How manufacturers can terminate commercial contracts successfully

As litigation solicitors who specialise in the manufacturing sector, we are often approached by clients at the end of a commercial relationship asking how they can terminate a contract with the minimum legal consequences.

The starting point is to determine whether you have the right under an express term in the contract or under common law. Ending a commercial relationship for a manufacturing client should never be considered without taking legal advice from a specialist dispute lawyer to understand the legal and commercial options available and their consequences.

When do these issues arise?

A manufacturing contract can come to a premature end for a number of reasons including:

1. A failure to complete a parties contractual obligations;
2. A failure to pay for the services or goods supplied;
3. A change in circumstances which makes the performance of the contract more difficult or impossible; or
4. A party realises that they have been misled before entering into the contract or have made a genuine mistake before committing to the contractual obligations

What does the contract say?

The starting point for a manufacturer thinking about ending a commercial contract is to review it carefully along with your legal advisor to assess the following:

1. What are the performance obligations for both parties?
2. Are there any contractual grounds which can be relied upon?
3. Are there contractual restrictions which may prevent or impede early termination?
4. Are there any formal contractual obligations which must be followed for there to be a valid contractual termination?
5. What contractual remedies can either party pursue following termination?

In this context it is vital that you and your litigation solicitor reviews the whole contract and any associated documents together with details of any pre contract negotiations or representations made. In James Kembell Limited v k Line Europe for example, a road haulier agreed to supply services in return for a minimum volume commitment. The claimant attempted to terminate the contract when these levels were not met, but its claim was dismissed as they had overlooked a contractual surcharge mechanism in the contractual documentation which provided them with an alternative remedy to termination.

Can you rely on statutory termination rights?

A manufacturer looking to terminate a contract will have to consider the impact of various statutory provisions including:

1. The reasonableness test under the Unfair Contract Terms Act 1977
2. Anti Money Laundering legislation
3. S11(4) of the Sale of Goods Act 1979 which gives a party a right to terminate for breach of a condition of the contract in certain circumstances
4. S233b of the Insolvency Act 1986

Can an implied term be relied upon?

It is important that manufacturers consider with their dispute solicitor whether they can rely on an implied term, for example entitling early termination provided the party has given reasonable notice where such a term is necessary or obvious to make the contract workable.

The potential minefield of Termination for breach

It is often our experience that this is the most common and contentious area for our manufacturing clients and where specialist strategic advice is most needed. Often, we are instructed by clients who have already taken steps to terminate the contract because they believe that their contracting party has breached its obligations or has failed to pay on time. In these circumstances it can be too late to avoid potentially severe consequences of a wrongful or premature termination.

Before terminating the contract, you should therefore consider the following with your litigation solicitor:

1. Do you have a contractual right to terminate?
2. Have all the contractual provisions been carefully considered?
3. Have you given the other party the opportunity to remedy the alleged breach?
4. Is the fact of breach accepted or likely to be disputed ? if so what evidence are your relying upon. At this point it may be worth considering whether you should obtain help from an Independent expert
5. Have you accepted the breach or by your conduct affirmed it and lost the right to end the agreement? This may be particularly problematic if there has been a delay since the breach
6. Has the party breached a sufficiently important term or obligation to create a right to terminate

It will also be important for you and your solicitor to consider the wider commercial impact of any decision to terminate. Will you be left with significant unpaid invoices, or sunk costs or unused pipeline stock which you will be unable to sell or recover? Will you need to find an alternative supplier to prevent you breaching your own contractual obligations with other third parties? How will termination impact upon other important commercial relationships? Could the other party bring a claim under the Commercial Agents regulations?

Exclusions and limitation of liability

Any manufacturer considering terminating an existing contractual relationship should consider any contractual limitation or exclusion clauses and discuss these with their litigation solicitor. These clauses may limit what damages the terminating party may seek to recover or the potential cost and consequences for wrongful early termination. The provisions of any liquidated damages clause will also have to be carefully considered.

A terminating party will also need to carefully consider its duty to mitigate its losses and what steps it should take on termination.

Are there any alternatives to litigation?

The contract may include a mandatory dispute resolution clause which should be followed, which may include a commitment to mediation or arbitration.

If not, an experienced litigation solicitor will also be able to advise on what alternative dispute resolution options are available. Such steps may help you preserve your commercial relationships which would otherwise be irretrievably fractured by a dispute or confidentiality and sensitive commercial information.

Conclusions

For any manufacturer the decision to terminate a contract will not be taken lightly and will inevitably have significant legal consequences. It is therefore essential that you take legal advice from a specialist litigation solicitor before termination to understand the potential consequences of termination and how to deal with any likely fallout.

At Clarke Willmott we have an experienced team of specialist commercial litigation solicitors with many years of experience dealing with clients within the manufacturing sector. We understand the commercial and practical issues that affect their businesses. By meeting regularly with our clients at their premises as well as speaking at and attending manufacturing conferences and sector events we can provide pragmatic and commercially focused advice

For more information or to speak with a member of our commercial litigation team, please contact us online.

Posted: 8 August 2024