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Do contractual termination provisions override common law rights to terminate?

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Construction contracts commonly provide that if a party wishes to terminate a contract then it first needs to take certain steps before pressing the eject button, for example, giving notice and/or allowing the other party an opportunity to remedy the breach.

But what if matters reach such a head that the innocent party doesn’t want to jump over any contractual hurdles and simply wants out? Can the innocent party ignore the contract and exercise its common law right to terminate for repudiatory breach?  Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] considered exactly this scenario. Whilst not a construction case, it contains lessons for parties to construction contracts.

The facts

The defendant supplier, Richmond, entered into an contract with the claimant, Vinergy, under which Vinergy agreed that Richmond would be its sole supplier of bitumen. Vinergy then proceeded to breach the contract in various ways, including sourcing the bitumen from a third party and also failing to make various payments. Richmond decided to terminate the contract for repudiatory breach.

Unfortunately for Richmond, this was not a clear cut matter because a sub clause in the contract termination provisions provided that if a party breached any of the contract’s terms, if the breach was capable of remedy, notice should first be given to the party in default to allow it to remedy the breach.

Vinergy contended that Richmond had no right to terminate at common law and should have followed the contract provisions. Richmond’s actions therefore amounted to a repudiatory breach. 

Richmond referred the matter to arbitration, where the tribunal ruled that it had lawfully terminated the agreement. Vinergy appealed on a point of law.  The issue before the court was whether Richmond could ignore the contractual notice provisions, relying instead on its common law right to terminate the contract.

The decision

The court upheld the tribunal’s decision. It held that there was no blanket rule that the contract termination requirements must always override the common law right to terminate.

It all depended on whether the breach fell within the scope of the contractual termination provision. The court referred to the earlier case of BskyB v HP Enterprises [2010] in which the judge distinguished between material breaches which fell under the scope of the contractual termination provisions, and repudiatory breaches which did not. The clause in question did not deal with the scenario where a party wanted to accept a repudiatory breach.

Furthermore, the judge held that even if he was wrong on this point, then because the tribunal had decided that the breach was not capable of being remedied, it did not fall within the ambit of the clause and so in any event Richmond could rely on its common law rights to terminate.

Lessons learnt

When negotiating the termination provisions make sure that you are clear in what circumstances you can terminate. When considering whether to terminate a contract, consider whether you must follow the contractual termination provisions, or whether the facts are such that you can terminate for repudiatory breach.

 

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