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 addition to these contractual rights, English common law implies a right into a contract that an ‘innocent’ party can terminate the contract where the other ‘guilty’ party has committed a sufficiently serious breach of its obligations that it affects the very substance of the contract - often referred to as a breach which goes to the ‘root of the contract’, for example where a supplier refuses to perform its obligations and abandons the contract or a buyer refuses to pay any invoices. Whether a breach is sufficiently serious to be a repudiatory breach is a question of fact and the relevant circumstances of the case.

It is possible to exclude the common law right to terminate the contract, but this must be expressly stated in the contract. The English courts have stated that they are unlikely to be satisfied that a party has abandoned such a valuable right unless the language used is sufficiently clear.

In many supply contracts, the parties may simply be in a buy-sell relationship where the buyer places an order and the supplier sells the product for which it is paid. This type of one-off buy-sell transaction may continue over several years, but under English law the buyer is not required to give any notice to terminate, it can simply stop placing future orders.

Notice period

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

Historically, if a contract was silent as to its term, there was a (rebuttable) presumption that it was permanent and irrevocable. However, the English courts have moved away from this presumption and will now principally look to the construction of the contract, with a view to ascertaining the parties’ intention. If the intention of the parties is not clear from the contract, the general rule is that an indefinite-term contract may be terminated by reasonable notice. There is no equivalent rule for fixed-term contracts, as where it is clear that the parties intended the contract to be for a fixed term, the courts will give effect to this intention.

The rules to determine the reasonable notice period for an indefinite term contract require analysis case by case, as what is reasonable will depend on a number of circumstances at the time of termination. Factors to be considered include:

  • the duration of the relationship - usually, the longer the relationship the more likely a longer period of notice will be required;
  • the degree of financial dependence of the terminated party on the terminating party, as greater dependence will militate in favour of a longer notice period;
  • the time the terminated party requires to replace the lost business; and
  • any capital investments made by the terminated party as part of the relationship (eg, staff, premises, equipment) to the extent that these may not have been fully amortised at the time of termination.
Automatic termination on insolvency

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

Under English law, there is no common law right to terminate a commercial contract on the insolvency of the other party. Similarly, no person may be excused from the performance of its obligations under the contract simply as a result of financial difficulty. To avoid this situation, parties will often include an express term in the agreement which permits either party to terminate on the insolvency of the other party.

Termination for financial distress

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

There are no general common law restrictions on terminating a contract if the other party is in financial distress. This situation will be governed by the provisions of the contract, and a party will be permitted to terminate for financial distress if this is provided for in the contract. However, there is a statutory exception set out in the Insolvency Act 1986, as amended by the Insolvency (Protection of Essential Supplies) Order 2015, which means that a supplier supplying essential services to a company is prohibited from terminating a contract for financial distress. ‘Essential services’ include electricity, gas, water, telecommunications services and IT services.

Force majeure

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

Force majeure is recognised under English law although it is a civil law concept. Force majeure is not defined in English law and so it should be defined in the contract often it is defined to include events such as fire, flood, war or similar events.

Force majeure suspends the obligations during the force majeure event but the obligations are not discharged (unless the parties agree otherwise). If the force majeure event continues for a long time, it may not be feasible for the agreement to continue and, in many cases, the force majeure clause is drafted in such a way to provide an option for the parties to terminate the agreement after a certain period of continuing force majeure.