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?

Under the Uniform Commercial Code (UCC), if a contract is indefinite as to duration, it will be valid for a reasonable time. Unless the parties agree otherwise, either party may terminate the contract at any time (though many courts have held that reasonable notification to the other party is required).

Parties to a long-term contract for the sale of goods may expressly agree to certain termination provisions. Some provisions may permit one or both parties to terminate for convenience, meaning a party can simply terminate at will, without the other party being in breach. These ‘at will’ provisions may be subject to other applicable laws or notice requirements.

A contract may also include the right to terminate for cause. Termination for cause typically occurs when one party is either in general breach of the agreement or one or more enumerated ‘events of default’ have occurred (for example, non-payment, failure to deliver or breach of warranty). Again, reasonable notification is typically required to terminate, unless the parties agree otherwise.

Notice period

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

Under the UCC, reasonable notification is that which will give the non-terminating party reasonable time to seek out an alternative arrangement. What is reasonable will depend on the particular facts and circumstances applicable to the case.

Automatic termination on insolvency

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

Although it is common for commercial contracts to provide for immediate termination upon the insolvency or bankruptcy of a party (an ipso facto provision), these clauses are subject to US business bankruptcy laws and are therefore not always enforceable if the insolvent party has filed for bankruptcy. If the insolvent party has not filed for bankruptcy, however, the other party may be able to rely on the ipso facto provision to terminate the contract. Although the insolvency of a party does not automatically terminate a commercial contract, it is generally considered to be sufficient grounds to terminate a contract in connection with other factors that constitute a default.

Termination for financial distress

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

Yes, if the distressed party has filed for bankruptcy, the other party may not be able to terminate the contract, as mentioned above. US bankruptcy laws generally protect the distressed business’s property, assets and contract interests during the proceedings and give the distressed party additional time and rights to determine what to do with the contract (cure and perform, reject, etc). If bankruptcy has not been filed and the distressed party has defaulted under the contract, the other party may issue a notice of default (as specified in the contract) or terminate under an ipso facto provision.

Force majeure

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

Yes. In commercial contracts, force majeure events typically include acts of God, war, acts of terrorism or similar events, fires, strikes, embargoes or other government actions, natural disasters, riots, shortages of power or transportation, or other events beyond the control of either party.

The parties may include a force majeure clause in the contract, which serves to excuse non-performance due to a force majeure event, or allocate the risk if certain events were foreseeable (for example, a severe hurricane in the south-eastern region of the United States) by negotiating the monetary terms of the contract. If a contract is silent as to a force majeure event, the court will look to its foreseeability to determine whether to excuse non-performance under the contract. If a force majeure event was foreseeable, the court will generally hold that the non-performing party bore the risk of the event and is therefore not excused from performance. If the force majeure event was not foreseeable, the non-performing party is generally excused.