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Terminating a contract? Look before you leap…

Terminating a contract the wrong way can have disastrous consequences, exposing a business to significant liabilities.

War in Europe, rocketing energy costs, UK financial “planning” which may have the ability to destabilise the economy; the future presents quite a bleak picture, at the moment. Given what is going on, suppliers may become too expensive and, equally, supplying to others may cease to be profitable – so it’s no surprise that some businesses may be looking to terminate contracts in the days ahead. However, terminating a contract the wrong way can have disastrous consequences, exposing a business to significant liabilities.

Before proceeding, you may wish to consider whether there may be a better way to re-jig your arrangements with the other party. Terminating a contract can be badly received. If you have good relations with the other party or may still need them in the future, why not have a preliminary discussion about what might make the relationship viable, moving forward. Renegotiation may end up being significantly cheaper than terminating and starting again. For extra commercial protection, ensure that all discussions take place on an agreed “without prejudice” basis, with a view to being protected from production to the court, if the matter subsequently results in a formal dispute.

Here are three tips for ensuring that, when the time comes for you to terminate a contract, you don’t create a situation which will cost you even more than if you had just continued as you were. Assuming that your contract is in writing and that you believe that termination of the contract is called for:

1. Check what it says about the timing of any termination and in relation to your right to do so:

  • Do you have the right to terminate? Is the contract for a fixed term? If it is, on what basis (if any) can you terminate before that fixed term is over? Some contracts will permit a party to terminate prior to the expiry of its full term on the basis that there has been a breach of the contract – but beware; many contracts provide a defaulting party with an opportunity to remedy their breach within a reasonable time.
  • If you jump the gun before that period has passed, you could create real problems for your business. Claiming to terminate a contract where your right to do so has not crystallised may amount to a “repudiatory breach”. In summary, that will entitle the other party (promptly) to accept your conduct as bringing the contract to an end and to sue you for all of the losses that flow from your (unlawful) termination. At a stroke, you will be left with all of the liabilities under the contract but unable to insist on the other party performing any of its own obligations – disaster!
  • If there is no breach of contract on which you can rely as a basis for termination, you will need to consider whether is possible to give notice of termination, where the period of notice is as agreed in the contract – say a year, a month, a week or some other period.
  • If so, check whether the giving of such a notice has to comply with any special requirements – for instance does it have to be given on a particular date in the calendar year? Giving notice at the wrong time is likely to be ineffective.
  • If no notice period is specified, the court may (if it becomes involved) imply a “reasonable” notice period. What that is will depend on the nature of the contract and, possibly, the factual context in which it is set. That will also need careful consideration, in order for any notice of termination to be effective.

2. Check what it says about the way in which any notices under the contract (including a notice to terminate) are to be delivered:

  • Most commercial contracts specify how and where notices to the parties are to be delivered – and when such notices are treated as having been delivered.
  • Some examples include; by post, by fax, by hand, and by email. The timing of the deemed date of delivery of the notice is likely to vary slightly, depending on the method used. That may be important as the last thing you will want is to start behaving, prematurely, as though the contract has been terminated whilst it continues in full force and effect.
  • Many a notice to terminate which has been delivered incorrectly or to the wrong place has resulted in grief for the party who failed to comply with the contract’s requirements – all of the pitfalls referred to at 1. above can come into play.
  • The contract may also specify that a specific reference should appear on any notice, or that it should be marked for the attention of a specific individual. Make sure your notice is addressed correctly or be prepared to face the consequences.

3. Ensure that you record all of the steps that you have taken. If there is a subsequent dispute, that may be crucial to defeating any claim that you have acted in breach of the contract’s requirements.

Experience shows that taking the time to get a notice of termination right will always be preferrable to firing from the hip. If in doubt, take advice on how to terminate – that might be the best commercial decision you ever make.

If you would like guidance on how to terminate a contract correctly, please contact our commercial solicitors.

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