1. Terminating Contracts in an Uncertain World
Arnondo Chakrabarti, Jonathan Hitchin & James Partridge Allen & Overy LLP

2. Coming up… Termination for breach (where no express provisions)
Express termination provisions - Events of Default
MAC Event of Default
Market Disruption Clauses

3. 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

4. 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

5. 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)

6. 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

7. 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

8. Express termination provisions
Two types of express termination clauses:
Failed performance (“Events of Default”)
Circumstantial events (“Termination Events”) eg. Insolvency

9. 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?

10. 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

11. 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

12. 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?

13. 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

14. 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

15. 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?

16. Events of Default Compared to termination clauses Variety of uses
Material Adverse Change (MAC) clauses

17. MAC Clauses Types of clauses and their purpose Inherent uncertainty
Relationship to frustration

18. 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.”

19. Elements of MAC clause Adverse effect on what? A subjective test?
Paragon Finance v Staunton (2001)
What counts as material?
What degree of certainty is required?
What if event was foreseeable?
M&A context – WPP/Tempus

20. 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)

21. Risks of invoking MAC MAC clauses narrowly interpreted
Burden of proof on party seeking to rely on clause
Risk of breach of loan agreement
Damages may include:
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

22. Conclusions on MAC Consider actual wording Fact specific
Getting it wrong could lead to large damages
But leverage in negotiations

23. 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?

24. Issues with the Market Disruption Clause
Reputational Risk?
Practicalities for Facility Agent
Competition Law concerns
How is interest calculated where a market disruption clause is invoked?

25. 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

26. 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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