Top Ten Tips for Contract Termination

Kit Burden

It hardly bears thinking about, but putting in place a new supplier can take a very long time and the termination assistance period needs to allow for this. Here a few top tips on how to draw up and maintain a termination plan, ensure quality of service throughout the termination period and guarantee a smooth changeover to a new supplier.

1. Check the notice provisions:

Even if you have a valid right of termination, you can catch yourself out by failing to serve notice in the specific ways required by the contract itself, and either delay your effective date of termination or, in the worst case, lose it altogether.

2. Ask the hard questions:

Terminating a contract by reason of the other party's breach of contract can be a risky process. If you jump the gun and terminate too soon (e.g when the other party may be in breach, but not a "material" breach), it will be you who is seen by the courts to have repudiated the contract and be liable to pay damages. You must be sure, therefore, that the other party really IS in breach of contract, and of the degree to which you may have contributed to the problem.

3. Check the contract termination provisions:

This may not be a straightforward as it seems. For example, it may harder under English law to determine the basis for terminating a contract that is triggered upon breach of "any" term of the contract, as opposed to one that allows for termination upon a "material breach" (even though that would probably not be a layperson's interpretation of the words).

4. Consider the alternatives:

If you have a genuine reliance upon the other contract party, what are you going to do if the contract is terminated? Is there someone else who can provide the services and if so, how long will they need to get up to speed?

5. Gather your information:

Unfortunately, contract terminations will often slip into litigation. You will accordingly need to safeguard the evidence that you will in future rely upon to justify your decision to terminate the contract.

6. Consult internally:

A termination of a supplier's contract may have wider ramifications than one might think. For example, what if one of their shareholders also happens to be a major customer of your organisation, and does not take kindly to your decision to terminate the contract?

7. Assess your remedies:

You should not assume that you will necessarily be able to recover all of your costs and expenses, even if you are terminating by reason of the other party's breach of contract. There will ordinarily be a limitation of liability clause in the contract that will put a cap on your recoverable loss, and which may also exclude some heads of loss absolutely.

8. Beware of "poison pills":

In the event a contract termination is simply effected by written notice to the other party (often called a termination "for convenience"), there may be amounts that must then be paid to the outgoing supplier. If you are lucky, these may be minimal, but in more serious cases they can amount to the upfront payment of all or a substantial proportion of the sums the supplier would have invoiced anyway, had the contract run to its full envisaged term.

9. Remember the staff:

Regardless of what the parties' intentions may have been, it is possible that there may be staff of a supplier, who will have a right to assert the transfer of their rights of employment to the original customer or its outgoing supplier pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006.

10. Consider what assistance you will require:

Hopefully your contract will contain detailed termination assistance/exit planning provisions that will contractually oblige the outgoing supplier to assist with the process of transitioning the services at the end of the contract term. If not, these terms will need to be negotiated as soon as possible, and ideally before the customer is committed to the course of termination.