Terminating contracts can be a risky business. A clumsy attempt at termination or an attempt to terminate when your counterparty’s breach is not sufficiently serious can backfire and give your counterparty the right to terminate and claim damages against you.
Many contracts require termination notices to be in a specific form or to contain certain information. They may also include (separate) clauses about how notice must be given and to whom. Good contract drafting will consider this and will provide clearly for the form of such notices. Where these exist, the notice itself must be compliant with those terms and, in all cases, it must be clear and effective.
In Vivergo Fuels v Redhall the court considered how to interpret a notice. Vivergo engaged Redhall to carry out mechanical and piping work at a new biofuel plant. A year after the contract started it came to an end. Vivergo claimed that it gave a valid notice under the contract to terminate on the grounds that Redhall had not proceeded “regularly and diligently” and had not provided an updated programme for the works. Redhall counter argued that the notice itself was not valid and that Vivergo had no grounds to terminate so their actions amounted to repudiation of the contract.
The judge looked at the proper construction of unilateral notices and made the following points:
- Unilateral notices are to be construed in the same way as contractual documents and therefore it is necessary to construe them objectively against the background or "the relevant objective contextual scene" known to both parties.
- The relevant meaning of the unilateral notices is the meaning that a reasonable recipient would have understood by the notices. The reasonable recipient "would have had in the forefront of his mind the terms" of the relevant underlying contract.
- The purpose of the notice is relevant to its construction and validity. Prima facie, if a notice unambiguously conveys the purpose, a court will ignore immaterial errors which would not have misled a reasonable recipient.
- The notice must be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when the notice is intended to operate. In this case the notice needed to properly specify the default.
- In the context of a clause which require a default notice (a warning notice) and then a termination notice, the two notices must be connected both in content and in time.
Practice point regarding notices:
- Good contracts will often have termination and notice clauses. Check these before you attempt to terminate a contract and comply with their terms.
- A notice may be effective even if the other party uses the wrong words or unconventional grammar provided they make their meaning clear and unambiguous.
- If you are giving notice, don’t risk being understood. Make sure your language actually conveys what you mean.