In a recent case, the UK Court of Appeal has considered the issues around termination of contracts relying on common law rights. Although the case itself concerned charterparties of ships, the judgment contains a number of practical messages relevant to anyone drafting termination provisions in commercial agreements.
In the case, the owner of three ships hired them out under three charterparties of five years' duration. Each contract gave the owner the express contractual right to withdraw the ship if the charterers were late paying the hire charges. The contracts provided:
"Failing the punctual and regular payment of the hire, or on any fundamental breach whatsoever of this Charter Party, the Owners shall be at liberty to withdraw the Vessel from the service of the Charterers without prejudice to any claims they (the Owners) may otherwise have on the Charterers."
The contracts required the charterers to pay the hire charges in advance.
In breach of contract, the charterers were late paying the hire charges under all three contracts. They claimed financial difficulties and made a number of promises to pay off the arrears, but these were not kept. Accordingly, the owners withdrew the ships and terminated the contracts, seeking payment of the arrears of fees and damages for breach of contract covering the reminder of the five year term.
On appeal, the Court of Appeal held that the charterers had shown that they were unable (due to financial difficulties), and therefore unwilling, to pay the fees as the contract required, for the remainder of the contract. They were, therefore, in breach of contract. The Court of Appeal was satisfied that this would trigger the owners' express contractual termination rights. But what about the position at common law?
The Court of Appeal said that the payment obligation in the contracts was an "essential" term but then went on to classify it as an `innominate term' and not as a condition. This meant that the charterers' failure to pay the hire charges did not necessarily give the owners the right to terminate the contract at common law. Significantly, the Court of Appeal said that most contractual terms are innominate unless the contract makes clear a contrary intention. It said that the courts should not be too ready to interpret contractual terms as conditions. If the consequence of a breach could vary from the trivial to the serious that would be indicative of the term being an innominate term and not a condition. Even if a breach triggers an express termination right, that does not necessarily make it a breach of condition.
Although the payment term was not a condition, the Court of Appeal considered that the owners had been justified in terminating the contracts at common law. The Court was satisfied that failure to pay the hire charges as required by the contracts was a repudiatory breach by the charterers. The Court said that missing a few payments might not be repudiatory if it cast no doubt on the charterers' willingness and ability to pay off the arrears and pay promptly in future. However, the evidence in this case had shown that the charterers were unwilling, because unable, to pay promptly in future.
In the alternative, the Court of Appeal said, although the contracts required payment in advance, the charterers had shown an intention to pay in arrears for the remainder of the term. That was a substantially different bargain from that contained in the contract and deprived the owners of substantially all the benefit of the contracts, giving them the right to terminate at common law.
In light of the Court of Appeal's observations in this case about conditions and innominate terms, anyone drafting commercial agreements should work on the basis that every term in the contract is innominate unless they expressly identify it as a condition or a warranty. Also, when drafting a termination clause, consider whether to agree expressly that any breach that triggers termination is a condition, leading to damages for loss of the contract, or that the rights arising under the termination clause are the sole remedy for the terminating party, excluding common law rights to terminate and claim damages for loss of the contract.