Automotive Latch Systems Limited (ALS) vs Honeywell International INC [2008] EWHC2171 (Comm)

The High Court has ruled that, a company called ALS (the corporate vehicle of a Mr Chevalier, the inventor of a car door latch mechanism (called ULS)) could not rely on past breaches as grounds for terminating and claiming damages under a joint collaboration agreement (JCA) with a manufacturer, Honeywell. The decision highlights the risks for an organisation in terminating its commercial agreements (in this case, a long term product development collaboration that had gradually turned sour) and the importance of keeping a clear documentary trail for the purposes of any later contract claims. In particular:

  • risks of wrongful rermination: terminating a contract for alleged breach (or material breach) by a counterparty continues to carry risk for the party alleging breach since if it transpires that termination was defective under the contract, the party making the allegation is itself open to a counterclaim. In this case, even though the court found that there was evidence to show that the Honeywell had not complied fully with its obligations to ALS, these breaches could not justify termination. ALS was therefore found to be in repudiatory breach of contract, as a result of its wrongful termination;
  • failure to notify the defaulting party of breach: of particular importance appears to be the timing of ALS' notice of breach when reviewed against the termination clause in the JCA. Construing the JCA's termination provisions strictly, the judge (Mr Justice Flaux) noted that the provisions (a) referred to present and not past breaches; and (b) allowed the defaulting party an opportunity to take steps to remedy the breach. To the extent that Honeywell had breached the agreement, these were found to have occurred six months before the date of ALS' notice of termination and ALS had not acted in relation to those breaches at the time they occurred. The court therefore rejected ALS' arguments justifying its later termination as 'artificial';
  • general performance obligations and failure to document: claimants also face difficulties in trying to assert failure to meet performance obligations when these are based on general obligations (e.g. reasonable behaviour) that are difficult to measure objectively. Much of ALS' claim was based on Honeywell failing to meet the JCA obligation to take "all reasonable actions without unreasonable delay to manufacture the latch at competitive cost". The court found that although Honeywell was in breach of requirements to act without unreasonable delay, these were not sufficient as grounds for termination (since they did not ultimately cause the project's failure). ALS' claim was also not helped by the fact that it had failed to document meetings and conversations with Honeywell during the 28 month course of the project. This meant it could not point to specific failures. On the other hand, Honeywell were able to produce emails, minutes of meeting and other documents to back up their defence. As a consequence, ALS appeared to have an uphill task in convincing the court of its claims. The eyewitnesses and expert evidence led by ALS also clearly failed to impress Mr Justice Flaux who noted that the inventor, Mr Chevalier whilst prepared to give evidence to an "unparalleled extent", struck him as a Walter Mitty like figure;
  • unrealistic expectations: it is also apparent that many of the problems came about as a result of some degree of 'overselling' on both sides which gave rise to misunderstandings and unrealistic expectations between the parties when entering into the project – perhaps not uncommon in many projects. In particular there was a misunderstanding as to how advanced the ULS product prototype was when entering into the JCA and also Honeywell's previous experience as a manufacturer in this specific field. Interestingly, while the Judge could not accept a Honeywell claim for misrepresentation by ALS in entering into the JCA, the court could review ALS' behaviour prior to entering into the JCA when assessing whether Honeywell's actions had been "reasonable" or not under the JCA;
  • damages for loss of a chance/lost profits: the case also illustrates the evidential difficulties for claimants seeking damages for loss of a chance (and ensuing profits) in the UK courts. ALS had claimed for damages for lost profits ranging between £332 million and £457 million, which were dismissed as "wholly unrealistic". Here, the judge noted that Honeywell had an express right to terminate the JCA (without penalty) in its sole discretion if continued performance was not commercially viable (i.e. applying the principle that in assessing loss or damage the assumption is that the defendant would have performed the contract in the way least onerous to itself). Continuing problems with development of the ULS after termination of the Honeywell relationship were also noted (and the fact that nearly 5 years after termination of the relationship, the ULS has not been produced in any volume by any car equipment manufacturer).