Contract termination—anticipatory repudiatory breach

James Kemball Ltd v “K” Line (Europe) Ltd [2022] EWHC 2239 (Comm)

The question

What approach will a court take to interpreting contract terms when a party purports to terminate a contract for anticipatory repudiatory breach?

The key takeaway

Where a professionally drawn contract between professionally represented parties is written in clear and unambiguous terms, a court will use the plain meaning of those terms to determine the right to terminate for the breach alleged. The availability of the common law right of repudiation will not provide a reason for the court to come to a different conclusion.

The background

James Kemball claimed damages from “K” Line for alleged breach of a service agreement (SA) by which James Kemball agreed to provide road haulage services for a fixed period (a minimum period of three years) and up to a defined maximum volume and by which “K” Line, who specialise in container transport by sea worldwide, agreed to provide an agreed minimum volume. 

James Kemball alleged that it was entitled to terminate the SA in accordance with its terms when “K” Line informed them that they would not be able, following a merger, to comply with the minimum volume requirement for all or most of the final period covered by the SA, referred to in the SA as “Period 3”. James Kemball purported to invoke the termination procedure within the SA, alleging anticipatory repudiatory breach of the SA by “K” Line for their prospective failure to provide the minimum agreed amount of business. Shortly after this, James Kemball terminated the SA under the following termination clause: “… the other Party commits a wilful, persistent and material breach of any provision of this Agreement”.

“K” Line’s position was that they were only liable for a surcharge in respect of any shortfall, to be calculated in accordance with a formula contained in the SA that it was agreed would apply where the minimum volume requirement was not met. This was contained in a clause stipulating that it was the “sole and exclusive” remedy available to James Kemball.

The decision

Commenting that the SA was written in clear and unambiguous terms—a professionally drawn contract between parties who were professionally represented when the contract was being drafted, the High Court dismissed James Kemball’s claim on the basis that:

• the effect of the word “commits” in the clause they chose to rely on to terminate the SA (wilful, persistent and material breach) did not apply to prospective events. The court compared this with another clause which entitled a party to terminate where the other party “ …threatens to cease to carry on business…” noting that no attempt had been made by James Kemball to rely on that provision. The contrast of the use of the words commits and threatens in terms of drafting showed that where the parties wanted to confer a power to terminate for prospective as opposed to present or past conduct, and they adopted language that made that clear. 
• the court also noted that had the parties wished to replicate the common law in relation to anticipatory breaches of contract as being a ground of termination under the clause relied on, they could have drafted the clause to have that effect, but they did not. Nor did they seek to terminate the agreement relying on any common law rights.
• the parties had agreed that the sole and exclusive remedy for failure to provide the minimum level of business was payment of the surcharge by “K” Line. This provision was entirely inconsistent with it being contemplated by the parties at the time the SA was entered into that James Kemball would be entitled to terminate for such a breach. There was also a separate provision in the SA, allowing “K” Line to terminate the SA, that described what the parties would deem to be a material breach so as to trigger a right to terminate. This showed that the parties had thought about how to approach each kind of risk differently.
• there was no actual breach as the defendant had said it intended to pay the surcharge so not only was there no repudiation, there was also no threat of repudiation.

Why is this important?

This case illustrates the interaction between contractually defined termination rights (and consequences) and common law rights of termination for repudiatory breach. It is important to have both contractual and common law termination rights in mind when drafting termination provisions, and when exercising a party’s rights to being an agreement to an end.

The right to terminate a contract may arise under the express terms of the contract and also for repudiatory breach under common law. Depending on the drafting of the termination provisions and associated remedies, and the actions / breaches of the counterparty, common law rights and remedies for termination may be limited or not available.

Any practical tips?

When drafting provisions dealing with contractual rights and remedies, consider all of the circumstances in which a right to terminate may be needed and the commercial remedies that should follow. Where appropriate, consider whether contractual termination clauses cover any potential prospective, present or past breaches.

Remember that the contract will be read as a whole—where different sections of the contract or more than one clause provides for termination, all of these provisions will be considered when interpreting the particular provision relied upon.

Consider whether particular limitations and exclusions (including ‘sole and exclusive remedy’ clauses) should apply in all / certain termination scenarios – and whether common law remedies should be available in cases of repudiatory breach.

When seeking to terminate, consider all of the termination rights that may be available, both under the contract and at common law, and how these may affect the remedies available (and any challenge to the (purported) termination).

Winter 2022