So, you think you have a right to terminate a contract – think again!
A new law that was introduced during the height of the pandemic to provide ‘breathing space’ for companies that were struggling financially, has been made permanent and may have serious consequences for some organisations. According to Ian Timlin at Conexus Law, a specialist advisory firm that provides end to end legal services for clients in the built environment and the digital world, the introduction of the Corporate Insolvency and Governance Act 2020 raises a number of concerns for companies moving forward and could impact their own financial situation.
“Many commercial contracts for the supply of goods and/or services contain a mutual term whereby either party to the contract has the right to terminate it, if the other party commits an Act of Insolvency. This includes going into liquidation, entering into a voluntary arrangement or administration or the appointment of a receiver (Acts of Insolvency). However, due to Covid-19, the UK government introduced a ban on termination for insolvency in July 2020, even if a contract provides for it. This is set to continue and means that such termination clauses are now unlikely to be enforceable. You may therefore be forced to continue providing goods and services to an insolvent company under a contract and not getting paid which might have an impact on your own solvency.
”In addition, companies won’t be able to make the ongoing supply of goods and services conditional on payment of outstanding sums that fell due before the Act of Insolvency occurred,” explains Ian.
There are a few exemptions – for example, some SMEs can terminate but they must do so by the 30th September 2020. Otherwise companies are reliant on the consent of the other party and if that is not given, may have to wait until the Act of Insolvency has finished (e.g. when the appointment of an administrator ceases, as then the legislation no longer applies) or make a court application on the grounds of hardship.
“We are advising clients that whilst this is largely a done deal for existing contracts, moving forward, new contracts should include provisions to address the effects of the legislation. These might include a right to terminate for convenience on notice; guarantees or security for payments by your counterparty; and reduced payment periods to highlight a company’s potential or actual payment difficulties.”
