Background

What can you do if your supply contract is terminated without your agreement?

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Highlights of the legal options available to you

As a supplier you rely on the contractual relationships with your customers for many reasons.  As well as helping to forecast the income stream for your business, you need to be able to ensure that you can plan how much stock and materials you require to fulfil your contractual obligations, and how many staff you need to deliver services and production.

A customer might want to terminate a supply contract for any number of reasons, but normally you would expect there to be some notification and discussion before coming to a mutually satisfactory arrangement, especially if there is to be a deviation from the terms of the contract.

But what can you do if a customer decides to terminate their contract without your agreement? This can have a devastating effect on your cash flow, your profits and potentially the viability of your business. In this article, I look at what you can do if your contract has been unlawfully terminated, and whether you can claim damages for your loss as a result of the termination.

There are two standard methods of termination of a contract: by following a contractual termination clause; or by using common law termination practice.

  1. Contractual termination – a well-drafted supply contract will have a clause that deals with termination and your customer should follow these agreed terms. For example, if your contract says that a termination notice can only be given after you have had chance to resolve a breach, then you must be given the opportunity to resolve it.
  2. Common law termination – if there is no clear termination clause in your supply contract, then termination must follow common law principles which are less clear and more open to argument.

Under common law your customer can terminate if there has been a ‘repudiation of contract’, but they must prove that a repudiatory breach (i.e., a serious breach) has occurred, for example:

  • if one party makes it impossible to carry out the contract so that the essential terms of the contract cannot be complied with; or
  • if one party refuses to perform its obligations under the contract; or
  • if a significant condition of the contract is breached – for example, if the quality of the supply is not up to the required standard and cannot be used; or
  • breach of an ‘intermediate’ condition has occurred, where a breach of one of the conditions of a contract is so serious that it actually removes the benefit of the whole of the contract for the other party.

Whether there is a contract or not, either party can rely on one of the common law reasons for terminating a contract.

Can a customer terminate by giving notice, even if there is no breach of contract?

Some contracts may give either party the right to terminate a contract for no reason, as long as they give sufficient notice. If a contract is short term or low value, this notice period may be short. For higher value and more involved contracts, longer notice is usually agreed and there may be a minimum period agreed before any notice can be given.

If there is no such notice allowed for in a contract, then there must be a reason for termination.

What are your remedies if notice is not properly served?

Whatever the reason for termination, proper notice should be given to you or the termination can be invalid. A contractual term may provide a specific method and time period for the notice to be given.

If the contract is silent on the subject of termination notice periods, what is ‘reasonable’ notice will depend on the type of arrangement you have with your customer (including complexity, length of contract, damage to jobs etc). It must be very clear that this is a termination notice.

Grounds for lawful termination of a contract

If there is no right to terminate in a contract simply on notice, then your customer will need to provide sufficient grounds to show that the contract can be lawfully terminated.

If you have a contract that sets out what is to be considered a breach that justifies a termination, then they must be able to prove that your actions or inactions constitute a breach of contract.

Has the customer reported the breach promptly?

A customer should provide you with timely notice of their requirement to terminate for a breach. Depending on the terms of your contract, it may be that you should have been given a chance to rectify the breach before notice is served.

If a serious breach has occurred, but your customer has appeared to accept that breach by continuing to deal with you for a period of time, they may lose their rights to terminate the contract.

What do you need to prove your contract has been unlawfully terminated or notice not provided correctly?

This will depend on the type of contract, and the reasons given for termination (if any). When you know what has been alleged against you, gather all the paperwork you can find. For example:

  • any notices of termination which you have received;
  • record the time when you were notified of the breach and when notice was served;
  • collect emails and all relevant documentation to show that you have not caused the breach;
  • gather evidence if you think you have already remedied a breach; and
  • keep contemporaneous notes of calls, if possible.

All this will help our solicitors to establish if the termination notice has been validly completed and served.

What remedies are available?

You may be able to claim damages against your customer for reasonable losses that you have incurred as a result of an unlawful termination. This can be resolved through negotiation, or some form of alternative resolution (such as arbitration), or by a court looking at the evidence and granting an order. You can explore the best options with your solicitor.

How to assess the damage to be claimed

We will consider the overall gain that you should have, or could have, made from this contract had it not been terminated unlawfully, including possible loss of profit, as well as more obvious losses incurred such as unsold stock.

Factors to take into account in assessing damage can include the investment you made in order to meet the contract. For example, payment for materials in advance, specialist equipment, extra staff costs or premises.

This is likely to be reduced by:

  • an obligation to mitigate your losses – for example, if you need to let go of staff that were taken on to complete the contract, you cannot claim the cost of wages until the end of the contract term;
  • the extent to which you can easily sell the supplies elsewhere; or
  • the extent to which you can make up profits through a similar contract with a new customer.

How we can help

As a supplier you rely on your customers to keep their side of the bargain and continue a supply contract unless they are entitled to terminate or they discuss ending the contract with you first. If you have had a supply contract terminated unfairly, speak to one of our team. Our solicitors have many years of experience in seeking damages for losses for our clients in these circumstances.

There may also be additional concerns if you have had a contract unlawfully terminated.  For example, you need to be sure that any confidentiality clause will continue to be honoured, and you might need to apply for an injunction to prevent damage.  For further information, please contact our dispute resolution team on 01733 882800 or email [email protected].

Helen Townsend LLB, Partner and Team Leader Dispute Resolution


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