The nature of termination for convenience clauses
As mentioned in our alert of last year, click here to read, it is increasingly the case that contracts provide one and, sometimes, both of the parties, with the ability to terminate the contract “for convenience” or “at will”. More often than not, such a provision will permit termination without having to specify a reason.
In that alert, we looked particularly at whether, in the light of English court authorities, the right to terminate under such provisions was unqualified and unconditional or subject to an obligation of good faith.
Most recently, in Comau UK Limited v Lotus Lightweight Structures Limited (unreported) 27 June 2014, Mr. Robin Knowles CBE QC, sitting as Deputy High Court Judge in the Commercial Court, considered whether a party’s losses following a termination for default could be affected by the availability of a termination for convenience provision.
The facts of the case The court had to consider an application for summary judgment on liability, with damages to be assessed, and for an interim payment in connection with a claim for repudiatory breach of contract.
The contract between Comau UK Limited (Comau) and Lotus Lightweight Structures Limited (Lotus) contained both a termination for breach provision, which could be operated by either party, and a termination for convenience provision, which could be operated by Lotus.
The termination for convenience provision at clause 12.5 was as follows:
“In addition to any other rights of Lotus to terminate the Contract Lotus may, at its option, and provided it is not then in breach of any payment obligation to [Comau] under the Contract immediately terminate the whole of the Contract but not only part at any time and for any reason, by giving written notice to [Comau]. Upon such termination…Lotus’ sole liability to [Comau] shall be, subject to Clause 12.7, to pay to [Comau] the aggregate of the following amounts without duplication:…”
Lotus failed to pay certain invoices as they became due and performance of the contract was suspended. Comau wrote to Lotus on 24 August 2012 referring to the termination provisions for material breach. Lotus was asked to rectify its breach and make the required payments. Lotus neither responded nor paid the sums due. On 8 October 2012, Comau wrote to Lotus giving notice that it had decided to terminate the contract with immediate effect.
Comau alleged in the legal proceedings that Lotus’s conduct was also in common law repudiatory breach of contract and that Comau had accepted that repudiatory breach on 8 October 2012, thereby, entitling it to damages.
At an early stage in the proceedings, Lotus consented to judgment being entered on a claim in debt in relation to the invoiced sums still outstanding. The damages sought by Comau in the proceedings which continued were for its “expectation interest”, that is, its lost profits on the entire project as a result of the termination of the contract; profits which Comau alleged it would have earned, but for termination of the contract.
The decision on liability
The judge held that Lotus had real prospects of successfully defending Comau’s allegation that it was in repudiatory breach of the Contract at 8 October 2012 for reasons which included the fact that Comau had referred to the contractual termination provisions in its letter dated 24 August 2012 and not to a termination at common law for a repudiatory breach.
The decision on quantum
The judge noted that, even if he had been persuaded on liability, he would have declined to order an interim payment in the sum sought or in fact any sum. This was on the basis that, as the terms of the contract allowed Lotus to perform the contract in different ways, such as terminating the contract subject to paying certain sums to Comau, damages must be assessed on the least onerous obligation.1
Although Lotus was in breach of its payment obligations, the judge stated that this did not appear to be relevant as the assessment of damages looks at what Lotus would do if there had not been a breach.
Therefore, any assessment would proceed on the assumption that Lotus would have exercised its rights under clause 12.5, because any other assumption ignores the limited nature of Comau’s “expectation interest”, namely, that Comau was never entitled to profits on the whole of the goods and services to be supplied pursuant to the contract, but was only ever entitled to such profit as it might have gained prior to any “termination for convenience”.
If clause 12.5 was ignored when assessing damages, the effect would be to give Comau the benefit of a better bargain than it actually made. Comau could, therefore, only be awarded nominal damages even if it established liability.
The court dismissed Comau's application for summary judgment against Lotus and for an order for the payment of interim damages.
What can we learn from the decision? This case makes it clear that where a contract allows performance in a number of different ways, including by early termination for convenience by the defendant, a damages award will not give a claimant the benefit of a better bargain than the minimum performance required by a defendant.
In the absence of contract drafting to the contrary, on the basis of the decision in Comau, the existence of a termination for convenience clause is likely severely to limit a claimant’s claims for expectation interest and damages for breach to the payment of any sums provided for in the termination for convenience clause.
If the consequences of the decision in Comau are not intended:
It should be made clear in the contract that, in the event of a termination for default under the contract or at common law, the termination for convenience provisions will not limit the recoverable damages
Alternatively, albeit less likely to be accepted, the losses payable in the event of a termination for convenience should include lost profits
As ever, it is vital that the intentions of contracting parties are not only fully understood, but also, and most importantly, clearly captured in the contract drafting.
IECA Europe Training Course - The Legal Framework and Governance of Energy Contracts
Thursday 11 September - Friday 12 September
Taking place at the Office of Reed Smith at The Broadgate Tower, 20 Primrose Street, London, UK.
Join the IECA for a two-day training course taught by the faculty members of the Centre of Commercial Law Studies, Queen Mary College, London University.
Topics will include:
Overview of Physical Commodities
The Role of Letters of Credit
Global Energy Governance
Relationship Between Banks and Commodity Markets
Regulation and Compliance
LNG and Disputes
Bills of Lading
This training course will benefit credit risk managers, compliance and regulatory lawyers and corporate lawyers. Lunch will be provided both days.
Click here for more information or to register.
Abrahams v Herbert Reiach Ltd  1 KB 477, see also Chitty on Contracts 31st edition Vol 1 at 26-074, both referred to at paragraph 23 of the judgment