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Termination for repudiatory breach: do contractual notification provisions apply?

17 May 2016

​A party who terminated a contract for common law repudiatory breach was not obliged to follow contractual termination provisions (including as to a cure period and notice). In Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC [2016] EWHC 525 (Comm) Vinergy claimed that the termination was not valid because the terminating party had not provided notice or an opportunity to remedy the breach, as required by the termination provisions in the contract. The Commercial Court noted that there was no generally applicable rule and refused to imply a term in circumstances where the contractual termination provisions did not expressly cover common law repudiation. 

Vinergy entered into a master supply agreement in August 2008 (the Agreement) with Richmond to receive a supply of bitumen for an extendable term of ten years. Disputes developed between the parties and Richmond terminated the agreement in July 2012. Vinergy denied liability and claimed that Richmond had unlawfully terminated the agreement.

An arbitral tribunal found that there had been three repudiatory breaches by Vinergy: (i) a breach of the exclusivity provisions of the Agreement by which Vinergy had undertaken to buy bitumen exclusively from Richmond; (ii) a failure by Vinergy to pay an invoice from July 2011 for almost a year; and (iii) failure by Vinergy to pay demurrage for certain shipments.

The tribunal held that Richmond had lawfully terminated the Agreement and awarded Richmond sums which had fallen due for payment and damages.

Vinergy appealed, claiming that the tribunal's finding was wrong in law.

Termination provisions in contract

Amongst other termination rights contained in Clause 17, Clause 17.1.1 allowed either party to terminate the Agreement immediately upon "failure of the other party to observe any of the terms [of the Agreement] and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party…". When Richmond terminated the Agreement, it did not give notice requiring remedy in accordance with Clause 17.1.1.

Clause 18 confirmed that termination in accordance with Clause 17 did "not prejudice the rights of action or remedy [of either party] in respect of any antecedent breach by the other party of any such party's obligation under [the] Agreement".

Repudiatory breach not covered by termination provisions

Vinergy argued that any common law right to terminate for repudiatory breach had to be exercised in the manner prescribed by Clause 17. It relied on Lockland Builders Ltd v Richwood (1995) 46 Con LR 92 (CA) in which the court had found that a party who sought to terminate for repudiatory breach should have followed a specific contractual termination provision because the alleged breaches fell within the scope of the termination clause.

Teare J recognised that the arbitral tribunal had already made a finding of fact that Vinergy's actions amounted to repudiatory breach. So he approached the matter as one of construction (relying on guidance from the Court of Appeal in Stocznia Gydinia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75 that Lockland Builders Ltd had not laid down any general principles for such situations). Teare J considered the following question: was the notice provision in Clause 17.1.1 intended to apply when a party sought to exercise its common law right to accept a repudiatory breach as terminating the Agreement?

There was nothing in Clause 17.1.1 which expressly referred to the right of a party to accept a repudiatory breach as terminating the Agreement and Teare J found that he could not imply such a provision for three reasons: (i) Clause 17.1.1 did not deal with common law repudiation and instead termination under the Clause was predicated upon "failure…to observe any of the terms" of the Agreement (which could be major or minor in terms of seriousness); (ii) the requirement to give notice to remedy in Clause 17.1.1 did not apply to other termination rights contained in the remainder of Clause 17 (with the judge therefore inferring that the notice requirements were intended only to apply to the specific termination right contained in Clause 17.1.1); and (iii) nothing in Clause 18 touched on either party's rights at common law to accept a repudiatory breach as terminating the contract.

Exclusivity breach incapable of remedy anyway

Teare J went on to consider the position if his approach was wrong and if Lockland Builders Ltd had laid down a more general principle. He considered whether "a clause requiring notice to remedy applies to breaches within the scope of the clause". First, he noted that it was clear that only breaches which were remediable would fall within the scope of Clause 17.1.1. Teare J considered that the second and third breaches by Vinergy (failure to pay an invoice, and failure to pay demurrage) were remediable and Vinergy was bound by the finding of the tribunal that the first breach (failure to adhere to an exclusivity arrangement) was "incapable of remedy" (despite being attracted by Vinergy's arguments to the contrary).

As such, even if Clause 17.1.1 applied to repudiatory breaches which were capable of remedy, it could not apply to the breach of the exclusivity provisions because that breach was not capable of remedy. Given the seriousness of the breach, Richmond was entitled to accept Vinergy's repudiatory breach of the exclusivity provisions as terminating the contract without the need to require remedy of the breach.

Comment: In all but a handful of circumstances, the court will approach an agreement on the natural reading of the words. In this case, if the parties had wished to apply notice provisions to common law termination for repudiatory breach, they should have done so expressly. The message is very clear: if you wish to include cure periods and specific notice periods for repudiatory breaches, do so explicitly. The court will not, as a matter of construction or implication, allow a party to require its counterparty to comply with such provisions at a later date.

This case follows a number of recent decisions in which the court has considered the interplay between express contractual rights to terminate an agreement and the rights to terminate that arise under common law. For example, the court's decision in C&S Associates UK Ltd v Enterprise Insurance Co Plc [2015] EWHC 3757 (Comm), highlights that exclusion of any common law remedy must be done explicitly, and the more valuable the right in question (for example, the right to terminate for repudiatory breach), the more express this wording must be. The decision in Vinergy takes this approach to its natural conclusion: where the parties intended to amend common law rights (for example, to add a cure period for repudiatory breaches), they must be explicit and clear in their drafting.

A cautious party may, despite this decision, wish to observe contractual notice provisions in case the specific facts of the case lead a judge to construe that such provisions apply to a common law termination for repudiatory breach. In such circumstances, the party exercising the provisions should ensure that it makes it abundantly clear that, despite following contractual notice provisions, it is exercising its common law right to terminate for repudiatory breach. Following the decision of Leggatt J in Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm), it is clear that a terminating party must explicitly communicate which right is being exercised (or that both rights are being exercised in circumstances where there is no inconsistency in doing so), otherwise the communication may not be sufficiently certain for there to have been an effective termination.

Further Information 

This case summary is part of the Allen& Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.

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