Contract Termination Rights

04/10/2018

When a business is considering entering into a new business arrangement and is at that stage where contracts are being prepared and possibly negotiated, it is natural to focus more on the key commercial terms such as the scope of the arrangement and associated charges and payment, however I would always advise clients to think ahead and to consider also, amongst other matters, termination rights.

A recent matter that I dealt with involved a logistics company, which had been appointed to transport health products to business clients across the UK.

The arrangement between the two companies was governed by a simple bespoke short-form written commercial contract, which the health products supplier entered into without seeking any legal input.

The contract was initially for a period of two years however it automatically rolled-on for an indefinite term after this initial period without being revisited or updated.

Following a change in the management structure at the health products company, the incoming management team sought to end the relationship with the logistics company, preferring to appoint its own service provider who they had previously built a strong business relationship with.

The new management team retrieved the contract from the bottom of an office drawer and asked me to advise on what rights of termination were available to them.

To their surprise, the contract only contained very limited termination rights, specifically, termination for a serious or repeated breach and termination due to the insolvency of either party. There was no termination right ‘for convenience’ or ‘at will’, which allow a party to terminate a contract on notice without having to specify a reason.

The logistics company had performed its obligations in accordance with the contract (and therefore was not in breach of contract) and was not subject to any insolvency related proceedings.

Ultimately, I had to advise my clients that there was no valid ground available to them which would allow them to lawfully terminate the arrangement. I did consider common law and implied rights of termination, but these were not appropriate. The only viable option was to seek commercial discussions with the logistics company in an attempt to reach a settlement. Following several management meetings, agreement was finally reached.

The matter highlights the importance of considering termination rights at the outset of a business relationship and, if appropriate, having sufficient flexibility to end a contract early ‘for convenience’.

It is also important to understand that contract terminations are often loaded with legal risk. There must be a justifiable reason for terminating, otherwise you could be in material breach of the contract and liable to pay the other side damages!

If you require any help reviewing or drafting commercial contracts or if you have already entered into a commercial contract and are considering terminating the arrangement, please contact me for advice by phoning 01782 205000 or emailing steven.brunt@beswicks.com