A Guide to Contractual Disputes
Managing business to business contractual disputes in the current cost of living crisis is a challenging task. Commercial contract which were once lucrative may now be unprofitable and businesses who once complied with all contractual provisions may have fallen behind.
What to do when a dispute arises?
The first step in managing business-to-business contractual disputes is for a party to take a step back and assess their contractual and common law rights, after which, they can develop a strategy which governs steps to be taken through the life of the dispute. We recognise that this can be challenging for businesses as certain decisions can result in contractual rights being lost. We therefore recommend seeking legal advice from the outset of a dispute.
Where a dispute cannot be resolved, a party may look to renegotiate or terminate a commercial contract. However, terminating a commercial contract without a valid reason and right to do so can amount to a breach of the contract, which can lead to claims for wrongful termination and damages against you.
How to terminate a contract?
A business wishing to terminate a commercial contract should identify all termination rights under the contract and at common law and assess any practical implications termination is likely to have, including duties which will arise on termination and duties which will survive following termination.
The procedural requirements to terminate will be specified in the contract and should be carefully followed.
Once notice to terminate a commercial contract has been given, it cannot usually be withdrawn and therefore a party should be careful to document their grounds for termination as at the date notice is provided and be sure they are prepared for the steps that will follow.
Is termination a breach of contract?
If there is no commercial contract, a party can terminate that contract without providing grounds for termination.
If there is a commercial contract, the requirements for termination set out in the agreement must be carefully complied with to avoid any inadvertent breach of contract. These contractual provisions may include a requirement for the grounds for termination to be included in a notice of termination and for the notice to be served on the other party in a specific manner, or within a set timeframe.
Failure to follow the contractual provisions may cause a party to inadvertently breach the contract or could cause a loss of the right to terminate. Where a party has acted in breach of contract, the opposing party could require the contract be upheld or could sue for damages.
Relying on breach of contract to terminate
A party cannot rely on its own breach of contract to terminate, even if the contract appears to give it that right.
While a breach of contract by an opposing party will often give rise to the right to terminate, parties should be aware that in some contracts, the termination clause may provide a party accused of acting in breach of contract with an opportunity to remedy this breach of contract before the aggrieved party is able to terminate.
Careful consideration must therefore be given to any factors surrounding a breach of contract which could interfere with the right to terminate.
Can a party terminate if a contract is unprofitable?
Due to the current economic climate, many contracts which were once advantageous to businesses, have become unprofitable.
Generally, contracting parties are bound to perform their agreed contracts even if continued performance becomes difficult or unprofitable. For this reason, many will look to terminate the contract or renegotiate the terms to ensure continued performance remains commercially viable.
Renegotiation is a sensible way to remove particularly onerous terms from a commercial contract while maintaining a business relationship. The difficulty with renegotiation is that it relies upon the parties’ goodwill which is not always forthcoming, particularly if the contract remains profitable for one of the parties.
If renegotiation fails or is not possible, the final option is to terminate the contract. Although termination can be achieved in most cases, it should be considered a last resort and legal advice should be sought before termination to avoid any potential claim that the termination amounts to a breach of contract.
How can we help?
If you would like to discuss any issues concerning contract disputes, please contact a member of our Commercial Disputes Team.