Termination Clauses and Notice under UK Contract Law

In a recent Court of Appeal case, the wording of a termination clause in a contract was in issue. It involved a firm called Artpower, which contracted to produce and sell clothes from the range of another company, named Bespoke Couture. The question was whether the contract was brought to an end automatically upon issue of notice of termination.

The relevant contract contained a term which allowed its termination if the other side committed a material breach which was not rectified within 30 days. A later clause in the contract also provided that it could be terminated immediately ‘on notice’ in certain circumstances. The clause relating to material breaches did not include the ‘on notice’ wording.

Bespoke Couture claimed that Artpower had been in material breach of the contract and gave 30 days notice requiring rectification of the breach. At the end of 30 days, the breach having not been rectified, Bespoke Couture regarded the contract as terminated. They claimed that the termination was, in effect, automatic, since the relevant clause did not specify that it would be ‘on notice’.

The key point at issue was the wording of the relevant clause, which said that the contract ‘may’ be terminated in the event of a breach, not that it ‘would’ be terminated. In the view of the Court of Appeal, this meant that the contract could be terminated, but not that it would be terminated automatically. Bespoke Couture would have to take a further step to terminate the contract.

The problem here was the ambiguous wording of the termination clause. In practice, when such clauses are invoked, relations between the companies involved are seldom at their best and the possibility of dispute is high. It is essential that such clauses are drafted in a clear and unequivocal manner.