Update: High Court provides guidance on termination for contracting parties

27 January 2016

In the recent case of C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm) the High Court considered a number of issues that will be of interest to contracting parties, including:

  • when a party can rely on a breach not cited at the time of termination; 
  • the extent to which a contractual agreement can vary or exclude common law termination rights;
  • the circumstances in which an agreement can be validly varied; and 
  • if ownership of materials necessarily gives a right to delivery up of those materials. 
    The case concerned a claims handling delegated authority agreement under which C&S handled motor insurance claims for Enterprise.  Enterprise terminated this agreement citing a repudiatory breach by C&S who refused to deliver physical files for audit to Enterprise's external auditor. Following termination, Enterprise also looked to claim that C&S's poor performance justified termination. Consequently C&S brought an action alleging wrongful termination and seeking damages. 
    Relying on an alternative reason not initially cited for termination
    The rule at common law is that a party may rely on another party's repudiatory breach as a ground for termination even when it was unaware and did not raise that specific ground at the date of termination. This is subject to an exception, established in the case of Heisler v Anglo Dal Ltd, which says a failure that if pointed out at the time would have been remediable, cannot be cited as a new subsequent ground for termination. C&S sought to rely on this exception and argued that Enterprise could not therefore rely on C&S's poor performance as grounds for termination as had it been raised at the time it would have been remediable. The judge, however, rejected this argument, distinguishing it from Heisler on the basis that in Heisler, if the terminating party had pointed out the failure at the time of termination then the other party would have been able to rectify it before an actual breach occurred. By way of contrast, in this case, the breach alleged had already been committed by C&S. The judge clarified that the Heisler qualification could only be applied to "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 other party being in breach altogether, either by giving an opportunity to perform its obligations in time or by enabling it to perform in some other valid way". 
    Limiting the right to terminate by contract
    The judge was also asked to consider the consequence of a contractual provision that allowed a party to terminate for material breach which, if capable of being remedied, was not remedied within 30 days of receipt of notice. C&S acknowledged this did not detract from Enterprise's common law right to terminate for material breach but argued that this provision amounted to an agreement between the parties that any breach that was capable of being remedied would not be considered a repudiatory breach. The judge also rejected this argument. He agreed that it was open to the parties to agree that certain breaches should not be repudiatory and that where a contract provides for this it may provide guidance as to what breaches should be treated as repudiatory. However, when considering the clause in the present case, he stated that providing for termination for material breach, but only after giving notice, would not exclude a sufficiently serious breach from giving rise to a right to terminate the contract immediately. The termination right being considered gave rise to an additional right to terminate and therefore supplemented rather than excluded a party's common law rights. 
    Variation of a contract by email 
    In addition to the above the judge was also asked to consider if the contract could have been validly varied by email where the agreement contained a standard variation clause stating that variations would only be effective if they were made in writing and signed on behalf of both parties. The judge found that in circumstances where the clause itself did not insist on a manuscript signature, paper documents or that both parties signatures must be on the same document, an email exchange between the parties where the relevant emails had been signed off (even informally) by an appropriate individual could meet the formalities of the variation clause. Therefore as long as the emails could satisfy the other requirements of contract variation, such as intention to be bound, they could represent valid variation of the contract.  
    Ownership of materials
    The contract contained a clause stating that Enterprise retained ownership of the files, however there was no express delivery up obligation on C&S. Enterprise argued that the ownership of the data/materials in C&S's possession gave them a right to delivery up of those materials and initially terminated the contract on the basis of C&S's failure to deliver those materials to Enterprise's auditor. The judge, however, held that whilst the right to possession of property usually goes with ownership, this is subject to agreement to the contrary. In circumstances where C&S had a duty to handle claims during the course of the agreement they were entitled to possession of the files. In this context, the audit clause which referred only to inspection of files was the correct clause governing C&S's obligations. 
    As well as providing further clarity about when a party can rely on a ground not raised at the time when seeking to justify a termination, this case also provides a number of other points likely to be of interest to contracting parties. In particular it highlights that:
    • Customers should always seek to include express delivery up provisions and give careful consideration to how any audit check is designed to operate;
    • whilst it is open to parties to agree that certain breaches are not repudiatory, the mere presence of cure period provisions will not exclude the common law right to terminate for repudiatory breach; and 
    • contracting parties need to be aware of the fact that variation by email, even in the presence of a standard variation clause, can be effective. 

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