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.

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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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No implied obligation of good faith in exercising contractual right of termination

The High Court has again considered the circumstances in which a duty of good faith will be implied into a contract, rejecting an argument that a party's contractual right to terminate a consultancy contract had to be exercised in good faith: Monde Petroleum SA v Westernzagros Limited [2016] EWHC 1472 (Comm)

An allegation that a party has breached an implied term of good faith may in some circumstances be a useful tool in a claimant's armoury. In the present case, however, the claimant was unsuccessful in its attempts to deploy this tool.  The deputy judge noted that, outside accepted categories of contract where a duty of good faith is implied by law (eg employment or partnership contracts), such a term will only be implied if the contract would lack commercial or practical coherence without it. That was not the case here. He also suggested that a duty of good faith could not apply to a contractual right to terminate, which can be exercised irrespective of the exercising party's reasons for doing so.

The decision provides another illustration of the difficulties that a claimant will face when seeking to imply a good faith term into a contract, particularly in relation to a contractual right of termination. Other recent cases where the courts have rejected an implied duty of good faith are considered here and here, or see our guide: How far can you act in your own self-interest? The role of good faith in commercial contracts, which forms part of our series of contract disputes practical guides.   

Gregg Rowan and James Robson, a partner and associate in our dispute resolution team, consider the decision further below.

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Court of Appeal finds innocent party could not affirm contract following repudiatory breach where defaulting party unable (not just unwilling) to perform

The Court of Appeal has upheld a decision that a party was not entitled to keep a contract alive for the purpose of claiming ongoing liquidated damages for delayed performance following its counterparty’s repudiatory breach: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789.

The Court of Appeal did not however base its decision on whether the innocent party had a "legitimate interest" in affirming the contract, as the High Court had done (see our blog post on the first instance decision). Instead, the Court of Appeal found that it was not open to the innocent party to affirm the contract because the defaulting party was unable to perform its obligations, as the commercial purpose of the venture had become frustrated, rather than simply refusing to do so. The decision suggests that an innocent party's ability to affirm a contract following a counterparty's repudiatory breach will be fettered if performance is no longer possible.

The Court of Appeal also disagreed with the High Court's suggestion that "good faith" principles are relevant in considering whether an innocent party has a legitimate interest in affirming a contract. Its comments on this aspect suggest a reluctance on the part of the senior judiciary to broaden the application of "good faith" principles in matters of interpretation and contractual construction.

Gregg Rowan and Rob Javin-Fisher, a partner and senior associate in our dispute resolution team who commented on the High Court decision, consider the outcome of the appeal further below.

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Contractual requirement to give notice calling for breach to be remedied did not apply to termination for repudiatory breach

The High Court has found that a notice requirement within a contractual termination clause did not apply where a party terminated at common law following the counterparty's repudiatory breach of contract: Vinergy International (PVT) Limited v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm).

The decision may give some comfort to those who wish to terminate a contract for repudiatory breach, without following any procedural requirements that might apply if they were to terminate under an express contractual right.

However, as it is a matter of interpretation of the relevant contractual provisions, each case will turn on its facts and it would be dangerous to assume that the same conclusion will be reached in every case. In some cases, a court might conclude that the procedural requirements apply equally where a breach falls within the scope of the termination clause and would also amount to a repudiatory breach at common law. Gregg Rowan considers the decision further below.

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High Court finds multi-party LLP agreements cannot be terminated for repudiatory breach

In a case that will be of interest to those in the fund management industry and all other areas of business in which corporate structures regularly involve LLPs (including, for example, professional services firms), the High Court has held that the doctrine of repudiatory breach of contract is implicitly excluded in LLP agreements, at least where they have more than two parties: Flanagan v Liontrust Investment Partners LLP [2015] EWHC 2171 (Ch).

In this case, the result was that the LLP member claiming there had been a repudiatory breach could not take advantage of the default statutory rules applicable to LLPs to obtain a pro rata share of the LLP’s assets and profits.

Gary Milner-Moore and Andrew Cooke, a partner and associate respectively in our dispute resolution team, consider the decision below. Continue reading