Morgan Russell Solicitors

Rights of termination in contracts (extract from the June 2012 edition of Commercial Law News)

When seeking to terminate a contract care needs to be taken to avoid finding yourself in breach instead, as this could affect your entitlement to damages. There is a well-established rule in English law that if X terminates a contract with Y for a flawed reason but later discovers there was a better reason  (even though X did not know it at the time) then X can rely on the later better reason to justify the termination (i.e. the terminating party can rely on any grounds which were available to it at the time it gave notice to terminate even though it did not yet know about them or mention such reasons in its termination notice).

In a recent case however, Leofelis v Lonsdale Sports [2012] EWHC 485 (Ch) the High Court expanded on this rule. Although X could rely on this rule to justify the termination, X may not be entitled to recover damages for the losses caused by Y’s non-performance of the contract after the termination date.  The point is that the loss must be shown to flow from the breach. So, whilst X could use evidence not previously known to it to prove Y was in breach and therefore termination was justified at the date of the original notice of termination, the High Court ruled that the loss suffered was not actually a result of that reason and it was not entitled to the damages sought.

However, this was the first time the court has considered this issue and there may well be future challenges. For now though, anyone considering terminating a contract should carefully consider all the factors involved to see if there are any other grounds for termination available. All such reasons should  be set out in the notice of termination in an attempt to avoid the reasoning that the terminating party’s right to damages does not flow from the reason given.

Further Information

If you have any questions regarding the above or require any assistance, please do not hesitate to contact Debbie Turner, Katya Cleere or Tim Nathan +44 (0)1372-461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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