Dispute update - July 2011

Boardroom Briefing

Things to consider before terminating commercial contracts

Business is tough at the moment and it is difficult to make predictions about future workflows.  Sometimes, a long-term contract can be a good thing as it can guarantee an income.  Of course, guarantees can prove worthless if the other side cannot afford to perform their side of the contract.  Even if your contract is entirely beneficial to you on paper, it might actually be costing your business money, and you may wish that you could escape it. 
Escape might also be on your mind if you’re on the wrong side of a contract, and you cannot afford to continue.  This article looks at the things you need to consider before you decide to put that escape into effect by terminating a commercial contract.

The first thing to consider is the commercial environment.  If you try to avoid your contractual obligations you might send a bad message to the market, so you need to be prepared to manage the fallout from your decision.  This will be particularly relevant if your decision is based purely on economics and not on the other party’s performance. 

You may need to enter into a contract with someone else, and they will not be impressed if it seems your business will not honour its obligations.  Make sure that you have an alternative in mind.  If there is no alternative, you may be better advised to attempt to renegotiate terms rather than terminating the contract.

If you decide to go ahead, you must be guided by the terms of the contract itself.  The contract may set out the circumstances in which either party can terminate.  You need to check whether those circumstances apply to you. 
At the simplest level, the contract may allow one or more parties to serve notice of termination.  If so, you should follow any specific procedures given in the contract, such as the form of notices, the time limits for serving notice and any periods in which the other party is entitled to try and remedy breaches.  If you try to terminate without following the exact procedures, you may find that your company is itself in breach of contract.

Not all contracts are in writing, and unless the contract is for a specific period you may be able to terminate on reasonable notice.  What is reasonable will depend on things such as the size of the contract, its importance to the parties and the duration of the contract.

You should also consider whether the other party is in breach of the contract.  The contract may give a right to terminate if the other party is in breach, often subject to a remedial period.  Be careful when considering these clauses.  They have to apply to your circumstances exactly, or again you could find that your company is in breach.

Even if the contract is silent on the effects of a breach of contract, you may be able to terminate.  Some breaches are termed “repudiatory”, in which case you have the option of either affirming the contract and continuing or accepting the breach and terminating the contract. 

Not all breaches are repudiatory, and this will vary depending on the contract and the circumstances.  In general, only the most serious breaches will give a right to terminate.  If there is a repudiatory breach, you should be careful not to give the other party the impression that you intend to carry on the contract, or that might be seen as an affirmation and you will have lost the right to terminate.

Unless the contract says otherwise, delays in making payment or delivery will not usually amount to a repudiatory breach, although you can sometimes change that by making time for performance “of the essence”. 

One area where mistakes are often made is in the context of insolvency.  It is often assumed that if the other side becomes insolvent, the contract automatically terminates, but this is not the case.  The contract must specifically say that insolvency gives good grounds for termination.  In reality, if the other party is insolvent they probably will not be able to perform and you may then be able to terminate.

Always remember that you might not be the only party wishing to escape the contract.  It may be hurting both sides.  If so, the parties to a contract can agree to a mutual discharge of their contractual rights and obligations.  It may not happen often but it is worth considering the other party’s position before you take action.

It is a good idea to obtain legal advice before taking steps to terminate a contract.  The pitfalls are many and varied!

Legal Update

JSC BTA Bank v Ablayzov [2011] EWHC 1136

We turn first this month to exotic Kazakhstan, and a tale of politics, tactics and intrigue.  The land of Borat has spawned a case which has already seen five major applications this year. 

Mr Ablayzov was the chairman of JSC BTA Bank, a bank subsequently nationalised by the government of Kazakhstan.  He was also a leading figure in the democratic opposition and he gave evidence to the court that (in the words of Teare J) Kazakhstan “has much in common with Ancient Rome”, with political assassination and imprisonment rife.

Following nationalisation, JSC BTA Bank issued a claim against Mr Ablayzov and others in London alleging fraud and breach of duty.  Mr Ablayzov applied for a stay of the proceedings on the grounds that the claim against him was being pursued at the instance of the President of Kazakhstan for the purposes of political oppression and to “eliminate him as a political force”, and was therefore an abuse of process.

Teare J considered the question of the tort of abuse of process. Claims brought for a collateral or ulterior motive have traditionally been regarded as an abuse of process, even though few cases based on abuse of process have succeeded. 
 
Teare J found that it was arguable that the President of Kazakhstan had indeed caused JSC BTA Bank to bring the claim against Mr Ablayzov, but concluded that this was not an abuse of process.  It was held that there was a legitimate purpose in the claim, namely to recover monies owed to the bank.  That meant that the claim was not an abuse of process.

This is an interesting case because it potentially allows more litigants to use the court process to pursue illegitimate objectives via legitimate claims.

Jet2.com Limited v Blackpool Airport Limited [2011] EWHC 1529 (Comm)

Jet 2 is a budget airline and it entered into a long-term contract with Blackpool Airport by which the airport was required to “use all reasonable endeavours” to provide a low-cost base for the airline.  The contract required the airport to “use best endeavours to promote” Jet 2’s low cost services from Blackpool.

Blackpool Airport’s published opening hours were 6am to 8pm, but Jet 2 needed to use the airport outside these hours in order to benefit from lower flight costs.  The airport initially allowed Jet 2 to operate outside the published hours, but then gave one week’s notice to Jet 2 to change its schedules so that it operated within the published hours.

Jet 2 issued proceedings, arguing breach of contract.  His Honour Judge Mackie QC found that there was no difference between an obligation to use best endeavours and an obligation to use all reasonable endeavours.  Both parties had assumed a commercial risk, and for the airport that meant it was not entitled to pick and choose what to do according to what suited its shareholders.

The court found for Jet 2, so your summer holiday this year is safe.

Roger Williams v Redcard Limited [2011] EWCA Civ 466

This is an ordinary little case, but a useful reminder of the principles of execution of documents.

Redcard Ltd agreed to sell its freehold in a property to Mr and Mrs Williams.  The individual directors of Redcard (whose names are sadly lost to posterity) held the leasehold interest and that too was to be sold to Mr and Mrs Williams. 

Unfortunately, Mr and Mrs Williams were not in a position to complete and Redcard sued them.  Mr and Mrs Williams argued that the agreement was not properly executed. 

As a contract for the sale of land, the agreement had to be signed by or on behalf of each party.  Section 44 of the Companies Act 2006 provides that a document signed on behalf of a company by two authorised signatories and expressed to be executed by the company has the same effect as if executed under the company’s common seal.

The agreement in this case was signed by the directors of Redcard, but it did not say that they signed “on behalf of” Redcard.  Mr and Mrs Williams argued that the agreement had been signed by the Redcard directors, next to the words “SIGNED……….SELLER”, only in their personal capacity, in order to transfer their leasehold interest, not Redcard’s freehold title. 

As the agreement was not expressed to be executed on behalf of the company, Mr and Mrs Williams argued that the section 44 formalities had not been complied with.

Mummery LJ held that because Redcard was defined in the agreement as the “seller”, and the signatures of the directors of the company were underneath the words “SIGNED………SELLER”, the agreement could only have been executed by the company.  The case was therefore decided in favour of Redcard.