Terminating your contract: When can you call it quits?

Parties to commercial contracts may wish to exit their contractual arrangements for all sorts of reasons. In many cases, they will have included in their contract a right to terminate in particular circumstances, and a process for doing so. Even where there is no express right to terminate, parties may be entitled to terminate under the general law for a counterparty’s breach.

But termination is a drastic step and should never be taken lightly. If a party gets it wrong, it may itself be in breach of contract, giving the counterparty a right to terminate or claim damages or both.

In this eighth of our updated and relaunched series of contract disputes practical guides, Tom Leech QCJames Doe and Robert Moore consider when a contract may be terminated and the implications of termination, and provide some practical tips for commercial parties.

You can click here to download the PDF guide or here to access our webinar exploring these issues.

We will be publishing further editions of the updated series of contract disputes practical guides in the coming months. In the meantime, the first seven editions in our relaunched series, and the remaining editions from the original series, can be accessed from the home page for our contract disputes series (which is also linked under “our guides” in the top menu).

Tom Leech QC

Tom Leech QC
Partner
+44 20 7466 2736

James Doe

James Doe
Partner
+44 20 7466 2583

Robert Moore

Robert Moore
Partner
+44 20 7466 2918

Catalyst // Pressure Points: Disputes risks – new guide on dispute risks arising out of the Covid-19 pandemic

Herbert Smith Freehills has published a new guide exploring a number of areas in which we anticipate that disputes may arise around the globe as a result of the Covid-19 pandemic or associated disruption.

These include contractual disputes, where parties may take steps to terminate a contract or claim damages if their counterparty is not performing, or conversely may be looking to rely on contractual or other mechanisms to excuse their own breach. Class actions may be brought where groups of individuals or businesses have similar claims arising out of the pandemic, for example shareholder, employee, competition or data breach claims.

The recent disruption has put many businesses at risk of insolvency, which in turn has increased the risk of insolvency litigation including claims brought by creditors and officeholders. The pandemic may also lead to an uptick of claims against the state by way of judicial review or other similar routes, and the actions and decisions of various governments may be scrutinised in a public inquiry (which may also involve commercial entities as participants). There is also the potential for investor/state claims under treaties designed to protect foreign investment.

Click here to read the guide on our website.

COVID-19 Pressure Points: Supply chain difficulties – new global guide including section on suspension and termination of contracts

Herbert Smith Freehills has published a new global guide on supply chain difficulties arising from the COVID-19 pandemic and associated restrictions.

The guide explores issues around: maintaining the links in the supply chain; competition law issues; product-related issues; and the suspension and termination of contracts. In each area, the guide suggests practical steps to consider immediately and further ahead, and environmental, social and governance (ESG) and human rights issues are also explored. Where appropriate, the guide includes country-specific overviews and insights on the issues covered.

Click here to access the guide.

 

 

 

Joint Operating Agreement arguably a “relational contract” but Commercial Court declines to imply duty of good faith or Braganza duty

In a recent decision, the Commercial Court found that an express and (on its face) unqualified right to discharge the operator in a Joint Operating Agreement (JOA) was not subject to any implied term of good faith, or that the right would not be exercised capriciously, arbitrarily or unreasonably: TAQA Bratani Limited and Others v RockRose UKCS8 LLC [2020] EWHC 58 (Comm).

The decision confirms that unqualified termination or discharge rights in JOAs are unlikely to be subject to implied terms of good faith, and therefore provides comfort for those who might exercise such rights.

The decision is also of interest in that, despite the court being prepared to treat the JOAs as arguably falling into the category of “relational” contracts (as considered here, for example), it nonetheless declined to imply an obligation of good faith in relation to the discharge right.  It is therefore a helpful reminder that the question of whether a contract is “relational” is just part of the analysis. The onus will still be on the party seeking to establish a duty of good faith to show that such a duty should be implied. As this decision makes clear, where that duty would qualify an otherwise unqualified contractual right, this may prove to be difficult.

James Robson, a senior associate in our disputes team, considers the decision further below. Continue reading

New Brexit podcasts looking at the impact on contracts and contract termination

In the latest update to the Brexit series on our Herbert Smith Freehills Podcast channel, Paul Butcher, Julie Farley, Maura McIntosh and Tom Henderson discuss what businesses need to know about the impact of Brexit on their English law governed existing and future contracts. We have released two new podcasts:

  • ‘The Impact on Existing and Future Contracts’ – In this podcast Paul Butcher, Julie Farley and Tom Henderson consider matters such as the continued use of references to the EU and EU legislation, continued compliance with EU and UK legislation and tips for drafting a “Brexit clause” to proactively address the possible consequences of Brexit.
  • ‘Will Brexit allow parties to bring their contracts to an end?’ – Maura McIntosh, Julie Farley and Tom Henderson discuss what businesses need to know about the possibility of bringing contracts to an end as a result of Brexit. This podcast includes consideration of force majeure clauses, material adverse change clauses and frustration at common law, as well as the recent High Court case in which the European Medicines Agency is arguing that Brexit frustrates its Canary Wharf lease.

Our podcasts are available on iTunesSpotify and SoundCloud and can be accessed on all devices. You can subscribe and be notified of all future episodes.

High Court decision illustrates the need to be sure of your ground before terminating for repudiatory breach

In a recent decision, the High Court found that a claimant’s letter purporting to terminate a contract for the defendant’s repudiatory breach could not take effect as a notice of termination under the relevant contractual provisions. As the court found that the defendant was not in repudiatory breach as alleged, the claimant’s letter itself amounted to a repudiation of the contract: Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd [2017] EWHC 1763 (TCC).

The decision highlights the important distinctions between contractual termination provisions and the common law doctrine of repudiation. Where a party purports to terminate for repudiatory breach and gets it wrong, it cannot necessarily rely on a contractual right of termination to save it from itself being in repudiatory breach.

Where a party wishes to be able to rely on a contractual right to terminate, it is best to say so expressly and ensure any contractual machinery is followed.

James Farrell, a partner, and Michael Barron, an associate in our dispute resolution team, consider the decision further below. Continue reading

Court of Appeal considers implied variation and good faith in relation to contractual rights of termination

The Court of Appeal has upheld a decision granting summary judgment to a defendant in relation to an allegation that it had wrongfully terminated a distribution agreement. The court rejected arguments based on contractual construction, implied variation and implied duties of good faith : Ilkerler Otomotiv Sanayai ve Ticaret Anonim v Perkins Engines Co Ltd [2017] EWCA Civ 183.

The decision provides useful guidance on when an express variation of a contract may result in the implied variation of other terms, a point on which there appears to have been no direct authority. The test is whether the express variation is consistent only with the existence of the alleged implied term. When agreeing variations to a contract, parties should be careful to consider whether the proposed changes have any knock-on effects on the rest of the contractual framework, which may need to be addressed by way of additional express amendments. It seems the courts are likely to assist a party in implying a variation only in relatively clear-cut cases.

The decision is also of interest in adding to a growing body of authorities rejecting a role for good faith in relation to contractual termination. 

Gregg Rowan and Andrew Hillam, a partner and an associate in our dispute resolute team, consider the decision further below.

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Terminating your contract: When can you call it quits?

Parties to commercial contracts may wish to exit their contractual arrangements for all sorts of reasons. In many cases, they will have included in their contract a right to terminate in particular circumstances, and a process for doing so. Even where there is no express right to terminate, parties may be entitled to terminate under the general law for a counterparty’s breach.

But termination is a drastic step and should never be taken lightly. If a party gets it wrong, it may itself be in breach of contract, giving the counterparty a right to terminate or claim damages or both.

In this eighth of our series of contract disputes practical guides, Tom Leech QC, Robert Moore and Gregg Rowan consider when a contract may be terminated and the implications of termination, and provide some practical tips for commercial parties. You can click here to download the PDF guide.

Continue reading

Court of Appeal finds party in repudiatory breach of contract due to repeated late payments

The Court of Appeal has recently found that a shipowner was entitled to terminate for repudiatory breach where the hirer was in persistent breach of an obligation for the punctual payment of hire: Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2016] EWCA Civ 982.

The court found that the term was not a strict condition of the charterparties, such that any delay in payment (however slight) would allow termination. However, the charterer's conduct amounted to a renunciation, as it demonstrated an intention not to perform the charterparties in a way which deprived the shipowner of substantially their whole benefit. That was, in essence, because it transformed a contract for advance payment into one for payment in arrears. 

The decision is of interest in demonstrating the court's general reluctance to conclude that a term is a strict condition, so that even a minor breach will allow a party to terminate and claim loss of bargain damages – unless the parties have made it clear that that is their intention. Merely including an express contractual right to terminate for breach of the term will not necessarily be sufficient.

The decision is also of interest in demonstrating that a party may be in repudiatory breach as a result of missed payments, even if the arrears represent a relatively small proportion of the overall sums due under the contract. Each case will however turn on its facts. Here it was significant that the punctual payment of hire under a charterparty has long been recognised as being of great importance to shipowners, even though the court concluded it is not a strict condition.

Gregg Rowan, a partner in our dispute resolute team, considers the decision further below.

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English law contracts post-Brexit: What changes should commercial parties expect?

The core principles of English contract law, such as interpretation of contracts and remedies for breach, will not be affected by Brexit and the key attractions of English law will remain.

Brexit may, however, have implications for particular aspects of parties’ contractual relationships, including how certain terms may be interpreted and whether any termination rights may be triggered, and on questions relating to jurisdiction and enforcement of judgments.

In this seventh of our series of contract disputes practical guides, Anna Pertoldi, Neil Blake and Alex Kay consider what might change post-Brexit, and provide some practical steps that contracting parties can take to protect their position. You can click here to download the PDF guide.

Clients and contacts of the firm can also register to access the archived version of our hour-long webinar exploring these issues by contacting Jane Webber. Or if you would prefer a shorter version focusing on key practical tips, Anna has also presented this 10 minute podcast.

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