A brief summary of the principles, recent developments and practical tips relating to terminating contracts and the availability of damages.
- A contract may be terminated early by either exercising a contractual right to terminate (eg through a termination clause), or the common law right to accept repudiation following a serious breach of contract.
- A party wishing to terminate a contract in accordance with its terms must comply with the contractual terms of termination and notice. Alternatively, if utilising the common law right, the party must accept the serious breach and communicate clearly and unequivocally to the other party that it treats the contract as terminated.
- A serious breach of contract can invoke both contractual termination rights and common law termination rights, such that both contractual (eg payments under the contract) and common law (eg damages for "loss of bargain") remedies are available. The right to terminate a contract under a termination clause, however, doesn’t necessarily require a breach of the contract. In this situation, only contractual remedies would be available to the innocent party.
- In Phones 4u Ltd (In Administration) v EE Ltd, the court had to decide whether damages for "loss of bargain" were available to EE, following its termination of the contract via a termination letter. In the termination letter, EE stated expressly that it was terminating pursuant to a contractual term, and did not identify any breach of contract or renunciation by Phones 4U as relevant to its decision to terminate. EE did, however, reserve all rights and remedies further available to it.
- It was later found that prior to EE’s termination of the contract, Phones 4U had committed a breach of contract which was arguably repudiatory and would therefore give EE the right to terminate and subsequently claim damages. The breach however was entirely separate to the circumstances which invoked EE’s contractual right to terminate.
- The court concluded that because EE had terminated the contract in express and sole reliance on the contractual term, without reference to the breach by Phones 4U, it could not subsequently claim common law "loss of bargain" damages on the basis that it had terminated in response to Phones 4U's entirely separate repudiatory breach. As such, common law damages were not available, and EE was limited to remedies provided for in the contract.
- The court also noted that the reservation of rights wording was ineffective after the contract had been terminated, as "a right merely reserved is a right not exercised".
What this means
- Parties should consider, prior to termination of a contract, all the relevant grounds that might give rise to a right to terminate and the remedies available to them.
- If it appears that a party might terminate for repudiatory breach but also has a contractual right of termination, it may be possible to terminate for the breach but include wording to the effect that if not so entitled to terminate it will instead terminate under the contractual provisions. Whether this is possible will depend upon the exact terms of the contract.
- Reservation of rights wording should not be relied on to reserve a common law right to terminate, as such right must be exercised prior to any other termination of the contract.