Take care when terminating: James Kemball Ltd v "K" Line (Europe) Ltd

Practical implications

This decision serves as a useful reminder to contracting parties to consider the best course of action when terminating a contract, including whether, when and how it could be terminated.

A party should carefully assess the provisions of the contract to ensure that any contractual termination right relied on is exercisable given the factual matrix. This is particularly so where a contract contains multiple termination provisions and various possible grounds upon which to rely for termination, including (as in this case) limitations on the use of those grounds. In addition, even if there are valid grounds to terminate and a right to terminate on such grounds exists in the contract, relying on the wrong contractual provision in a termination notice might invalidate termination. Parties should also consider whether to rely on multiple contractual termination rights in the alternative.

In addition to contractual rights of termination, parties should bear in mind common law principles relating to repudiatory breach and should consider serving a termination notice relying on such principles in addition, but without prejudice to, any contractual termination notice. As HHJ Pelling KC noted here, "[t]he serving of such notices without prejudice to the effect of the other is a well-recognised and used technique".

Background

Under a service agreement (the "SA"), the defendant (whose business included transporting cargo to and from ports around the world, including the UK) agreed to supply a minimum number of jobs to the claimant (a company transporting shipping containers by road to and from UK ports) between 1 April 2016 and 31 March 2019. The defendant's parent company merged with two other shipping companies to create a new joint venture company, which planned to commence operations from 1 April 2018.  As a result, from that date the defendant would no longer carry out UK container business and therefore would no longer be able to perform its obligations under the SA.

The SA contained the following key provisions relevant for the purposes of this article:

• Clause 2.2(a) provided that the defendant would offer the claimant no less than a specified daily minimum number of jobs per day;
• Clause 3.3 provided that for each month the defendant was unable to offer the required minimum number of jobs per day, the claimant's "sole and exclusive remedy shall be to levy a surcharge in respect of that month", calculated by reference to a formula in the SA;
• Clause 11.3(a) gave either party the right to terminate by giving written notice if the other party "commits a wilful, persistent or material breach…and, if the breach is capable of remedy, fails to remedy it within 30 days after being given written notice of the breach and requiring it to be remedied"; and
• Clause 11.3(d) gave either party the right to terminate by giving written notice if the other party "ceases, or threatens to cease, to carry on business".

In a letter dated 12 March 2018, the defendant stated that, to the extent it was unable to offer the claimant sufficient jobs to meet the monthly minimum under the SA, it intended to apply clause 3.3 (i.e. permitting the claimant to levy a surcharge).

On 16 April 2018, the claimant sent a notice to the defendant in which it purported to invoke the termination procedure in clause 11.3(a) of the SA for "persistent and/or material and/or repudiatory breach(es)" of the SA due to the defendant's  "unambiguous and repeated confirmation over a prolonged period of time" that it would not be complying with the service commitment obligations under the SA in relation to the period from 1 April 2018 to 31 March 2019. The claimant purported to give effect to its notice and terminate the SA by way of letter dated 22 May 2018 pursuant to clause 11.3(a) of the SA for anticipatory repudiatory breach.

Decision of the Court

The parties, who had both been legally represented at the time of contracting and had the SA drawn up professionally, agreed that liability turned primarily on the true construction of the SA, in accordance with the principles set out in, amongst other cases, Arnold v Britton [2015] UKSC 36 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50. HHJ Pelling KC determined that "the construction of the SA should be approached by reference to the natural and ordinary meaning of the provisions being construed, considered in the context of any other relevant provisions of the SA, and bearing in mind the overall purpose of the provision being construed and the contract in which it is contained."

The Court rejected the claimant's submission that it would have been difficult or impractical to serve a notice that both purported to accept a repudiation at common law as well as rely on a contractual termination mechanism and noted that the service of such notices without prejudice to the effect of the other is a well-recognised technique. The claimant could also or alternatively have relied on clause 11.3(d) to terminate; there would have been no difficulty in serving a termination notice under clause 11.3 that invoked different sub-paragraphs in the alternative. However, in circumstances where the claimant had not sought to rely on wrongful repudiation at common law or any provision other than clause 11.3(a), the claimant had to bring itself within clause 11.3(a) to succeed.

It was therefore necessary for the claimant to show that the defendant was in "wilful, persistent or material breach" of the SA on 16 April 2018 (i.e. when purported notice under clause 11.3(a) was given) because clause 11.3(a) was not expressed to apply to prospective events. The Court contrasted the use of "commits" in clause 11.3(a) with "threatens to cease" in clause 11.3(d) and found that this difference in language demonstrated that, where the parties wanted to confer a power to terminate for prospective as opposed to present or past conduct, they adopted language that made that clear.

The Court dismissed the claimant's suggestion that such construction would be uncommercial: (1) “commercial parties are free to make their own bargains” and effect must be given to the unambiguous language used here; and (2) commercial common sense is relevant only to the extent of how matters would have been perceived by reasonable people in the position of the parties when the contract was made.

The Court found that the contractual right to terminate under clause 11.3(a) was not a remedy available to the claimant for a breach of clause 2.2, since the sole and exclusive contractual remedy available for the defendant's failure to provide a daily minimum number of jobs under clause 2.2 of the SA was for the claimant to levy a surcharge pursuant to clause 3.3. When the termination notice was sent by the claimant to the defendant on 16 April 2018, there had been no wilful, persistent or material failure to comply with clause 3.3 which would have enabled the claimant to rely on the termination provision in clause 11.3(a). In fact, the defendant had made it clear that it intended to comply with clause 3.3 in its letter of 12 March 2018.

On a true construction of the contract, clause 11.3(a) could only be triggered if a breach had already occurred when the termination notice was given. That was not the case here. In circumstances where the defendant had made it clear that it would comply with clause 3.3, it could not be said that the claimant would be deprived substantially of the whole benefit the parties had intended that it should obtain. The benefit the claimant was entitled to was the provision of the minimum number of jobs and, in default, the payment of a levy under clause 3.3. As a result, the SA was not repudiated and the defendant had not threatened to repudiate it.