This can be particularly so in the consumer and retail sector with long global supply chains, operating in a fast paced and ever changing environment, often with complex contractual routes to market.
Few things send parties off to their lawyers as often as talk of their contracts being terminated. This makes it important for those doing the terminating, to ensure they have fully thought through the process they are about to embark upon. Getting it wrong can be serious. Litigation is expensive, can waste huge amounts of management time, potentially result in adverse judicial awards, and damage brand and market share.
Before pulling the trigger
If you are considering terminating a contract, it is helpful to step back from the situation and assess, whether termination is really the only solution:
- Would a renegotiation suffice? Depending on what is driving the desire to terminate, could a renegotiation of key terms solve the issues? If it can be done amicably, or even against the threat of a termination or claim for breach of contract, then that may still produce a better outcome.
- Claim damages instead? Where breaches of contract have caused financial harm, that does not mean you have to terminate the contract. There may be an alternative situation where you assert a claim for damages and then potentially settle amicably whilst maintaining the overall contractual relationship. Even if you cannot settle and you have to bring court proceedings, the contract may still continue.
- Suspension? Many contracts, especially since COVID, contain force majeure clauses which (whilst each contract needs to be looked at on its own terms) may enable the suspension of rights and obligations on the occurrence of specified events outside of the parties' control. A contractual break may then lead to further commercial discussions about the future arrangements, without the need for a contentious termination.
How to terminate
Getting termination wrong can easily make a bad situation worse. Considering the following points will reduce that risk:
- What does the contract say about termination? Many contracts contain provisions that enable termination on a "no fault" basis. It may be that the contract will expire after a fixed term or following a specific period of written notice. Or, there may be break clauses that kick in after certain periods of time or volumes. If there are, can you live with the agreement until you reach a natural expiry point? Doing so, may allow longer to plan for the termination as well as de-risking it.
- Has there been a termination event? Many contracts contain a list of specified events of default, some of which may require notification and then a period of time for remediation. In each case, the contractual provisions need to be carefully assessed to ensure that the necessary grounds for termination exist.
- Ensure you don't lose the right to terminate: Once a termination right has arisen, you have to decide whether to rely on it and terminate or waive termination and claim damages. It can be possible to extend the time to make the election, but if you continue to perform the contract you typically cannot "store up" a termination right into the future.
- What if the contract does not permit termination for cause? All may not be lost, since generally contracts can be terminated in circumstances where the other party acts in such a way as to deprive its counterparty of substantially the whole benefit of the contract. This is in addition to other common law rights that may enable termination or void the contract, such as where a party was fraudulently induced into entering into the contract or where performance has become impossible.
- Process and formalities matter: Where a contract specifies a process or procedure for termination, then it should be followed. A failure to do so may not necessarily be fatal to the termination, but it can be, and it introduces unnecessary risk into an already challenging situation.
Practical matters
There are also some practical issues that can make a huge difference:
- Documents: In any contentious legal situation, documents matter. If you are planning a termination, or fear a counterparty may seek to terminate an agreement, keep proper records of relevant events to demonstrate the standard of performance and a paper trail of correspondence to show that issues are being raised with the other side. In any legal dispute, access to good records can make a huge difference.
- Mitigation: Even though damages are available for breaches of contract, the wronged party still has a duty to mitigate its loss. Where it fails to do so, the right to recover damages can be curtailed.
- Settlement discussions and without prejudice: Should you get into settlement discussions with the other side, it is possible to hold confidential settlement discussions without having to later disclose them to the Court. This is important because, otherwise, any concessions you make in seeking a resolution may be construed as an admission in later Court proceedings.
- Specific contracts: Even within the UK, there are certain types of contacts that apply mandatory rules that may override written contractual terms. An example of this is commercial agency (which has a specific meaning) and which entitles the agent to claim payments in certain termination situations, irrespective of any contractual terms.
- International contracts: Even if the contract is under English law, international contracts, can sometimes have a different characterisation in foreign jurisdictions. For example, in the Gulf many legal systems provide protections to local distributors (as well as agents). Not being aware of this, can result in unwelcome surprises and change the rights and remedies available to the parties, normally in favour of the overseas party in that foreign jurisdiction.
Legal advice
Early legal advice, when considering contracts, can be extremely valuable in helping to reduce the risk in a potentially contentious situation. Not only will it help find the best way though and avoid surprises, it will also ensure you are properly represented in any escalation, advised on issues like legal privilege and help you focus activities on the overall objective.
Conclusion
Ensuring you receive expert legal guidance before proceeding with contract termination is crucial to achieving the best outcome for your business. DWF's Dispute Resolution team have extensive experience handling contract termination to parties initiating or facing contractual termination, providing commercially-focused strategic advice to minimise business disruption and financial loss.
Written by Richard Twomey & Virali Patel.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer sector and Dispute Resolution experts.
