Terminating Contracts in an Uncertain World
Arnondo Chakrabarti, Jonathan Hitchin & James
Partridge
Allen & Overy LLP
Coming up…
 Termination for breach (where no express
provisions)
 Express termination provisions - Events of Default
 MAC Event of Default
 Market Disruption Clauses
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Do I have a right to terminate for breach?
Two separate issues
 Breach
 Failure to perform a term or terms of the contract
 Remedy – damages for losses caused by breach of
the clause or clauses
 Repudiation
 Manifesting an intention not to be bound
 Remedy – option to terminate prospectively and claim
damages for loss of the contract
 “Anticipatory breach” is not a case of breach at all
but, rather, of repudiation
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Do I have a right to terminate for breach?
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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Options for the Innocent Party
 Terminate contract and sue for loss of bargain
 Affirm contract – lose right to terminate
 “No waiver” clause not sufficient to prevent affirmation by
conduct (Tele2 International Card Co SA & ors v Post Office Ltd
[2009] EWCA Civ 9)
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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 Bank’s 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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Other ways of bringing contract to an end
 Vitiation (eg. for misrepresentation or mistake)
 Frustration
 Very narrow test – Davis Contractors Ltd v Fareham UDC
 “Frustration occurs whenever the law recognizes that without
default of either party a contractual obligation has become
incapable of being performed because the circumstances in
which performance is called for would render it a thing
radically different from that which was undertaken by the
contract.”
 Automatic termination – no election required
 Must not be due to the act or election of the party seeking
to rely on it
 Expiration in accordance with terms of contract
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Express termination provisions
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Two types of express termination clauses:
a) Failed performance (“Events of Default”)
b) Circumstantial events (“Termination Events”) eg.
Insolvency
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Interpreting termination provisions
 Do I have to give notice or can I terminate
immediately?
 Can I terminate for breach even if the breach is
trivial?
 What is a “material” or a “substantial” breach?
 Can I still claim damages if I terminate?
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Interpreting termination provisions
 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 to
seriousness of breach
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Interpreting termination provisions
 Can I terminate for breach even if the breach is
trivial?
 Garden Guardian case: 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 of
substantially the whole benefit of the contract
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Interpreting termination provisions
 What is a “material” breach?
 Not the same as a repudiatory breach
 National Power – remediable breach likely to have
serious effect on counterparty if not rectified
 Dalkia Utilities – look at nature of breach – failure to
pay three monthly instalments (out of 173) in a row
was material
 Why does “any breach” have to be a repudiatory
breach while a “material breach” does not?
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Interpreting termination provisions
 What is a “substantial” breach?
 Crane Co v Wittemborg – essentially the same as
repudiatory 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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Interpreting termination provisions
 Can I still claim damages if I exercise
contractual right of termination?
 Yes – but depends on construction of contract
Stocznia Gydnia v Gearbulk Holdings Ltd 2009 [EWCA]
 Damages limited if breach is not also repudiatory:
 Will recover loss suffered to date
 Won’t get “loss of bargain” damages unless
contract specifically provides for it
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Drafting tips
 Be specific:
 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 loss
of bargain?
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Events of Default
 Compared to termination clauses
 Variety of uses
 Material Adverse Change (MAC) clauses
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MAC Clauses
 Types of clauses and their purpose
 Inherent uncertainty
 Relationship to frustration
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Business MAC
 “Any event or series of events occurs which, in the
opinion of the Majority Lenders, is reasonably likely to
have a Material Adverse Effect.”
 “Material Adverse Effect means a material adverse
effect on:
(a) the business or financial coundition of any
member of the Group or the Group as a whole;
(b) the ability of any Obligor to perform its obligations
under any Finance Document; or
(c) the validity or enforceability of any Finance
Document.”
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Elements of MAC clause
 Adverse effect on what?
 A subjective test?
 Paragon Finance v Staunton (2001)
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What counts as material?
What degree of certainty is required?
What if event was foreseeable?
M&A context – WPP/Tempus
Practical steps
 Document reasons for invoking MAC (eg. board
minutes)
 Compare borrower’s position at time agreement
signed against position when seek to invoke MAC
 Record alternative options
 Seek support of other lenders?
 Any other relevant provisions of agreement? (eg.
other Events of Default)
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Risks of invoking MAC
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MAC clauses narrowly interpreted
Burden of proof on party seeking to rely on clause
Risk of breach of loan agreement
Damages may include:
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Losses from cross-defaults
Cost of arranging alternative financing
Increased cost of alternative finance
Loss of business opportunities
Loss of going concern value if borrower becomes
insolvent
Conclusions on MAC
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Consider actual wording
Fact specific
Getting it wrong could lead to large damages
But leverage in negotiations
Market Disruption
 Market Disruption clauses in loan agreements - How
do they work?
 LIBOR does not currently represent the cost of
funds of Banks
 Current approach – are these clauses being
invoked?
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Issues with the Market Disruption Clause
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Reputational Risk?
Practicalities for Facility Agent
Competition Law concerns
How is interest calculated where a market disruption
clause is invoked?
Possible Solutions?
 Lower the threshold
 Disclose only blended rates to borrowers
 A documented process for exploring appetite for
invoking the clause
 Use Reference Banks rather than Screen Rate
 Higher of a screen rate and a Reference Bank rate
 Adjustment to Screen Rate
 Reference to CDS spreads
 Increasing upfront margin
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Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
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