Terminating a contract: the risk of inadvertently affirming the agreement
Businesses involved in contractual disputes should carefully consider the extent of their legal rights and remedies before taking steps to end the contract. A new High Court decision illustrates the risks of failing to appreciate the consequences of pursuing a course of action – limiting the potential remedies available.
A party can terminate their contract where there has been a repudiatory (serious) breach. On termination, the innocent party is entitled to end the contract and claim damages.
Rescission of the contract actually extinguishes the contract from the point it was purportedly entered into, with the parties being restored to their original position. A party may seek rescission on grounds of, eg fundamental mistake and misrepresentation. The remedies following termination of the contract may, therefore, be more limited than in rescission.
Termination
The dispute in Actinon PTE Ltd v Char Biocarbon Inc [2026] EWHC 94 concerned a licence agreement between an engineering design consultancy (the claimant) and a Canadian company (the defendant).
The agreement, executed in August 2021, granted the defendant an exclusive license over certain products. The agreement provided for royalty payments covering the first three years to be paid in four equal instalments of $750,000.
The defendant made several payments but then fell behind. The claimant sent a formal demand for the outstanding payments (almost $1.43m) and warning of further action if payment was not made. Particularly, the claimant gave notice of immediate termination of the contract if the amount owed was not paid within 30 days.
The defendant responded by accepting the termination notice while reserving its “rights and remedies” - but disputed the amount claimed and alleged breaches by the claimant.
The claimant issued proceedings and applied for summary judgment before a defence was entered. Only then did the defendant file its defence, along with a counterclaim which (for the first time) made allegations of misrepresentation and seeking rescission of the contract.
Affirmation
At issue was whether accepting the claimant’s termination of the agreement amounted to affirmation by the defendant - even where it failed to fully appreciate the consequences at the time.
The High Court concluded that the defendant had affirmed the contract when it accepted the termination notice. Further, it had no defence to the claimant’s money claim.
The judge stated that it did not matter whether or not the defendant knew, when sending its letter accepting the claimant’s termination, that it had a purported right to rescind the agreement. The defendant had to choose “between two inconsistent courses of action” (accept or not accept the notice of termination) “and it made an unequivocal choice to accept that the agreement was terminated”.
This amounted to an affirmation that the agreement was valid up to then. Furthermore, the decision to terminate a contract, once communicated, was final and irrevocable.
What does this mean?
The decision is an important reminder for business organisations to take legal advice before taking steps to end a contract; or respond to notice and claims from the other contractual party.
Always discuss contractual disputes with specialist solicitors experienced in commercial litigation as early as possible.
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