Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

A commercial contract will generally include some circumstances in which either party will have the right to terminate.

In some cases there may be an implied obligation to act in ‘good faith’ when exercising an express right to terminate. For example, Australian courts have held that, in a commercial contract, there can be implied terms of good faith and reasonableness, especially in a standard form contract containing a general power of termination for breach.

A clause excluding all implied terms can be effective to exclude any implied obligation, including to act in good faith when exercising termination rights.

The Franchising Code of Conduct sets timing and content rules for the notice requirements when a franchisor exercises a right to terminate for breach or convenience.

Note that in contrast with some jurisdictions, there is no requirement under Australian law that an agent or distributor is entitled to receive certain payments on termination.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

If an agreement is silent on how it may be terminated or does not permit termination other than for breach, then a number of considerations apply. Generally, the law will permit the agreement to be terminated on ‘reasonable notice’. This is often an issue for distribution and agency agreements.

What constitutes reasonable notice in terminating a commercial agreement depends on the circumstances existing when the notice is given. The period of notice must be sufficiently long to enable the recipient of the termination notice to wind down the existing business. Winding down the business may involve handing over management in order to transfer outstanding deliveries or preserve customer relations for the business, making alternative business or employment arrangements if the recipient is dependent on the agreement, negotiating new agreements, clearing stock held by the recipient under the contract, and winding down any existing business relationships arising out of the agreement, including subcontracts or negotiations.

It is also relevant whether the recipient has outlaid any extraordinary expenditure or effort in relation to the agreement before the commencement of the notice period. The length of time that is considered reasonable to account for these factors will also depend on the nature of the business, as well as the nature of the relationship between the parties and the industry in which they operate.

Given the obvious uncertainty in assessing what would be a reasonable time, commercial parties should always address in their contracts the period of the contract and how it can be brought to an end.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No. Insolvency legislation in Australia does not terminate a commercial contract automatically on insolvency of the other party.

For contracts entered into after 1 July 2018, there will be a statutory stay on enforcement of contractual rights against a company that arise only because:

  • the company enters, or proposes to enter, into an arrangement or compromise in order to avoid an insolvent winding up;
  • a receiver, receiver and manager, controller, mortgagee in possession or agent for the mortgagee in possession is appointed to the property of the company; or
  • the company enters into administration.

Certain rights (including rights of set off, rights to performance or enforce performance, rights of assignment or novation and rights to payment under an indemnity) are excepted from the statutory stay. Other rights (such as rights to suspend performance, step-in or terminate) will be unenforceable until the statutory stay on enforcement is lifted by a court order, or consent to enforcement is given by the counterparty (or the administrator, scheme administrator or managing controller appointed to the counterparty).

It is still appropriate to include express rights of termination arising upon the insolvency of the other party, as these rights are not void but merely unenforceable during the period of the statutory stay. However, parties should consider including more specific termination triggers (for example, triggered by non-performance or non-payment) in order to retain an immediately enforceable termination right.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

In addition to the statutory stay described in question 19, there is a restriction on suppliers of essential services (being electricity, gas, water or carriage services) terminating a contract for financial distress. Subject to these exceptions, there are no general restrictions on terminating a contract if the other party is in financial distress.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Force majeure is not a recognised concept at common law. As a result, parties wishing to make provision for force majeure must draft the intended provisions into the contract, including the consequences of a force majeure event.

When drafting a force majeure clause, parties should ensure that the definition of ‘force majeure event’ or ‘force majeure circumstance’ accurately reflects the intention of the parties, as this will determine when the restraint on the right of termination will operate.

A force majeure event must be outside the control of the parties. If circumstances are specified that are not, on an objective analysis, outside the reasonable control of the party concerned, then the clause may be regarded as a liability exemption clause, in which case the clause will be interpreted strictly against the party seeking to rely on it. Force majeure clauses usually list various events by way of example but not limitation. Generally, a person who seeks to rely on a force majeure clause is obliged to do everything that is reasonable to obviate the force majeure event.

A force majeure clause commonly operates to suspend the party’s affected obligations during the period that the force majeure continues, subject to the party giving notice of the force majeure and taking all reasonable steps to limit the effect of the force majeure. Further provisions might be appropriate in some circumstances. For example, a provision might be included authorising the other party to make alternative arrangements while the delay occurs and specifying a time after which the unaffected party (or either party) may terminate the contract, even though the force majeure continues.