As the UK begins the process of exiting the European Union and forging new trade links far and wide, the mantra ‘be careful what you negotiate and take care when you terminate’ has rarely been more apt. The mantra is equally apt for commercial parties that might be reconsidering their own contractual relationships in light of so-called Brexit. This article provides a timely and practical reminder of the principles underlying contractual termination.

Always consider an express termination clause

English common law entitles contracting parties to terminate contracts in certain circumstances. This is most common in the case of a breach of a fundamental term of the contract, known as a repudiatory breach. The question then becomes: is the breach so fundamental as to amount to a repudiatory breach? Unfortunately, in many situations the answer is unclear.

To avoid, or at least minimise, such uncertainty, parties should consider whether to include an express termination clause which allows one or both of the parties to terminate in specified, pre-defined circumstances. Most common examples are for a material breach, out of convenience by providing reasonable notice, a change of control or the insolvency of the other party, at the risk of the other party becoming insolvent.

The express termination clause ought to be as clear as possible

The usual reason for including an express termination clause is to leave little room for doubt between the parties as to when either, or both of them, can exit the contract. All the more reason, therefore, to make the clause as clear as possible so as to avoid any room for doubt as to whether the circumstances which entitle termination have indeed arisen.

Apr-Jun 2017 issue

Signature Litigation LLP