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Businesses should specify all reasons for termination of contracts

Businesses that terminate contracts because of breaches by the other party must make sure they identify the correct grounds for the termination or risk the court saying they are not entitled to compensation, even if the termination is actually justified on other grounds.

Lonsdale Sports signed an agreement granting Leofelis a licence to use its trade mark in certain countries. In 2007 Leofelis purported to terminate the agreement, saying that Lonsdale had repudiated it. Leofelis claimed compensation representing lost profits for the period the agreement would otherwise have lasted.

The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party, looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform the contract.

Lonsdale successfully showed that it had not repudiated the agreement for the reasons given Leofelis. But Leofelis then discovered that Lonsdale had also carried out other acts, before Lefelis had purported to terminate, that did amount to repudiatory breaches of the agreement. It therefore argued that the original termination remained valid on those alternative grounds.

The court agreed that the other acts justified the original termination of the agreement, so that the 2007 termination was still effective. However, it refused to award Leofelis any compensation. It said that the repudiatory breaches that actually occurred were not the cause of the termination (they could not have been, because Leofelis did not know about them when it terminated the agreement), which meant that those breaches could not have caused the loss of profits flowing from the termination either.

There are arguments against this decision. One is that, if the other repudiatory breaches had not occurred, the termination would not have been effective. In one sense, therefore, those breaches did cause the termination. Another is that the losses flow from the fact of termination – what triggered the termination is irrelevant. However, unless it is appealed, this decision stands.

Recommendation

Businesses purporting to terminate an agreement should ensure that they specify all possible repudiatory breaches by the other party that justify termination (and also any contractual grounds for termination) in the notice of termination, so that it is clear the business considers them the cause of the termination, and therefore the cause of any losses that flow from it, if there is a dispute.

Case ref: Leofelis v Lonsdale Sports [2012] EWHC 485

Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]