TerminatingSupplierContract

26 February 2002

Mark O'Conor




Preparing for divorce at the point of marriage. Whilst not a terribly wholesome thought, it is essential that when a contract is drafted, the terms clearly deal with the consequences of a breakdown of the relationship and the rights and remedies of each party should the other fail to deliver that which it contracted to provide.

In recent months several high profile public and private sector ICT contracts have fallen upon rocky ground. At that point, the parties will have become entrenched in their views towards one another and sooner or later they reach for the contract as a source of remedy and guide to procedure.

It is critical therefore that the contract has been kept up to date. Time and again non-legal consultants will tell you that once you have got through the pain of agreeing contractual terms you will be able to stuff the contract into a bottom drawer and get on with the important business of implementing the project. Don't be fooled. Unravelling a contractual relationship is multiplied in complexity if the position under the contract no longer reflects the position on the ground. A perfect situation will be where all changes (by formal change control procedure) have been documented and appended to the original terms. More often however, the current contractual position will be a blend of verbal agreements, exchanged emails and general confusion, a world away from the signed contract.

So can I terminate?

Your contract should be able to answer this question. Normally (particularly in substantial contracts) there will be several options to terminate. These will often include termination for customer default, termination for supplier default, termination as a result of a force majeure event (something which substantially frustrates the contract), and sometimes an ability to terminate for convenience.

Specifically here I'm considering termination for supplier breach.

Firstly, whilst you may feel morally wronged, that you have lost faith in your supplier and that you can't see a way forward, such sentiments may not be enough and it will be imperative to begin to build a substantial and relevant body of evidence. You will need to be able to substantiate your claim that the supplier has failed to perform. To do so you will need to be able to point to an obligation in the contract, and show (by reports, emails, print-outs and so on) that the obligation has not been satisfied.

Secondly, you will need to consider the extent to which the breach is of a fundamental nature. Whilst it is not necessarily critical that the breach be utterly fundamental (particularly if your contract gives you a right to roll-up small breaches into a right to terminate for persistent breach) a more fundamental default will give you an easier job of terminating the contract. Recent caselaw in the UK has made it clear that the courts will not allow just any old breach to justify termination of a contract. (For further details see Rice (T/A The Garden Guardian) v Great Yarmouth Borough Council (2000) CA LTL 30/6/2000 DOC NO. C8600766)

So now you have a grievance and evidence to support your argument, what next?

What do I do now?

The answer can be simply put - use the contract. The termination provisions should specify that you need notify your supplier of the nature of the breach and (if capable of remedy), that you should afford the supplier the opportunity to attempt to put matters right. Further your notification should specify that if the supplier is incapable of remedying the situation within the time specified then, in accordance with the specific provisions of the contract, you will be entitled to terminate.

If this seems overly simple then that is because rarely are matters so clear cut. Usually a dispute will grow where both parties perceive that the other has failed to perform its contractual obligations. As such it is critical both not to threaten to terminate if you are not going to go through with it, nor to terminate wrongly where you do not have the right to do so. Indeed wrongful termination can in certain circumstances give the terminated party rights against you.

Bear traps?

The starting point for terminating a contract has to be the terms of the contract, but as any litigator will tell you, there is an art to correctly exercising your rights to terminate, and a great degree of skill involved in choosing the right time and right way to exercise those rights. If your intention is to carry on with a contractual arrangement rather than effecting termination, you will want to force the supplier to meet its obligations using the threat, real or actual, of the ultimate sanction: termination. If so a blend of legal and commercial approach should be employed.

It will be important to keep your legal ducks in a row (avoiding accidental waiver of a right, or loss of valuable rights through effluxation of time, consent or acquiescence). At the same time you should commence immediate negotiations with a view to securing a satisfactory compromise (one where it is not you who feels compromised).

To sum up, a sufficiently well drafted contract, well maintained and reflecting the current position on the ground, should mean that you have all the information, procedure and rights you need to escape a troublesome contract.

A version of this article was published in the March 2002 edition of MIS Magazine.