Termination of Contracts: Will Reasons Later Argued Suffice?

Termination of Contracts: Will Reasons Later Argued Suffice?

Commercial contracts can be broken by either party in certain circumstances, but when can a party justify termination by a new reason given later - after the termination has taken place?  

The expert commercial litigation lawyers at Bahamas law firm ParrisWhittaker are highly experienced in advising and representing businesses on the terms and conditions, and termination of their commercial contracts.

The High Court in the UK has given important guidance on termination for contracting parties. It considered the scope of an exception to the rule that a party can rely on grounds for termination not initially raised.  The general rule is that a party may subsequently raise a ground for terminating the contract that was not relied on at the time the contract was terminated.  However, where the ground relied on by the terminating party is one that, if notified, could have been remedied by the other party – the general rule does not apply.

In this case, the claimant company took action against the defendant for breach of contract.  The claimant had refused to hand over files to the defendant’s external auditor and the defendant; therefore, they terminated the contract on the grounds this was a serious breach of contract. Later, however, the defendant justified termination of the contract on the grounds of the claimant’s poor performance – and the claimant then claimed damages for wrongful termination.

What did the Court decide?

The High Court ruled that a party may later justify termination on the basis of a ground not mentioned at the time of termination.   The court set out four principal conclusions:

  • It is open to parties to agree that certain breaches or kinds of breach are not to be treated as repudiatory. Such clauses will be effective
  • Every case will depend on the particular contract in issue
  • Where a contract does provide that certain breaches or kinds of breach are not to be treated as repudiatory, that may provide guidance as to whether other kinds of breach qualify or are capable of qualifying as repudiatory. For example, breaches which are less serious are unlikely to do so
  • However, a clause such as providing for termination in the event of a material breach but only after the giving of a notice and a failure to remedy, will not by itself prevent a sufficiently serious breach from amounting to a repudiation of the contract justifying an immediate termination. Such a clause will generally provide for a right to terminate which is in addition to a party's common law rights

What does this mean?

Careful drafting of commercial contracts remains critical.  Termination clauses must clearly state any limitations on the reasons for termination, and when they can be put forward.   Clarity on when the parties can and cannot terminate is important to mitigate the risk of future dispute.

How can we help?

The commercial litigation lawyers at Bahamas law firm Parris Whittaker have years of experience advising commercial organisations on their commercial contracts including termination of contracts. We can assist you in ensuring the contracts terms fully and effectively protect your interests, including in light of potential future disputes. Contact us straight away for urgent, strategic advice.

1 C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm)