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Can a contract be terminated for grounds not initially raised?

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11/02/2016

Citing grounds for termination

The general rule is that termination of a contract may be justified if a party was in repudiatory [1] breach at the time of termination, even if the terminating party was unaware of, or did not cite, that breach. The exception to that general rule is that a party may not rely on a breach that is not raised at the time of termination if, had the failure been mentioned, the breach could have been put right. (The exception is know as ‘the Heisler exception’ [2]).

In C&S Associates UK Ltd v Enterprise Insurance Company Plc [3], Enterprise terminated its claims handling contract with C&S for repudiatory breach because C&S failed to deliver files to Enterprise’s external auditor and, subsequently, on the grounds of C&S’ poor performance under the contract. Arguing that if it had been told of problems it could have put things right, C&S sought damages for wrongful termination in reliance on the Heisler exception.

Clarifying the scope of the Heisler exception, the High Court held that the exception only applies to ‘anticipatory breaches’, or to situations where, if it had been made aware, the party in breach could have taken steps to perform its contractual obligation or to remedy it in some other way. In addition, the court stated that even if the Heisler exception applies, the party relying on it must be able to show that there was at least a real prospect of the necessary correction being made.  (That the breach ‘might’ have been put right is not enough.)

In this case, by the time the contract was terminated, the date for performing the relevant obligations had passed, and the breaches could not be rectified. The Heisler exception did not, therefore, apply.

An aside: variation of contract by e-mail

Just as an aside, during the parties’ contractual relationship, they had exchanged e-mails relating to various matters, including increasing C&S’ fees. The contract contained a standard clause which provided that variations would only be effective if made in writing and signed by or on behalf of both parties. It bears noting that the court found that a contractual variation had occurred by virtue of one party’s e-mail signature block and the other’s informal “Many thanks Myles, much appreciated. Mike”.

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[1] A ‘repudiatory’ breach is a breach of contract that is so serious that it goes to the heart of the contract and gives rise to a right for the aggrieved party to terminate.
[2] Heisler v Anglo Dal Ltd [1954] 1 WLR 1273
[3] [2015] EWHC 3757 (Comm)

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