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Justifying early termination and varying contracts by email

The High Court has considered a number of issues in the recent case of C&S Associates UK Ltd v Enterprise Insurance Company plc.

The High Court has considered a number of issues in the recent case of C&S Associates UK Ltd v Enterprise Insurance Company plc [2015] EWHC 3757, including the scope of the exception to the general rule that a party can justify termination by a new reason given later.

C&S Associates UK Ltd (“C”) handled motor insurance claims for its customer, Enterprise Insurance Company plc (“D”). D wanted to carry out an audit exercise but C refused to deliver files to D’s external auditor. D claimed that this was a serious breach of its contract with C and terminated that contract. However, D later cited C’s poor performance as a new, different reason to justify termination. C challenged this and sought damages for wrongful termination.

The case involved a number of issues, of which the following are two examples:

Giving a new reason for termination not mentioned at the time of termination

The general rule is that a party can justify termination by relying on a new failure or breach that was not mentioned at the time of termination. An exception to this rule, from cases such as Heisler v Anglo Dal Ltd [1954] 1 WLR 1273, is that where the new failure or breach is capable of being remedied, such failure or breach cannot be used if it was not mentioned at the time of termination.

The court held that D was entitled to use poor performance as a new reason for termination, even if C could have cured the breach. The decision was based on the following:

  • The Heisler qualification concerned "anticipatory breaches or, to the extent that this is different, to situations where if the point had been taken, steps could have been taken to avoid the party being in breach altogether, either by giving it an opportunity to perform its obligation in time or by enabling it to perform in some other valid way"

  • Even if the Heisler qualification concerned actual breaches that had already been committed, there had to be a real prospect of the necessary correction being made (it would not be enough that the matter “might” have been put right)

  • In the Heisler case, if the terminating party had pointed out the other party’s failure (a defect in a guarantee), the other party would have been able to rectify it before the deadline for performance had passed so that no breach would have occurred; whereas in C’s case, when D terminated the contract C’s alleged breaches by poor performance had already taken place.

What is the effect of this decision?

The case highlights the need for clear drafting of termination clauses to state that, if this is what the parties intend, new reasons for termination cannot be used post-termination to justify early termination. The effect of this would be that, if a termination notice is not valid or justified, a new termination notice would need to be given for any new reason. This may give the defaulting party an opportunity to avoid termination by curing the failure or breach, if the contract additionally provides for a cure period.

Variation of a contract by email

The standard variation clause in the contract between C & D required that, for a variation to be effective, such variation should be in writing and signed by or on behalf of the parties.

The issue before the court was whether there had been an effective variation of the contract by email in respect of the increase of C’s fees under its contract with D.

The court found that the variation clause in the contract was intended to ensure that the parties would not be bound by oral communications or informal written documents that are not signed. It then held that the email variation of C’s fees was valid because the variation clause did not specify paper documents or a manuscript signature, nor that both parties’ signatures needed to be on the same document. The relevant emails had been signed by appropriate individuals through their respective signature blocks in the emails.

What does this mean for email exchanges?

Contracts typically include a standard clause stating how the contract should be varied. Such clauses usually require that only written amendments signed by the parties are effective. On its own therefore this would not be enough to prevent a variation by email (particularly if the interpretation clause allows for emails to be included in any reference to “written” or “writing”). Therefore, if the parties do not want variations to be made by email, this should be expressly stated in the contract.

In addition, it should be made clear in any email exchange that you are negotiating “subject to contract” and do not intend to be bound until a formal document is executed.

If you are interested in finding out more about this or any other contractual or commercial issue, please contact Haroon Younis, a solicitor in the Corporate department, on 0113 213 4037 or email haroon.younis@weightmans.com.