Terminating your contract: When can you call it quits?

Parties to commercial contracts may wish to exit their contractual arrangements for all sorts of reasons. In many cases, they will have included in their contract a right to terminate in particular circumstances, and a process for doing so. Even where there is no express right to terminate, parties may be entitled to terminate under the general law for a counterparty’s breach.

But termination is a drastic step and should never be taken lightly. If a party gets it wrong, it may itself be in breach of contract, giving the counterparty a right to terminate or claim damages or both.

In this eighth of our series of contract disputes practical guides, Tom Leech QC, Robert Moore and Gregg Rowan consider when a contract may be terminated and the implications of termination, and provide some practical tips for commercial parties. You can click here to download the PDF guide.

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Court awards additional sum to compensate successful party for exchange rate loss on legal costs

In assessing the costs to which a German claimant was entitled on having succeeded in its patents claim in the English High Court, the court has awarded an additional sum of £20,000 to compensate for the claimant's exchange rate loss on payments to its solicitors, particularly in light of the significant fall in the value of sterling against the euro since the EU referendum result: Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France S.A. [2016] EWHC 3421 (Pat).

The judge commented that, where a foreign company has had to exchange its local currency into sterling in order to pay costs as the litigation has gone on, it is (in principle) entitled to be compensated for any additional expenditure incurred as a result of exchange rate losses in the same way as it is entitled to be compensated by the payment of interest for being kept out of its money.

This appears to be a novel point on which there was no previous authority. The decision suggests that, where a successful foreign party has suffered significant exchange rate losses in converting funds to sterling to pay legal costs, it may be entitled to compensation for those losses.

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Turkish Court of Appeal takes restrictive view of English jurisdiction clause

A decision of the Turkish Court of Appeal has important implications for parties to agreements with a Turkish element (such as a Turkish counterparty or place of performance in Turkey) who wish their disputes to be litigated in the English courts (or some other courts) rather than in Turkey.

Turkish courts have long recognised and respected contractual clauses that grant jurisdiction to an overseas court, provided that they comply with the Turkish Private International Law No 5718 (“Law 5718”). However, in a recent decision, the Turkish Court of Appeal has taken a restrictive approach,  rejecting a jurisdiction clause in favour of the "English courts" as insufficiently precise to be a valid choice of jurisdiction.

It remains to be seen whether the Turkish courts will follow this approach in future, but the decision serves as a warning to parties conducting business with a Turkish element. Such parties should consider revisiting and potentially amending the jurisdiction clauses in their contracts to minimise the prospect of ending up before the Turkish courts, if that is not what has been agreed.

Serdar Paksoy and Simel Sarialioglu of Paksoy, one of Turkey's leading independent law firms, and John Ogilvie and Oliver Elgie of our London office, consider the decision and its implications further below.

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Court of Appeal considers where harmful event occurred for the purpose of jurisdiction in economic tort claim

In a claim alleging conspiracy and unlawful interference in the claimant's business by cutting off supplies, the Court of Appeal has held that the harmful event occurred where the goods should have been delivered to packaging agents. As this was either Italy or the Netherlands, the English courts did not have jurisdiction. It was irrelevant that the failure to deliver meant the claimant was unable to supply its English distributor – that was merely consequential or indirect damage which was insufficient to give the English court jurisdiction under the Brussels and Lugano regime: Actial Farmaceutica LDA v Professor Claudio de Simone, Mendes SRL and another [2016] EWCA Civ 1311.

A defendant domiciled in an EU or EFTA member state can be sued in tort in another member state if the harmful event occurred there. This has been interpreted as meaning both the place where the event giving rise to the damage occurred and the place where the damage occurred.

The place where damage has occurred isn't always easy to determine, particularly in cases concerning economic loss. This decision (and the earlier Court of Appeal decision in AMT Futures Ltd v Marzillier, Dr Meier & Dr Guntner Rechtanwaltsgesellschaft mbH [2015] QB 699, considered here, which it draws heavily on) give guidance on the correct approach. The search is for the state where the jurisdictionally significant harm has occurred, or where damage has occurred which is closest in causal proximity to the harmful event. In this case, that was the non-delivery to the packaging agents.

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High Court considers requirements for demand under a guarantee

In a recent decision, the High Court enforced a demand guarantee against a guarantor who claimed that sums due had not been demanded in accordance with the guarantee's terms, including because an incorrect delivery method had been used: MUR Joint Ventures BV v Compagnie Monesque De Banque [2016] EWHC 3107 (Comm).

The decision underlines the importance of ensuring the terms of a guarantee are clear and precise, in particular as to what is required in order to make an effective demand for payment under the guarantee. Where the demand is to be accompanied by documents and those documents are to take a particular form, the guarantee should make that clear. Where there are other requirements, such as a specified delivery method, the guarantee should leave no room for doubt as to whether or not these are intended to be mandatory. In this case, the court concluded that a requirement for registered post was merely directory, and there was no question that the demand had in fact been received by the guarantor. Accordingly, the demand was effective.

From the perspective of the party making demand under a guarantee, however, it is advisable to comply strictly with any requirements set out in the documents. That is the best way to avoid a dispute arising in the first place.

Andrew Cooke, a senior associate in our disputes division, considers the judgment below.

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Court of Appeal finds party in repudiatory breach of contract due to repeated late payments

The Court of Appeal has recently found that a shipowner was entitled to terminate for repudiatory breach where the hirer was in persistent breach of an obligation for the punctual payment of hire: Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982.

The court found that the term was not a strict condition of the charterparties, such that any delay in payment (however slight) would allow termination. However, the charterer's conduct amounted to a renunciation, as it demonstrated an intention not to perform the charterparties in a way which deprived the shipowner of substantially their whole benefit. That was, in essence, because it transformed a contract for advance payment into one for payment in arrears. 

The decision is of interest in demonstrating the court's general reluctance to conclude that a term is a strict condition, so that even a minor breach will allow a party to terminate and claim loss of bargain damages – unless the parties have made it clear that that is their intention. Merely including an express contractual right to terminate for breach of the term will not necessarily be sufficient.

The decision is also of interest in demonstrating that a party may be in repudiatory breach as a result of missed payments, even if the arrears represent a relatively small proportion of the overall sums due under the contract. Each case will however turn on its facts. Here it was significant that the punctual payment of hire under a charterparty has long been recognised as being of great importance to shipowners, even though the court concluded it is not a strict condition.

Gregg Rowan, a partner in our dispute resolute team, considers the decision further below.

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High Court decision illustrates danger of using “all” in a negative clause

In a recent decision, the High Court had to consider the proper construction of a term which entitled the parties to rescind "if all of the Conditions have not been discharged" by the longstop date: Dooba Developments Limited v McLagan Investments Limited [2016] EWHC 2944 (Ch). 

Describing the question as finely balanced, the court held that the power to rescind arose only where none of the Conditions had been discharged by that date; it did not arise where any of the Conditions had not been discharged.

The case highlights the ambiguity of the word "all" when used in a negative context, and the importance of using clear, unambiguous language to avoid questions over interpretation.

Kerrie Barrett, an associate in our disputes team, considers the decision below.

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Court of Appeal decision confirms high threshold for fraud requirement in a common law derivative action in the LLP context

A recent Court of Appeal decision provides a useful reminder of the limited scope of the exceptions to the rule in Foss v Harbottle in common law derivative actions, which continue to apply to limited liability partnerships (LLPs) as they are not subject to the statutory regime for derivative actions under the Companies Act 2006. The Court of Appeal's decision confirms that common law derivative actions should only proceed on the basis of the "fraud on the minority" exception in cases of actual fraud or where wrongdoers have improperly benefitted themselves at the expense of the LLP: Harris v Microfusion 2003-2 LLP & ors [2016] EWCA Civ 1212.

While the continued existence of a common law derivative claim is, in theory, a powerful tool at the disposal of members of an LLP, this case further demonstrates that the reality is that such claims will likely succeed only in exceptional circumstances.

Gary Milner-Moore and Tom Henderson, a partner and senior associate in our dispute resolution team, consider the decision further below.

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Commercial Court considers interpretation of clause excluding consequential or special losses

The Commercial Court has considered the proper construction of the phrase "consequential or special losses, damages or expenses" in a ship-building contract, concluding that (in this specific contract) it meant any losses resulting from physical damage other than the cost of repair and replacement: Star Polaris LLC v HHIC-PHIL INC [2016] EWHC 2941 (Comm).

While this case does not establish new law, it is a useful illustration of the court's approach to construction of contractual terms and, in particular, that the court will construe limitations of liability in the context of the contract as a whole. It demonstrates in particular that, even if the court has previously decided on the construction of a similar (or even identical) term in a different contract, it may reach a different conclusion on its meaning in this different context.  Here it was significant that the contract in question provided a complete code for dealing with liability, so it was not just a question of determining what liability was excluded, but ascertaining what liability was undertaken.

As a practical matter, the case illustrates that parties should take great care in ensuring that any terms defining or restricting their contractual liabilities are clear and unambiguous. Using precedent wording from a different contract that the court has already ruled upon is no guarantee that a similar approach will be taken in a different context.

James Baily and Martin Hevey, a partner and associate in our dispute resolution team, consider the decision further below. For more information on contractual limitation and exclusion clauses, see Defining your liability in advance: Liquidated damages, limitation and exclusion clauses from our contract disputes practical guides series.

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Court of Appeal clarifies scope of potential liability under the Misrepresentation Act 1967

A recent Court of Appeal decision provides welcome clarity for issuers on the scope of their potential liability under the Misrepresentation Act 1967, and the use of disclaimers to restrict that scope: Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S) (In bankruptcy) [2016] EWCA Civ 1262.

The court held that the publication of an investor presentation in a way that actively invites investors to make use of its contents for a purpose other than the presentation's original purpose could create sufficient proximity to give rise to a duty of care in relation to the content of the presentation. However, potential liability for a misrepresentation in a document can be avoided by a valid disclaimer of liability contained in the same document notwithstanding that the disclaimer itself had no contractual effect (ie was merely a non-contractual notice).

Further, the Court of Appeal (contrary to the first instance decision) determined that section 2(1) of the 1967 Act applies only to a contract which the representee has been induced to enter into directly by the representor, and does not extend to obligations of a contractual nature which the representee acquires from a third party and in respect of which it would have no right of rescission.

For more information, please see our Banking litigation e-bulletin on the decision.

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