United States: Exercising Termination Rights - As Always, Approach With Caution

Introduction

Against the current backdrop of depressed oil prices, companies operating in the oil and gas industry are taking measures to adapt to a new 'normal', such as streamlining their portfolios to focus resources on core business units or jurisdictions. That may in turn necessitate withdrawals from certain contracts that are no longer economically viable or profitable.

Companies wishing to bring a contractual agreement to an end generally have two options available to them: (i) terminating in accordance with any express contractual provisions; or (ii) exercising a right to terminate at common law in response to a breach that is sufficiently serious so as to be 'repudiatory'.  The recent decision in Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC [2016] EWHC 525 (Comm) highlights the interplay between contractual and common law termination rights, in particular as regards whether it is necessary to give notice of termination under a contractual provision and give the contract-breaker time for the breach to be remedied, where there has been a repudiatory breach.  

Parallel termination rights

Express termination clauses tend to be the innocent party's first port of call. However, they may very well not be a complete code, if they do not displace the common law consequences of a 'repudiatory breach of contract' - a fundamental breach which deprives a party of substantially the whole benefit of the contract, such as a refusal to perform any contractual obligations. In the event of such a serious breach, the injured party may be entitled to exercise a parallel right to terminate at common law.  

The right to terminate for repudiatory breach must be excluded expressly through clear words. It is not just deemed to have been abandoned because there is an express termination clause that the parties adopted. In Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, the Court of Appeal noted that the parties to any contract:

"... enter into negotiations in the expectation that if one of them commits a breach which goes to the root of the contract in the sense just described, the other will be entitled to recover damages for the loss of his bargain. The parties may, of course, agree to depart from that position, but that is the point from which they start."

Whether the common law right of termination has been excluded will depend on the particular contract. To bring a contract to an end at common law, the innocent party must 'accept' the repudiation.  That requires an overt act that is plainly inconsistent with the contract continuing in force. There is no requirement that accepting a repudiation must be done in writing, though it is of course safest to do so.  The innocent party must make a choice: if it does not accept the repudiation, it may be taken to have affirmed the contract, thus waiving the breach. But once a repudiatory breach has been accepted, the contract comes to an end with immediate effect. 

Do contractual notice requirements apply to termination rights at common law?

Vinergy v Richmond was an appeal against an arbitration award, as the parties had not excluded the right to appeal on a point of law in the circumstances permitted by Section 69 of the Arbitration Act 1996.

The High Court was called upon to determine whether a buyer's repudiatory breach of a master service agreement allowed the supplier to terminate the contract at common law, and in doing so bypass the clauses in the contract requiring it to give notice to the breaching party as well as an opportunity to cure the breach.

The arbitral tribunal found that three repudiatory breaches had been committed by the buyer:  a breach of the exclusivity provisions of the agreement and two breaches of payment obligations. Each of these breaches permitted the supplier to lawfully terminate the agreement at common law.

Clause 17.1.1 was at the heart of the dispute. It stated that:

"... failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days".

Richmond had terminated without giving notice under that provision. Vinergy had not, therefore, been given the opportunity to remedy the breaches that the contract seemed to envisage.

In the High Court, Vinergy argued that Clause 17.1.1 and the requirement for serving notice showed that the parties had intended that breaches would only be sufficiently serious if they had not been cured after a notice had been served.  Moreover, the clause said that it applied to a failure "... to observe any of the terms ...", which might cover a repudiatory breach as well.  In support of that contention, Vinergy relied on a statement by Ramsey J in BSkyB v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC)

"Equally, the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach."

Vinergy also relied on a Court of Appeal decision relating to a construction contract, Lockland Builders v Rickwood (1995) 46 Con LR 92 (CA). In that case, the contract entitled the employer to terminate for delay or defective materials by serving notice and complying with a contractual procedure. The employer did not do that, and instead sought to terminate for repudiatory breach. The Court of Appeal noted that:

"[the clause requiring notice] did impliedly preclude [the employer] from terminating the contract on the facts of the present case otherwise than by the exercise of his rights under [the clause] since the complaints made fell squarely within the scope of [the clause], i.e. complaints as to the quality of materials and workmanship. However, [the clause] would not have done so in relation to breaches outside the ambit of [the clause], e.g. by [the contractor] walking off the site when the works were still substantially incomplete."

The High Court upheld the arbitral tribunal's decision and disagreed with Vinergy.  Teare J approached the construction of Clause 17.1.1 differently.  He found that the provision did not expressly extend to repudiatory breaches. The parties had simply said that a breach of any of the provisions of the contract that had not been remedied within a period of 20 days from the relevant notice gave rise to a termination right (under that particular provision). Clause 17.1.1 could only extend to repudiatory breaches if a term to that effect could be implied. He decided against implying this, for a number of reasons:

- Clause 17.1.1 could apply to minor breaches. There was no reason why a requirement that applied to breaches that did not have serious consequences should also be made to apply to serious, repudiatory breaches.

- Clause 17 as a whole also created a termination right in respect of five other specific breaches - including insolvency. The cure period of 20 days did not apply to any of the other five grounds, so there was no reason to think that the parties had intended for it to operate 'across the board', including to repudiatory breaches. 

No term could therefore be implied. The judge found that as drafted, this provision applied only to breaches which were in fact capable of being remedied. The two failures to pay were remediable, but the breach of the exclusivity provision (caused by the buyer secretly contracting with a different supplier for the supply of cargoes) was not, as the arbitrators had decided. It was this breach that permitted the supplier to avail itself of its common law termination rights.

Discussion

Teare J decided the matter on a point of interpretation, by determining which types of breaches the clause requiring notice and a cure period applied to based on the contract wording. He did not think that any of the authorities laid down a legal principle, but if he was wrong and there was a legal principle after all, it would be that "... a clause requiring notice to remedy applies to breaches within the scope of the clause." Repudiatory breaches are not, therefore, immune from being caught by notice or cure period provisions. 

Difficulties could arise where a contract requires a specific notice or a cure period for termination following a 'material' or substantial breach. 

In Crane Co v Wittenborg A/S [1999] All ER(D) 1487, the Court of Appeal considered a clause that read:

"B. Either party shall be entitled forthwith to terminate this Agreement by written notice to the other if that other party commits any substantial breach of any of the provisions of this Agreement and in the case of breach capable of remedy fails to remedy the same within 90 days of receipt of a written notice giving full particulars of the breach and requiring it to be remedied."

The Court of Appeal found that substantial meant the same as repudiatory:

"'Substantial' deprivation of the intended contractual benefit is after all one way in which the test of repudiatory breach is often expressed.  ... I therefore consider that substantial should be read as equivalent to repudiatory."

It might well follow that, where the contract includes a similar clause, a repudiatory breach would be caught by a requirement for a cure period if it were remediable. Whether a repudiatory breach is remediable is a question which (as so many others) depends on the facts of the case.  For instance, even an outright refusal to perform any further obligations under the contract (a good example of a repudiatory breach in the form of a renunciation) might be remedied if the contract breaker changes their mind and resumes performance following a contractual notice. So while the common law right to terminate is very frequently present, it provides no guarantee for risk free and immediate termination even where it has arisen. The contractual termination provisions still have to be reviewed carefully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.