We reported recently on a Commercial Court decision which held that termination for convenience clauses operate to place a limit on claims for loss of profit. As the contract breaker could have terminated for convenience at any time, no entitlement to loss of profit was said to arise. This view has now been challenged by a TCC decision published last week.
The decision concerns a procurement claim brought by Willmott Dixon against Hammersmith and Fulham Borough Council. Willmott Dixon was the incumbent provider of repairs and maintenance services to the Council and lost out on the award of a new contract for the same services to a competitor. Willmott Dixon challenged the probity of the procurement process and sought to recover the profit it would have expected to earn had it been awarded the new contract.
The proposed contract was for a 10 year initial term but permitted the Council to terminate for convenience on six month’s notice after the first year of the contract (i.e. 18 months after commencement at the earliest). The Council argued that any claim to damages ought to be limited to this 18 month period as Willmott Dixon would not have had any guaranteed entitlement to work beyond that period.
The court rejected Willmott Dixon’s claim on the merits, but found in its favour on this specific point. The court held that it was open for Willmott Dixon to make factual arguments, by reference to political, budgetary or economic considerations, to show that the Council would not have terminated for convenience and would have operated the contract for its full 10 year term (assuming of course that Willmott Dixon had been successfully awarded the contract in the first place).
These findings would appear to be at odds with the recent Commercial Court decision in Comau v Lotus Lightweight (reported by us here). The court in that case held that in such cases damages ought to be assessed on the basis that the defendant would have immediately exercised its right to terminate for convenience. The court in Comau noted that“any other assumption ignores the limited nature of [the innocent party’s] ‘expectation interest’ – that [it] was never entitled to profits on the whole of the goods and services to be supplied pursuant to the Agreement but was only ever entitled to such profit as it might have gained prior to any ‘termination for convenience’.”
The Comau decision was not referred to by the TCC and different authorities were cited by the court in each case to justify these opposing conclusions. The law on this topic would therefore appear to be in an uncertain state and parties will need to await further decisions and possibly authoritative guidance from the Court of Appeal to understand the full effect of termination for convenience clauses. In the meantime, parties should be aware that such clauses may in certain circumstances result in an exclusion of liability for future loss of profit in the event of breaches of contract.