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Can the termination of an agreement be justified by something discovered later down the line?

In C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm), the High Court confirmed that a party can justify termination of an agreement by reference to a failure which it was not aware of at the time of termination. The Court also provided useful guidance on the circumstances in which a contractual right to terminate may preclude a party’s common law right to terminate for repudiatory breach.

As this is an English decision, it is not technically binding in Scotland but it is highly persuasive.

Facts

C&S Associates UK Ltd was a motor insurance claims handler for Enterprise Insurance Company plc. Enterprise wanted to conduct an audit on the claims which C&S handled on its behalf, but C&S refused to deliver the files to Enterprise’s external auditor. As a result, Enterprise terminated the agreement for repudiatory breach and subsequently cited C&S’s poor performance as further grounds for termination.

C&S brought a claim against Enterprise seeking damages for wrongful termination arguing that:

  • Enterprise should not be able to rely on C&S’s poor performance to terminate as C&S would have been able to rectify the failure had it been notified of it. This exception to the general rule was established in Heisler v Anglo Dal Ltd [1954] 1 WLR 1273; and
  • Enterprise should not be able to terminate for repudiatory breach because the agreement contained a clause permitting either party to terminate for material breach on 30 days’ notice.

Decision

The High Court rejected C&S’s arguments and confirmed that a party can justify termination of an agreement by reference to a failure of which it was not aware at the time of termination. The High Court explained that the exception to the rule established in Heisler only applies to anticipatory breaches or to situations where steps could have been taken by the defaulting party to avoid the breach altogether. In this case, C&S would not have been able to remedy the breach even if it had been notified of it as the date for performance had already passed.

On the second point, the High Court agreed that it is open to parties to agree that certain breaches will not amount to a repudiatory breach. However, the parties had not done so in the present case. The agreement between Enterprise and C&S contained a clause permitting either party to terminate for “material breach” provided that, if the breach could be remedied, that party must give the defaulting party 30 days’ notice.

C&S argued that this amounted to an agreement that any material breach capable of remedy could not be treated as repudiatory. The High Court rejected this argument on the basis that the clause did not expressly prevent a sufficiently serious breach from amounting to repudiation of the contract. Therefore, it did not extinguish Enterprise’s common law right to terminate immediately for repudiatory breach.

Comment

This decision is a useful reminder that a party can justify a decision to terminate by reference to a failure of which it was previously unaware. The Heisler exception will only apply if the other party could have taken steps to prevent the contractual breach from occurring had it received notice of the failure.

Further, contracting parties should consider whether they wish to exclude the right to terminate for certain repudiatory breaches or to specify a time period in which such breaches must be rectified. If so, the parties should take care to ensure that their intentions in this regard are clearly set out in the contract.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, click here.

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