Resist termination of contract

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Resist termination of contract

We enabled an electrical components manufacturer to resist a distributor’s termination of a contract. We stepped in to resolve the issue and ensure that our client received the sums it was entitled to.

How we resolved the dispute

We were instructed, and:

  • Advised our client to not accept the termination.
  • Awaited the next due payment from the distributor.
  • Informed the distributor that the termination was ineffective, and that they were in breach of contract themselves by not paying the fixed monthly sum.
  • Resolved to our client’s favour.

The business contract

The business contract, which we had drafted, contained the following clauses:

  • The contract between the parties was exclusive. This meant the distributor could not use the services of another electrical components manufacturer.
  • The contract was clear on termination. It stated that termination had to be in writing and served on the party at its registered office address. If termination was in writing, then it took immediate effect.
  • The business contract was for a fixed term of ten years. The distributor would pay our client an annual sum for the manufacturing of the electrical components. The quantity of components was fixed to each month.
  • The annual sum was paid in twelve fixed monthly instalments. However, the sum was agreed on an annual basis on the first and subsequent anniversary of the business contract’s term.

How not to terminate

The relationship had subsisted for nine years. Suddenly the distributor asserted that it wished to terminate the business contract. It had paid the four monthly instalments of the annual sum due from the final anniversary date. It claimed it did not have to pay for the remaining eight months, as the termination took immediate effect.

The distributor sent our client a letter, unaddressed, and attached to an email. The letter stated that the distributor wished to terminate the contract and release itself from its obligation under the business contract to pay the remaining eight months of the agreed annual sum.

This email surprised our client, since

  • The term had only eight months remaining; and,
  • Our client expected the contract to be renewed for a further term of ten years.

Stepping in to resolve the issue

Our client immediately sought our advice. It had already began producing components for the next eight months. Our client did not want a financial loss by incurring manufacturing costs, coupled with loss of the monthly recurring income from the distributor. It needed to protect cash flow.

Resisting termination of contract

It was important that our client did not acknowledge the letter attached to the email. If it had, then arguably termination would have been accepted. Our client would then have been prevented from claiming the eight monthly instalments.

Rather, we argued that the business contract had not been terminated, as termination was not in writing and therefore the distributor remained bound by the contract: the distributor had to continue to make the payments until the business contract’s expiry.

Knowing what to do and when

Timing was important. If we immediately notified the distributor, it would have served a revised termination correcting the error. Rather, we waited until the next monthly payment was due. Then we wrote to the distributor and informed them that:

  • The use of writing had not been complied with, therefore the contract had not been terminated;
  • The business contract was clear on termination, therefore there could be no confusion on the termination process;
  • There was no course of dealing between the parties where email correspondence was considered sufficient as notice in writing; and
  • They were in breach of contract by not making the most recent monthly payment.

Now the distributor had breached a fundamental term of the business contract by not complying with the most recent monthly payment. Hence we retained the right to litigate for the breach, for a remedy of specific performance. This is where a party is obliged by the court to comply with the terms of a contract. Our client could also claim costs.

Settling a breach of contract dispute

This was sufficient to bring the distributor to the negotiating table. The distributor agreed to remain in the contract for the remaining eight months, providing our client ceased action for breach.

As a result of our correspondence, the manufacturer was able to:

  • Receive the monthly instalments for the remainder of the term;
  • Ensure that manufacturing costs incurred were no longer wasted by the distributor’s defective termination; and
  • Search for an alternative distributor once the business contract’s term expired.

The manufacturer instructed us to draft a new contract to protect against similar risks occurring in the future.

How to protect your business

This case goes to show how effective drafting, coupled with the right case tactic, can ensure that you retain your rights under a business contract where a party attempts to wrongfully terminate.

John Deane heads the commercial team at Gannons. John advises businesses on business contracts, how they operate, and what to do if things are not going to plan.