To terminate or not to terminate?
Commercial contracts commonly provide that if a party wishes to terminate the contract then it first needs to take certain steps before it is able to do so, for example, by giving notice or allowing the other party the opportunity to remedy any breach. But what if one party wishes to terminate the contract due to the unlawful actions of the other party? This was the scenario which occurred in the case of Vinergy International (PVT) Limited v Richmond Mercantile Limited which was heard by the High Court earlier this year.
Vinergy was an Indian company who entered into an agreement (“the Agreement”) with Richmond, an UEA company, under which Richmond agreed to supply bitumen to Vinergy for 10 years. However, part way through the Agreement Richmond terminated the Agreement and commenced arbitration proceedings seeking damages on the grounds of Vinergy’s breach of its obligations to buy bitumen exclusively from Richmond and its failure to pay an invoice. Vinergy claimed that Richmond had terminated the Agreement unlawfully because it had failed to give it notice in accordance with the terms of the Agreement and, as such, it contended that the termination was unlawful and a wrongful repudiation of the Agreement.
At arbitration, the Tribunal ruled that Richmond had lawfully terminated the Agreement. Vinergy appealed.
The issue which the Court had to decide was whether Richmond could ignore the contractual provisions in the Agreement and instead rely on its common law right to terminate the contract. At common law, where a party to a contract commits a breach that is sufficiently serious, the innocent party may choose to accept that breach by giving notice to the other party. The contract is then terminated and the innocent party can claim damages. This is known as a repudiatory breach. The issue was therefore whether Richmond could rely on its common law right to terminate the Agreement by reason of a repudiatory breach by Vinergy so as to circumvent the notice requirement within the termination clause of the Agreement.
The Court upheld the Arbitrator’s decision and dismissed the appeal. It held that there was no general rule that the contract termination requirements should override the common law right to terminate. The Judge found that the termination provision in the Agreement did not apply to repudiatory breaches and even if it did, the breach in question was incapable of remedy and therefore was not within the scope of the termination clause.
This case illustrates that where one party to a contract informs the other party that it no longer has any intention of being bound by the contract, the innocent party would not reasonably be expected to give notice before being able to terminate the contract.
Where a party is considering whether to terminate a contract, it will need to consider carefully whether or not it has to follow the contractual termination provisions or whether the facts are such that it can terminate on the grounds of repudiatory breach.
If you are involved in any contractual dispute then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or email him on “LPatel@LawBlacks.com”.