Termination for convenience clause limited claim for loss of profit
COMAU UK v LOTUS LIGHTWEIGHT STRUCTURES [2014]
The Court considered whether there had been a correct termination when a breach occurred and also whether a party’s claim for loss of profit following a termination for default could be affected by a termination for convenience provision.
Background:
There are two main ways that a contracting party may terminate for breach of contract by the other party, namely:
- a right to terminate under the express terms of the contract; and/or
- a common law right to terminate for repudiatory (serious) breach.
Facts:
- Comau (C) is part of the Fiat group and it entered into an agreement with Lotus (L) whereby C would supply goods and services to L in relation to a production line for a new model to be produced at L’s factory.
- The contract provided for L to pay the contract price in accordance with a staged payment schedule. L failed to pay the sums due on two invoices submitted by C in accordance with that schedule.
- Accordingly, C sent a letter to L stating that the invoices were overdue and giving 7 days' notice of its intention to suspend the performance of its own obligations as it was entitled to do under the contract. L paid the first invoice and part paid the other the following month but approximately £536,000 remained outstanding. C's performance of its own obligations remained suspended in accordance with the agreement.
- The contract permitted either party to terminate for material breach if the breach was not remedied within 30 days and also gave L the right to terminate for convenience (ie without cause) provided it was not in breach of any payment obligation. L’s liability in this event was also set out in the contract.
- C then sent L a written warning that it was in material breach of the agreement which had to be corrected within 30 days, failing which C would terminate in accordance with the termination provisions of the contract.
- L did not pay the sums which remained outstanding or otherwise respond to the letter. C wrote to L again, giving notice that it had decided to terminate the agreement with immediate effect.
- Although the agreement contained a number of provisions dealing with contractual termination, C alleged that L's conduct was in repudiatory breach of the agreement and that C had accepted that repudiatory breach when it sent its final letter, entitling it to damages.
- L agreed it owed the outstanding sum under the second invoice. C claimed its lost profits on the entire project due to the termination of the agreement, profits that it alleged would have been earned but for the termination.
Decision:
- The Court dismissed C’s claim for summary judgment as it found that L did have real prospects of defending C’s claim. The main reasons it gave were:
- C’s termination notice only referred to termination under the contract for material breach, not for repudiatory breach at common law;
- C contended that L’s prolonged failure to pay or to make any proposals to pay the sums due under the agreement meant that L had clearly and unequivocally shown an intention not to perform its contractual obligations. However, the Court found that the payment by L of the first invoice, albeit late, and part payment of the second invoice, were consistent with an intention to perform rather than evidence of an intention not to do so;
- the period of suspension of the contract between C’s notice to remedy and termination was only seven weeks which, in context, was comparatively modest;
- C could have sent another letter to L making it clear that it intended to rely on its rights at common law and to that end that it was making ‘time of the essence’ (meaning that any further delay, however minor, would entitle C to terminate the contract) and that it would treat a continued and unexplained failure to pay as a repudiatory breach. However, C had not done this.
- Regarding any assessment of damages for loss of profit, this would have been on the assumption that L would have exercised its rights to terminate for convenience. C was not entitled to profits on the whole of the goods and services to be supplied under the agreement but only to such profit as it might have gained prior to any possible termination for convenience. The contract clearly set out the extent of L’s liability if it had terminated for convenience and hence the effect of any other interpretation would have been to give C the benefit of a better ‘bargain’ than it actually made. Consequently, any such damages would have been notional even if it was established that L was liable.
Points to note:
- This is another case demonstrating the distinction between contractual termination and termination for repudiatory breach at common law. When sending a termination notice, ensure that you are clear which termination right you are exercising - under the terms of the contract or because there is a repudiatory breach at common law. If necessary, include both alternatives.
- This decision shows that the Court will assume that the accused party will only perform the minimum obligation required and will assess damages for breach of contract on this basis. Otherwise this would mean giving the injured party the benefit of a better ‘bargain’ than it had contracted for.
- When terminating a contract be very careful not to act too hastily. Make sure an adequate period of time has elapsed from the initial warning and, if necessary, be prepared to serve additional notices clarifying and re-iterating your position and making ‘time of the essence’ for payment.
- In coming to its conclusion the Court ignored the fact that because L was in breach it was, according to the express wording of the clause, not able to terminate for convenience. Query whether this should have been a factor taken into account?
- The case highlights the potential importance and impact of ‘termination for convenience’ clauses. Many purchasers are very insistent upon having them even though they also want the benefits associated with long-term contracts. Suppliers need to be aware that a termination for convenience clause effectively renders any minimum fixed term redundant, unless the right does not apply until after the expiry of the minimum term.