Contractual versus common law rights to terminate: a reminder from the English courts

Summary

Parties often specify various termination rights in their contract and also agree that these do not affect the parties’ common law right to terminate in response to a repudiatory breach. But, where parties specify certain conditions precedent to the exercise of their contractual termination rights (eg notice, attempts to remedy the breach, time periods), will those conditions also apply to the parties’ common law right to terminate for repudiatory breach?

In Vinergy International (PVT) Ltd v Richmond Mercantile Ltd FZC, the High Court said that these conditions precedent applied only to the parties’ contractual termination rights and not their common law termination rights. However, this decision was reached on the basis of the terms of the parties’ contract.

The case does not lay down any new principles or tests but does emphasise the importance of agreeing contractual terms which govern the relationship between contractual and common law rights. In particular, where parties agree contractual termination rights, we would advise that they also:

• Specify whether or not these are supplementary to or are intended to exclude the parties’ common law rights, especially in relation to termination. In particular, if the parties intend to exclude any common law rights (eg if they want their contractual termination regime to contain the only permissible ways in which each party can terminate the contract), they should use clear wording that the common law right to terminate is excluded.
• Specify whether any conditions precedent eg any notice or timing requirements, or provisions allowing for any breach to be remedied, also apply to the common law right to terminate (if this is preserved). The Vinergy case suggests that the common law right to terminate will operate free of any restrictions in the contract but this all depends on the terms of the contract.

The Vinergy case

This case concerned a contract under which Richmond agreed to supply Vinergy with bitumen. Richmond alleged that Vinergy had committed three repudiatory breaches of the contract: (i) by purchasing bitumen from another supplier, in breach of the contractual exclusivity clause, (ii) by failing to pay an invoice for over a year, and (iii) by failing to pay demurrage for various shipments.

Richmond purported to terminate the contract on the basis of these repudiatory breaches. The contract provided for an express right to terminate as long as 20 days notice was provided in advance for any breaches which were capable of being remedied. However, Richmond did not give any such notice; instead, it purported to terminate immediately.

The matter was decided by way of arbitration. Richmond argued that it had terminated the contract for repudiatory breach pursuant to its common law right (rather than under the contract). It was common ground that the contract preserved the parties’ common law right to terminate. As a result, Richmond argued, the 20 days notice requirement was irrelevant as it applied only to any exercise of its contractual right to terminate.

Vinergy, in response, relied on selective comments from a few previous English court decisions which suggested that a common law right to terminate must not be read in isolation from the parties’ agreement as to any contractual termination rights. Accordingly, Vinergy argued, the 20 days notice requirement applied also to the exercise of any common law right to terminate.

In the arbitration proceedings, the Tribunal found that Richmond had terminated the contract pursuant to its common law right, in response to Vinergy’s repudiatory breaches, and that the 20 days notice requirement did not apply.

Vinergy appealed the Tribunal’s decision under s. 69 of the English Arbitration Act 1996 ie that the Tribunal had erred on a point of law. In particular, Vinergy argued that the Tribunal was not entitled to disregard the 20 days notice requirement, even where Richmond had terminated pursuant to its common law right.

Decision

Mr Justice Teare dismissed Vinergy’s appeal and agreed with the Tribunal that Richmond’s common law right to terminate was not fettered by the restrictions in the contract, which he said applied only to the contractual right to terminate.

In particular, Teare J held that the previous decisions relied upon by Vinergy did not amount to a principle that a common law right to terminate must follow any conditions specified by the parties in relation to their contractual rights to terminate. Instead, it was all a matter of construction of the relevant clauses. In this case, Teare J held that:

• the contract did not state that the 20 days notice would apply to the parties’ exercise of their common law right to terminate; in fact, it suggested that this requirement was confined to the specific termination right in which it appeared in the contract (which was actually one of six specified circumstances giving rise to a termination right); and
• there was no basis on which he could imply a term into the contract that the parties’ common law right to terminate should be exercised in accordance with the 20 days notice requirement set out in the contract, relating to one of the six specified contractual rights to terminate.