Legal Briefing

High Court delivers knock-out blow to application for damages flowing from repudiatory breach

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Corporate and commercial | 01 June 2012

The High Court has ruled in favour of the Lonsdale group in two related summary judgment actions: Leofelis SA & anor v Lonsdale Sports Ltd & ors; and Trademark Licensing Company Ltd & anor v Leofelis SA (the Leofelis actions). The applications were in relation to claims stemming from alleged repudiatory breaches of a licence, which had been granted to Leofelis to allow it the use of Lonsdale-owned trade marks. The court decided that a breach of the licence, not known about by Leofelis at the time it had sought to terminate, could be relied upon as a defence to a claim for damages for wrongful termination, but not to found a claim for damages in respect of losses Leofelis alleged it had suffered after the date of termination.

This decision will have considerable ramifications in terms of the damages that Leofelis will be able to recover if successful in its claim, and may have wider-reaching consequences in the area of damages for repudiatory breaches of contract more generally.

Repudiatory breach of contract

A repudiatory breach of contract is a breach that is so significant it will entitle the innocent party to treat the contract as terminated with immediate effect, and will often entitle it to sue for damages flowing from the breach. However, as we have previously indicated in our article in the May 2011 edition of The In-House Lawyer, where a party terminates a contract on the basis of a repudiatory breach by another party, and the basis of that termination turns out to be untrue, it is possible for the non-terminating party to sue for wrongful termination itself.

So what is the position when a party seeks to terminate on the basis of an alleged repudiatory breach and, although the alleged breach turns out to be untrue, some other repudiatory breach has been committed that is only discovered by the terminating party after it has terminated the contract? This issue was considered in Boston Deep Sea Fishing & Ice Co v Ansell [1888] in which the court decided that an employer was able to avoid a claim for wrongful dismissal by demonstrating that its employee had committed a repudiatory breach of his employment contract, even though it was not the repudiation that it had relied upon at the time when the contract of employment was terminated.

In the Leofelis actions, it was common ground that the precedent established in Boston Deep Sea Fishing would apply. However, the issue before the court was whether Leofelis could claim damages based on the future consequences of such a repudiation, after the date on which the contract was actually terminated.

Facts of the Leofelis actions

The applications in the Leofelis actions largely concerned the same parties: three companies within the Lonsdale group (Lonsdale); and Leofelis SA. In 2002, Lonsdale granted Leofelis an exclusive license to use a number of trade marks within certain countries (the Territories) for an initial period of six years, but which could be extended by Leofelis until 2014 (the Agreement). Under the terms of the Agreement, Leofelis was to pay fixed annual royalties to Lonsdale and Leofelis was entitled to grant sub-licenses of the trade marks to third parties, subject to obtaining the consent of Lonsdale (which was not to be unreasonably withheld). Leofelis granted a sub-license to an Italian company, Leeside SRL, which proceeded to sell Lonsdale-branded goods in Germany.

In September 2007, Leofelis claimed that Lonsdale had committed a repudiatory breach of the Agreement by obtaining an injunction in the German courts to prevent sales by Leeside in Germany of goods bearing the trade marks. Accordingly, Leofelis purported to terminate the Agreement and claimed damages for loss of profits for the period remaining under the contract with Leeside. Lonsdale did not accept the termination and demanded payment of the royalties due under the Agreement. When Leofelis failed to pay the royalties in time, Lonsdale terminated the Agreement with immediate effect.

At a first instance hearing, the presiding judge declared that the German sub-licence had been valid. However, the Court of Appeal reversed the decision, finding that Lonsdale had been within its rights to obtain the injunction in Germany. This meant that Leofelis had not been entitled to treat Lonsdale’s actions as a repudiatory breach and its purported termination of the Agreement was itself a breach of contract.

Lonsdale subsequently made an application for summary judgment on the matter, but by the time this proceeded to be heard, Leofelis had learned of Lonsdale allowing other goods carrying the trade marks to be distributed in the Territories by a third party (the Third-Party Licence). This behaviour amounted to a repudiatory breach of the Agreement by Lonsdale and Leofelis sought to rely on it as an additional ground for its purported termination of the Agreement notwithstanding that it was not aware of the facts at the time of its purported termination. Leofelis relied upon the principle established in Boston Deep Sea Fishing, whereby a party can rely on an unrelated alleged breach if it is shown to be substantiated, and use it retrospectively to validly terminate an agreement.

The claims

The Leofelis actions consisted of two different sets of proceedings. In 2005, Leofelis and Leeside made a claim against Lonsdale for loss of actual and projected royalty income as a result of Lonsdale’s breach of exclusivity (the 2005 action). Leofelis claimed not only the income it estimated it would make up until the expiry of the Agreement, but also income it would have made up until 2014 (on the basis that the Agreement would have been extended). In 2009, Lonsdale made a separate claim for the royalties it would have been paid with respect to the remaining term of the Agreement after Leofelis purportedly terminated the Agreement (the 2009 action). In the 2009 action, Leofelis counterclaimed for damages on the basis of Lonsdale’s repudiatory breach.

Arguments: the 2005 action

On behalf of Lonsdale, Mr Leggatt QC submitted that Leofelis was not entitled to claim for damages for loss of sales subsequent to the date Leofelis had purported to terminate the Agreement. He argued that Leofelis had treated the Agreement as at an end and consequently regarded itself as no longer having a license. Mr Leggatt QC also submitted that in accordance with the authority laid down in Bwllfa & Merthyr Dare Steam Collieries (1891)Ltd v Pontypridd Waterworks Co [1903], the court should not shut its eyes to what had actually happened and therefore Leofelis should not be allowed to claim damages on the assumption that the Agreement continued for its full term (and renewal term).

Mr Balwin QC, representing Leofelis, argued that it was a fundamental principle of law that damages should be quantified as at the date of breach and it is only in limited circumstances that the court should take subsequent events into account.

Arguments: the 2009 action

Lonsdale accepted that, should it have committed a repudiatory breach in granting the Third-Party Licence, Leofelis would have a good defence to Lonsdale’s claim for damages, as Leofelis’ purported termination of the Agreement would have been justified even though it was unaware of this fact at that time. However, Lonsdale challenged the assertion that Leofelis was entitled to claim damages against Lonsdale for any repudiatory breach in such circumstances. Lonsdale relied on the same principle as Leofelis cited in support of the 2005 action: that the measure for breach of contract is to put the innocent party in the same position that it would have been in if there had been no such breach. Lonsdale argued that in the circumstances, Leofelis would have purported to terminate the contract regardless of Lonsdale granting the Third-Party Licence.

Leofelis submitted that, should summary judgment be given in favour of Lonsdale, it would allow Lonsdale to benefit from having concealed its breach of contract in granting the Third-Party Licence. Leofelis also pointed out that, had it have known of the Third-Party Licence at the time it purported to terminate the Agreement, it would have relied on this as a ground for termination.

The judgment

In his judgment for both actions, Roth J stated that the court would take account of an event occurring after a breach if it had the effect of reducing damages that were assessed on the basis of lost future benefits. This was consistent with the application of the basic compensatory principle as established in Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007]. In the current situation however, it was appropriate to go back to first principles: the measure for assessing damages for a breach of contract is to put the innocent party in the position they would have been had the breach not occurred. Therefore, Roth J was asked to assess the likely duration in which Leofelis might have suffered loss had no breach occurred.

With regard to the 2005 action, Roth J accepted the argument submitted by Mr Leggatt QC that, as the Agreement would have terminated in 2007 notwithstanding the granting of the Third-Party Licence, Leofelis could not have earned any royalties by way of sales after that date. Roth J considered that this conclusion was not affected by the fact that the cause of the Agreement coming to an end was a separate and subsequent breach by Lonsdale. He considered that awarding damages to Leofelis after late September 2007 would be to provide it with a ‘windfall’.

With regard to the 2009 action, Roth J stated as follows:

‘In this situation, if [Lonsdale] had not committed the repudiatory breach, the contract would still have come to an end as [Leofelis] decided to terminate it without knowledge of that breach by [Lonsdale]. [Leofelis] therefore should not be able to rely on [Lonsdale’s] repudiatory breach as the grounds for recovering damages for the contract coming to an end, ie for loss caused by [Lonsdale’s] non-performance of its primary obligations thereafter.’

Roth J referred to Leofelis’ argument that this enabled Lonsdale to benefit by having concealed its breach of contract. He pointed out that a contract will only come to an end as a result of repudiatory breach where the innocent party accepts the repudiatory breach as terminating the contract. As Lonsdale’s repudiatory breach had not been known at the time Leofelis purported to terminate the Agreement, it cannot have been accepted as bringing the Agreement to an end and was therefore not the cause of the termination or any losses flowing from it.

Comment

This decision is important insofar as it clarifies that, while a party is able to point to a repudiatory breach of which they were unaware at the date they sought to terminate a contract and use it to justify that termination, they are not able to use the same repudiatory breach as a ground for claiming damages. The reasoning behind the decision is logical: in any circumstances where the terminating party was unaware of the repudiatory breach, the termination would have happened in any event, notwithstanding the breach and, as such, the terminating party should not be able to profit from the decision to terminate by some later emergence of fact. This is consistent with the principle that, upon termination of a contract, all obligations to be performed under that contract come to an end.

It also reinforces the importance of a party ensuring that a repudiatory breach has occurred before taking steps to terminate the contract. The Leofelis actions illustrate how a party can be left unable to recover losses that flow from a perceived breach if actions are taken without due consideration.

The summary judgment decision will have significant consequences in terms of economic viability of the ongoing litigation in the Leofelis actions. It might have been thought preferable to adjourn the summary judgment in the 2009 action, as if Leofelis was to lose its case in establishing that the Third-Party Licence was a repudiatory breach of contract, then there would be no need for the summary judgment. However, Roth J considered that it was important for the parties to know if it was clear that a large part of the damages claim could not succeed, as this would have significant practical consequences in terms of the commercial realities of the litigation. Given the extensive and complex history of the litigation, it will be interesting to see how the parties decide to progress with their actions in light of this decision.