The termination of contracts for breach is a notoriously
complex area of the law. Parties seeking to terminate can easily
find themselves subject to an allegation that their attempts were
flawed, with the result that they themselves are in breach of
contract and subject to rights of termination exercisable by the
other party. The hunter becomes the hunted. In such cases, there is
a longstanding rule that a party attempting to terminate is
permitted to justify its termination on any grounds available to it
at the time, even if those grounds were not yet known to it or
mentioned in its notice of termination. A High Court decision last
month has found that a party relying on this rule, whilst being
able to justify its termination, may not be entitled to recover
damages. This is a potentially controversial decision and should be
carefully taken into account by parties considering rights of
termination.
Lonsdale Sports Limited ("Lonsdale") is the owner of
the "Lonsdale" trademark used in connection with various
clothing and leisure goods. Lonsdale granted Leofelis S.A. an
exclusive licence to use the trademark within certain European
countries. Subsequently, in September 2007, Leofelis claimed that
Lonsdale had repudiated the licence agreement and purported to
terminate and claim damages for loss of profit for the period
remaining under the agreement.
Lonsdale disputed the validity of Leofelis' termination and
was successful in showing that Leofelis' original allegation of
repudiation was unfounded. Leofelis then sought to rely on
alternative grounds of termination not known to it at the time of
its original notice in September 2007. In particular, evidence
submitted by Lonsdale showed that it had granted a licence to use
the trademark to a Latvian company. Leofelis alleged that the
circumstances surrounding the granting of this licence amounted to
a repudiation of its contract with Lonsdale and thereby provided a
separate justification for its original notice in September
2007.
The court accepted that the circumstances surrounding
Lonsdale's agreement with the Latvian company were capable of
justifying Leofelis' original notice of termination, but ruled
out any claim for losses flowing from termination. As the agreement
with the Latvian company was not known to Leofelis' at the time
of its original notice, Roth J held that, "the alleged
breach, although its nature met the test for a repudiatory breach,
cannot be the cause of the termination and thus of the loss that
flowed from the termination." .
The court acknowledged that the issue had not previously been
decided and the decision may therefore be open to challenge in the
future. In particular:
- The causation analysis carried out by Roth J would not appear to take into account the fact that the unknown repudiation, whilst not causing Leofelis to give its original notice of termination, was nonetheless the cause for why the notice was effective. Had the unknown repudiation not occurred, the notice would have been invalid.
- It may be open to question whether a causation analysis such as that undertaken by Roth J is applicable to the assessment of damages flowing from termination for repudiatory breach. Other cases may suggest that such damages flow from the fact that the contract has been validly terminated, rather than from any causation analysis of the repudiatory breach which led to termination.
It remains to be seen how this decision will be received in
subsequent cases. For the time being, parties considering the
termination of contracts should consider carefully whether any
other grounds for termination may exist beyond those specifically
relied upon. In a construction context, parties would be well
advised to consider whether repudiatory breaches of contract exist
alongside any contractual right to terminate. Where possible, both
grounds should be given effect to by the terms of the notice of
termination with a view to avoiding an impression that one
particular ground is the true cause of the decision to terminate.
Whenever one ground is able to be characterised as the true cause
of a party's decision to terminate, the reasoning in Leofelis v
Lonsdale Sports poses a risk that the party's right to damages
will depend on that ground alone and that other grounds, whilst
potentially available to justify the validity of the termination,
will not sustain a claim for damages.
References: Leofelis v Lonsdale
Sports [2012] EWHC 485 (Ch).
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 04/04/2012.