Terminating commercial contracts

We help businesses achieve their commercial objectives. Sometimes this means ending or renegotiating contracts that are no longer practical or commercially beneficial. It also means resolving disputes and seeking injunctions relating to contractual performance and payment when things go wrong.

Recent cases

We are often asked to review commercial contracts that no longer provide value to our clients or have led to disputes between business partners.

In recent months, we have helped our clients:

• Renegotiate a contract to make its terms more commercially favourable;
• Successfully defend a termination notice alleging a failure to remedy a breach; and
• Protect their goods and brand reputation while minimising losses after a customer business became insolvent.

We aim to put our clients on solid ground and help them avoid hidden traps, as discussed below.

What is contract termination – a common misconception

It may seem obvious, but it is worth clarifying these terms because their legal meanings affect the options available to your business.

Termination

“Termination” generally discharges the parties from future obligations to perform the contract, while accrued rights and liabilities usually remain. Claims for damages arising from an earlier breach may also survive. Damages aim to compensate the innocent party for the loss caused by the breach, subject to the applicable legal principles and contractual terms.

Rescission

“Rescission” is a remedy that may be available where a contract is voidable, for example because of certain misrepresentations. It generally seeks to unwind the contract and restore the parties, so far as possible, to the positions they occupied before entering into it. The availability and consequences of rescission depend on the circumstances.

Hot topics and hidden traps to avoid

Commercial contracts can contain traps that create difficulties when a business relationship breaks down. We have set out below some court decisions and practical tips to help minimise the risks to your business.

Side letters – more uncertain than efficient

In the recent case Maurice MacNeill Iona Ltd (t/a Century 21 UK) v C21 London Estates Ltd [2018] EWCA Civ 1823, the Court of Appeal considered whether terms in a side letter formed part of a franchising contract.

Background

A franchisor and franchisee agreed a side letter dealing with outstanding fees under their first franchise agreement. The franchisee later entered into a second franchise agreement for another part of the franchise. The franchisor assumed that the side letter’s terms also applied to the second agreement. When the relationship broke down, it argued that non-payment of fees under the first agreement justified terminating the second.

The main questions were:

• Were the side letter’s terms incorporated into the second contract?
• If so, did a breach of those terms give the franchisor the right to terminate the second agreement?

What was held

The Court of Appeal treated the issue as one of contractual interpretation. The second agreement was a written contract containing an entire agreement clause and was therefore construed in accordance with its terms, without relying on the parties’ subjective intentions or other documents. On the facts, the side letter’s terms did not form part of the second agreement.

A guarantee in a side letter can, in principle, form a condition of a contract, but that was not the position here. The failure to pay punctually was a curable default under the agreement and did not justify terminating the entire franchise agreement.

The Court of Appeal emphasised that contractual obligations should be incorporated expressly into the contract.

This case highlights the risks of relying on side letters to introduce additional contractual terms. Although they may appear convenient as a commercial relationship develops, businesses should ensure that important obligations are properly incorporated into the relevant agreement.

Fiduciary duties – more than contractual obligations, but not enough to terminate

In Crocs Europe BV v Anderson (t/a Spectrum Agencies (A Partnership)) [2012] EWCA Civ 1400, the Court of Appeal considered the termination of an agency agreement.

Background

The defendant acted as an agent for the appellant and owed certain fiduciary duties. The appellant alleged that a website on which the defendant’s employees posted derogatory comments about its products breached the agency contract and justified terminating the agreement.

The questions considered by the court were:

• Did the agency contract impose fiduciary duties beyond the agent’s ordinary contractual obligations?
• Did any breach justify terminating the agency agreement?

What was held

The Court of Appeal held that the agency contract set out the agent’s contractual obligations rather than imposing additional fiduciary duties. It also explained that fiduciary law does not automatically entitle a party to terminate a contract following a breach of fiduciary duty.

Other remedies may be available, depending on the nature of the duty, the circumstances of the breach and the parties’ contractual arrangements.

The case is a reminder not to act too hastily when considering termination for an alleged breach of duty. Carefully drafted contractual provisions can help clarify the consequences of particular breaches.

The key question is whether termination is justified under the contract and the applicable legal principles, or whether another remedy may be more appropriate.

Practical tips for software licences

Businesses operating through digital platforms often rely on software licences. It is important to understand what the licence actually covers:

• Are you paying only for the licence, or does the fee also cover maintenance and technical support?
• If support is included, what does it cover?
• Is the licence time-limited or perpetual?

Renewal or extension

Automatic renewals may be subject to conditions, such as renewing on time and paying fees promptly. Failure to meet these requirements can lead to termination or additional charges.

Alternatively, some businesses prefer a renewal process requiring agreement from both the supplier and the customer. However, this offers no certainty that the parties will agree to renew on the same or better terms.

Termination

Software licence agreements commonly provide for termination either for convenience or for cause.

‘Termination for convenience’ allows a party to terminate without having to establish a breach, subject to the terms of the agreement. For example, a business may use this right when a licence is no longer commercially viable.

‘Termination for cause’ allows a party to terminate where specified circumstances arise, such as a breach of the licence agreement. Even a licence described as perpetual may be terminable in defined circumstances.

If your contract contains termination rights, you should follow the agreed procedure carefully. The agreement may prescribe how notice must be served or limit termination rights to particular parts of the contract. Failure to comply with these requirements may itself result in a breach.

Our team has extensive experience of contentious and non-contentious contractual matters across a range of industries. If you are unsure how to proceed, we can review your contract and advise on practical next steps to help achieve your commercial objectives.