Gardner Leader

Termination of Contracts

October 2007

An increasing number of commercial disputes are arising as a result of contracts being prematurely terminated and Chris Felton, Litigation Partner at Gardner Leader Solicitors in Newbury, offers some advice from the following typical situation.

I am the MD of a distribution business. One of my major suppliers has just written to me to terminate its contract (I have heard it has signed up with another distributor on more favorable terms). This will have a huge impact on my business as I have orders for goods which I may not be able to meet. What can I do?

Your supplier’s ability to terminate will depend on the terms of your agreement. Is it in writing?

Yes, subject to our standard terms, but I don’t really fully understand how they would apply to this situation.

Most contracts allow for certain situations where either party can terminate either by a specified notice period or because the other party is somehow in breach of its terms and it is fair for the innocent party to end the relationship. Does the contract cover a fixed period?

Yes, it is for 12 months, but we are only 6 months in, so doesn’t that mean that the supplier is in breach?

Not necessarily. Are there any clauses in the contract which allow the supplier to give notice early to end the contract?

No definitely not, as it was our intention that my business had a 12 month period where the price of goods supplied under the contract was agreed.

Okay, so have there been any other problems in relation to the contract eg. any complaints from the supplier?

Well only that we have been a bit late on a couple of monthly payments. Oh and there was a problem with one of the specifications for some goods we ordered, but that’s it.

That might explain the situation, but it will depend on the facts. You see some contracts specifically allow the parties to terminate for breach of the agreement if certain obligations are not met. Termination usually occurs for one of the following reasons: 

• Any breach (however trivial) – the courts are reluctant, however, to extend the circumstances when this can be used. (Rice (T/A The Garden Guardian) v Great Yarmouth Council).

• Repeated breaches – obviously you need to be aware of this and try to make payments on time.

• Material breach – when deciding this, the courts take into account the commercial circumstances of the case (National Power plc v United Gas Company Ltd). Sometimes there may be a definition of what amounts to material breach in the contract.

• Substantial breach – which is self-explanatory.

I think it would be unfair to say that any of my actions amounts to a breach. If a court agrees with me, what can I do? 

You may have a course of action for unlawful termination which could give rise to a claim for damages. This may be for any additional amounts you have had to pay over and above the contract price to replace the supplier. In addition, you may be able to claim for disruption to your business and for loss of profit.

And how can I stop this from happening again? 

You can’t cover every situation, but where you know you are reliant on a fixed term contract, it may be possible for you to limit the circumstances where the other party can terminate the contract, and so this will give you more protection.

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