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Ally Tow
Ally Tow,
Terminating Contracts - a cautionary tale
19 June 2014

Careful consideration should be given before any steps are taken to terminate a contract as this can often result in unexpected or sometimes disastrous consequences as two recent cases demonstrate.

In Vivergo Fuels Ltd v Redhall Engineering Solutions Ltd [2013] EWHC 4030 (TCC) the parties entered into an agreement in March 2010 under which Redhall agreed to carry out mechanical and piping work for Vivergo at a new biofuel plant in Saltend, Hull.

It was common ground between the parties that a termination of the contract was effected in March 2011. However, there was a dispute as to which of the parties had terminated the contract and the consequences of such termination including, in particular, whether such termination was lawful.

The facts of the case were relatively straightforward. Following a tender process Redhall were successful in securing the contract with Vivergo to carry out the mechanical and piping works for the north side of the site in Hull. The contract provided for the works to be commenced on 4 January 2010 with completion by 11 February 2011. The contract also made provision for the scope of the works to be extended to include the south side of the site. The contract was subsequently varied to include these additional works.

By June 2010 it became clear that Redhall would be in difficulties meeting the completion date and a variation of the contract was agreed, although there was a dispute as regards the specific terms of variation.

By February 2011 the position had not improved and Vivergo issued a notice to Redhall making it clear that termination of the contract would be effected if Redhall had not used its best endeavours to rectify the position within a specified period of time. Such notice was served in accordance with the terms of the contract.

Vivergo took the view that Redhall had not used its best endeavours to remedy the default contending that they were not proceeding with the works in a diligent manner. This, said Vivergo, amounted to a repudiatory breach of contract on the part of Redhall, which Vivergo accepted, thus entitling them to terminate the contract. Redhall contended that they were not in repudiatory breach and Vivergo were not entitled to terminate the contract. When Vivergo then issued proceedings seeking recovery of alleged lost profits of £1,060,000 Redhall sought to defend them alleging that Vivergo's actions amounted to a repudiatory breach which Redhall accepted and thus, it was Redhall who had terminated the contract. The court agreed with Redhall and Vivergo's action failed.

Conversely, in Newland Shipping & Forwarding Limited v Toba Trading FZC [2014] EWHC 661 (Comm) the parties entered into two contracts in August and September 2010 wherein Newland agreed to sell gas and gasoline to Toba.

Toba made advance payments of about $3.2m to Newland under these contracts for goods that were never delivered, Newland stating that there were no available stocks of gas or gasoline at the oil refinery in Turkmenbashi where the products were to be sourced. Toba sought a refund of these monies but Newland said they were experiencing cash flow problems and were not able to return the monies.

To resolve the issue, Newland proposed that the parties enter into further contracts under which Newland would sell petroleum products to Toba with a 20% deduction being applied to invoices raised under these contracts which would go towards refunding the earlier advance payments. Toba agreed and two new contracts were entered into in February and March 2011.

Both contracts were terminated in April 2011 by Newland. Newland contended that the contracts were terminated in accordance with the provisions thereof as by failing to pay Newland's invoices Toba were in repudiatory breach. It also alleged that the contracts provided for Toba to compensate Newland for all losses connected with its failure to pay for the goods.

Following termination Newland issued proceedings seeking damages for alleged losses. Toba defended the proceedings alleging Newland did not have the right to terminate and counterclaimed seeking recovery of the advance payments. The court found Newland was entitled to terminate the contract, Toba being in repudiatory breach and further that Toba were therefore liable to Newland in damages. However, it went on to find that Toba's repudiatory breach did not prevent it from seeking to recover the advance payments – Newland had been unjustly enriched by the receipt of these monies and Toba was entitled to be repaid. Whilst the court did therefore order Toba to pay damages to Newland in the sum of $334,967.44 it also ordered Newland to pay monies to Toba in the sum of about $3.2 million

For further information, please contact our Dispute Resolution Team on 0118 952 7206 or submit an enquiry.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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