A recent decision of the Commercial Court has provided a useful example of both the perils of termination and the effect of a well-drafted "sole and exclusive remedy" clause.
Commercial lawyers David Lowe and Andrew Smith explore the key points of the case and the subsequent judgment in this podcast.
A more detailed insight into this case, as well as a full transcript of this podcast, can be found below.
Background
James Kemball Limited ("JKL") brought proceedings against "K" Line (Europe) Limited ("K Line") for damages following termination of a transport agreement between the parties.
JKL had agreed to provide road haulage services for a fixed period and up to a defined maximum volume, and K Line agreed to supply a minimum amount of business, referred to as "Jobs", over a three-year period.
In February 2018, during the third year of the three-year period, K Line informed JKL that due to changes with the company, it may not be able to meet the minimum number of jobs. K Line said that if it could not offer sufficient Jobs to meet the Monthly Minimum, it intended to "apply clause 3.3.".
Clause 3.3 says: "For each month that K-Line is not deemed to have complied with the provisions of clause 2.2 (a "K-Line Shortfall Month"), JKL's sole and exclusive remedy shall be to levy a surcharge in respect of that month. The surcharge shall be calculated by reference to the target number of Jobs for the K-Line Shortfall Month as set out in Annex 1 Part A (the "Monthly Target") in accordance with the following formula…".
Termination
JKL alleged that K Line was in "anticipatory repudiatory breach" of the agreement, by failing to comply with clause 2.2, which provided that K Line was obliged to offer no fewer than the Daily Minimum of Jobs referred to in clause 2.1.
Consequently, relying on clause 11.3(a), which provides that a party could terminate the contract by giving written notice "if the other Party commits a wilful, persistent or material breach of any provision of this Agreement and, if the breach is capable of remedy, fails to remedy it within 30 days of being given written notice of breach", JKL threatened to terminate the agreement if K Line did not cure the breach.
In response, relying on its stated intention to comply with clause 3.3, K Line maintained that it was not in breach of the contract.
JKL ignored this, and the possible application of clause 3.3 altogether, and proceeded to give written notice of termination, citing again an "anticipatory repudiatory breach".
It is worth noting that JKL initially claimed a right to payment of just under £12.5 million. However, the value of the claim had reduced to £6.8 million at the point of issue, and then to £560,000 at the point of trial – all of which suggests that JKL may perhaps have been a little hasty at the time at which the issue arose.
Similarly, despite the repeated reference to an "anticipatory repudiatory breach", it was accepted prior to trial that JKL had sought only to terminate for material breach under clause 11.3, thereby relying on express termination clauses in the agreement - and that it had not elected to terminate for an alleged repudiatory breach (i.e. under a common law right).
Decision
In considering K Line's alleged breach, the judge found that the obligation to buy a minimum number of Jobs (clause 2.2) could not be read in isolation, and must be read together with the obligation to pay a surcharge on a shortfall (clause 3.3). Consequently he felt it was plain that the parties intended that a failure to achieve the minimum quantity would not allow K Line to terminate for material breach.
This was for the following reasons:
- The mechanism at clause 3.3, which meant K Line had to pay a surcharge on a shortfall, had been agreed by the parties to be the sole and exclusive remedy;
- The payment of a surcharge as a sole and exclusive remedy is entirely inconsistent with it being contemplated by the parties that JKL should also be allowed to terminate for breach; and
- Elsewhere in the contract there were detailed provisions dealing with other failures to perform. This indicates that the parties had thought with care about failures to perform, and emphasises that the surcharge mechanism had been intentionally drafted the way it was.
As a result, the judge found that JKL was not entitled to terminate for material breach.
The judge noted that if K Line had refused to pay the surcharge that could have been a breach that justified termination. But that had not happened - K Line made it clear that it intended to comply with the obligation to pay a surcharge.
Interestingly the judge commented that if JKL had terminated for good reason (e.g. K Line did not pay the surcharge) then as the Consequences of Termination clause did not keep the surcharge clause alive post termination, the sole and exclusive remedy would have ceased to apply. That would have meant that JKL would have been able to recover its damages for breach of contract which might have been higher than the surcharge.
Key messages from the case
There are three key messages to take from this case:
- Termination requires careful consideration, and often some sort of legal input. If a party does not terminate its contract(s) correctly – through failing to identify the correct basis for termination, or failing to give the correct notice – then it risks losing its rights to damages and becoming embroiled in expensive litigation. Indeed, when it goes really wrong, a botched attempt at termination can lead to the terminating party becoming liable for wrongly breaching the contract themselves:
- Sole and exclusive remedy clauses do work. This is good news for drafters – the drafting in this agreement worked in the way it was drafted, and protected K Line as intended; and
- Parties need to be careful when drafting the clause stipulating which clauses survive termination. If JKL could have found a way to terminate for a different breach, it could have avoided the sole and exclusive surcharge arrangement – which by contrast may not have been the drafters' intention.