The Commercial Court recently dampened car group Fiat’s hopes of receiving a loss of profits pay out from Lotus by dismissing its application for summary judgment on a claim for repudiatory breach of contract 1.
In so doing, the Commercial Court confirmed that when assessing damages, a defendant will only be required to fulfil the minimum contractual obligations and a claimant will not get more than they bargained for.
The claim arises out of an agreement between a subsidiary of Fiat and Lotus for the supply to Lotus of goods and services for the manufacture of the chassis for a new model of car at Lotus’ factory.
The agreement provided for Lotus to pay the contract price in accordance with a staged payment schedule. Lotus failed to make the required payments on time and, as at 24 April 2012, it owed £536,122 to Fiat in respect of an invoice which should have been paid by 30 December 2011. Fiat duly suspended its performance of the agreement pending payment of the overdue monies in accordance with its contractual rights.
The agreement provided both parties with the right to terminate for material breach of any condition of the contract which was not remedied within 30 days’ notice of the breach. Lotus also had the right under the agreement to terminate at will on terms that it pay Fiat for any work undertaken and any associated costs.
Fiat exercised its right to terminate for material breach on 8 October 2012 after Lotus failed to pay the outstanding sum within 30 days of a notice to remedy being served on 24 August 2012.
Fiat subsequently issued proceedings against Lotus. In the proceedings, which are ongoing, Fiat alleges that, in addition to the contractual debt claim, Lotus is liable for loss of profits arising out of its common law repudiatory breach of the contract. It values its loss of profits claim based on what it terms its “expectation interest”, namely that, but for Lotus’ breach of the agreement, it would have earned the maximum potential contract price.
In support of the claim for repudiatory breach, Fiat submits that Lotus’ prolonged failure to pay or make any proposals to pay the sums due under the contract demonstrated a clear and unequivocal intention on the part of Lotus not to perform its obligations under the contract. Fiat asserts that it was thereby deprived of substantially the whole of the benefit of the contract.
Lotus consented to judgment on the debt claim in the sum of £536,122 but is defending the claim for common law repudiatory breach of contract. Fiat proceeded to seek summary judgment in respect of this outstanding head of claim, with an interim payment pending the assessment of damages.
The issue before the judge was whether Lotus has a real prospect of successfully defending the claim for repudiatory breach of contract.
In support of its application, Fiat highlighted the following points:
- In addition to failing to pay the outstanding invoice in full, Lotus had failed to pay the first invoice on time, making payment nearly three months late;
- Lotus had only paid 10% of the amount due under the second invoice and that was paid nearly four months late;
- Lotus’ had failed to respond to correspondence about the overdue invoices or to offer any explanation for the failure to pay or make any proposals about payment;
- By October 2012, Lotus had only paid 5.9% of the total contract price and Fiat was deprived of the opportunity of fulfilling the contract because Lotus had failed to pay the amounts due in respect of the services already performed; and
- It was not fair to expect Fiat to wait indefinitely for Lotus to pay the sums due without terminating the agreement and claiming damages for its loss of bargain.
The judge dismissed the application for summary judgment identifying the following reasons in support of his finding that Lotus has a real prospect of successfully defending the claim for repudiatory breach:
- Fiat’s notice to remedy of 24 August 2012 referred to its intention to terminate the contract under the terms of the contract alone. It did not refer to terminating for repudiatory breach;
- Lotus’ failure to respond must be construed in the context of the fact that the contract remained in an interim condition of suspension;
- The late payment of the first invoice and part payment of the second invoice were evidence of Lotus’ intention to perform the contract rather than an intention not to perform it;
- The percentage of the potential total contract price that had been either invoiced or paid ignored the fact that Lotus had the right to terminate the contract at will and, therefore, that the actual contract price might be a great deal less;
- The period of suspension of the contract between Fiat’s notice to remedy and termination was only seven weeks which, in context, was comparatively modest; and
- It had been open to Fiat to send a further letter to Lotus making it clear that it intended to rely on its rights at common law and to that end that time was of the essence and that it would treat a continued and unexplained failure to pay as a repudiatory breach. Fiat had not done this.
Assessment of Damages
Given the judge’s dismissal of the application, it was not necessary to deal with Fiat’s request for an interim payment of damages. Nevertheless, the judge made some telling remarks about the merits of Fiat’s quantum claim.
The judge categorised Fiat’s claim to be in a class of case where the defendant’s contractual obligations could be lawfully performed in a number of different ways. Referring to the reasoning in Abrahams v Herbert Reiach Ltd2, the judge confirmed that the court will only require such a contract to be performed by the defendant in the least onerous way.
Applying this principle to Fiat’s claim, it appeared to the judge that Fiat’s loss should be assessed on the basis that but for its breach, Lotus would have availed itself of the right to terminate the contract at will to reduce its liability to Fiat. To assess damages on any other basis would be to give Fiat the benefit of a better bargain that it had actually made.
This case serves as a useful reminder of the difference between contractual termination and termination for repudiatory breach. A claimant needs to carefully prepare the groundwork in order to avail itself of both remedies.
The case also illustrates that the court will assume that a defendant will only perform the minimum obligation required of them and will assess damages for breach of contract on this basis. Given this, we assume that Fiat is managing its expectations for its “expectation interest” claim.