Business contract early termination
- John Deane
- Updated: Thu, 2nd Mar 2017
Not every business contract works as planned. You may need to exit the contract early and terminate. We find the way for contract termination with minimum risk. If you’re on the other side facing the loss of contract termination we plan how to maximise your position.
Contract termination support includes:
We regularly act for smaller companies involved in a contract termination often from a much larger business. We are not scared off by the thought. We will put in place a strategy for you and fight your corner.
Contract termination – preserving your position
There can be a host of reasons for early contract termination. We have dealt with cases involving:
- The business contract is no longer economically viable, as a result of internal or external factors.
- You no longer require the product or service subject to the business contract.
- The other party is in financial difficulty or on the brink of insolvency.
- The other party has been bought by or is in the process of being bought by a competitor, who is forcing early termination of the business contract for governance reasons.
- The other party is carrying on its business, either within the terms of the business contract or otherwise, which may damage the reputation of your business.
- There is no written contract or it cannot be found.
Contract termination strategy
Termination may not always be the most appropriate method of ending the contract. Your contract may contain post-termination restrictions, or you will be exposed to claims for terminating early.
Our approach is to limit damage. This entails considering your circumstances, examining options, and then developing a strategy.
Contract termination rights
The law on termination of business contracts can be complex. It can generate unintended consequences. Contract termination rights are usually exercised by provisions contained within the business contract. However, termination rights may arise under other provisions, e.g. where the business contract has been breached through the other party’s :
- Poor performance of the business contract;
- Non-performance of the terms of the business contract; or
- Non-compliance with terms of the business contract, unrelated to performance.
Most business contracts contain survival clauses. Survival clauses remain in full force despite the business contract’s termination. Often survival clauses relate to confidentiality and third party rights.
Contract termination – effectiveness
When terminating a business contract, the general rule is that positive action is required. Terminating a contract must be intentional and unequivocal. Methods of termination vary, depending on the contract and the reason for termination.
Most business contracts require termination to be given in writing. Take care, where this is a provision of the business contract. Writing may mean paper only and may not mean electronic communications. Don’t assume email correspondence is sufficient. Email is often not enough to effectively terminate a business contract. In addition, we advise clients to document their reasons for termination. It helps prevent unnecessary resistance.
Continuing the contract
Care is needed when a right to termination arises. If you continue with the business contract after a termination right has arisen, and a reasonable time passed, then you are considered to be affirming the business contract through performance. If this is done, the right to terminate is effectively lost.
Terminate or affirm the contract?
However, there is a middle ground between terminating the contract and affirming the contract. A party wishing to terminate will have a reasonable time in which to consider termination. Reasonable time is considered on a fact by fact basis. Where time is short or the business contract relates to a volatile market, such as securities, then a reasonable time will be considered very short.
We ensure that termination is considered and acted on in a timely fashion to prevent affirmation occurring by notifying the other party of the termination right reserved. Recent court decisions have held that where a business contract contains terms and conditions attached to termination, such terms and conditions have to be strictly followed.
Contract termination alternatives
We consider the parties’ relationship before examining methods of termination. For instance, perhaps one party just want to slightly change the contract terms, as the relationship has existed for some time, and the party would like it to continue. Then consider:
- Renegotiation: A variation to the business contract to match the intended change to circumstances. It is crucial that variations are formally recorded in writing.
- Dispute escalation. This is often sufficient to bring the other party to the negotiating table.
- Threat of termination: to instigate a revised position.
You’ll probably damage the relationship by terminating the contract. So first consider alternatives to termination. This is where we assist you. We find that mediation is often a successful approach which will lead to a solution relatively inexpensively compared to litigation and arbitration.
Frustration of a business contract
A general rule of law is that if performance of a business contract becomes more difficult or impossible, the party who fails to perform its obligations is liable in damages. However, the exception to this is frustration.
Frustration automatically discharges the parties from the business contract. Common frustrating events are:
- The destruction of the subject matter of the business contract, e.g. the goods.
- The unavailability of the subject matter.
- Incapacity, such as where the contract is for personal services and the person can no longer perform the service. Construction contracts are a common example.
- An event varying the contract so substantially it renders performance impossible.
- The business contract becoming illegal through a substantive change in law.
It is possible to bypass the rules on frustration by providing an express clause in the business contract which governs the situation where a frustrating event occurs. Again, drafting is key and this is where we add value.
Contract termination – successful cases
Our expertise is in terminating complex, higher value business contracts. Recent instructions include:
- Licence contract termination: on behalf of a licensor. The licensor was in receipt of approximately £500,000.00 per annum in fees from the licensee. We protected our client’s position by ensuring that post-termination restrictions remained in full force.
- Factoring contract termination: on behalf of a regional invoice financier. Our client had recently entered the factoring market.
- Commission contract termination provisions: reviewed the termination provisions contained within a standard form commission contract. Our client was a supplier of customer databases to cross-border EU telecoms companies and was in receipt of estimated annual commission payments of £750,000.00.
- Investment services contract termination provisions: We drafted the termination provisions in accordance with our client’s instructions from its in-house asset management department. We worked with the in-house team to ensure that our provisions were tailored accordingly. The investment of £100,000.00 was for a start-up application company.
- Business supply contract termination: where our client, a supplier of luxury goods, had obtained a lucrative contract with another wholesaler elsewhere on better terms. We released our client from its obligations.