Getting termination right

A recent case (Lombard North Central plc v European Skyjets Ltd (in liquidation) [2022] EWHC 728 (QB)) has brought into focus what parties need to consider when seeking to terminate contracts.

Lombard North Central plc (Lombard) provided a secured loan of over US$8.7m to European Skyjets Ltd (Skyjets) for the purposes of acquiring an aircraft with the lender being granted a mortgage over the aircraft. Skyjets failed to make several instalment payments on time, but it did make various payments, so that there were points at which the account was not in arrears.

The relationship between the parties deteriorated. Various disputes arose in relation to the calculation of arrears and late payment fees. While Skyjets had repeatedly queried the amounts being charged by way of late payment fee, it had not at any point queried the entitlement to levy the fee.

At a meeting Lombard purported to terminate the agreement and demanded payment of the outstanding sum of over US$5.8m. It also gave notice of its intention to exercise its powers as mortgagee in relation to the aircraft. The termination notice specified the non-payment as being the only grounds for the breach. However, contemporaneous documents recorded Lombard as referring to defaults including non-payment, change of control, issues with the specified asset cover ratio, and a change in material adverse conditions.

Lombard sold the aircraft and claimed the balance, of over US$5m. Skyjets brought a counterclaim for damages in the sum of £26m, denying Lombard's entitlement to terminate the agreement or to sell the aircraft, and alleging that Lombard had breached its duties as mortgagee.

The judgment should provide comfort to parties seeking to terminate contracts, but it also identifies certain pitfalls that may arise.

Lombard was entitled to terminate the agreement and could sell the aircraft. As a matter of construction of the relevant provisions, the judge concluded that there was a breach whenever an amount was not paid when it was due to be paid and it was not necessary for the breach to be continuing at the date of the termination notice.

The court held that a termination notice will not be invalid for having failed to identify the relevant breach or for having inaccurately stated the sums due where on the precise wording of the relevant clauses, there was no contractual requirement to identify the breach or provide a period to cure the breach. The court did reiterate that parties should still strictly comply with any conditions for the exercise of the right.

It was further held that where contractual clauses give a party a right to terminate, that will not, in the ordinary course, impose additional duties on that party in the exercise of its discretion.

The case also serves as a reminder that no waiver clauses and reservation of rights statements will not be taken at face value in circumstances where they are contradicted by the parties' conduct. Lombard accepted late payments and had given Skyjets further time to pay the arrears. Although Lombard sought to rely upon a no waiver clause and a reservation of rights, the court found that neither the clause nor the statement was sufficient where Lombard gave Skyjets the opportunity to regularise the position by a specific date.

If you are faced with contractual breaches, we are here to help. We can advise on steps which should be taken to protect your position and consider the contract provisions to advise you on termination rights and remedies.

To speak to a member of our Commercial Litigation team, please call 01689 887 887.