Resist contract termination

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Gannons enabled an electrical components manufacturer to resist a contract termination by one of their distributors .

We stepped in to resolve the issue and ensure that our client received the sums it was entitled to. We advised our client not to accept the termination and await the next payment due from the distributor. Then we informed the distributor that the contract termination was ineffective, and that they were in breach of contract themselves by not paying the fixed monthly sum. This allowed us to resolve the case in our client’s favour.

The business contract

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

Exclusive contract

This meant the distributor could not use the services of another electrical components manufacturer.

Clarity 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.

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.

Annual sum, paid in twelve fixed monthly installments

However, the sum was agreed on an annual basis on the first and subsequent anniversaries of the business contract coming into effect.

Poor contract termination

The relationship had proceeded well for nine years. All of a sudden, the distributor declared that it wished to terminate the business contract. It had paid the four monthly installments 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 contract 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 had fully expected the contract to be renewed for a further term of ten years.

Gannons intervenes

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 losing the monthly recurring income from the distributor. It needed to protect cash flow.

Resisting contract termination

It was important that our client did not acknowledge the letter attached to the email. The distributor could have claimed that this meant our client accepted the contract termination if they had. This would have then prevent our client from claiming the eight monthly installments they were due.

We then argued, as per the agreement, that because the distributor had not served their contract termination in writing, the business contract had not been terminated. Therefore the distributor remained bound by the contract and 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 as they had not terminated the contract in writing, the contract had not been terminated. We argued to them that the business contract was clear on termination. Therefore there could be no confusion on the termination process. Furthermore, there was no precedent established between the parties which equated email correspondence to notice in writing. Hence 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 the remedy of a specific performance. This is where the courts oblige a party 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 taking action over the contract breach.

As a result of our correspondence, the manufacturer was able to receive the monthly installments for the remainder of the term. This meant that the costs of manufacturing their products that our client had incurred were no longer wasted. They were also able to 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. 

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