Termination of contracts and insolvency

It has been common practice for parties to construction contracts to include in their contract a term which entitles a party to terminate the contract between them in the event that either party enters into an insolvency procedure. As a result of changes introduced by the Corporate Insolvency and Governance Act 2020 such clauses will cease to be effective and so should not be invoked once a party has entered into a relevant insolvency procedure. Notwithstanding this legislative change, it may be that such termination clauses will continue to exist (given that there are exceptional cases where termination may be permitted) but the general effect of the new Act is clear, namely that termination is no longer permitted simply because a party has entered into a relevant insolvency procedure. Given this restriction on the efficacy of termination clauses, the better approach in the future is likely to be to focus attention on a due diligence exercise in relation to the other party’s solvency prior to entry into the contract or to monitor their solvency on an ongoing basis during the lifetime of the contract so that, if it is desired to terminate the contract, such termination can validly take place prior to the other party entering into a relevant insolvency procedure.