By Anne Scheland – Partner
If you are a business owner, chances are you have a contract which no longer serves it purpose. Perhaps your situation has changed over time, or circumstances are now different to when you entered into the contract. Whatever the reason, to bring such a contract to an end can be costly. Below are tips for managing this kind of situation legally and so you can avoid huge costs.
About 70% of all disputes involve a contract. Globally, in the construction industry the average value of disputes ballooned to over £32m in 2014. Disputes may be with a customer, a supplier or a competitor, resulting in a range of costs for the business. The financial, operational and emotional costs to a small and medium-sized enterprise (SME) of a dispute are numerous. The overall impact is negative – slowing the ability to invest, innovate, grow and take on employees. It is therefore critical that SMEs minimise the costs of a dispute.
Most contracts are of a short duration and simply run their course. However, others continue for a longer period and over time circumstances may change leaving one party feeling that the reasons for entering the contract are no longer valid. It is then that they ask themselves: how I can bring the contract to an end?
4 ways to end a contract on legal grounds:
1 Dispute prevention – termination clause
A clear draft termination clause offers the quickest, cheapest and ‘cleanest’ result. These clauses set out how the contract can be terminated and the consequences for both parties. You should therefore consult with a lawyer before agreeing the terms of a contract to ensure that it enables you to exit the contract should you need to do so.
In the absence of being able to rely on a termination clause, you will need to take legal advice from a dispute resolution lawyer. This may not be as expensive as you think and ultimately could save you a great deal of money and time. This advice will determine if there are grounds in law for your bringing the contract to an end
2 Frustration – the contract is illegal, impossible to perform or radically different due to an event outside of the parties’ control.
Examples: The contract is for a manufacturer to deliver goods and a storm leads to the sinking of the container. Or, a pharmaceutical company is contracted to supply a drug which is legal at the time of entering into the contract, but the drug is made illegal before delivery.
3 Vitiation – the contract was never validly formed and should be rejected for reasons such as one party being induced to enter into the contact on the basis of a misrepresentation.
Examples: A car company states the product can travel at 100mph when in fact the maximum speed is 60mph. Or, as has been in the news recently, the emissions ratings stated are in reality incorrect and the buyer purchases the product based on the information provided.
4 Repudiation – termination due to a breach of the contract (termination may not always be possible, and you may only have recourse to a damages claim).
Examples: Goods were delivered and an outstanding debt which accrued beyond the agreed terms was not paid. Or, there was an obligation on a tenant to look after premises but the tenant allowed the property to fall into a state of disrepair which caused the landlord to suffer financial loss. Here are the specifics for ending a commercial property lease.
Each of the above options are fact sensitive. Consider that the consequences of trying to bring a contract to an end when there are no grounds to do so can be severe, possibly entitling the other party to substantial damages. This is one reason why it is crucial that you consult with a litigation lawyer before taking any action to end a contract.
Bringing the contract to an end is a consideration in itself; the other factor is whether you have a damages claim against the other party (or vice versa). This may take the form of:
- Reliance damages – ‘reversing the deal’ putting you in the position you would have been in had the contract not happened. In this example, financially any money spent can be claimed back from the other party.
- Damages for failure to perform – the cost of substitute performance when a party does not adhere to their contractual obligations. This may involve having to get someone else to perform the task, meaning the costs can be claimed back from the party who failed to perform in the first place. An example could be failure to manufacture roofing material necessary to complete a building.
- Repudiation – the cost of substitute performance, plus all profits you can show would have flowed from the contract. This example can be difficult to prove. However, if a technology manufacturer was due to deliver a new product for a trade event (and it can be proven through past records that the event would have generated sales) then it can be possible to claim from the manufacturers the profit which would have been made.
How to avoid a costly dispute.
How to avoid a costly dispute
Be aware: ending a contract early, can give rise to a dispute. And all disputes are unique and are specific to their particular set of facts but as a business owner, you can protect yourself. Take the following advice when entering into a contract, and throughout the life of the contract:
Keep a clear record of all communications between the parties up to the time the contract was formed and throughout the life of the contract, to demonstrate a clear timeline of events.
Keep a record of all documents.
Make sure a well drafted, clear and specific termination clause is included in the contract.
Should you decide to end a contract, take the time to carry out a full analysis of your options and the practical implications of each route. If done properly, this exercise, should greatly strength your position should a dispute arise. Mistakes made at an early stage in this process can prove costly.