Obligation to allow an opportunity to remedy before terminating
VINERGY INTERNATIONAL v RICHMOND MERCANTILE [2016]
The High Court considered whether a a requirement that a party wishing to terminate for contractual breach must give an opportunity to remedy the breach applied when the party was terminating not based on the contractual provision but under separate ‘common law’ rights for repudiatory breach.
Background:
So-called ‘common law’ rights do not need to be stated in the contract; they simply exist in the background under the general law and they apply unless expressly excluded. The right to terminate for ‘repudiatory breach’ (or a very serious breach generally indicating a clear intention not to be bound by the contract going forward) is perhaps the best known example. Technically a party ‘accepts’ a repudiatory breach by the other and thereby brings the contract in question to an end. Acceptance can be by words or conduct or a formal communication but it must be clear.
Facts:
- The parties entered into an agreement for Richmond (“R”) to supply Vinergy (“V”) with bitumen. R alleged that V had committed various repudiatory breaches of the contract including purchasing bitumen from another supplier contrary to an exclusivity clause, failing to pay an invoice for over a year and failing to make certain other payments related to various shipments. R purported to terminate the contract on the basis of these repudiatory breaches.
- The termination clause provided as follows: “17.1.1 Either party may terminate this Agreement immediately upon … failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days; …”.
- However, R did not give V the opportunity to remedy required by clause 17.1.1 but instead it purported to terminate immediately.
- V argued that R's failure to give it an opportunity to remedy the alleged breaches in accordance with clause 17.1.1 was unlawful and itself amounted to a repudiatory breach.
- Both parties agreed that the contract did not exclude the parties’ right to terminate at common law and R argued that it had terminated the agreement pursuant to its common law right as opposed to under the contract. R therefore maintained that the requirement for a 20 day remedy period was not relevant as it only applied if it was exercising its contractual right to terminate.
- An arbitration tribunal found in R's favour. V appealed.
Decision:
- The Court dismissed V’s appeal and said it was a matter of construction whether a clause requiring a period to remedy applied to a party terminating for repudiatory breach at common law. It rejected V's argument that, where a contract provided for a remedy period to be given as part of a contractual termination procedure, that requirement would always also apply when a party sought to terminate at common law.
- In relation to clause 17.1.1, the judge decided that:
- it did not expressly apply to a repudiatory breach at common law and there was no justification for implying that it did apply;
- clause 17 provided six contractual rights to terminate - the requirement to give notice to remedy in clause 17.1.1 did not apply to the other five. It could be inferred from this that the remedy period was only intended to apply to the specific contractual right to terminate set out in clause 17.1.1 and not to any of the other express rights to terminate in clause 17 nor to the right to terminate at common law; and
- the only type of breaches within the scope of clause 17.1.1 requiring a remedy period were ones that could be remedied.
- The arbitration tribunal had already ruled that the breach of exclusivity was not remediable and therefore even if clause 17 did apply to a common law termination, R was entitled to terminate without first giving V a chance to remedy the breach. R’s acceptance of the repudiatory breach and termination of the contract had therefore been valid.
Points to note:
- Parties routinely set out various express termination rights in their agreements. Very often contracts are, however, silent on whether these rights apply in addition to any common law rights. We suspect that this is often because, having set out specific rights of termination and the formalities for exercising them in the contract, the parties are unaware that there may still be additional ‘extra contractual’ rights to terminate.
- Sometimes agreements state that any express rights are ‘without prejudice’ to (ie do not affect) common law rights and remedies but how many contracting parties really understand what these sorts of ‘boilerplate’ provisions actually mean?
- The terminating party should always be careful to specify in any notice which right to terminate it is exercising – whether it is the right at common law, a contractual right or both.
- Very few breaches are traditionally thought of as being incapable of being remedied. It is interesting that the arbitration tribunal here clearly considered that the breach of exclusivity was incapable of being remedied and this aspect was not appealed. As a result, strictly it was not necessary for the Court to decide the case on the basis it did.
- In terms of construing which breaches are capable of remedy and therefore caught by a requirement for a remedy period, it may be useful to set out in the contract which breaches the parties consider as irremediable. Depending on the nature of the agreement, breaches of confidentiality and security are examples sometimes given. The same principle applies to referring to what would constitute a ‘material’ breach which would trigger termination.
- An agreement may expressly exclude the right to terminate at common law. It is presumed that neither party intends to abandon remedies for breach which are available under the general law. Clear words must be used in the contract if the parties wish to exclude their common law rights. At least if the contractual termination provision is the exclusive statement of the rights of the parties, both parties would know where they stand. Even if common law rights are not excluded, perhaps it should be expressly provided that the requirement to give an opportunity to remedy a breach applies both to any right to terminate under a provision set out in the contract and any applicable right to terminate at common law.