How Do We Get Out of This Terminating Contracts in a Time of Financial Crisis

7/31/2019 How Do We Get Out of This Terminating Contracts in a Time of Financial Crisis

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Andrew Denny, Partner and Richard Farnhill,Senior Associate

Allen & Overy LLP

How do we get out of this? Terminatingcontracts in a time of financial crisis.


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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 cannotrecover damages, either

Damages for breach are always calculated thesame 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 ofthe clause or clauses

Repudiation

Manifesting an intention not to be bound

Remedy option to terminate prospectively and claimdamages for loss of the contract

Anticipatory breach is not a case of breach at allbut, 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 Banks 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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a) Express provisions for failure to perform

ISDA Master Agreement 2002 Clause 5(a) definesan Event of Default, e.g. failure to pay or deliver

Clause 6 states what happens if an Event ofDefault occurs right to specify Early TerminationDate


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Frequently asked questions

Do I have to give notice or can I terminateimmediately?

Can I terminate for breach even if the breach istrivial?

What is a material or a substantial breach?

Can I still claim damages if I terminate?


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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 toseriousness of breach


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Can I terminate for breach even if the breach istrivial?

Garden Guardiancase: 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 ofsubstantially the whole benefit of the contract


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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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What is a material breach? Not the same as a repudiatory breach

National Powerremediable breach likely to have

serious effect on counterparty if not rectified

Dalkia Utilitieslook at nature of breach failure topay three monthly instalments (out of 173) in a rowwas material

Why does any breach have to be a repudiatory

breach while a material breach does not?


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What is a substantial breach?

Crane Co v Wittemborgessentially the same asrepudiatory 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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Can I still claim damages if I terminate?

Yes but limited if breach is not also repudiatory:

Will recover loss suffered to date Wont get loss of bargain damages unless

contract specifically provides for it


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b) Contractual provisions for circumstantial events

ISDA Master Agreement 2002, Clause 5(b) definesTermination Events, e.g. illegality

Clause 6 sets out consequences - may give only oneparty the right to terminate e.g. party who is not theAffected Party (if only one Affected Party)


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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 marketas a sign of weakness

Alternatives:

Specify events / economic indicators / target performanceto constitute a MAC

Texas Pacific Group relied on a termination right connectedto Bradford & Bingleys debt ratings to walk away fromproposed 179m investment


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Drafting express termination clauses

Be specificre:

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 lossof bargain?


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Conclusions

Important points

Clearest to rely on an express termination clause, but take care ifyou wish to preserve the full benefit of the contract damages

Keep in mind difference between breach of a condition andcondition precedent

Keep in mind the difference between breach and repudiation

For repeated small breaches, consider the cumulative position

How Do We Get Out of This Terminating Contracts in a Time of Financial Crisis

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