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The death of a commercial relationship

In this final article of our three part series, we will discuss how you can best prepare for the breakdown of your commercial relationship.

What has gone before will ultimately govern how it ends. So, if you followed our guidance in part one 'The birth of a commercial relationship’ and part two ‘The marriage of a commercial relationship’ you should have a well thought out contract and an excellent working relationship with the other party.

However, in reality even with the best intentions, in the words of Geoffrey Chaucer, all good things must come to an end. Whether there has been an acrimonious split mere months after you signed on the dotted line or your changing business needs have led to a natural and harmonious parting of ways many years down the line, by being prepared and taking a sensible approach drawing your relationship to an end you can save a lot of time and money.

It’s not you, it’s me

There are many reasons why a commercial relationship may break down or a contract can end. By being aware of this you can anticipate the other party’s actions and plan for the future. Common reasons for termination include:  

  • The fixed contract term has expired or a party chooses not to renew the contract
  • The contract is loss making
  • One party can no longer fulfil its obligations, persistently refuses to do so or materially breaches the contract
  • One party is insolvent
  • Repeated late payments
  • One party undergoes a change of control.

This list is by no means exhaustive but is indicative of the variety of scenarios that can arise.

Terms for termination

While it may seem pessimistic, making sure you fully understand and are comfortable with your rights of termination at the inception of the relationship will stand you in good stead when it comes to the break up. Just as no two contracts are the same, the process of termination can be extremely varied. Be it a unilateral or mutual decision to terminate, you will need to look at your contract carefully and review all of the options.

What are your options?

Notice period: Your contract will contain provisions which dictate how much notice is needed depending on the reason for termination. In some instances you may be able to terminate immediately on written notice, while in other scenarios you may be required to give a number of months’ written notice.  

Fixed term or rolling contract: Contracts can be for a fixed period or a rolling term. Where there is a fixed term you should always consider the implications of terminating the contract early. Where it is a rolling contract, there may be a break option which means that at a certain point a party can choose whether to continue with the contract or terminate without any ill consequences.  

Opportunity to renew: There may also be an opportunity to renew a fixed term contract. You should decide whether you wish to continue well in advance of when the contract expires (and in any event within the window specified in the contract for serving a renewal notice) to assist you to best manage the implications to your business if the other party does not wish to renew.

The pre-nup

Some contracts include terms for compensation on early termination in certain circumstances. These are often used by suppliers as a way to spread contract-specific investment risks. You should check whether your contract contains such a clause before taking any steps to terminate so you can make an informed decision and weigh up the cost of exiting early against the risk of holding out until the end of the minimum term.

Agreeing to disagree

Unfortunately, no matter how well drafted your contract and how hard you work at maintaining a strong relationship with the other party, disputes do happen and an agreement may not be able to be reached without outside intervention. This can mean internal dispute procedures, mediation, arbitration or litigation and which route is taken will likely be governed by the dispute resolution clause in your contract. How a dispute is resolved will affect any future relationship so this should always be considered when deciding how to proceed.

Jurisdiction

If you are contracting with overseas parties you should always be aware of the laws and jurisdiction governing the contract. This may be the laws of England but it could also be those of a different country and there is always the risk that the other party may try to bring a claim in their own jurisdiction. Bear this in mind and always seek legal advice if this is an issue.

Moving on

Hopefully, by following our advice and making informed decisions, the end of your commercial relationship will not be a traumatic one. Entering into any commercial relationship is a big step and not a commitment to be taken lightly. There is never a guarantee that things will run smoothly and there will always been an inherent element of risk. However being aware of your rights and obligations and being familiar with the terms of your contract is the best way to prepare yourself for any eventuality.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Craig Chaplin

Partner - National Head of Commercial & Competition

I am a Partner and Head of the Commercial & Competition Team.