No one wants to miss out on a bargain…
Many businesses have encountered the situation where a customer decides to ‘cancel’ the contract, despite having no contractual entitlement to do so. This can leave you in a difficult position.
The issue often arises in long term supply or service contracts when one party declares that it is going to stop making payments (or has stopped making such payments) and will no longer continue with the contract. They may cite a reason, such as unsatisfactory performance. However, the real motive may simply be a wish to escape the contract; perhaps due to cash flow issues or a plan to take the business elsewhere.
Faced with such wrongful termination, you may be tempted to let matters be, or to require only on the payment of sums due to date. However, that leaves you without the further income that you had expected to earn over the full term – referred to in the dusty law books as the ‘loss of a bargain’.
Generally, where the other party to your contract commits (or says it will commit) a breach so serious as to go to the very essence of the contract, this will be a repudiatory breach. A wrongful termination of a contract will amount to such a breach.
When faced with a repudiatory breach, you may elect to affirm the contract and press the other party to perform it. However, if you want to end the contract, you must elect to accept the breach and tell the other party that you are treating the contract as discharged.
Whilst this discharges you from your further obligations under the contract you remain able to claim:
- Payment of any overdue invoices; and
- The profit you would have made had the contract had run its course.
Damages for breach of contract are intended to put the wronged party in the position that it would have been if there had been no breach.
As to the other party; they may allege that their own reason for termination (for example, poor service) was itself a repudiatory breach on your part, allowing them to terminate in the manner that they did. Disputes often come to a head with both parties alleging that the other is guilty of a repudiatory breach and claiming significant damages.
Electing to treat a contract as repudiated therefore has its risks. If you terminate the agreement based on a breach that is not serious enough to be repudiatory, then you will yourself have breached the contract and could face a claim for damages.
The uncertainty over what might constitute a termination event is often managed in contracts by termination clauses that permit termination in specified scenarios; such as, non-payment, late delivery, or service issues. Indeed, the contract may provide for termination in circumstances which would not of themselves amount to a repudiatory breach. Such clauses will often provide for the remediation due in the circumstances of early termination and this gives a degree of certainty.
However, tread carefully when deciding to rely on the contractual termination provision rather than electing to accept a repudiatory breach because, in doing so, you could forgo your right to claim for the ‘loss of bargain’.
A well thought out exit strategy is vital and this is the time to pick up the phone to your solicitor. A discussion at an early stage is likely to save disappointment and expense in the long run.