In the current economic climate all businesses should be looking to save money. This includes undertaking a legal review of all existing contracts. Circumstances change and what may once have been an advantageous situation may now be unprofitable.
Contracts such as facilities management, logisitcs, IT support and other purchasing and outsourcing arrangements often go unreviewed for long periods of time. Active management of contracts is particularly important during a recession and can ultimately save a business thousands of pounds.
Termination under express contractual terms
If you are considering whether exit from a contract is possible the most logical starting point is generally the express terms of the contract itself. The contract may be terminable for a “material” breach by one of the parties – what is meant by a material breach is rarely defined.
Is the contract expressed to continue indefinitely? The contract may be able to be terminated on “reasonable notice” however the law in this area is unclear and what the courts consider “reasonable” will depend on the facts of each individual case.
Termination at common law
Where there are no express provisions under the contract, it may be necessary to consider whether a right to terminate arises at common law. This is a complex area of law and advice should be sought.
Termination for insolvency
Most contracts allow for the termination by one party should the other party become, or be deemed to become, insolvent. For example, if a winding up petition is issued, or in some cases if the party cannot pay its debts as they fall due then you may be able to rely on such a clause to terminate the contract.
Legal advice should always be sought before terminating any contract. If you wrongly terminate a contract without a valid right to do so then you may be giving the other party a right to sue you for damages, or affirm the contract and insist on continued performance.
Understanding your legal position will help you to minimise your exposure should things ultimately go wrong.