We previously reported on two High Court decisions relating to the effect of termination for convenience clauses as potential limiters on claims for loss of the bargain damages in termination cases. A TCC decision last month has considered this topic further in the context of a project manager’s appointment for a residential development in central London. Whilst illustrating the potential limiting effect of such clauses, the case leaves the correct legal approach unresolved.

Termination clauses as limiters of liability

A party terminating a contract for repudiation or otherwise for default by the other party will usually be entitled to compensation for loss of the contractual bargain. This will often take the form of a loss of profits claim for the remaining term of the contract. However, complications can arise where the defaulting party nonetheless had a contractual right to terminate for convenience. Is the innocent party still able to claim for loss of profits for the remaining duration of the contract on the assumption that the right to termination for convenience would not have been exercised?

The cases on this issue are not entirely consistent. In a previous Law-Now in 2014, we reported on a Commercial Court decision (Comau v Lotus Lightweight) which had taken a strict approach, finding that a termination for convenience clause eliminated a right to claim for loss of profit (for our Law-Now on this case, please click here). The court noted that to find otherwise would ignore the limited nature of the innocent party’s “expectation interest” in the contract: “[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’.”

A somewhat different line was taken by the TCC in Willmott Dixon v London Borough of Hammersmith and Fulham also decided in 2014. There a factual enquiry was deemed necessary to determine, in all of the circumstances, if and when the defaulting party would have exercised its right to terminate for convenience (for our Law-Now on this case, please click here).

Redbourn Group Ltd v Fairgate Developments Ltd

RGL was appointed as development manager by Fairgate in respect of the development of Fairgate’s own building and two adjoining pieces of land. RGL’s remuneration under its appointment was broken down into stages with fixed fees associated with those stages of work. The key stages were to: (i) assemble the site from three titles (one of which included obtaining a long lease from Network Rail); (ii) obtain planning permission; and (iii) management of the project to completion. Fairgate’s fee for project management was to be a fixed percentage of the build cost together with a bonus for completion on time and within budget. It was also entitled to a fixed fee upon the securing of planning permission, however the submission of a planning application was subject to approval by Fairgate.

Fairgate purported to terminate the contract for material breach by RGL. Among other things, Fairgate complained that RGL had failed to obtain planning permission for the project and had failed to negotiate the necessary lease with Network Rail who had since leased the relevant land to an alternative investor. Fairgate’s allegations in this regard were rejected by the court in a previous hearing and Fairgate was found to have repudiated the contract. It is notable in this regard that Network Rail had decided at an early stage that the Fairgate development was not aligned with its own strategy for the land in question, meaning the lease would never have been agreed. Without the lease, RGL could not be criticised for failing to submit a planning application.

RGL claimed damages for Fairgate’s repudiation, consisting of the fixed fee for securing planning permission and its project management fee together with the bonus for completing on time and on budget. This was said to reflect the sums RGL would have earnt had the contract been carried out. RGL’s claim was rejected by the court on two grounds:

  • The contractual discretion given to Fairgate to approve any application for planning permission meant that RGL never had a guaranteed right to earn the remaining fees under the contract. RGL’s appointment could have stalled at the planning permission phase through no fault of its own or Fairgate’s.
  • Alternatively, on the facts RGL would never have been able to achieve a key deliverable (namely the lease of the Network Rail land) and the project originally envisaged in RGL’s appointment had therefore become an unrealistic project to pursue. Fairgate would therefore have been justified in deciding not to proceed with the project.

Conclusions and implications

This case provides another example of a right to terminate for convenience (or in this case a discretion not to proceed) imposing a limit on a defaulting party’s liability for loss of profit in the event of termination. The court’s reasoning does not shed much light on the tension noted above between the earlier decisions in Willmott Dixon and Comau. Parts of the decision appear to be supportive of the line taken in Comau where the mere existence of a termination for convenience clause was sufficient. However, it was clear on the facts that Fairway would never have proceeded with the project in any event and the approach in Willmott Dixon could be said to be equally applicable.

The tension between these two competing approaches remains, therefore. Pending clarification from further High Court or Court of Appeal decisions, parties should be aware of the limiting effect that termination for convenience clauses or contractual discretions such as that considered in the present case may have on the recoverability of losses arising on termination.

References:

Comau UK Limited v Lotus Lightweight Structures Limited [2014] EWHC 2122 (Comm).

Willmott Dixon Partnership Ltd v London Borough of Hammersmith and Fulham [2014] EWHC 3191 (TCC).

Redbourn Group Ltd v Fairgate Developments Ltd [2018] EWHC 658 (TCC).