Part 1 – general principles
In recent months, we have seen a rise in client queries across our firm’s practice areas relating to termination of contracts. In a series of upcoming blogs, we will be looking at the legal principles relating to contract termination under English law. This will include issues arising under specific types of maritime contracts such as charterparties and shipbuilding contracts.
In this first blog we consider some general principles including: how a right to terminate arises, issues relating to termination notices, and points to bear in mind when (re)negotiating terms as an alternative to termination.
If there are any particular areas or topics that our followers would like us to focus on as part of this termination series, please add a comment on our LinkedIn post and we will do our best to cover these.
Termination of a contract can come about in a number of different ways and for a variety of reasons. Market fluctuations and poor economic conditions are two situations where we commonly see a rise in termination issues and disputes.
Most recently, following the outbreak of Covid-19, a number of our clients have faced termination issues due to (amongst other things) the severe disruption to supply chains and negative impact on cash flow. In many cases, this has affected the ability of businesses to fulfil obligations under contracts leading to situations where termination rights come into sharp focus.
Another potential reason for termination, in any market, is a party’s failure to perform in accordance with the contract. Inadequate performance can take many forms. For example, a buyer under a shipbuilding contract has the right to cancel the contract where delivery of the newbuilding vessel by the shipyard is delayed beyond a certain period, as specified in the contract (say 150 days beyond the contractual delivery date). Another example is a charterer’s right to terminate a charterparty where the vessel is not delivered in the required condition by the cancelling date.
In any situation where termination is being considered (or threatened against you), it is crucial to establish that a right to terminate actually exists. Generally, this right arises as either (i) an express term in the contract or (ii) a right under common law. We comment on both categories in more detail below.
Express contractual right to terminate
Most contracts contain express provisions allowing a party to terminate in specific circumstances. Examples include termination without cause (often called termination for convenience), due to material breach, following insolvency of either party etc.
A contract may also contain a Force Majeure (FM) clause allowing either party to terminate the contract if the FM event continues for a certain period of time. Since the outbreak of the Covid-19 pandemic, there has been a sharp rise in cases concerning suspension and termination rights under FM clauses. For key points to consider in relation to FM clauses please see our previous articles here and here.
Simple as it might sound, in each case, the wording of any express termination provisions must be carefully considered to determine whether the contract allows a party to terminate.
Termination under common law
Other than in express provisions in the contract, a termination right can arise under common law. Examples include:
- Breach of a condition: breach of a fundamental term of a contract, which entitles the innocent party to terminate the contract. Unless a contract specifies that a particular clause is a condition, the court will determine this by looking at the intention of the parties.
- Repudiatory breach: breach of a clause which is not a condition, but where the breach is so serious that it deprives the innocent party of substantially the whole benefit of the contract.
- Renunciation: by words or conduct, one party shows an intention no longer to be bound by the contract.
- Frustration: contractual obligations become fundamentally altered or impossible to fulfil after an unforeseen supervening event. The doctrine of frustration is typically difficult to establish and it is preferable (where possible) to rely instead on specific FM provisions in the contract.
Termination notices and formalities
If a party wishes to exercise a termination right, a key point is how and when this should be communicated to the other party.
It is important to check what the contract requires in terms of the form of any termination notice. For example, does it have to be sent by email, courier, fax, or all of these methods? Who should it be addressed to? Failure to comply with the notice requirements in the contract may well invalidate any termination notice, so it is extremely important to get this step right.
Before terminating, it is always advisable to check any requirements relating to remedy or cure of the breach. For example, in the case of non-payment of hire, charterparties commonly require Owners to give notice to charterers of this breach and provide a grace period for payment, before being entitled to withdraw the vessel, thereby terminating the charterparty (1).
Even if a termination notice has been served, this does not mean that negotiations cannot continue between the parties. This might be either to “revive” the contract or agree a new set of terms, such as reduced rates or extended delivery periods under charterparties or shipbuilding contracts.
It should be kept in mind that any such negotiations between parties are admissible in any future court proceedings. In most settlement discussions, parties should include the words “without prejudice” in correspondence/documents. This gives parties more comfort that any concessions they make in negotiations will not be used against them if the matter does end up in court or arbitration.
Please keep an eye on our blog for future articles in this series which will be posted in the coming weeks.
(1) For example, see clause 11(b) of the BIMCO NYPE Time Charterparty: https://bi-cd02.bimco.org/contracts-and-clauses/bimco-contracts/~/link.aspx?_id=EEBE70C0DDB44328BFE184C79D2BA623&_z=z#