Termination rights and refunding sums paid
GDYNIA v GEARBULK (CA) [2009]
The right to terminate a contract for breach is often one of the most valuable protections for any contracting party. It is therefore extremely important to be clear about the rights of termination - whether you are seeking to terminate or being faced with the threat of termination. Equally as key is understanding the consequences of termination.
This case is potentially of very great significance to companies who state their liability upon termination is limited simply to a refund of fees paid. The limit to a refund is very common particularly in the IT industry but this case must throw some doubt about whether that position needs to be reconsidered.
facts:
- This case concerned three separate shipbuilding contracts each on effectively identical terms. Payment for the ships was to be made in instalments against pre-defined milestones. The contract provided that if the purchaser validly exercised its right to terminate, the seller was obliged to refund the instalments already paid together with interest.
- The contract also provided that if delivery was delayed the purchase price was to be adjusted through a reduction in the final price instalment as liquidated damages. ‘Payment’ of these liquidated damages was said to preclude any right to further compensation for delay. The liquidated damages were capped and there was an express right to terminate the contract if the delay exceeded 150 days. Also, if there was a delay which meant it was reasonably clear that the vessel could not be completed by the specified date, then the purchaser did not have to wait for the period of delay to expire but could terminate as soon as that became apparent.
- In the event the purchaser ended the contract pursuant to these provisions and claimed (and obtained) a refund of the fees paid. It then subsequently sought to claim that it was also able to terminate the contract at common law and claim damages for ‘loss of bargain’ over and above the refund that had been made.
decision:
- The Court of Appeal said that:
- the circumstances giving rise to the purchaser’s right to terminate were in all cases a serious breach and that with the payment of liquidated damages for less serious breaches, these provided a strong indication that if the right to terminate were exercised, the parties’ intention was that the purchaser should be able to recover for loss of its bargain;
- experienced businesses were assumed to know the law gives a right to recover damages for loss of bargain if one party commits a breach which deprives the other party of substantially the whole benefit of the contract. Such right was stressed to be extremely valuable and very specific words are required to make it clear the parties intend to abandon such rights. The fact there was no wording reserving any rights which might arise under the general law was insufficient to exclude such rights. This conclusion is perhaps questionable as the drafting tries to establish an all encompassing regime to deal with the consequences of delay;
- the interpretation put forward on behalf of the supplier would mean the supplier could refuse to perform the contract and only be liable to refund instalments of the price. This would be unlikely to appeal to a purchaser and would raise the question as to whether or not it can have been the parties’ intention for the contract to be so unbalanced regarding the consequences of termination for breach.
- The Court was also asked to consider whether the fact the purchaser had expressly terminated under the contract terms precluded it from arguing that the contract was also discharged at common law. The Judge concluded that given the nature and seriousness of the breach, the notice of termination operated both as termination under the contract terms and as acceptance of the supplier’s repudiation of the contract under the general law (even though the notice made no reference to the latter).
points to note:
- This case highlights the importance of clearly stating whether any contractual rights of termination are to apply instead of or alongside rights of termination at common law. If these are not set out, then the Courts are reluctant to exclude common law rights. Often this is overlooked, probably on the basis that the contractual and common law rights are considered to be almost the same thing. What is evident is that they will not always be and certainly the consequences of each may differ. A right to claim damages at common law can often be broader than a contractual remedy to claim a specified level of damages.
- Hence, if it is intended that only the rights of termination under the contract should apply, unambiguous wording should be included that the remedies set out in the contract are in place of any rights and remedies provided by law. This is not guaranteed to be watertight but should be considered if you are a supplier or manufacturer. Alternatively, if you are a customer, you should at least be aware if your common law rights have been excluded and consider seriously whether or not your contractual rights are sufficient.
- Suppliers should be wary that this case may indicate that a contract simply purporting to provide a refund in the event of a breach may be capable of being challenged either under the Unfair Contract Terms Act 1977 (UCTA) or through a very strict interpretation. Consideration should perhaps be given as to whether or not such an approach can be justified in future.
- This case is also interesting in the light of SAM v Hedley [2002] in which a limit on liability to a full refund of sums paid for breach of warranty for the supply of an IT system was upheld as being entirely reasonable. There was express wording in that case to say the refund was the sole and exclusive remedy but perhaps it is an indication that since the Hedley decision, the courts are taking a slightly more robust view or it could be a reflection of a perceived greater risk of consequential loss from an IT contract. Our suspicion is that the truth is simpler – two different judges came to different conclusions! Unfortunately that does not make it easy to advise with any certainty. However, as the Gdynia case is a Court of Appeal decision and is more recent, strictly it should take priority.