22 May 2024, 11:46
By Stephen Sidkin May 03, 2016

Supply contract termination made easy

Have you kept to your new year’s resolution to end your supply contract? If not, then take a look at this article by Stephen Sidkin before you do – it could make the process much more efficient and painless than it might otherwise be …

The starting point is to determine what is the contract which is in place between you and your supplier. This is far from being a statement of the blindingly obvious. Take, for example, the situation where the supply contract provided for it to expire at the end of 2014. But before it expired, you and the supplier exchanged thoughts about a new contract, and you even sent a draft of a new contract to the supplier.

But then … radio silence. More particularly, throughout 2015 you continued to place orders, received goods, and paid your supplier.

So what is the contractual relationship? Is it the case that:

a) The terms of the original contract (which provided for it to expire at the end of 2014) continued to apply throughout 2015 and into 2016? Or

b) The terms of the draft contract which you sent to the supplier applied from 1st January 2015 until now? Or

c) There was no supply contract in place between you and the supplier. Instead there was simply a series of contracts for the sale and purchase of goods?

Answering these questions is the start of getting the termination process right.

If – and it is a significant if – the answer to the above is either a) or b), then the next issue is to determine what is expressly stated in the contract. If the contract sets out how the parties may end their relationship, then this will generally be acceptable to the English courts. If, therefore, the contract is ended in accordance with its terms, the courts are unlikely to intervene. 

But if the supplier is based outside the UK, care may be needed, even if the contract is stated to be governed by English law. The reason for this is that many countries have national rules which may supplant English law in order to protect the supplier. This will be especially so if the supplier can be regarded as the weaker party.

If the contract does not specify the notice period, then as a matter of English law it will be necessary to give reasonable notice to the supplier. What is reasonable notice will depend upon the factual matrix in respect of the particular contract. 

In contrast, if the national rules of the supplier’s country override the reference to English law in the contract, then you may find that complying with the contractual notice period is insufficient. Instead, such national rules will require that a longer period of notice is given, and if it has not been, the supplier may claim damages.

The alternative to terminating a supply contract by the giving of contractual notice is to rely on a breach of the contract by the supplier. But whether or not this can be done depends very much on the terms of the contract.

As a result it is first necessary to determine whether the contract sets out clearly what amounts to a breach of contract. If so, it is then necessary to assess whether or not the circumstances which have occurred amount to a breach and, if they do, what the consequences are. 

For example, if the termination clause allows a supplier an opportunity to remedy the breach, it will be an abject disaster to claim instead that the breach means that the contract is at an end. Instead, it is far better that you send the supplier the appropriate notice requiring that the breach be remedied in accordance with the terms of the contract.

Unless the contract requires otherwise, you do not need in such notice to also state your intention to terminate the contract if the supplier fails to remedy the breach. 

If, however, the breach is not remedied, then again it is better that you pause before acting. This is because it is first necessary to determine what, if anything, the contract states about the means by which the dispute is to be resolved.  Is there, for example, a specific provision that the English courts will have exclusive jurisdiction to determine disputes? 

Even if there is, have you previously checked that the national rules of the supplier’s country do not override such a provision?

Depending on what (if anything) is stated in your contract and where the supplier is located, it may suit you to commence proceedings in the English courts. This is not because you want to engage in hostile litigation, but instead to deter or delay the supplier from starting proceedings in the courts of its own country and, as a result, aid the commencement of settlement negotiations.

Having addressed this issue of dispute resolution it is important that you also have regard to what is set out in the contract about post-termination issues – of which there will be further discussion in the second part of this article.

Stephen Sidkin is a partner at corporate law firm Fox Williams LLP. He established and leads Fox Williams’ agentlaw team.

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