• Careers
  • Contact Us

High Court Rules on Innocent Party's Dilemma

on Monday, 10 December 2018.

A commercial contract often sits in the drawer until it is needed...

One big reason for pulling it out is if an innocent party has suffered from what the other party has done, and it wants to decide on its next course of action. One choice that may be available, depending on how severe the breach, is whether the innocent party should terminate or carry on with the contract.

This can be quite a dilemma, as the High Court has shown in the recent case of Motortrak Ltd v FCA Australia Pty Ltd

Facts of the Case

Motortrak Ltd (M) and FCA Australia Pty Ltd (F) entered into a contract, under which M agreed to provide services to F's dealers. F suspected that its former Managing Director had received bribes from M to enter into the contract. Despite that suspicion, F decided to continue with the contract as immediate termination would have caused adverse commercial consequences - with service disruption. F decided to wait until it had found an alternative service provider six months later to terminate the contract.

M claimed against F for unpaid invoices and lost profit. There was an exclusion of liability clause, which excluded liability for lost profit, but M argued that the exclusion applied only in relation to performance of the contract rather than a refusal to perform it altogether.

High Court Decision

The High Court ruled that F had acted wrongly in terminating the contract. It had actually affirmed the contract, because it took no action when it had become aware of the breach. Although F had sound commercial reasons for waiting, in order to minimise disruption to its business, it lost its chance by doing so. The innocent party, F, then became the wrongdoer, by giving notice of termination after it had affirmed the contract.

That said, M's argument in relation to the exclusion of liability failed. F was able to exclude liability for M's lost profits.

Comment

This is a classic case of a dilemma facing an innocent party when the other party to the contract is in breach. The first question the innocent party has to work out is: whether the breach by the offending party is so serious as to allow the innocent party to terminate? Get that wrong, and the innocent party becomes the wrongdoer.  The second issue, which the innocent party found out to its cost here, is not to wait so long before exercising your rights so that you lose your rights by affirming the contract, because then the innocent party could end up as the wrongdoer.

So what should be done?  Protect the business by not terminating too early, or don't wait too long to protect your legal rights? In reality, it is a balancing exercise, and there are steps that can be taken to preserve your position. It's always important to take legal advice in this situation, to ensure that the innocent party does not end up being the one seen to be in the wrong.


If you want advice on how to get out of a contract, please contact Paul Gershlick in our Commercial Contracts team on 01923 919 320.