Transcript Termination Provisions - Allen & Overy Seminars > What`s new?

How do we get out of this? Terminating
contracts in a time of financial crisis.
Andrew Denny, Partner and Richard Farnhill,
Senior Associate
Allen & Overy LLP
The three regimes
 Common law: repudiatory breaches
 Conditions precedent
 The termination provisions in your contract
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Common law
Some myths
 You can always terminate for breach
 If you do not terminate for breach, you cannot
recover damages, either
 Damages for breach are always calculated the
same way
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Common law
Two separate issues
 Breach
 Failure to perform a term or terms of the contract
 Remedy – damages for losses caused by breach of
the clause or clauses
 Repudiation
 Manifesting an intention not to be bound
 Remedy – option to terminate prospectively and claim
damages for loss of the contract
 “Anticipatory breach” is not a case of breach at all
but, rather, of repudiation
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Common law
The risk of wrongful termination
 Wrongful termination is, itself, a repudiatory breach
 For example
 A has a loan facility with B Bank
 B Bank is in difficulty and it seems certain that it will be
unable to transfer funds on time
 Bridging finance will cost A £1m
 A replacement facility will cost A £15m
 B Bank’s profit on the facility is £20m
 If A sues on the breach alone he recovers £1m
 If A terminates with cause he recovers £15m
 If A terminates wrongfully, B Bank can sue for £19m
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Common law
The first step – classification of terms
 Condition
 Warranty
 Innominate terms
The types of repudiatory breach
 Breach of condition
 Serious breach of innominate terms
 Repeated other breaches in exceptional cases
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Conditions precedent
 Different regime
 Specified obligations do not take effect
 Generally, no damages
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Termination Provisions

Two types of express termination clauses:
a) Failed performance (“Events of Default”)
b) Circumstantial events (“Termination Events”)
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Termination Provisions
a) Express provisions for failure to perform
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
ISDA Master Agreement 2002 Clause 5(a) defines
an “Event of Default”, e.g. “failure to pay or deliver”

Clause 6 states what happens if an Event of
Default occurs – right to specify Early Termination
Date
Termination Provisions
 Frequently asked questions
 Do I have to give notice or can I terminate
immediately?
 Can I terminate for breach even if the breach is
trivial?
 What is a “material” or a “substantial” breach?
 Can I still claim damages if I terminate?
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Termination Provisions
 Do I have to give notice before terminating?
 Will depend on wording of contract
 Generally:
 Notice often not required if breach cannot be
remedied
 If can be fixed, usually have to give chance to do
so – failure to rectify following notice adds to
seriousness of breach
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Termination Provisions
 Can I terminate for breach even if the breach is
trivial?
 Garden Guardian case: a cautionary tale
 Court rejected argument that “any breach” could
cause the right of termination to arise
 Alan Auld Associates: repeated minor breaches can
be repudiatory if they deprive the innocent party of
substantially the whole benefit of the contract
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Termination Provisions
 What about contractual freedom?
 c.f. ISDA 2002 Master:
 Clause 5(a)(i) – failure to pay or deliver
 Clause 5(a)(ii)(1) – failure to comply with “any
agreement or obligation”
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Termination Provisions
 What is a “material” breach?
 Not the same as a repudiatory breach
 National Power – remediable breach likely to have
serious effect on counterparty if not rectified
 Dalkia Utilities – look at nature of breach – failure to
pay three monthly instalments (out of 173) in a row
was material
 Why does “any breach” have to be a repudiatory
breach while a “material breach” does not?
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Termination Provisions
 What is a “substantial” breach?
 Crane Co v Wittemborg – essentially the same as
repudiatory breach
 So why is “substantial” any different from “material”?
 Anticipatory breach was not a breach for the purpose
of this clause
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Termination Provisions
 Can I still claim damages if I terminate?
 Yes – but limited if breach is not also repudiatory:
 Will recover loss suffered to date
 Won’t get “loss of bargain” damages unless
contract specifically provides for it
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Termination Provisions
b) Contractual provisions for circumstantial events
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
ISDA Master Agreement 2002, Clause 5(b) defines
“Termination Events”, e.g. illegality

Clause 6 sets out consequences - may give only one
party the right to terminate e.g. party who is not the
Affected Party (if only one Affected Party)
Termination Provisions
 Would market turmoil constitute a “material adverse change”?
 Check drafting
 MAC clauses narrowly construed – WPP v Tempus
 Reliance on a MAC clause can be perceived by the market
as a sign of weakness
 Alternatives:
 Specify events / economic indicators / target performance
to constitute a MAC
 Texas Pacific Group relied on a termination right connected
to Bradford & Bingley’s debt ratings to walk away from
proposed £179m investment
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Termination Provisions
 Drafting express termination clauses
 Be specific re:
 Breaches for which a party can terminate
 What is meant by terms such as “material”,
“substantial”, or “material adverse change”
 Steps that are required to terminate (e.g. notice)
 Consequences of termination e.g. damages for loss
of bargain?
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Conclusions
 Important points
 Clearest to rely on an express termination clause, but take care if
you wish to preserve the full benefit of the contract damages
 Keep in mind difference between breach of a condition and
condition precedent
 Keep in mind the difference between breach and repudiation
 For repeated small breaches, consider the cumulative position
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