Skip to main content

March 1, 2017

What to consider when a commercial contract is no longer working for you

 

Most contracts are drafted for a set duration and expire at the end of the term without issue. However in some circumstances you may want to bring a contract to an end early. This may be because of events that could not have been foreseen when the contract was entered into, or because one or both parties consider that the contract is no longer working.
Whatever the reason it is important to consider all the options, and implications, before making a decision to terminate the contract. It is important to take a step back and consider these consequences from an early stage so that the decision is not taken lightly. This could greatly improve the outcome down the road.
The first step is to look at the contract itself. The most straightforward way to terminate the contract will be by using the termination clause in the contract, provided it is clearly drafted and you fit within the conditions set out. A full review of the contract will be required as there will also usually be consequences for termination so you need to be clear on the effects of terminating and the potential liabilities.
There will also usually be a number of clauses that survive termination and therefore it is important to remember that terminating the contract will not remove your liability for any breach of contract you have committed. There may be remedies available to the other party resulting from the breach, which could be financially burdensome or onerous. For example the other party may have the right to instruct a third party to perform your obligations under the contract at a cost to you. If these remedies survive termination then they cannot be amended/varied once the contract is terminated. It is therefore important to ensure that there are no outstanding breaches of contract at the date of termination.
If you are concerned about terminating because for example, you need or want to maintain an ongoing working relationship then you could consider varying the contract instead. Many contracts allow variation and this is usually stated expressly as being acceptable in writing by duly authorised representatives of both parties. This may give both parties the opportunity to renegotiate the contract to reflect the change in position. Whatever the reason for considering termination, the best starting point is often a 'without prejudice' negotiation with the other party to discuss your concerns and see if an amicable agreement can be reached for both parties.
Finally it is also important to consider potential implications or consequences of terminating a contract that will not be specified within the contract itself, but could be afforded to contracts under UK/EU regulation or legislation. For example, under the Commercial Agents Regulations 1993 commercial agents are entitled to a pay-out upon termination of a commercial agency agreement.
Therefore careful consideration at the outset of all the obligations to be placed on you as the terminating party will put you in a better negotiating position and will help you make the best commercial decision for you.

 

Return to index