Termination options: General law or contractual right
29 May 2014
In Newland Shipping and Forwarding Ltd v Toba Trading FZC  EWHC 661 (Comm), 12 March 2014, Leggatt J considered the interplay between express contractual rights to terminate an agreement and the rights to terminate that arise under the general law. A party which has a right to terminate both under a contract and the general law may exercise both of those rights provided there is no inconsistency in doing so. If it would be inconsistent to exercise both rights, the party must elect which right it wishes to exercise. The party seeking to terminate must clearly communicate which right is being exercised (or that both rights are being exercised), otherwise the communication may not be sufficiently certain for there to have been an effective termination.
Newland and Toba entered into a contract for the sale and carriage of gasoil. Clause 7 of the contract gave Newland the right to cancel the contract if Toba failed to pay for the goods within a set period and provided that Toba would be obliged to compensate Newland for all associated losses. Clause 12 sought to limit Newland and Toba's liability for loss or damages of any kind, except as expressly provided in the contract.
Inter-play between contractual right to terminate and termination under the common law
The judge observed that the "inter-play" between contractual termination rights and termination rights under the general law was "an area which is not free from difficulty". He noted that an express termination clause will not exclude the right to terminate under the general law unless the contract clearly says so. Leggatt J also confirmed that there is generally no inconsistency in opting to terminate both on the basis of an express contractual term and on the basis of a repudiatory breach. So, where both are available, a party can elect to exercise both at once. However, there may be an inconsistency in the exercise of these rights if the consequences of their exercise conflict. In the Dalkia case1, contractual termination and acceptance of a repudiation would have had "markedly different consequences" as the former allowed the defaulting party to retain possession of the energy plant in question (provided it paid a termination sum) whereas the latter would have entitled the innocent party to take it back. In these circumstances the judge in Dalkia found that the single termination notice could not be taken to have produced two "diametrically opposing consequences" and held that there had been a contractual termination only.
- in cases where the consequences of contractual termination and termination under the general law are identical, termination will be valid even if the innocent party declines to specify which right he is exercising;
- if the consequences of each termination right are different (but not inconsistent) termination will only be effective if the innocent party specifies which right is being exercised, or alternatively specifies that both rights are being exercised otherwise there is not sufficient certainty for the termination be effective;
- where the consequences of exercising one termination right are inconsistent with the consequences of exercising the other, the innocent party must elect between the two rights and must clearly communicate his choice for termination to be effective.
Newland's termination – consequences were "different" but not inconsistent
Which termination right(s) had Newland exercised?