Termination of a contract for repudiatory breach

The High Court has recently considered whether a party terminating a contract for repudiatory breach at common law must follow the contract's termination provisions and give the other party notice and an opportunity to cure the breach. In the case of Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm), Richmond Mercantile FZC (“Richmond”), a United Arab Emirates company, entered into a long term agreement to supply bitumen to Vinergy International (PVT) Limited (“Vinergy”), an Indian company. Vinergy was obliged to buy its entire requirements from Richmond.

The contract contained the following termination clause:

"Clause 17.1.1. Either party may terminate this Agreement immediately upon: (i) 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."

After four years, Richmond purported to terminate the agreement for repudiatory breach by Vinergy, on the grounds that it had allegedly breached the exclusivity provisions by purchasing substantial supplies from a third party, and that Vinergy had failed to pay both an invoice and demurrage charges (being charges for failure to load or discharge deliveries by ship on time).

Vinergy argued that Richmond's failure to give it an opportunity to remedy the alleged breaches in accordance with the termination clause in the contract was unlawful and itself amounted to a repudiatory breach.

Under common law, the most serious (repudiatory) breaches of contract give the aggrieved party the right to end the contract by giving notice to the other party. Contractual termination provisions, however, commonly provide for immediate termination rights on the occurrence of certain events such as insolvency or irremediable material breach. If the breach is remediable, however, a contract may require the party wishing to terminate to give the defaulting party an opportunity to cure or remedy the breach within a specified period. If such an opportunity is not given, the aggrieved party may thereby wrongly terminate the contract, putting itself in repudiatory breach of contract.

Following an arbitration decision that the termination was valid despite the lack of notice and opportunity to remedy, the terminated party appealed.

It was held in this case that it was a matter of construction as to whether a clause requiring notice and a cure period applied to a party terminating for repudiatory breach at common law. There was no general principle that it should so apply. In this case, it was held that:

• The termination provisions at clause 17.1.1 did not expressly apply to a repudiatory breach at common law and there was no justification for implying wording to the effect that it should; and
• The only type of breaches within the scope of clause 17.1.1 were remediable ones.

The arbitration tribunal had already ruled that the exclusivity breach was not remediable and therefore the terminating party was entitled to rely on it to justify termination without first giving notice and a chance to remedy the breach. There was no leave to appeal on this point.

Accordingly, Richmond was not obliged to follow the notice and cure period procedure set out in the contract in respect of Vinergy's repudiatory breach of the exclusivity provisions, and its acceptance of such repudiatory breach and termination of the contract on this ground had been valid.

Mr Justice Teare upheld the arbitrator's decision and dismissed Vinergy's appeal.

This judgment raises the practical question of whether, when purporting to exercise a common law right to terminate a contract, a party should comply with any notice or cure period that is expressed in the relevant termination provisions.  The cautious approach would be to observe the contractual termination procedures even when exercising a common law right to terminate, in case the terms are subsequently construed as applying to a common law termination situation.  However, the terminating party should take care to specify in any notice that it is exercising its common law, rather than contractual, rights of termination, as the exercise of each such right may have different consequences.

From a practical perspective, this case highlights the fact that the parties need to be clear in the drafting of termination provisions in contracts. For certainty, if parties do intend a notice and cure period to apply both to repudiatory breaches of contract as well as contractual breaches, the contract should say so.