In this Spotlight on… article, we look at some of the perils of termination.
Claims for wrongful termination are fertile ground for lawyers. In many cases a dispute can be avoided by taking steps at an early stage to assess the risks rather than waiting until after termination to deal with the fallout. We’ve set out below some of the key areas where attention should be paid. You can also hear more about termination in our webinar.
Are there different options for termination available to you?
Be aware that which option you choose may affect the remedies available to you and the risk of things going wrong.
If there is a choice between accepting a repudiatory breach and using a termination for convenience clause, remember that using the termination for convenience will not allow you to pursue a damages claim for loss of bargain. However, if you accept what you think is a repudiatory breach and get it wrong, you may end up instead paying damages for wrongful termination. There may therefore be circumstances where a termination for convenience is a safer option.
If the contract includes a “notice to remedy” provision, then consider carefully how this may interact with common law rights. Recent case law has indicated there are no hard and fast rules, and the relationship between common law and contractual rights of termination is a question of construction in each case. Depending on the wording of the contract and the circumstances of the case, it may be necessary to trigger the notice to remedy clause rather than relying on common law rights to terminate immediately for repudiatory breach.
Is there a termination for convenience provision?
In an uncertain financial climate, attention might turn to long term supply contracts such as those for the provision of IT services and whether costs savings can be made by terminating. In the absence of any breach, if there is no right to terminate early for convenience then you will be bound for the remainder of the contract term, even if the service is no longer required. It is important that those entering contracts for internal business support purposes understand the implications of fixed term contracts and do not seek to terminate them for costs saving reasons.
Are you thinking of terminating because of insolvency?
Although the Corporate Insolvency and Governance Act (“CIGA”) was introduced in response to Covid-19, its provisions which restrict termination of contracts with insolvent parties remain in place. These provisions (which introduced a new provision into the Insolvency Act) apply to the supply of goods and services and to various insolvency procedures and extended the pre-existing provisions in relation to certain essential services.
There are exceptions and exclusions, and as ever the devil is in the detail. It is therefore important to consider these provisions carefully if dealing with a company entering into an insolvency process, as the impact may extend further than just limiting the right to terminate.
Are you thinking of suspending performance for non-payment?
Bear in mind, there is no common law right to suspend performance for non-payment (although there are statutory provisions in relation to certain construction contracts). If there is a contractual right, it is key to ensure that any procedural requirements are followed. Suspending performance without the right to do so or without following any contractual process may amount to a repudiatory breach of contract, allowing the other party to terminate and claim damages for wrongful termination.
Make sure that the teams responsible for the day to day running of your contracts are aware of this so that they don’t down tools before they come to you to seek advice on terminating for non-payment.
Do you have an internal requirement that advice must be sought from the legal team before terminating any contract?
In an ideal world, any decision to terminate a contract would be reviewed with the legal team prior to taking any action. Many issues following termination arise because of failing to follow the correct mechanism, e.g. not giving the requisite amount of notice, not relying on the most favourable grounds for termination, not having valid grounds for termination and/or not giving notice using the method or in the form specified in the contract.
Ensure that those responsible for the day to day management of contracts understand the risks of terminating wrongfully and the need to review the contract before taking any ill-judged steps to end it.
The next steps
If you need advice in relation to termination of a commercial contract, or any other dispute resolution issues, we have an experienced dispute resolution team who can support you. Get in touch with our team today.