Most modern commercial contracts contain detailed termination provisions setting out how a contract can be terminated by one side if the other does something wrong, but they do not always work as intended. For example, a termination may clause state that a party has the right to terminate the contract if the other party’s breach is not remedied within 30 days, or if the breach is not capable of remedy the contract can be terminated immediately. But when is a breach capable, or incapable, of remedy? In a recent English Court of Appeal case the judges had to decide what kind of breach of contract they were dealing with. The case also illustrates how important pre-contractual heads of agreement can sometimes be.
At the beginning of 2007 Formula One team Spyker MF 1 Racing (the Team) found major sponsors in the shape of Etihad, Abu Dhabi’s national airline, and Aldar, a major Abu Dhabi property development company (the Sponsors). Immediately before the opening of the 2007 F1 season a binding Heads of Terms Agreement dated 13 March 2007 was entered into, and a full contract followed on 12 April 2007.
Under the contract the Team undertook that it would adopt the name “Etihad Aldar Spyker F1 Team” during the years 2007, 2008 and 2009. However, under clause 5 of the contract the Team had the right to source an alternative Team sponsor for the years 2008 and/or 2009 with full naming and livery rights, enabling an alternative sponsor to become the main Team sponsor, but only if the Team obtained an irrevocable and enforceable written commitment from the alternative sponsor to pay more money than was due under the existing contract from the Sponsors. In the event that such a commitment was received the Sponsors had the right then to (i) match the new money and keep their naming and livery rights, (ii) effectively share sponsoring rights with the new sponsor at a reduced price, or (iii) terminate the agreement.
Clause 21 contained a reasonably standard termination provision, which read: “The Sponsors may terminate this Agreement with immediate effect on the giving of written notice to SPYKER at any time [if]… SPYKER has committed any material breach of this Agreement which, if capable of remedy, has not been remedied within ten (10) Business days of receipt of written notice giving particulars of the breach and requiring its remedy.” The clause did not refer to what would happen in the case of an irremediable breach.
On 1 September 2007 Dr Vijay Mallya, a prominent Indian entrepreneur and billionaire, announced that he had made a successful bid for the Team. He proceeded in short order to rename the Team “Force India Formula One Team” (Force India), it would seem on the basis that he felt that Etihad and Aldar, whom he had inherited as the main sponsors of the Team, were paying too little for the privilege. As part of the general rebranding, Mallya also arranged for a new livery for the Team’s car sharing the Sponsors’ logos on the car with the prominent use of the Kingfisher logo. Kingfisher was not only another airline, which detracted from the branding of Etihad, but also the major beer brand in India, which did not go well with the antipathy to alcohol in Muslim Abu Dhabi.
Discussions ensued between the Team and the Sponsors, but eventually, on 27 January 2008, Etihad and Aldar served a letter terminating the contract. The Team claimed that they did so out of the blue and in bad faith, and, because of the provisions of clause 21, they were not entitled to do so. If there had been any breaches, then these had been remediable, and the Sponsors should have given the Team 10 days notice. If the breaches were irremediable then the Sponsors had delayed too long and had effectively waived their rights to terminate. By serving notice of immediate termination as they had done on 27 January 2008 it was, in fact, the Sponsors who had repudiated the contract, and Force India was entitled to damages.
In English law there are 2 types of breach of contract that can give rise to termination rights, firstly a breach that falls within the terms of any termination clause which may exist in the contract itself and secondly what is known as a “repudiatory breach”. A repudiatory breach of contract is a breach which is sufficiently serious that it gives the innocent party the right to bring the contract to an end. In such circumstances the innocent party has 2 options; it can “accept” the repudiation and the fact that the contract is at an end, with the right then to sue for damages for breach of contract, or it can “affirm” the contract and insist that the other party continues to perform the contract. If it affirms the contract then it effectively loses its right to treat the contract as terminated. The right in English common law to effectively terminate a contract for a repudiatory breach exists whether or not there is a termination clause in the contract itself.
The High Court found that, if there had been any breach by Force India, that breach had effectively been waived by the Sponsors as a result of the discussions between the parties between September 2007 and January 2008, and so when the Sponsors came to terminate the contract for alleged breach they had acted too late and that termination was unlawful. Somewhat surprisingly therefore, Force India was entitled to substantial damages from the Sponsors.
The Court of Appeal took a substantially different view. There was evidence of considerable communications between the parties during the latter part of 2007, and in the view of the court this showed that there had been a cumulative process of breaches of contract as Force India had sought to distance itself from the naming and livery obligations it owed to the Sponsors in order to rebrand itself as an Indian team. The key questions were what kind of breach of contract did this process amount to, what, if any, termination rights arose, and did the Sponsors do anything which meant that they lost those rights.
Clause 21 did not apply to irremediable breach, only to a material but remediable breach. As a result, no prior written notice of termination was required in the case of an irremediable repudiatory breach. In the view of the court, when Force India changed its team name and abandoned the contractual Team Name by omitting the names of its main sponsors Etihad and Aldar, this was a clear, grave and continuing breach of the contract. There had been no approval by the Sponsors of the use of the Kingfisher logo, and the deliberate change of the car livery without consultation with, and the approval of, the Sponsors was a further serious breach of the contract.
The judge in the High Court had concluded that any such breaches were remediable, in the sense that Force India “could have put matters right”, either by changing the Team Name back to Etihad Aldar Spyker F1 Team and/or by reverting to the previous livery and removing the Kingfisher logo. However, the Court of Appeal completely disagreed. An analogy was drawn between the publication of confidential information and the publishing of advertising matter not containing a party’s name: one releases information which should be kept confidential, the other broadcasts a product in an inappropriate way. In neither case was it possible to put the genie back into the bottle. The breach was irremediable.
A decision on the part of an innocent party to affirm the contract (and therefore let it continue in force) requires knowledge of the relevant facts and a communication of the decision, in words or conduct, in clear and unequivocal terms, to the other party. A party may be taken to have elected to affirm where it acts in a manner which is consistent only with a decision to affirm or where it allows too much time to pass by without indicating any decision. The delay in this case, which took place during the winter break between 2 Formula One racing seasons, did not mean that the Sponsors lost their right to accept the Team’s repudiation of contract. As a result, the Sponsors were entitled to bring the contract to an end, which they did on 27 January 2008, and were accordingly entitled to damages.
It is interesting to note that, in coming to its conclusions with regard to the precise terms of the contract (and therefore whether it had been breached), the Court of Appeal took into account not only the terms of the contract itself but also the preceding heads of agreement which had in principle been superseded by the contract. As a result, great care should be taken to ensure that pre-contractual heads of agreement are drafted accurately or, at the very least, any later contract expressly overrules any particular terms in the heads.
© Taveners 2011