JUMPING SHIP: PRINCIPLES AND CASES ON TERMINATION

Iqbal Mohammed

1.

This talk is about the other side of the coin. It will set out the grounds which may give
rise to a right to terminate, practical issues with terminating agreements and what
risks may be involved.

Background
2.

In a breach of contract, the innocent party (Claimant) has a number of remedies

available to it. The remedies depend on whether the breach is of a condition,
warranty or innominate term.

3.

Any breach of contract gives rise to a cause of action; not every breach gives a
discharge from liability: Chitty, 30th Ed., at 24-001.

4.

A breach of a condition entitles the Claimant to repudiate the contract and/or claim
for damages: Poussard v Spiers and Pond [1876] 1 Q.B.D. 410. A condition being
a term which goes to the root of the contract: per Blackburn J. at p. 414. A
termination results in the both parties being relieved of their respective obligations
going forward and the Claimant being entitled to damages for the losses suffered.

5.

The Claimant must, of course, elect termination. He may prefer to treat the contract
as continuingaffirming the contractor waive his right of discharge.

6.

A contract may expressly provide for a right to terminate upon a breach which would
not otherwise in law amount to a repudiatory breach. It may also provide for grounds
for rescission. You will be given a $15m lesson in the importance of each.

7.

Not unusually, there may be a dispute as to who breached first. The Claimant, if he
fails to establish a fundamental breach, faces the risk of being found to have
breached the contract himself by not continuing with the agreement.

The election
8.

Firstly, the Claimant must establish a repudiatory breach. Whether a particular

breach is repudiatory is often a difficult judgement call to make:
A business having leased a brand new vehicle wants to terminate the agreement
after the vehicle broke down for the second time in 21 days. Both breakdowns were
on the road and caused serious inconvenience and lost sales. The hirer previously
repaired the vehicle without charge and is doing so again. The vehicle has been used
for only 5 days out of 21.

9.

The legal question is as reiterated by the Court of Appeal in Eminence v Heaney

[2010] EWCA Civ 1168, at 61:
whether, looking at all the circumstances objectively, that is from the perspective
of a reasonable person in the position of the innocent party, the contract breaker has
clearly shown an intention to abandon and altogether refuse to perform the contact.

10.

Motive is generally irrelevant, however, potentially repudiatory conduct resulting from

a genuinely held mistaken belief about the repudiating partys rights under the
contract may not be relied upon to terminate: Woodar Investment Development
Ltd v Wimpey Construction U.K. Ltd [1980] 1 W.L.R. 277, at p. 283.

11.

Secondly, upon being satisfied of a fundamental breach, the Claimant must decide
what to do. The decision need not be instant, as indicated by Rix L.J. in Stocznia
Gdanska SA v Latvian Shipping Co [2003] 1 C.L.C. 282 at p. 309:

between acceptance of repudiation and affirmation of the contract [there is] the
period when the innocent party is making up his mind what to do. If he does nothing
for too long, there may come a time when the law will treat him as having affirmed. If
he maintains the contract in being for the moment, while reserving his right to treat it
as repudiated if his contract partner persists in his repudiation, then he has not yet
elected.

12.

There are obvious risks in taking too long. The Claimant may inadvertently affirm the
breach but his right to terminate may also be overtaken by events: frustration, further
performance et cetera. Also bear in mind that until the Claimant has terminated, he is
bound to perform his obligations unless the other party has indicated otherwise or
their breach prevents that performance.

13.

Thirdly, once the Claimant has decided to accept the repudiation, he must
communicate his decision to terminate the contract to the breaching party.

14.

Communication is interpreted generously and may not be in any particular from or

even from the Claimant. Lord Steyn held per curiam in Vitol S.A. v Norelf Ltd.
[1996] A.C. 800, at p. 811, that:
It is sufficient that the communication or conduct clearly and unequivocally conveys
to the repudiating party that that aggrieved party is treating the contract as at an
end the aggrieved party need not personally, or by an agent, notify the repudiating
party of his election to treat the contract as at an end. It is sufficient that the fact of the
election comes to the repudiating party's attention.

15.

Once the repudiation has been accepted, it may not be withdrawn.

Reasons for termination

16.

A contract may afford the right to rescind or terminate. Each may obviously have
significantly different consequences. If the intention is to communicate rescission,
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this must clearly be made out. A mistaken reference to termination could be costly.
Shell Egypt West Manzala GMBH v Dana Gas Egypt Ltd. [2010] EWHC 465
(Comm) represents a cautionary tale for solicitors drafting termination letters.
17.

A good example of the difference in damages is the case of Howard-Jones v Tate

[2012] 1 P. & C.R. 11.

18.

Usually, the notice of termination will be in the form of a letter. Unfortunately, the
drafting may fall to solicitors. The letter will often set out the repudiatory breach and
the fact that it has been accepted by the Claimant and the contract has been
terminated as a result.

19.

Of course, the reasons should be carefully considered and accurately set out.
However, if the wrong reason has been given, all may not be lost. Greer J. aptly
described the legal position in Taylor v Oakes Roncoroni & Co [1922] 127 L.T. 267
at p. 269:
It is a long established rule of law that a contracting party, who, after he has become
entitled to refuse performance of his contractual obligations, gives a wrong reason for
his refusal, does not thereby deprive himself of a justification which in fact existed,
whether he was aware of it or not

20.

There are exceptions to this.

These were restated in Glencore v Lebanese

Organisation for International Commerce [1997] C.L.C. 1274 at p. 1286:

If the point not taken is one which, if taken, could have been put right;
If either the doctrine of waiver or estoppel applies; or
If goods have been accepted /retained (Sale of Goods Act 1979, s. 35).

21.

Despite some judicial criticismprimarily from Lord Denning as cited in Glencore

it is perfectly respectable for a Claimant to purport to terminate because of one
reason and justify termination on the basis of another reason in court.

22.

The classic jumping ship case is one of a reluctant purchaser who no longer wants
to complete: Eminence. Its also another tale of caution to solicitors drafting letters
involving the calculation of days!

23.

An important judgement in Leofelis SA v Lonsdale Sports Ltd [2012] EWHC 485

(Ch) illustrates the significance of being able to go back and recast the reasons for
termination.
Lonsdale granted to Leofelis an exclusive licence to use certain trademarks within
certain European territories in return for royalties. Leofelis in turn licensed these
marks to manufacturers for royalties with the written agreement of Lonsdale. The
agreement was due to expire in 2008, but was renewable at the option of Leofelis to
2014. In September 2007, Leofelis purported to terminate the agreement on the
basis that Lonsdale had obtained an injunction against a German licensee of Leofelis,
which repudiated the agreement.
Lonsdale denied repudiation and demanded that Leofelis continue its payment of
royalties. On appeal, it was held that Leofelis had not established repudiation.
Lonsdale subsequently brought a claim for breach of contract against Leofelis and
applied for summary judgement. In disclosure, Leofelis learned that Lonsdale had in
fact, breached the exclusive agreement by licensing the relevant marks to another
party, something which was completely unknown to Leofelis at the time.
Leofelis argued, in its counterclaim, that its termination was valid on different grounds
which existed at the time, an argument which was accepted.

Effect on damages
24.

Remember the law school basics; the Claimant must prove contractual breach and
resultant loss.

25.

Generally damages are assessed at the date of breach aiming to put the Claimant in
the position he would be had the contract been fulfilled. However, the court will not
ignore facts which would have resulted in the contract not being fully performed, even
if not breached, in any event. The majority held in Golden Strait v Nippon Yusen
Kubishika Kaisha [2007] 2 A.C. 353 at p. 391, that:
considerations of certainty and finality have in this case to yield to the greater
importance of achieving an accurate assessment of the damages based on the loss
actually incurred.

26.

Consequently, Claimants must be alive to any arguments that may be raised to

attack quantum. The Claimant must never forget the word actually in the above
passage.

27.

In Lonsdale, Leofelis subsequently established valid grounds for termination and

counterclaimed for losses suffered as a result of repudiation. However, the court held
that the repudiatory conduct, which was subsequently discovered, did not in fact
cause the 45m of losses claimed.

28.

Lonsdale persuaded the court that as a matter of principle, even if such a repudiatory
breach on its part were established, Leofelis cannot recover in respect of any lost
sales by its licensees after 28 September 2007, since irrespective of any breaches
arising from Agreement, Leofelis decided to bring the Agreement to an end and
treated itself as no longer having a licence as from that date. Lonsdale obtained
summary judgement in respect of those parts of the claim.
6

29.

While this judgement has been the source of significant comment, it is submitted that
it is highly fact specific and more closely concerns the Claimants failure to prove that
the repudiatory breach caused loss. Roth J, applying Golden Strait, states at 66
(emphasis added):
The unknown breach of the Agreement by Lonsdale was not accepted by Leofelis as
a repudiation for the obvious reason that it was unknown. Therefore, that alleged
breach, although its nature met the test for a repudiatory breach, cannot be the cause
of the termination and thus of the loss that flowed from the termination. Put another
way, Leofelis is not able to contend that if Lonsdale had not engaged in the impugned
conduct regarding SIA, then the Agreement would have remained on foot such that
Leofelis was in a position to earn continuing royalties from its sub-licences.

30.

And at 68:
Viewed as a question of causation, therefore, I consider that the counterclaim to
damages after 28 September 2007 must fail.

31.

This is, however, a good illustration of the need to widely consider the grounds a
party has for termination, in law and under the contract, and include them all in the
notice to prevent reliance on one particular ground which may be invalidated at trial.
Of course, this will not assist the Claimant who knows of no other grounds.

Conclusions
32.

Those advising a potential Claimant of a breach of contract which may be repudiatory

should carefully consider whether there is sufficient evidence to satisfy a court
objectively of the other sides intention to abandon the contract.

33.

Parties should consider carefully whether any other grounds for termination exist
beyond those specifically relied upon.

34.

Where possible, both repudiatory breaches and contractual termination grounds

should be given effect in the notice of termination with a view to avoiding an
impression that one particular ground is the true cause of the decision to terminate.

35.

Whenever one ground is able to be characterised as the true cause of the

termination, Leofelis poses a risk that the partys right to damages will depend on
that ground alone and that other grounds, while validating the termination, will not
sustain a claim for damages.

IQBAL MOHAMMED
24 May 2012