Insurer able to terminate contract after High Court considers validity of both the termination notice and an email exchange varying the contract

In the same judgment, it also confirmed that an email exchange could vary a contract where the variation clause specified that any variations must be made in writing and signed by the parties in order to be effective.

When considering the validity of the termination notice, Mr Justice Males ruled that the so-called 'Heisler qualification' only applied to "anticipatory" breaches of the contract and not to breaches of the contract that had already occurred, even if the other party could have mitigated the effect of those breaches had it been notified of them.

Litigation law expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com said that the judgment was an interesting clarification of the circumstances where termination could be justified on grounds not set out in the termination notice.

"The judge made the finding that the Heisler qualification will not apply to breaches that have already occurred, even if the consequences of the breach can be mitigated," he said. "So, for example, let's assume that a supplier misses a contractual delivery date but the termination notice omits to mention this particular breach. In the light of this judgment, that breach may still be a valid ground of termination even if the supplier, had it been notified of the breach, could have delivered late".  

"However, the judge agreed that the terminating party may not rely on such facts if, had it raised them before termination, there would have been a real prospect that the other party could have avoided being in breach. Therefore, whilst this provides some comfort to terminating parties, it also emphasises the importance of following contractual notice procedures when terminating 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, the right to terminate for that anticipatory breach may be lost," he said.

Enterprise, a Gibraltar-based insurer, terminated its contract with claims handler C&S Associates in January 2014 without giving the three months notice required under the contract. It claimed that it was entitled to do so on one of two grounds: either because C&S refused to send claims files to it for the purposes of an audit of open files which it was conducting (which was the only ground relied on the termination notice), or because of C&S's "seriously negligent" performance of its services under the contract (to which the termination notice did not refer). C&S argued that Enterprise was not entitled to terminate the contract on either ground; and that by doing so Enterprise had itself committed a repudiatory breach of the contract.

In his judgment, Mr Justice Males said that C&S's refusal to send the files to Enterprise was not of itself enough to terminate the contract.  The judge therefore considered whether Enterprise was entitled to rely on C&S's allegedly defective performance, even though it had not relied on it in the notice of termination.

It has already been established through case law that the party terminating a contract may justify doing so on the basis of facts which, at the time of termination, would have provided a good reason for terminating even though the party did not rely on them when terminating. C&S attempted to rely on the so-called 'Heisler qualification' of this general principle, which arises from a 1954 case of the same name and creates an exception to the general rule if "the point taken is one which if taken could have been put right".

However, Mr Justice Males said that C&S's version of the Heisler qualification "states the matter far too broadly".  He considered "that the Heisler qualification applies only to anticipatory breaches or, to the extent that this is different, to situations where if the point had been taken steps could have been taken to avoid the party being in breach altogether, either by giving it an opportunity to perform its obligation in time or by enabling it to perform in some other valid way".

"This is not such a case. If Enterprise is able to make good its case, the breaches on which it relies had already occurred. Nothing could change that .… In any event C&S's case as to what would be involved in remedying the breach (by which in fact it meant improving its standard of performance so that similar breaches were not committed in the future) was extremely vague," he said.

The ruling also raised some interesting points about contractual variation clauses, including whether it is possible to vary a contract by email where the clause specifies that any variations must be made in writing and signed by the parties in order to be effective, said Michael Fletcher.

"It was held in this case that an email exchange, even though not an executed document, is capable of satisfying such a clause and constituting a binding variation to the contract," Fletcher said. 

"This demonstrates the importance of good project management and contract management for commercial parties generally, particularly those on large projects where the parties often communicate by email but the assumption is often that, unless a formal change notice has been executed, the contract has not been varied. There is now case law to show that such emails, if sent between individuals of appropriate authority and sufficiently clear in their terms, may be binding - even if the parties also contemplated that they would subsequently enter a contract or change notice," he said.

"Parties will need to ensure that there is discipline in their communications so that they do not inadvertently vary a contract by email. They must also ensure that, if they elect to vary a contract by email, any such variations are properly recorded so that the content of the varied baseline contract is clear," he said.