Terminating an agency, distribution, or supply agreement? Stephen Sidkin, a partner at Fox Williams LLP, and Jess Howard, an associate, discuss how you can easily get it wrong and why it is important to get it right.

 

A party seeking to terminate a contract for serious breach can commonly make one or more mistakes, including:

• misinterpreting a termination clause;
• incorrectly attempting to rely on the repudiatory – that is serious – breach of the other party; or
• simply not following the correct termination procedure set out in the contract.

Sometimes this is because there is confusion between the two main grounds for terminating a contract – contractual termination and termination at common law. Contracts typically confer rights of termination, which specify the circumstances in which one or both parties can terminate the contract. For example, if one party commits a material breach, fails to meet certain contractual milestones, or becomes insolvent.

However, under common law, contracts can also be terminated if a serious breach occurs. A serious breach is a significant violation of a contract that demonstrates a party’s clear intention to not be bound by the terms of the contract. The parties under contract need to get termination notices right. Failure to terminate correctly can mean losing the right to terminate altogether, or even giving the party in breach the right to terminate and claim damages for wrongful termination. In the case of the termination of an agency agreement, a claim for compensation or indemnity under the Commercial Agents Regulations or the EU Agents Directive. The mistakes and problems that can occur were illustrated in a recent High Court judgment.

Serious breach case examples compared

Topalsson GmbH v Rolls-Royce Motor Cars Ltd

A few weeks ago, judgment was given in a case involving Rolls-Royce Motor Cars (“RRMC”), which serves as a reminder of the principles underpinning termination under English law and the significant consequences of serving defective termination notices.

RRMC entered into a supply agreement with Topalsson, a German software company, to supply digital visualisation software for its new model. The agreement included a general timeline for meeting certain milestones and deliverables. A revised, more detailed implementation plan was later agreed between the parties.

Subsequently, RRMC issued a termination notice on the basis that Topalsson had failed to achieve the original milestones set out in the agreement. Topalsson rejected the termination notice, arguing that the milestones had never been agreed, and affirmed the contract (in other words, treated the contract as continuing).

RRMC then sent a second termination notice on the basis that the agreed revised milestones had not been met or that Topalsson’s delay amounted to a serious breach of the agreement. Unsurprisingly, Topalsson again claimed that the second termination notice was invalid. However, this time, Topalsson elected to accept the alleged serious breach, and initiated proceedings against RRMC for wrongful termination.

The Court decided that the first termination notice sent by RRMC relied on erroneous grounds, as the agreement did not contain contractually binding milestones. However, with its second termination notice, RRMC had validly terminated the agreement as the milestones in the revised plan were contractually binding.

By choosing to affirm the contract in response to RRMC’s first termination notice, Topalsson had waived RRMC’s breach of invalidly terminating the contract. Therefore, RRMC had managed to evade committing a serious breach itself.

Alan Ramsay Sales & Marketing Ltd v Typhoo Tea Ltd

A few years ago there was another case concerning termination notices and waivers. The case concerned an agency agreement between Typhoo Tea and its former agent, Alan Ramsay.

The agency agreement included a 12-month notice period. However, Typhoo Tea sent two without prejudice emails to Alan Ramsay purporting to terminate the agreement by giving three months’ notice. Alan Ramsay replied by open email accepting Typhoo Tea’s serious breach (of giving notice significantly less than the agreement stipulated) and confirmed that it would treat the agreement as terminated at the end of the three-month notice period.

The Court decided that, given Typhoo Tea’s emails were without prejudice, Alan Ramsay had not been allowed to treat them as serious. As a result, in relying on Typhoo Tea’s alleged serious breach, Alan Ramsay’s was itself in serious breach. In turn, this gave rise to the question of whether Typhoo Tea had accepted Alan Ramsay’s serious breach, thereby bringing the agreement to an end.

As was the position with Topalsson’s response to RRMC’s first termination notice, the Court decided that Typhoo Tea had also waived Alan Ramsay’s breach, given that it had not done anything to signify that it was accepting the breach, so bringing the agreement to an end. Consequently, Typhoo Tea lost its right to terminate the agreement and Alan Ramsay was awarded compensation under the Commercial Agents Regulations.

What to consider on termination?

• It is important to consider the consequences of termination and whether terminating the contract is the most appropriate route for you at that time. For example, consider whether the other party can remedy the breach under the terms of the contract, and if so, be alive to any relevant deadlines.
• If you have decided that you want to terminate the contract, it is essential that you exercise the termination rights correctly in accordance with any relevant termination clauses in the contract:
  – In what circumstances are you allowed to terminate?
  – How much notice must you give?
  – What procedure must you follow?
  – To whom should notice of termination be addressed?
• What is the correct method of service?
• Ensure you communicate your clear intention to terminate the contract through a written notice to the other party, setting out the detailed grounds for termination.
• If the other party has committed a serious breach, make sure to act quickly in deciding whether you want to terminate the contract or not:
  – If you terminate the contract by accepting the serious breach, you may be entitled to seek damages for breach of contract;
  – If you know about the breach and treat the contract as continuing, you will be at risk of affirming the contract (and will consequently lose the right to terminate and claim damages);
  – But if you terminate a contract incorrectly for a serious breach, you could inadvertently commit a serious breach and be liable for damages;
  – Whether or not a breach amounts to a serious breach will vary on a case-by-case basis.

www.agentlaw.co.uk
www.distributorlaw.co.uk
www.fashionlaw.co.uk
www.foxwilliams.com