Termination for convenience clauses: a limitation of liability by the backdoor

United Kingdom

A recent unreported decision in the Commercial Court may have significant implications for parties to construction contracts containing termination for convenience clauses. The decision applies established legal principles to suggest that the existence of such clauses will prevent or significantly limit claims for loss of profit even in the cases involving a repudiatory breach of contract.

The decision concerned a contract for the supply of goods and services by Comau (part of the Fiat group) relating to the installation of a new production line at a factory owned by the Lotus group. Lotus delayed in making certain payments under the contract and Comau sought to terminate under the contract and at common law for repudiatory breach. Comau brought proceedings to recover the profit it would have earned had the contract been performed by Lotus.

Lotus argued that Comau’s claim for loss of profit ought to fail due to a termination for convenience clause included in the contract (which provided no entitlement to recover loss of profit). Lotus argued that it could have terminated the contract at any time and Comau therefore had no right to earn a profit for the full duration of the contract (Comau therefore had an insufficient “expectation interest” to sustain a claim for loss of profit).

The court agreed with Lotus and applied established legal principles which require a court, when assessing damages for breach of contract, to assume that a contract-breaker will perform a contract in the least onerous way possible. The court therefore proceeded on the assumption that Lotus would have exercised its right to terminate for convenience. The court noted that, “any other assumption ignores the limited nature of Comau’s ‘expectation interest’ – that Comau was never entitled to profits on the whole of the goods and services to be supplied pursuant to the Agreement but was only ever entitled to such profit as it might have gained prior to any ‘termination for convenience’.”

One notable aspect of the court’s reasoning is the apparent absence of any need by Lotus to show that it would have exercised its right to terminate for convenience had Comau not terminated the contract. The mere existence of the termination for convenience clause appears to have been sufficient without evidence of causation as to whether or not the clause would – as a matter of fact – have impacted upon the profits which Comau would have derived from the contract.

Parties negotiating contracts with termination for convenience clauses would be well advised to consider the full ramifications of such clauses in light of this decision. To the extent that this decision provides an unwelcome limitation of liability, parties should seek to clarify their intentions in the termination for convenience clause itself, addressing specifically the extent to which the clause may be relied upon to reduce damages which might otherwise be recoverable under the contract.

Reference: Comau UK Limited v Lotus Lightweight Structures Limited [2014] EWHC 2122 (Comm)