (Comm), [2013] 2 Lloyd s Rep. 69, as to which see Randall, fn. 48 above, at See Financings v Baldock [1963] QB 104 (CA) at , and Op cit, at , esp fn

19 loss of the other party s future performance. In principle such a clause is effective, unless it is invalid under the common law rule against penalties. Provided the recovery expressly provided for is not extravagant, and follows the sort of recovery which the common law would allow, it is unlikely to be caught by that rule: see e.g. Esanda Finance v Plessnig [1989] HCA 7, 166 CLR 131, and Dalkia Utilities v Celtech supra at [122] (clauses not penal); contrast Financings v Baldock [1963] 2 QB 104 (CA), AMEV-UDC Finance v Austin [1986] HCA 63, 162 CLR 170, and Dalkia Utilities v Celtech supra at [123] (clauses penal) CASE STUDY: Dalkia Utilities Services v Celtech International It is suggested that, consistently with the rule that the terminating party may rely on any available ground for termination which was in fact available at the time of termination, whether or not known, and whether or not previously relied upon by him (see 3.1 & 3.2 above), if a party who served a notice of termination relying (only) on an ETC was in fact also entitled to terminate at common law for a repudiation, then: he may subsequently rely on the latter right, and accordingly recover loss of bargain damages in the usual way: see Progressive Mailing House v Tabali [1985] HCA 14, 157 CLR 17, and Stocznia v Gearbulk supra (in particular in respect of the termination letters re hulls 24 and 25) at [44]-[45], and at least where the grounds for termination under the ETC and the common law were the same, any argument that the effective cause of his loss was not the other party s breach, but his own decision to exercise his rights under the ETC will be rejected, on the grounds that such a contract proceeds on the footing that if the innocent party chooses to exercise his rights under the ETC, the other party s breach is to be viewed as the effective cause of the contract s termination (Stocznia v Gearbulk supra at [36]; quaere the legitimate scope of the contrary views expressed by Opeskin in his (earlier) article Damages for breach of contract terminated under express terms (1990) 106 LQR 293 at 315 (text to his fn 97, and accompanying citations) A related issue may arise with regard to the terminating party s so-called duty to mitigate his loss. A breach of this duty (by failing to take reasonable action to avoid the loss) will be taken to break the chain of causation between the breach and the loss. 19

20 In the case of The Solholt [1983] 1 Lloyd s Rep 605 (CA) a buyer exercised a right under an ETC to terminate its contract to purchase the eponymous vessel (or US$5M) for (very slightly) late delivery, despite (i) the sellers having repeatedly sought a short extension of time to enable the sale to go through (at the contract price), (ii) the buyers still needing such a vessel, (iii) nothing being shown to be wrong with The Solholt, and (iv) its market value having risen since the contract by 10%, to $5.5M. The buyer s actions were described by Sir John Donaldson MR as something of a mystery, adding that it was this combination of a rise in market value and cancellation which has created an unusual situation and may have created unusual consequences in law (at 607) The experienced trial judge (Staughton J) held that on the facts the buyers ought reasonably to have negotiated a new contract of purchase with the sellers, and that if they had done so they would have secured a new contract to buy at the original contract price, and the Court of Appeal declined to interfere with this finding (at ). Accordingly, the buyers were not entitled to recover their $½M loss. The Court s judgment (at 608) emphasises the importance of not confusing the unfettered right to terminate a contract under an ETC with a right necessarily to recover all losses suffered in consequence of so acting (the latter right is not absolute, and depends on proof of causation, which is negated by a failure to take reasonable action to mitigate those losses). Although the same result could follow a termination at common law, given that such a termination would generally arise in the context of the other party having committed a repudiatory breach, it is less likely that a court would nevertheless hold, as a matter of fact, that the innocent party ought reasonably to have negotiated and entered into a new contract with him. 7.2 Contract draftsman attempt to circumvent the rule mentioned at above in a number of ways: By expressly providing for loss of bargain damages (or an equivalent sum) to be payable on a termination under the ETC. As mentioned at above, such a clause will be effective provided it is not penal in nature or effect 20

21 7.2.2 By expressly providing that an (otherwise) minor breach shall be a breach of Condition in the strict sense (see at above) By expressly providing that the time for performance of the relevant obligation (late performance of which would not otherwise be of sufficient seriousness to amount to a repudiation) shall be of the essence : see Lombard v Butterworth supra 53 Consequences of ETCs (5): Reducing the risk of an own goal by attempted termination 8 A further consequence of Treitel s question of very great difficulty is that an innocent party, faced with a breach of contract by the other party, may conclude that the breach was sufficiently substantial to entitle him to terminate at common law 54 and serve a notice accepting the breach as terminating the contract, only to find out some time later that a judge (or even an appeal court) takes a different view. In the meantime, an astutely advised contract breaker may have leaped at the opportunity itself to terminate the contract, by treating the innocent party s termination notice as itself a repudiation of the contract, and accepting that repudiation as terminating the contract (if only thereby to avoid potential liability for loss of bargain damages). The presence of an ETC may assist in saving the innocent party from his actions backfiring. 8.1 Under ordinary contract principles a party may assert a genuinely held view of the effect of, or position under, a contract (e.g. that it has been validly terminated under an ETC), because he is mistaken in good faith as to the true contractual position, and in those circumstances he will not, without more, be taken to have repudiated the contract, at least where (a) he makes it clear by his words and actions that he is ready and willing to abide by his true contractual obligations as determined by the court, and (b) his actions do not have the immediate effect of depriving the other party of a substantial part of what he is entitled under the contract: Woodar v Wimpey [1980] 1 WLR 277 (HL), in particular at 283A-B per Lord Wilberforce 55 and 295A-H per Lord Keith of Kinkel, 56, as reconciled with The Nanfri [1979] AC in Dalkia Utilities v Celtech supra per Christopher Clarke J at [148]; Vaswani v Italian Motors [1996] 1 WLR 270 (PC); Eminence Property Developments v Heaney [2010] EWCA Civ 1168, [2010] 3 EGLR 165, in particular 53 At per Mustill LJ 54 Or that the term breached constitutes a strict Condition of the contract 55 Citing James Shaffer Ltd v Findley Durham & Brodie [1953] 1 WLR 106 (CA) and Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699 (CA) 56 Also citing Ross T Smyth and Co Ltd v T D Bailey and Son & Co (1940) 164 LT 102 at 107 per Lord Wright 57 A case of cynical and manipulative conduct [on the part] of the ship owners per Etherton LJ in Eminence Property Developments v Heaney infra at [62] 21

22 at [61]-[64] per Etherton LJ for an elegant summary of the courts approach to such cases It is in practice a good deal easier to deploy such an argument where the basis for termination relied on, albeit ultimately unsuccessfully, was an ETC present in the contract. Lord Wilberforce drew attention to that aspect of the facts in Woodar v Wimpey supra: it would be a regrettable development of the law of contract to hold that a party who bona fide relies upon an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights. 59 As Carter has put it, it was the presence of an ETC in the contract underlying which saved Wimpey However, it should be emphasised that it is by no means always the position that an attempted but ineffective termination in reliance on an ETC will not be held itself to have constituted a repudiation provided that it was attempted in good faith. In Dalkia Utilities v Celtech supra, the time for Dalkia s performance of its primary obligations (which it refused on the basis that its termination had been effective) had arrived, and there had been no discussions between the parties about leaving the true position to be resolved by the court, with Dalkia then to perform if it turned out to be wrong. Had the judge held Dalkia s termination to be ineffective (which in the event he did not), he would have held the same to have amounted to a repudiation by Dalkia, which Celtech had validly accepted as terminating their contract (at [149]-[151]. Legal advisers beware! 61 Some conclusions 9.1 The advantages of effecting a termination at common law include the following: Preserves a claim to loss of bargain damages Greater flexibility as to facts justifying termination (provided overall they are sufficient to constitute a repudiation) 58 See to similar effect in Australia DTR Nominees v Mona Homes [1978] HCA 12, 138 CLR 423, and in New Zealand Starlight Enterprises v Lapco Enterprises [1979] 2 NZLR [1980] 1 WLR 277 at 283D-E, emphasis added 60 Op cit at Court proceedings, even if brought on quickly enough, cannot be used to test the position in advance, because a declaration of entitlement to terminate a contract which is still on foot is regarded as a hypothetical matter: Galaxy Communications v Paramount Films of Australia [1998] NSWCA 48, Stein JA unsympathetically observing at [36] that an innocent party s concern that they may elect to give a notice of termination which is later found to be invalid and amount to a repudiation of the agreements is a risk which [they] have to weigh in electing to give a notice of termination 22

23 If the entitlement to terminate has arisen, there is no obligation to offer the other party the opportunity to remedy its breaches first Anticipatory termination may be possible, without first waiting for the due date for performance to arrive Relief from forfeiture (if otherwise potentially available) is less likely to be granted to the contract breaker It may be less easy for the other party successfully to rely on any exclusion clause, in particular if its repudiatory breach was deliberate Any efficacious means of communication will be effective in law. 9.2 The advantages of effecting a termination under an ETC include the following: Greater certainty as to whether the right to terminate has arisen (though the grounds for doing so are limited by the exact wording of the ETC) In principle, there is no need to establish a repudiatory breach as such (though if the specified grounds under the ETC are minor/trivial, the ETC may be construed so as to require a more serious breach) Termination taking effect on the expiry of a period of notice and/or at a specified future date may well be possible It may be easier to run a Woodar v Wimpey defence, should you need to do so If there is no necessary inconsistency in the consequences, you may be able to rely on common law repudiation later, should it become necessary or desirable. JOHN RANDALL QC JULY 2014 ST PHILIPS CHAMBERS 55 TEMPLE ROW BIRMINGHAM B2 5LS jrandall@st-philips.com 23