1. Andrew Denny, Partner and Richard Farnhill, Senior Associate Allen & Overy LLP How do we get out of this? Terminating contracts in a time of financial crisis.

2. LT:3995898 The three regimes  Common law: repudiatory breaches  Conditions precedent  The termination provisions in your contract

3. LT:3995898 Common law Some myths  You can always terminate for breach  If you do not terminate for breach, you cannot recover damages, either  Damages for breach are always calculated the same way

4. LT:3995898 Common law 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

5. LT:3995898 Common law The 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

6. LT:3995898 Common law 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

7. LT:3995898 Conditions precedent  Different regime  Specified obligations do not take effect  Generally, no damages

8. LT:3995898 Termination Provisions  Two types of express termination clauses: a)Failed performance (“Events of Default”) b)Circumstantial events (“Termination Events”)

9. LT:3995898 Termination Provisions a) Express provisions for failure to perform  ISDA Master Agreement 2002 Clause 5(a) defines an “Event of Default”, e.g. “failure to pay or deliver”  Clause 6 states what happens if an Event of Default occurs – right to specify Early Termination Date

10. LT:3995898 Termination Provisions  Frequently asked questions  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?

11. LT:3995898 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

12. LT:3995898 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

13. LT:3995898 Termination Provisions  What about contractual freedom?  c.f. ISDA 2002 Master:  Clause 5(a)(i) – failure to pay or deliver  Clause 5(a)(ii)(1) – failure to comply with “any agreement or obligation”

14. LT:3995898 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?

15. LT:3995898 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

16. LT:3995898 Termination Provisions  Can I still claim damages if I terminate?  Yes – but 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

17. LT:3995898 Termination Provisions b) Contractual provisions for circumstantial events  ISDA Master Agreement 2002, Clause 5(b) defines “Termination Events”, e.g. illegality  Clause 6 sets out consequences - may give only one party the right to terminate e.g. party who is not the Affected Party (if only one Affected Party)

18. LT:3995898 Termination Provisions  Would market turmoil constitute a “material adverse change”?  Check drafting  MAC clauses narrowly construed – WPP v Tempus  Reliance on a MAC clause can be perceived by the market as a sign of weakness  Alternatives:  Specify events / economic indicators / target performance to constitute a MAC  Texas Pacific Group relied on a termination right connected to Bradford & Bingley’s debt ratings to walk away from proposed £179m investment

19. LT:3995898 Termination Provisions  Drafting express termination clauses  Be specific re:  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?

20. LT:3995898 Conclusions  Important points  Clearest to rely on an express termination clause, but take care if you wish to preserve the full benefit of the contract damages  Keep in mind difference between breach of a condition and condition precedent  Keep in mind the difference between breach and repudiation  For repeated small breaches, consider the cumulative position