In the case of James Kemball Ltd and “K” Line (Europe) Ltd a clause setting out the parties’ sole and exclusive remedy in respect of a specific breach was put to the test and upheld by the judge. This is reassuring for parties who negotiate and include such clauses in their contracts.
James Kemball Ltd (Kemball) and “K” Line Ltd (K Line) entered into a services agreement where it was agreed that Kemball would provide haulage services to K Line. The agreement contained minimum volume obligations on K Line.
Following internal business changes and restructuring, K Line notified Kemball that it may not be able to achieve the minimum volume obligations under clause 2.2. K Line also stated that if it could not achieve the minimum volume obligations then clause 3.3 would apply. That clause set out the “sole and exclusive remedy” agreed in respect of a failure to comply with the minimum volume obligations.
Clause 3.3 states: “For each month that K-Line is not deemed to have complied with the provisions of clause 2.2 (a K-Line Shortfall Month), JKL's sole and exclusive remedy shall be to levy a surcharge in respect of that month. The surcharge shall be calculated by reference to the target number of Jobs for the K-Line Shortfall Month as set out in Annex 1 Part A (the monthly target) in accordance with the following formula”.
Claim for termination
Kemball alleged that K Line was in “anticipatory repudiatory breach” of the agreement. K Line maintained that it was not in breach as it intended to pay the surcharge as envisaged by clause 3.3.
Nonetheless, Kemball hastily served a written notice to terminate relying on clause 11.3(a) which stated that either party may terminate the agreement on written notice to the other party if the other party “commits a wilful, persistent or material breach”.
The judge said that the meaning of the agreement should be approached by reference to the natural and ordinary meaning of the words used, in context – there was no reason to reject this approach just because with hindsight it appeared imprudent from the Kemball’s point of view. He therefore held that the claim failed because the remedy provided by clause 3.3 for a failure on the part of K Line to comply with clause 2.2 had been agreed to be the “sole and exclusive remedy” available to Kemball. Therefore, Kemball did not have the right to terminate under clause 11.3(a) as it purported to – indeed a right to terminate was entirely inconsistent with clause 3.3.
The judge also commented that in any event, in order for Kemball to successfully rely on clause 11.3(a) it would need to show that K Line was in “wilful, persistent or material breach” at the date the notice to terminate was served. Kemball was attempting to rely on clause 11.3(a) for an “anticipatory” breach and the judge commented clause 11.3(a) is not expressed to apply to events that are prospective. Therefore, in the circumstances, Kemball would not have been entitled to rely on clause 11.3(a) as a reason to terminate. If K Line failed to pay pursuant to clause 3.3 then Kemball may have been able to rely on clause 11.3(a) to terminate the agreement.
Despite finding there was no right to terminate, the judge also commented on the clause dealing with “consequences of termination”. Often, a “consequences of termination” clause lists out the specific clauses which the parties intended to survive termination, or there may be wording to the effect that all clauses intended to continue in force after termination or expiry will do so. In this case, the consequences of termination clause stated: “any rights or obligations to which any of the Parties to this Agreement may be entitled or be subject before its termination shall remain in full force and effect where they are expressly stated to survive such termination”.
Therefore, in the hypothetical situation where Kemball did have the right to terminate under clause 11.3(a), it would not have been able to claim payment under clause 3.3, as clause 3.3 was not expressly stated to survive termination – any damages would be on the basis of the usual rules of recovery.
Things to consider
- Termination – the decision to terminate should never be taken lightly, wrongful termination could put you in breach of contract
- Sole and exclusive remedy – when negotiating contracts, a party needs to carefully consider whether it really intends for a stated remedy for breach to be the sole and exclusive remedy
- Consequences of termination – it is easy to overlook such a clause, however, parties should pay attention to the drafting to ensure it correctly captures their intentions regarding what survives and what does not