The Lockpick - Exiting unsuitable or unprofitable contract

Whether you were in favour of leaving the EU or were hoping to remain, the ongoing uncertainty relating to Brexit continues to put pressure on numerous commercial relationships.  Even prior to the Brexit vote, the economic crisis was forcing many contracting parties to revisit historical contracts and question their profitability, usefulness and effectiveness but what happens if you want out?  Whether you’re looking to manage, renegotiate or exit an unsuitable or unprofitable contract, knowing your legal rights before taking any action is of paramount importance. Failing to understand and minimise your risk may leave you facing a claim for wrongful termination or breach of contract - act in haste, repent at leisure.  Our new fixed fee contract review service – the Lockpick – is designed to unlock these risks and give you clear advice on your options. 

For those looking to manage costs, increase value or terminate an existing contract which has become unprofitable or no longer meets business needs, a clear understanding of the legal mechanisms available to effect such a change must be obtained.  The starting point is inevitably the contract itself and contracting parties should ascertain whether, and in what circumstances, a renegotiation of key terms can take place or a notice of termination served.  Once the contractual framework is understood, attention should turn to an appreciation of the commercial relationship.  If it is desirable to maintain the relationship, a different approach to the renegotiation or exit will undoubtedly be taken.   

Where termination is the preferred option, parties should consider whether an event (such as insolvency) can prompt a termination or whether there has been a breach of any of the contractual terms.  Whilst some contracts set out what constitutes a breach and the effects of such a breach many do not and an analysis of case law is often required in order to ascertain whether a breach has been committed and whether that breach is remediable or of such a serious nature that it permits a party to terminate.  If there has been no breach then consider other circumstances in which a notice of termination can be given (i.e. on notice) or whether the contract may be nearing the end of its term.  Where no term is specified and a contract is silent on term or termination rights, it is likely that it can still be terminated on reasonable notice.  However what is considered to be “reasonable” will very much depend on the facts of each case.  Factors the court might consider include: 

  • The financial dependence of the terminated party on the contract and its ability to replace lost business;
  • The current term of the contract;
  • The intention of the parties at the time they entered into the contract.

Where a renegotiation on price, timings or other terms is the favoured approach but the express contractual terms do not allow for this, parties should encourage a round table discussion in an attempt to make a contract workable on both sides.  Where the other party is not amenable to such a discussion a party should consider what pressure they can bring to bear on the other side under the framework of the contract to encourage such discussions to take place – often where a contracting party begins to exercise a number of its previously ignored rights, such as audit rights, right to request information etc, life can be made quite difficult and negotiations encouraged.   

Whether you’re looking to renegotiate terms or exit from a contract, being in a position to act quickly is essential.  You should ensure that any opportunities to encourage a renegotiation are exploited and be alive to breaches that may entitle contractual termination or that give you the right to elect to treat yourself as discharged from further performance.  You should also ensure that any notices are served accurately and in a timely manner to prevent any objection that you failed to properly serve your notice or waived your right to rely on the breach or acquiesced in the conduct.    

However, before taking any positive steps it is essential that an informed assessment is made of your right to terminate and that you have an appreciation for the risks in getting it wrong – if you purport to terminate a contract without a valid right to do so or if you seek to renegotiate and give the impression you may fail to perform going forward you may end up facing a damages claim.  Finally, ensure that you address all additional issues that may arise out of the termination prior to any termination taking place including, but not limited to, transitional arrangements, immediate post termination requirements (eg deleting and destroying confidential information) and the impact on employees. 

At Ortolan we appreciate that this is a current yet complicated issue facing many of our clients.  In order to assist we are offering the Lockpick; a bespoke service where we review an existing problematic contract and, for a fixed fee, provide you with advice on the options available to you to renegotiate or exit the contract in accordance with your desired objectives.  Please click here for more information.

Posted on 09/06/2016 by Ortolan

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I have worked with Ortolan Legal since 2010 and used their services extensively. They have provided corporate and commercial legal advice and we have also drawn on their capability in the areas of employment law, dispute resolution and property law. What makes them so different is their ability consistently to deliver commercially focussed and high quality advice at a price point which simply cannot be matched by other law firms. They aim to strip out unnecessary overhead costs, concentrate on the quality of their core service and pass on these cost savings to their clients. It works.

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