You are in a contract that you wish to terminate, or you are on the receiving end of a notice to terminate. How do you ensure that any termination is valid?

At common law a party may justify termination on the grounds that the other party was in repudiatory breach at the time of termination. The general rule is that a party may subsequently raise additional grounds for termination that were not relied on at the time that the contract was terminated.

However an important exception to this rule is where the ground relied on by the terminating party is one that, if notified, could have been remedied by the other party, i.e. if the failure could have been put right (known at the ‘Heisler exception’). 

A recent case [1] provides some useful guidance about how and when the Heisler exception can apply.

Enterprise Insurance Company  terminated their agreement with C&S Associates citing a repudiatory breach by C&S. Following termination Enterprise also looked to claim that C&S’s poor performance justified termination. C&S brought an action alleging wrongful termination and seeking damages, and sought to rely upon the Heisler exception because had Enterprise notified it of the matters of which it subsequently complained, any defects could have been put right.

The Judge rejected this argument in this case and confirmed that the Heisler exception only applies in cases where, at the time of termination, the other party would have been able to rectify it before an actual breach occurred. In this case the breach alleged had already been committed by C&S.

So what does this mean?

The court has confirmed that a party may later justify termination on the basis of a ground not mentioned at termination.  However, it may not be possible to cite a new breach, not mentioned at the time of termination, if the failure could have been put right, so the Heisler qualification applies only to “anticipatory breaches”.

This case emphasises the importance of following contractual notice procedures when terminating any contracts and ensuring that any remediable breach, in particular where the breach is anticipated but has not yet occurred, is notified to the party in default so that there is an opportunity to remedy the position. Otherwise any right to terminate for that breach may be lost.

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[1] C&S Associates Ltd v Enterprise Insurance Company Plc [2015]

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.