Not following termination procedure put innocent party in breach
GESNER v BOMBARDIER (CA) [2011]
A buyer who terminated for late performance without following the correct contractual termination procedure to the letter was itself found to be in breach.
Facts:
- G entered into a contract to buy an aircraft from B. It provided that G could invoke the termination clause if B delayed in delivering the aeroplane in accordance with the specification for 90 days for a ‘non-excusable’ reason. Delivery was delayed by 90 days and G gave notice to terminate.
- The drafting was not very clear but there was no express right under the contract to terminate immediately on notice for non-excusable delay of 90 days, only a reference to a right to terminate under the general termination clause. This gave a right to terminate for insolvency related reasons, which did not apply, or to terminate for material default having given 10 days’ notice to cure any such default.
- Hence, B argued the only available right for G to terminate required that it be given 10 days’ notice to remedy the delay and make the aeroplane ready for acceptance by G. As G had not referred to the 10 day period in its termination notice and given B the extra grace period specified, B treated G as if it was in material default, turning the tables.
Decision:
- The Court ruled, somewhat reluctantly, in favour of B. The contract provided a procedure to deal with material default which G had not followed and consequently, G was itself in breach.
- The Judge said that he did not think this flouted business common sense and that the Court should be cautious of being drawn into an inquiry about the commerciality of the transaction.
- Having said that, the Judge did concede there was a rational argument that the simple procedure of terminating without further notice where there was three months' excusable delay (ie for reasons beyond the seller’s reasonable control, which right did exist) should also be expected to be available where there was the same period of non-excusable delay. He commented that, “commercial rationality and fairness do not easily or necessarily square with a provision which is intended to favour a defaulting seller. In such a situation it seems to me that the court should be particularly careful about seeking to impose its own ideas of fairness on a commercial contract between parties of equal bargaining power”.
Points to Note:
- The unfortunate outcome for G, the buyer, illustrates how important it is to precisely follow the provisions in the contract. It also shows how critical it is to specify very clearly how the agreement can be terminated if a certain event occurs and what notice and remedy period (if any) needs to be given.
- G maintained “something had gone wrong with the drafting”. This can sometimes be argued to support the correction of a mistake and construing the wording of the agreement in context to get as close as possible to the meaning which the parties intended. Here the Court’s view was that the wording was not necessarily contrary to what the parties could have intended, so the argument failed. Although it was noted that the wording of the agreement was curious, the Court emphasised that its role is not to rule on the commerciality or fairness of a contract.
- The effect of the decision was highly significant for the parties. As a result, the seller, B, was entitled to keep some 10% of the purchase price (approximately $4million) as liquidated damages. The seller was also not obliged to reimburse the buyer for a further $4million in interest. A very costly mistake by the buyer indeed!