Contract termination – obligation to engage during notice period

AMT Vehicle Rental Ltd v Volkswagen Group United Kingdom Ltd [2022] EWHC 2934 (Comm)

The question

In a contract for the supply of vehicles, was the customer required to inform the supplier of its requirements during the contractual notice period?

The key takeaway

In a contract to supply hire vehicles, the customer had a duty to engage with the supplier by informing the supplier of its need for vehicles and allowing the supplier to offer hire vehicles based on the customer’s needs during the notice period.

The background

AMT Vehicle (AMTV) contracted with Volkswagen Group UK (VWUK) to supply them with hire vehicles to replace their customers’ vehicles when they were unable to be used because of breakdown or other need for investigation or repair.

In order to facilitate the booking process, AMTV was given daily access, via a third party intermediary, to a spreadsheet (the booking master sheet) showing VWUK’s demand for vehicles. AMTV could then match VWUK’s need with one of its vehicles.

In September 2019, VWUK gave notice to terminate the contract – It had decided that it would be more efficient to have a single supplier of vehicles and AMTV was not a viable contender because it was not large enough. VWUK decided to terminate its agreement with the third party intermediary and AMTV. VWUK’s notice expired in March 2020 and it was common ground between the parties that the notice was effective from that date.

From October 2019 to March 2020, VWUK removed AMT’s access to the booking master sheet and did not otherwise inform AMTV of its needs for replacement vehicles. This made it impossible for AMTV to meet VWUK’s needs and supply vehicles. AMTV contended that this placed VWUK in breach of the terms of the contract. It claimed damages by way of lost profits for the hires that VWUK would have made from it, but for the breach.

The decision

One key issue for the court was whether VWUK owed a contractual obligation to notify AMTV of its requirements (ie allow it access to the booking master sheet or similar) and allow it the opportunity to respond to vehicle requests during the notice period. In its judgment, the court reasoned that knowledge of that need was central to the performance of the contract and that the commercial efficacy of the contract depended on there being a contractual obligation on VWUK to give this notification.

The court focused on clause 2.1 of the contract which stated that “… VWG engages the Provider to provide the services to VWG …” and, in particular, the meaning of the word “engage”. The court found that the clause was worded to be a term of the contract, not simply background to it, suggesting that it was meant to have some operational significance and also that the presumption against surplusage would favour the clause having some meaning beyond simple repetition of the background section. While there was no requirement for VWUK to engage AMTV in respect of any particular vehicle need, that did not mean there were no contractual obligations as to how the parties should deal with each other.

The court accepted AMTV’s pleaded case that VWUK was obliged to engage with it during the course of the contract. On whether VWUK had breached the contract, the court found that VWUK was in breach of clause 2.1 in not informing AMTV of its need for replacement hire vehicle services or giving it an opportunity to offer its services in response to such information from October 2019 until the termination of the contract in March 2020.

The court awarded AMTV its losses by assessing what hires it would probably have obtained from VWUK, disregarding any possibility that VWUK would simply have refused to propose any hires, then discounting from the sums received for the hires the costs that AMTV would have incurred.

Why is this important?

During a contractual notice period, contracting parties should continue to perform their obligations under the contract. Just because notice to terminate has been given, this does not mean that the obligations under the contract cease.

Any practical tips?

During the proceedings, VWUK argued that the use of the word “engage” in clause 2.1 was more consistent with the word “involved” which had been used elsewhere in the contract. The court noted that, in VWUK’s examples of use elsewhere in the contract, the word “engage” was used passively whereas in clause 2.1 the use was active and transitive. The parties and court had also examined dictionary definitions of the word “engage”. This forensic approach to interpreting key terms is worth noting.

When drafting contractual provisions, consider that the courts took seriously AMTV’s reliance on the presumption against surplusage in the construction of a contract, quoting previous case law: “Surplusage is by no means unknown in commercial contracts, of course, but it is unusual for parties to include in the operative part of a formal agreement of this kind a whole clause which is not intended to have contractual effect of any kind. One starts, therefore, from the presumption that it was intended to have some effect on the parties’ rights and obligations”. If a particular clause is intended to have some significance to the parties’ obligations rather than simply to restate the background to the contract, then its inclusion in the operative part of an agreement is compelling evidence that it is intended to have contractual effect.

The court also considered that the commercial efficacy of the contract depended on there being a contractual obligation on VWUK to notify AMTV of their vehicle requirements.

Spring 2023