Terminator II: issuing an invalid termination notice followed by a valid second

Termination notices can be fraught with risk. One misstep and terminating parties can find themselves at risk of repudiating a contract themselves, even where the other party is in breach of contract, write Michael Comba and Tiah Weekes.

The case of Topalsson GmbH v Rolls-Royce Motor Cars Ltd [2023] EWHC 1765considered what happens where a terminating party first issues an invalid termination notice followed by a valid termination notice. Did the second rescue the first?

Background

RR entered an agreement with Topalsson for digital visualisation software for its new Ghost model (the “Agreement”). The project was severely delayed.

Topalsson alleged that RR was operating on an unrealistic timeline. Conversely, RR claimed Topalsson misrepresented its expertise and inadequately resourced the Agreement, causing poor performance and delays.

In April 2020, RR purported to terminate the Agreement at common law on the basis that Topalsson failed to achieve set milestone dates. Topalsson rejected this notice as invalid, claiming that the milestones at issue had never been agreed, and it affirmed the Agreement.

Later that month, RR sent a second notice, purporting to terminate at common law or, alternatively, under the Agreement as further milestone dates had not been met. Again, Topalsson claimed that the notice was ineffective, meaning RR was in repudiatory breach of the Agreement. Topalsson accepted the alleged repudiatory breach and stopped work in May 2020.

Topalsson claimed damages for unlawful termination and lost profits for RR’s repudiatory breach. RR counterclaimed damages flowing from Topalsson’s repudiatory breach.

The judgment

The court dismissed Topalsson’s claim that the Agreement had been unlawfully terminated and upheld the RR’s claim for damages for repudiatory breach. Topalsson were found on the facts to have failed to comply with their obligations under the Agreement and plans between the parties.

The court agreed that RR’s first termination notice erroneously relied on Topalsson’s breaches of milestones that had been superseded in a later plan. However, it held that there was nothing precluding RR from issuing the second notice. On the facts, Topalsson did materially breach the Agreement enabling RR to terminate under the Agreement and at common law for repudiatory breach.

Analysis

Parties must take care when serving termination notices. In this case, it was fortunate for RR that Topalsson opted to affirm the Agreement following the first notice, allowing RR a ‘second bite of the cherry’. Had Topalsson accepted RR’s repudiation, costly damages could have ensued. Indeed, a similar note of caution applies to parties considering acceptance of a repudiatory breach committed by way of an invalid termination notice.

The case however provides some comfort to terminating parties that may be possible to rescue an earlier attempt at invalid termination with a subsequent valid notice.