Douglas Adams’s ‘The Hitchhiker’s Guide to the Galaxy’ brought us a salutary exchange between Arthur Dent and Ford Prefect with Arthur posing the question to Ford Prefect: “What happens if I press this button?”,
“I wouldn’t,” comes Ford’s reply, but too late, the button had been pressed.
“What happened?” enquires Ford.
“A sign lit up saying ‘Please do not press this button again’” is Arthur’s sheepish report. There lies the caution.
Terminating a contract before it has concluded can be a risky business. It might seem simple to do, but appearances can be deceptive – and the legal implications of getting it wrong can put a business significantly on the commercial back-foot.
There are countless instances where a contract termination has resulted in a dispute, and a recent case involving the purchase of a Ferrari is one such example. The argument was whether the seller had validly terminated the agreement after the purchaser failed to pay within the specified time.
Payment was made late, and the seller argued it was entitled to refuse to deliver the vehicle. The case illustrates that a contract termination might appear straightforward on the face of it but can prove tricky and result in an unwelcome and costly dispute.
It is therefore advisable to follow the age-old idiom and ‘look before you leap’, because there may be steps you can take to mitigate the risks involved in terminating an agreement.
So, where do the main risks lie?
Firstly, are you entitled to terminate the contract?
The starting point will be to establish whether the terms of the contract give you a right to terminate in your particular circumstances, bearing in mind that a party who invalidly terminates a contract may find themselves on the receiving end of a claim for breach of contract. If the contract does not expressly permit a termination in your circumstances, you should consider whether the law will come to your aid to imply rights to you.
Secondly, if you have a right to terminate, make sure you don’t lose it.
The conduct of a party in the course of an agreement might amount to an express or implied waiver of its termination rights; for example, allowing more time for a payment to be made may constitute a waiver of the right to terminate on late payment. Similarly, delay may defeat a right to terminate so you may need to act promptly.
Next, how do you exercise the ‘right to terminate’ effectively?
The method by which a contract is terminated may be prescribed by the agreement. If so, the process needs to be followed rigorously to avoid problems. Careful thought may need to be given to the meaning of the contract’s words, and the termination notice itself will need to be clear and unequivocal. The words and content of the notice along with the methodology and timing of delivery can be very important.
Get these things wrong and the notice can be entirely ineffective. Get it right, however, and you stand a good chance of mitigating the risk of a dispute and avoiding having to pay an unbudgeted compensatory sum to your counterparty or not achieving your commercial objectives.
Finally, have you tested the proposed termination for unintended consequences?
Mitigating the risk of unintended consequences means having to think prospectively about the possible effects the termination of the agreement will have on other commercial relationships, or indeed financing arrangements.
If the relationship is one of commercial agency and you are the principal, you might well be liable to compensate or indemnify the agent upon termination, whatever the agreement says. It is therefore prudent to carry out a risk assessment measuring and balancing the consequences of getting the termination wrong before you act.
The clear ‘take away’ here is the sense in taking advice before you press the red button of a contract termination – to check that those areas of risk that could have costly repercussions are thought through.
Our commercial dispute resolution team are experienced in disputes that arise in contract terminations and are therefore well placed to advise on risk mitigation when a decision on a contract termination looms on your horizon.