Company Disputes – Varying And Terminating Contracts

Contracts dominate the commercial world; therefore, it is vital that business owners understand the consequences and responsibilities that come with entering into one.  Even the most basic supplier or agency agreement can cost an organisation thousands of pounds in legal fees and lost productivity, not to mention shatter a carefully nurtured commercial reputation, should a dispute develop.

Varying a contract

It is a commercial reality that parties doing business together do not simply enter into self-contained discrete contracts with each other but engage in a business relationship that evolves and changes over time.  Variation of contracts will naturally occur, especially in contracts that run for many years.  The key to avoiding a dispute developing is to ensure the variation is managed correctly.

It is standard practice to have a clause within the contract stating that any variation must be made in writing and signed by all parties.

The case of C&S Associates UK Limited v Enterprise Insurance Company Limited [2015] looked at whether an informal email exchange could amount to a variation of a contract, even where the agreement terms stated that any variations must be in writing and signed by both parties.

The relevant contract clause stated, “Any variation of this Agreement shall not be effective unless made in writing and signed by or on behalf of each of the Parties to this Agreement.”

Mr. Justice Males held that electronic signatures fulfilled the requirement for the written variation to be ‘signed’ by both parties to the agreement.  Also, despite the relatively informal language of the email exchange, it was clear by the subsequent conduct of the parties that the intent to create legal relations was present; for example, the variation included an increase in fees which were paid without protest.

This ruling is hugely significant.  It not only puts organisations on notice that a quick email with an electronic signature can change the terms of an agreement and this is a risk that must be managed internally, it also provides clarity for businesses that contractual clauses can be varied by a simple email, something which will be valued by managers and in-house counsel in today’s fast-paced corporate environment.

Termination of a contract

Many disputes between companies are born out of the termination of an existing contract.  For a contract to be terminated at common law there must be:

  • a breach of a condition of the contract
  • a repudiatory breach of an ‘intermediate’ or ‘innominate’ term of the contract
  • a party’s outright refusal to perform all or the substantial part of its obligations under a contract (‘anticipatory breach’ or ‘renunciation’), or
  • where one party makes it impossible (by act or omission) to perform the contract.

Some contracts will have express termination provisions, but many do not.  And this is where complexities can develop.

In the case of C&S Associates, the court was asked to clarify whether or not a part could rely on a breach not cited when the contract was terminated.   Initially, Enterprise terminated their contract with C&S Associates citing a repudiatory breach by C&S who refused to deliver physical files for audit to Enterprise’s external auditor.  Following termination, Enterprise also looked to claim that C&S’s poor performance justified ending the agreement. Consequently, C&S brought an action alleging wrongful termination and sought damages.

The general rule at common law is that a party can justify ending an agreement by relying on a new failure or breach that was not mentioned at the time of termination.  However, this is subject to an exception which was laid down in the case of Heisler v Anglo Dal Ltd which held that if the new failure being relied on was not pointed out at the time of termination and could, in fact, have been remedied, it cannot be cited as a new ground for ending the agreement.

C&S Associates stated that if their poor performance had been raised at the time the contract was terminated, they could have remedied the situation, therefore the ending of the agreement was unlawful.

Mr. Justice Males rejected this argument, distinguishing the facts of the case from Heisler, as the breach alleged had already been committed by C&S Associates.  The judge clarified that the Heisler qualification could only be applied to, “anticipatory breaches or, to the extent that this is different, to situations where if the point had been taken, steps could have been taken to avoid the other party being in breach altogether, either by giving an opportunity to perform its obligations in time or by enabling it to perform in some other valid way.”  In this case, the poor performance had already taken place, therefore, the Heisler exception could not apply.

The process for terminating a contract

To ensure a contract is terminated in accordance with common law principles and does not leave you open to claims for damages:

  • Check the provisions of the contract carefully, making sure that any disputes resolution processes set out in the agreement are diligently followed
  • Consider sending a ‘without prejudice’ notice to the other party before terminating the contract asking for a meeting to try and sort the situation out. Any communication or negotiation done ‘without prejudice’ is not admissible in court
  • If termination is inevitable, make sure you set out the notice in-line with any directions set out in the actual agreement. State the reason for termination under a particular provision of the contract, or explain that the breach is repudiatory, entitling you to end the agreement
  • Make sure you clarify the date termination is effective from
  • Include a provision for claiming interests and costs

Concluding comments

If you are forced to terminate an agreement, make sure you take all practicable steps to mitigate your loss, as the court will not award compensation for losses that could have been reasonably avoided.

Variation and termination of commercial contracts can leave a party wide-open to litigation if experienced legal advice is not sought in advance.  By speaking to a solicitor prior to taking action, you can save yourself time, money and stress.

Bennett Griffin are award-winning Solicitors based in West Sussex. From our office in central Worthing our experienced and specialist Solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Our specialist solicitors can provide expert advice on company disputes involving variation or termination of contracts.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.