Contract management and termination – a guide for individuals and businesses

Whether you are an individual or a business, it is likely that you have entered into a contract for the sale or supply of goods or services.

For a contract to be enforceable, it must comprise four essential elements: a clear offer, acceptance of that offer, consideration (which may take the form of payment or a promise to act), a mutual intention to create legal relations and the parties entering into the contract must have capacity. It is therefore crucial to examine the contractual clauses with care to ensure that you, or your business, are fully prepared to meet the obligations that they impose.

During the course of a contract, one or both parties may seek to bring it to an end. Termination releases all parties from the obligation to continue performing their primary duties such as payment or delivery of services, from the effective date of termination.

A party may seek to terminate a contract for various reasons. The most common grounds for termination include:

• Breach of contract by the other party;
• The contract may not be profitable;
• The customer no longer requires the goods or services; or
• The other party has gone into insolvency.

Before taking steps to terminate a contract, it is advisable to seek professional legal advice, to evaluate the merits of your case for termination and identify potential risks or disadvantages that you or your business may face.

At the outset, it is essential to locate the contract and review its terms in detail. Contracts frequently contain termination notice provisions, requiring parties to provide a specified period of advance notice often measured in days or months before the agreement can be lawfully ended.

The below points should be carefully considered by a party wanting to terminate a contact:

1.          Assess the grounds for termination

A party should identify all termination rights – namely the common law right to accept a repudiation or contractual rights to terminate for cause or convenience. Further, parties should consider the following:

a. A party cannot normally terminate on grounds of its own breach of contract;

b. The validity of a termination right, i.e. is the termination right still safe to rely on if some time has passed since a termination right arose;

c. Does the contract include a termination clause that expressly restricts unreasonable or vexatious termination – i.e. check whether the contract requires parties to act reasonably or in good faith upon termination;

d. Check for express limits on termination rights. For example, does the contract require either party to give a minimum amount of notice; and

e. Jurisdictional restrictions may mean that local laws will override the termination right. Even if English law governs the contract, another state’s mandatory laws may apply to protect the contracting party.

2.          Assess the implications of termination

Parties should assess the practical factors that may arise upon termination. These may include:

a. Considering whether there are any transitional arrangements such as selling off stock or switching to another provider. You should also consider the timeframe for doing so;

b. Assess how the termination may affect your staff. For example, consider whether employees of a terminated supplier may be transferred to the customer or to another supplier;

c. Consider whether any contractual duties survive termination and consider whether you are required to return or destroy confidential information or personal data;

d. Evaluate whether it would be more profitable to keep the contract alive as opposed to terminating it and having to go through the time and hassle of entering into a new contract; and

e. Finally, consider whether there are alternatives to termination. This could include varying the contract to reflect the changed circumstances, or alternatively, consider the assistance of Dispute Resolution, such as through the medium of mediation to deescalate the situation.

3.          Identify the termination right to exercise.

4.          Check if the contract requires a cure procedure

The contract may permit termination on the grounds of a remediable breach only after the aggrieved party has given the other a chance to remedy the breach within a specific time.

5.          Giving notice

Ensure to check whether a minimum period of notice is required and ensure that you clearly communicate that you are terminating the contract. Furthermore, parties should check the service provision of a contract to confirm where and how to send a termination notice and when it is to be deemed received.

6.          Document the termination grounds and process

Keep written evidence of any decisions and the process.

Terminating a contract can quickly become stressful, time‑consuming, and adversarial if the right procedures are not followed. All of this will lead to increased costs. To avoid these challenges, organisations should establish strong contract management systems that ensure agreements with customers, clients, or employees are handled correctly and efficiently.

Contract Management

Ensuring that contracts are managed effectively from inception to its expiry or renewal can be important for a number of reasons:

• Time and cost efficiency – Streamlined processes reduce delays, cut unnecessary expenses, and ensure obligations are met.
• Meeting business objectives – Well managed contracts make goals/objectives clearer, easier to track, and more consistently achieved.
• Improved customer satisfaction – Proper oversight helps prevent disputes and reduces the risk of dissatisfaction among the parties.

Practical steps include:

1. Before implementing a contract management framework, organisations should assess the current systems in place. This will help to highlight the existing problem areas, the current tools or methods being used and may help to identify any opportunities to integrate AI or automation to help streamline workflows.
2. Ensure coordinated collaboration across departments. Depending on the type of contract, this may include a business or commercial team to ensure that the commercial deal is accurately reflected in the draft contract; a procurement team to select suppliers through a structured procurement processes or a legal team to assist with drafting the contract.
3. Having a contract template or clause library is a good starting point. This will facilitate quicker negotiations by having pre-approved fall-back positions for different contract scenarios and will overall improve the turnaround time for a contract and will help to improve consistency. We can help you prepare appropriate documents.
4. Once the contract is ready to go, it is vital to complete all necessary checks before signing. Preparing a checklist can help confirm that every requirement has been met, reducing the risk of errors or oversights. We can also assist with this.

Whether you are an individual or a business and you are ending a contract, managing ongoing contractual commitments, or looking to enter into a new agreement, contact a member of the Commercial Dispute Resolution team at Geldards for legal advice or assistance.