The termination of a supply contract is the bringing to an end of the parties’ principal obligations under the contract, whether by reason of the natural expiry of the contract term, by reason of the satisfaction of the contract’s purpose, or by reason of an event entitling a party to terminate prematurely. Under Iraqi law, the framework for premature termination is established by the Iraqi Civil Code No. 40 of 1951, which sets out the grounds on which termination may be sought, the procedures for the bringing of termination, and the consequences of termination. The contract may supplement the statutory framework by defining additional grounds for termination, prescribing the procedures, and addressing the consequences.
Rescission for Non-Performance
Rescission for non-performance is the principal mechanism by which a party may terminate a contract for the other party’s breach. Under Civil Code, where one party to a synallagmatic contract fails to perform its obligation, the other party may, after notification, demand the performance of the contract or its rescission, together with compensation in either case where loss has been sustained. The right to rescind is conditional upon the breach being material; minor or technical breaches do not, in general, support rescission. The rescission is effected, in the absence of contractual provision, by judicial decision pursuant to which the court establishes the breach and pronounces the termination.
Unilateral Termination Clauses
The contract may confer on a party the right to terminate unilaterally upon the occurrence of specified events, without the necessity of judicial intervention. Such clauses are recognised under Iraqi law as an exercise of party autonomy, subject to the principle of good faith and the prohibition of abuse of right. The drafting of unilateral termination clauses should specify with precision:
- The events triggering the right of termination, defined with sufficient objectivity to support the application of the clause
- The procedure for the exercise of the right, including any cure periods, notice requirements, and form requirements
- The effective date of termination
- The consequences of termination, including the survival of post-termination obligations
The clauses should be drafted to engage with the statutory framework rather than to depart from it inadvertently.
Termination for Convenience
Termination for convenience is termination without cause, exercised at the unilateral election of the terminating party. Termination for convenience clauses are recognised under Iraqi law, particularly in long-term and framework arrangements. The drafting should specify the notice period, the consequences for outstanding obligations and call-offs, and any compensation payable to the terminated party in respect of investments made or losses sustained. Termination for convenience clauses in arrangements engaging Iraqi commercial agents, distributors, or franchisees should be assessed against the protections of the Commercial Agency Law No. 79 of 2017, which limits the principal’s ability to terminate without serious cause.
Material Adverse Change and Change in Control
Termination on material adverse change and termination on change of control of the counterparty are conventional features of substantial supply contracts. Material adverse change provisions permit termination where the financial position or the commercial circumstances of the counterparty deteriorate to a defined extent. Change of control provisions permit termination where the ultimate ownership of the counterparty changes, reflecting the importance of the counterparty’s identity to the contracting party. The drafting should specify the events triggering the right and the procedures for its exercise, with attention to the proportionality of the response to the change.
Termination by Mutual Agreement
The parties may at any time agree to terminate the contract by mutual consent, on terms negotiated between them. The agreement should be documented in writing and should address all matters that would otherwise require resolution, including the position with respect to outstanding obligations, payments due, return of property, return or destruction of confidential information, and the release of claims. A well-drafted termination agreement substantially reduces the prospect of subsequent disputes.
Procedure for Termination
The procedure for termination engages, depending on the basis of termination:
- The giving of notice of breach and the affording of any cure period
- The giving of notice of termination, in the form prescribed by the contract
- Where required, the institution of judicial proceedings for the declaration of rescission
- The implementation of the consequences of termination, including the cessation of performance and the implementation of transition arrangements
The procedural requirements should be observed with care, as a failure of procedure may invalidate the purported termination and expose the terminating party to claims for wrongful termination.
Consequences of Termination
Termination has the effect of bringing the parties’ principal obligations to an end, save for those obligations expressed in the contract or implied by law to survive termination. The consequences typically include:
- cessation of further performance of the principal obligations
- accounting between the parties for performance rendered and payments made
- return of property in the possession of either party belonging to the other
- return or destruction of confidential information
- disposal of inventory held by a distributor or agent
- compensation of either party for loss caused by the termination, where applicable
- transition to a successor supplier or to in-house performance
Post-Termination Obligations
Certain obligations are expressed in the contract, or implied by law, to survive termination. Common surviving obligations include confidentiality obligations, non-compete and non-solicit obligations (to the extent enforceable), intellectual property licences granted on a perpetual basis, indemnities, the obligation to cooperate with audits and investigations relating to performance during the term, and the obligation to defend or settle third-party claims arising from performance during the term. The drafting should make the surviving obligations express to avoid uncertainty as to their continued effect.
How We Can Help
Etihad Law Firm advises on the termination of supply contracts in Iraq, including the assessment of the grounds for termination under the Iraqi Civil Code, the drafting of termination notices, the conduct of judicial proceedings for rescission, the negotiation of termination by mutual agreement, the structuring of transition arrangements, and the conduct of disputes arising from termination including under the Commercial Agency Law No. 79 of 2017.