A recent case sheds light on the importance of careful drafting and interpretation of contractual termination provisions.(1) It also provides guidance on the correct measure of damages when a purported termination proves to have been unlawful.
In 2003 MMP GmbH, a Swiss recruitment consultancy, entered into a 15-year franchise agreement with Antal International Network Limited, an established international recruitment agency. The franchise had operated for nearly five years when, in June 2008, Antal received a complaint from one of MMP's candidates, Mr Baumann.
On ending a personal relationship with Miss Bosshard, one of MMP's recruitment consultants, Baumann was deluged with text messages from her, as well as emails, phone calls and letters to his home address and his parents' address. According to Baumann, word of his problem was "spreading throughout the financial world".
Supposedly in response to Baumann's complaint, Antal terminated its franchise agreement with MMP with immediate effect, relying on Clause 16.2(l) which provided that MMP should not "at any time, do anything to affect adversely [Antal's] name, Trade Marks or other Intellectual Property". This clause was designated as a substantial term, breach of which would entitle Antal to terminate the agreement immediately.
Antal's chief executive officer (CEO) gave evidence of his concern that the incident could damage the Antal brand, and that such damage could spread quickly and broadly. He explained that he had considered it necessary to move quickly in terminating the agreement so as to prevent possible damage.
Unfortunately for Antal, disclosure during the course of litigation distorted this otherwise straightforward rationale. First, a note prepared by Antal as a crib sheet for the telephone call with MMP contained the words 'no business'. On cross-examination, MMP's operations director accepted that this was a reference to the absence of revenue from MMP that year. In another unfortunate turn, a contemporaneous internal email from Antal's CEO was disclosed, which contained the following remarks:
"We need to clean up the network and open great territories to better people, like we're doing in… Switzerland. I am thrilled we have gotten shot of Oscar [MMP's managing director and sole shareholder] and the ladies did very well to do it."
MMP denied that Bosshard's behaviour amounted to a breach of the agreement and issued proceedings claiming that the purported termination by Antal was itself a repudiatory breach. It claimed damages by reference to the value of MMP's business with the franchise compared to its value without it.
Antal maintained that it was entitled to terminate the agreement with immediate effect. Alternatively, it argued that damages (if any were due) should be assessed by reference to loss of profit, not the diminution in the value of MMP's business.
The judge found that Bosshard's conduct did not amount to a breach of the franchise agreement. Rather, he found Antal's purported termination to have been wrongful and in repudiatory breach. However, the victory was hollow, as the judge rejected MMP's damages claim. His reasons were as follows.
Liability
First, the judge found that Bosshard's actions could properly be attributed to MMP on the basis that the complaint was not about the private actions of an individual, but rather about the actions of a recruitment consultant whom Baumann had engaged - on however informal a basis - and who was misusing data from his curriculum vitae. Her conduct would have amounted to breach of her employment contract to which she would have no answer. Accordingly, she could not be said to have been "on a frolic of her own". The more important issue was whether her actions amounted to conduct that did "affect adversely [Antal's] name, Trade Marks or other Intellectual Property". It was here that Antal came unstuck.
The judge accepted that the reference to Antal's name should be construed widely to encompass the whole Antal brand, reputation and goodwill. He also accepted the evidence that Antal's CEO genuinely feared damage to the Antal brand.
However, there was no evidence that Bosshard's conduct had damaged the brand. On the true construction of the clause, actual damage was required in order for the termination provision to be triggered. The judge held that:
"a fear or concern that MMP's conduct may damage the brand is not sufficient to constitute a breach of the clause. There must be evidence that the conduct has in fact adversely affected the brand."
Damages
On the question of damages, the judge recalled the most basic principle of contractual damages: the measure is "the amount required to place the claimant in the position that it would have been in if the contract had not been broken".
In circumstances such as these, he held that the measure of damages was, "in shorthand", the loss of profits suffered as a consequence of the breach. The judge acknowledged that if the effect of the breach of contract had been to put the company out of business, then by definition, there would be no future profits (or losses) against which to compare the profits (or losses) which the company would otherwise have made. In such case it would be appropriate to look at the relative values of the business concerned. However, that was not applicable here. MMP was continuing to do business and the appropriate measure of damages was therefore its loss of profit, not the diminution in value arising from the loss of the franchise.
This case is another example of the importance of drafting watertight clauses. The inclusion of one or two words - 'might' or 'might reasonably' - would have significantly widened the scope of the termination provision, obviated the need to prove actual damage and ultimately changed the outcome of the litigation. As would be expected of a commercial enterprise, Antal was effectively seeking to invoke its termination rights to contain damage that might otherwise arise. Unfortunately, in this instance, the contractual provision in question did not facilitate this most obvious commercial response.
The case also highlights the need for care when creating documents that may ultimately be disclosed in the course of litigation. Although the judge rightly found the insights into the thoughts and motivations of Antal's senior managers to be "not really relevant" to the issue of whether Bosshard's behaviour amounted to a breach of the specific clause in question, the disclosures are a reminder of the embarrassment and prejudice that can be suffered in the event that such internal correspondence must be disclosed.
Finally, the case reinforces the need for pragmatism when embarking on litigation. MMP advanced its case solely on the basis that the correct measure of damages was the diminution in value of the business. It did not plead an alternative argument based on lost profits and its case therefore ultimately fell on that point alone, rendering MMP entitled to nominal damages "at most". The judge found MMP's valuation on the basis of the diminution in value analysis to be "hopelessly speculative and over-inflated". Therefore, even if he had decided the damages point in MMP's favour, its claim to damages would still ultimately have failed.
For further information on this topic please contact Matthew Dando at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) MMP GmbH v Antal International Network Limited [2011] EWHC 1120.