Business Law

Law of Contract: Termination

Universiti Brunei Darussalam

Ahmad Jefri Abd. Rahman | October 2017

1 © Ahmad Jefri Rahman

Lecture Synopsis

 What is termination?
 When might you want to terminate a contract?
 Alternatives to termination
 How to terminate a contract
 Notice of Termination – By Email
 Why provide contractual powers to terminate?
 Losing a right to terminate
 What is the effect of terminating a contract?
 What can you get from a contract that has been terminated for breach?

2 © Ahmad Jefri Rahman

Termination

 What is termination?

 Termination describes a contract expiring or being brought to an early end. It

can be applied to ending a contract at common law or under a termination
clause (Aktielselskabet Dampskibsselskabel Svendborg v Mobil North Sea Ltd [2001]
EWHC 518, paragraph 17).

 Termination under the rights stated in a contract, unlike rescission, does

not undo the contract as if it had never existed. Instead, it excuses all
parties from further performance of their primary obligations. Some duties
survive, including the duty to pay damages for a breach already committed.

3 © Ahmad Jefri Rahman

When might you want to terminate a
contract?
 A party to a contract might wish to terminate it for various reasons. Common
reasons include the following:

 Breach of contract by the other party, perhaps because:

 the other party’s performance is unsatisfactory in critical respects;
 the other party is refusing to perform the contract at all; or
 the other party’s performance is acceptable, but it has breached some other provision of the
contract, such as a contractual obligation of confidence.
 The contract is no longer economically viable (for example, the customer can get
the same goods elsewhere, more cheaply).
 The customer no longer requires the goods or services.
 A party has gone into insolvency or is about to do so.
 One party has been bought by a competitor of the other.
 One party is carrying on its business in a way that the other fears will damage its
own reputation.

4 © Ahmad Jefri Rahman

Alternatives to termination
 Termination may not be appropriate if the parties want or need
an ongoing relationship.

 Alternatives to termination include the following:

 Variation. The parties may renegotiate the contract to reflect the changed
circumstances. For more information on variation, see Practice note, Contracts:
variation.

 Dispute resolution. The contract may lay down a procedure for dispute
escalation, as described in Practice note, Hybrid, multi-tiered and carve-out
dispute resolution clauses.

 Threats to terminate. A threat of termination could instigate a renegotiation of

the relationship.

5 © Ahmad Jefri Rahman

How to terminate a contract
 Positive action is generally needed
 Some positive action is generally required to terminate a contact. It is rare
for a contract to provide for automatic termination Similarly, some positive
action is required to end a contract at common law.

 A party wishing to terminate a contract should do the following:

1. Assess the legal grounds on which it can terminate the contract.

2. Consider the practical and procedural implications of termination.
3. Comply with any procedural requirements for terminating under a
contractual right or at common law.
4. Document the grounds and process of termination.

6 © Ahmad Jefri Rahman

Notice of Termination – By Email
 Some contracts require notices to be "in writing" (a sensible
requirement for proof).

 These may say expressly whether an email is "written" for this

purpose. If the contract is silent on this point, it is a question
of contract interpretation.

 It is well established that an email can meet the statutory

requirement for writing in a guarantee (Golden Ocean Group Ltd
v Salgaocar Mining Industries PVT Ltd [2012] EWCA Civ 265).

 Therefore, emails can qualify as writing for contracts.

7 © Ahmad Jefri Rahman
 Relevant questions, when interpreting a contractual
requirement for "writing", include the following:

 Does the contract mention writing elsewhere, in the context of

communications that could only be by email, or that could never be an
email?

 Are the parties' email addresses given in the contract? What for?

 Is writing defined so as to exclude email? This sort of provision may

reflect a concern that such an important notice should be hard to miss
and hard to alter. It is sometimes found in the interpretation clause.

8 © Ahmad Jefri Rahman

 The party wishing to terminate needs to make clear in the termination notice that
it is actually terminating the contract:

 "Although the [termination provision] provides for no specific formal notice the
consequences of a failure to comply are severe, resulting in the termination of the
Agreement. The parties cannot have intended termination to be brought about
without [the party receiving the notice] knowing or having reason to know the
significance of the alleged notice. The email [notice] came from out of the blue.
There is no evidence that [the party purporting to terminate], at the time of
sending the email, intended it to be a notice under the [termination provision]. The
email does not say it is such a notice. If [the party purporting to terminate] had
wished the email to be a valid notice then, without having to observe any particular
formalities, it should have made it quite clear what the nature and purpose of the
communication was."
 (Jet2.com Ltd v SC Compania Nationala De Transporturi Aeriene Romane Tarom
SA [2012] EWHC 622, at paragraph 52.)

9 © Ahmad Jefri Rahman

 A notice of termination must be unequivocal to be effective. In such a
notice:

 "You must either affirm the whole contract or rescind the whole contract:
you cannot approbate and reprobate (emphasis added) by affirming part of
it and disaffirming the rest ... ."

 (Suisse Atlantique Societe d’Armement Maritime v NV Rotterdamschke Kolen

Centrale [1967] 1 AC 361, at page 398.)

10 © Ahmad Jefri Rahman

Why provide contractual powers to
terminate?

 Contracts commonly include clauses allowing parties to terminate in

specified circumstances. The triggers for termination often include
insolvency and breach of contract.

 A termination clause may also remove uncertainty and so reduce the risk
of disputes and litigation, since it is often unclear whether a breach of
contract has triggered the right to terminate at common law.

 However, whether a contract term allows a party to terminate in any

particular circumstances is always a question of fact and interpretation.

11 © Ahmad Jefri Rahman

 Common contractual
termination rights
 Depending on the nature of
the contract, commercial
contracts typically include a
range of provisions allowing
a party to terminate on
grounds which may include
the following:
12
 Breach - A clause may allow
termination for, for example, material
breach, substantial breach, repeated
breaches, irremediable breach and any
breach.
 Convenience (on notice) - A party
may reserve the right to terminate the
contract without cause. This might be
useful if the party no longer requires
the goods or services, or the contract
becomes uneconomic. The contract
does not define grounds for
termination, but requires the
terminating party to give notice.
© Ahmad Jefri Rahman
 If the contract is low value or for a  Change of control of the other
short duration, the parties may agree party - A party concerned to ensure
that it can be terminated by a short that the other party will not compete
notice period. with it, or that the other party
maintains the same business focus as
when the contract was made, may
 Parties to more complex or expensive
push for a term giving it the right to
contracts will generally insist on
terminate for a change of control of
longer notice, and often a minimum
the other party. The other party might
term.
try to insist that the right will arise
only if it is acquired by a competitor
 One party (typically the supplier) may need of the party wishing to terminate.
a minimum term to recoup its capital
investment. Sometimes a compromise is
struck, under which a party may terminate
during a minimum term, if it pays the other
compensation reflecting the other’s
irrecoverable capital investment.

13 © Ahmad Jefri Rahman

 Damage to reputation - A party
may want to be able to terminate a
contract if it fears damage to its
reputation from the other party’s
conduct, because of the contractual
association between the parties. This is
particularly an issue where the other
party interacts with the first party’s
customers, or the first party is a
charity.
14
 Insolvency of the other party - A
party will usually wish to terminate a
contract if the other party becomes
insolvent, or is at risk of insolvency, or
ceases to trade. For this, you need a
termination clause; the common law
gives no right to terminate on grounds
of insolvency.
© Ahmad Jefri Rahman
Losing a right to terminate
 The party with a right to
terminate, whether for breach at
common law or under a contract
 Once a party commits itself to
term, has a choice to end the
one, the other ceases to be
contract or keep it alive.
available. This is the principle of
election, also known as waiver by
 Once the choice is communicated, election.
it cannot be undone.
 Therefore, once a contract is
 This is a general principle of terminated, it cannot be revived
English law when a party faces a (unless both parties agree).
choice between two inconsistent
courses of action.

15 © Ahmad Jefri Rahman

 In the same way, the right to
terminate can be lost when a
party communicates its choice to
keep the contract alive.

 This is known as affirmation.

 A party may affirm a contract

expressly, but affirmation may also
be inferred from a party’s actions,
typically if it continues to perform
and demand performance of
duties that should end on
termination, after becoming aware
of the facts which give it a right to
terminate.
16 © Ahmad Jefri Rahman
What is the effect of terminating a
contract?
 Primary obligations end; other terms and accrued rights
survive

 When a contract is terminated, whether under a

termination clause or for breach at common law, it is not
undone as if it had never been made (ended ab initio)
 (State Trading Corp of India Ltd v M Golodetz & Co Inc Ltd [1989] 2
Lloyd’s Rep 277, at page 286).

 The contract still has a legal effect and does not cease to
exist.

17 © Ahmad Jefri Rahman

 Other duties will survive, such as
the following:

 Secondary obligations. Clauses  Accrued rights. Rights that have

having a contractual function that is unconditionally accrued due by the
procedural, collateral or ancillary to time of termination are still
the subject matter of the contract normally enforceable.
will survive.

 They are the so-called “secondary”

obligations.

 See the judgment of Phillips LJ in Rock

Refrigeration Ltd v Jones [1996] EWCA Civ
694, after the heading “Alternative Route”
for discussion on the law of survival of
primary and secondary obligations.

18 © Ahmad Jefri Rahman

 Clauses that normally survive  Whether the parties intended a
termination include:- contractual obligation to survive
termination is a question of contract
interpretation in each case (Duffen v
 choice of law, Fabro Spa [2000] 1 Lloyd’s Rep 180, at
 jurisdiction, paragraph 60).

 arbitration or dispute resolution

 Rationale for the clauses still
 limits and exclusions of liability surviving?
 indemnities,  It would be odd if the parties intended
 liquidated damages, any of these choices to fall away after
termination, just when they might be
 confidentiality, needed to help resolve a dispute.
 restrictive covenants,
 intellectual property rights,
 the survival clause itself.

19 © Ahmad Jefri Rahman

What can you get from a contract that
has been terminated for breach?
 The general rule:
Compensation
 The general rule is that
 The purpose of an award of damages should (so far as a
damages for breach of monetary award can do it)
contract is to compensate place the claimant in the
the injured party for loss, same position as if the
and not to punish the contract had been
wrongdoer. performed (Robinson v
Harman (1848) 1 Ex 850).

20 © Ahmad Jefri Rahman

 Contract damages are, therefore, essentially
compensatory, measuring the loss caused by the breach.

 To put it another way, the damages enquiry involves

comparing the position the claimant is in fact in, following
the breach, and the position the claimant would have
been in but for the breach.

 Accordingly, the awards are often called “expectation

damages”, because they seek to put the claimant in the
position it expected.

21 © Ahmad Jefri Rahman

 The net loss is calculated by quantifying all the harms
caused by the breach and then deducting or crediting all
the benefits caused by the breach.

Net loss =
[Crediting all benefits caused by breach]
less
[Quantity of all harms caused]

22 © Ahmad Jefri Rahman

 Damages for financial or monetary loss

 The majority of contract damages awards compensate for

financial loss.

 This takes many forms, including costs or liability the claimant

has incurred to a third party (but would not have incurred but
for the breach), and profits the claimant has foregone (that is,
would have earned but for the breach).

23 © Ahmad Jefri Rahman

 Measures for such loss can be made in several forms :

 Difference between value or cost of cure

 Presumption of breaking even and “reliance loss”
 Lost Management time

24 © Ahmad Jefri Rahman

 Difference in value or cost of
cure
 In many cases, even though the
defendant has breached the contract,
the claimant can pay for a third party
to cure or reinstate so as to put the
claimant in as good a position as if the
defendant had performed.
 For example, the claimant might pay
for repairs to rectify a breach of
warranty of quality by a seller of
goods, or a partial non-performance
by a builder.
25
 Where already incurred by the time of
trial, such a cost will be recoverable
from the defendant providing it was
not so unreasonable as to be a failure
to mitigate and/or a break in the chain
of causation.
 Where the cost of cure has not been
incurred at the date of trial, it will only
be recoverable where incurring the
cost would be “reasonable” in all the
circumstances.
© Ahmad Jefri Rahman
 The presumption of breaking
even and “reliance loss”
 In seeking to prove loss, the
claimant benefits from a rebuttable
presumption that but for the
breach the claimant’s venture
would have broken even.
 This means that if the claimant has
already incurred costs but not yet
had a chance to complete the
venture, it is presumed that the
breach which halts the venture
caused the claimant to lose
revenue equal in value to the
expenditure already incurred.
26
 For example, in Anglia Television v
Reed [1972] 1 QB 60, a TV
company entered into a contract
with an actor to take part in a film,
the actor broke the contract and
the film could not be made. In that
case the claimant was unable to
say what the profit would have
been had the actor performed the
contract, but because of the
presumption of breaking even, the
claimant was able to recover the
wasted expenditure it had
incurred.
© Ahmad Jefri Rahman
 Lost management time  This is not because that cost was
itself caused by the breach.
 A particular well-established
application of the presumption of  Rather, it is presumed that the
breaking even is the award of claimant would have earned
damages for lost management revenue from the staff at least
time. equal to their cost to the claimant
if they had not been diverted from
revenue-producing activity but for
 Where as a result of the
the breach.
defendant’s breach the claimant’s
staff were diverted from their
usual tasks in order to investigate
the breach or deal with the
consequences of the breach, the
claimant can recover its net cost
of the staff (that is, their wages).
27 © Ahmad Jefri Rahman
 In Azzurri Communications Ltd v
International Telecommunications
Equipment Ltd [2013] EWPCC 17
Birss J observed that:

 ”if the breach can be said to have

caused diversion of staff to an
extent substantial enough to lead
to a significant disruption of the
business then it is reasonable to
draw the inference of a loss of
revenue equal to the cost of
employing the staff.”

28 © Ahmad Jefri Rahman

 Damages can also be claimed for Non-financial losses

 Mental distress and loss of amenity

 Personal injury and physical inconvenience

29 © Ahmad Jefri Rahman

 Mental distress and loss of  Exceptions are examples of cases
amenity where the contract have “a major
or important object of the
contract was to give pleasure,
 Non-financial and non-property
relaxation or peace of mind”
damage loss falling short of
personal injury are traditionally
subject to a general bar to
recovery (see Addis v Gramophone
Company Ltd [1909] UKHL 1) to
which narrow exceptions apply

30 © Ahmad Jefri Rahman

 Developing from this exception are cases where “the very object of a
contract is to provide pleasure, relaxation, peace of mind or freedom from
molestation” (Bingham LJ in the surveyor’s negligence case of Watts v
Morrow [1991] WLR 1421).

 This rule in turn evolved in a series of earlier cases in which damages for
mental distress had been awarded in cases of supply of sub-standard
holidays (for example, Jarvis v Swan Tours Ltd [1973] EWCA Civ 8).

 Other contracts for purely non-commercial purposes (such as wedding

photographs in the Scottish case of Diesen v Samson (1971) SLT (Sh Ct) 49).

31 © Ahmad Jefri Rahman

 End of slides

32 © Ahmad Jefri Rahman