Considering repudiation and liability in the termination of contracts

Anita Crozier is an associate at law firm CMS

A party terminating a contract for repudiation or otherwise for default by the other party will usually be entitled to compensation for loss of the contractual bargain. 

“The Dalton case provides an example of when a termination-for-convenience clause (albeit not in a construction contract) did not provide a limit on liability”

Generally, this will take the form of a loss-of-profits claim for the remaining term of the contract. However, complications may arise where the defaulting party nonetheless had a contractual right to terminate for convenience. 

It is therefore important that parties consider the extent to which termination-for-convenience clauses may be relied upon to reduce damages that might otherwise be recoverable under the contract but, at the same time, remain acutely aware that such clauses do not always serve as a limitation of liability.

The case

The very recent case of Dalton Group Limited v City of Edinburgh Council [2023] CSOH 4 dealt with the thorny issues of repudiation and liability around termination.

Dalton Group was the exclusive purchaser of Edinburgh City Council’s scrap metal. A dispute arose regarding the degree of contamination of the scrap being purchased – with Dalton alleging hazardous gas canisters were frequently present in the scrap. There was a meeting and then an email exchange between the parties, following which Dalton claimed that deliveries of scrap stopped, whereas the council claimed that Dalton refused to accept the scrap.

Generally, a refusal to perform plainly goes to the root of the contract and is generally considered to be a repudiation of the contract. Repudiation does not terminate the “innocent” party’s obligation automatically, but instead gives the innocent party a choice to (1) accept the repudiation and therefore treat the contract as terminated; or (2) affirm the contract and insist upon performance.

Here, faced with a repudiatory breach, Dalton argued that the council’s wrongful repudiation was not accepted by it – Dalton had affirmed the contract; the contract continued. Whereas the council argued the contract had been lawfully terminated – it could rely on a termination-for-convenience clause allowing it to terminate at any time by giving three months’ notice; damages should be assessed by the least burdensome method of lawful termination and limited to three months’ worth of loss of profit, rather than loss of profit for the time left to run of the contract.

In reaching its decision, the court acknowledged Dalton’s position that the contract had never been terminated (whether lawfully or unlawfully), given Dalton had never accepted the council’s wrongful repudiation (in line with a party’s choice to affirm the contract and insist upon performance when faced with a repudiatory breach). The court further acknowledged that the council could have exercised the termination provisions of the contract, but it chose not to. The court therefore concluded that “in a case where the contract has not been terminated, damages do not fall to be assessed by reference to the least burdensome method of terminating the contract”. As a result, the council faced a full claim for loss of profit, not limited to the period of three months within the termination-for-convenience clause.

How this affects contractors

The Dalton case provides an example of when a termination-for-convenience clause (albeit not in a construction contract) did not provide a limit on liability following wrongful termination and allowed a full claim for damages to be taken. However, there is no settled law in this area and there are many cases, such as Comau v Lotus Lightweight [2014] EWHC 2122, in which it was held that the mere existence of a termination-for-convenience clause was sufficient to eliminate a right to claim for loss of profit.

Furthermore, the Dalton case serves as an important reminder that parties to a contract are aware that their actions or inactions may innocently or carelessly terminate a contract, opening them up to potentially costly legal consequences. If a party is looking to terminate its contract early, it needs to be alive to key practical issues and clearly communicate its intention to terminate (in line with the contract provisions). Whereas, if the party wants to prevent a breached contract from continuing, it needs to be careful not to inadvertently affirm the contract through conduct.

While it is generally preferable to avoid a termination situation in the first place, contractors should pay close attention to the wording of any termination-for-convenience clauses in their contracts and the effect that such clauses may have on the recoverability of losses arising on termination.

Leave a comment