Commercial Contracts… is cancellation a breach too far?
The effect of the Covid-19 pandemic on UK businesses has been dramatic to say the least, and it’s perhaps understandable that some businesses need to cancel or vary existing contracts. From a legal perspective, this is not as simple to do as it might first appear, and the risk of being sued by the other party is extremely high. Our Commercial Contracts Director, Stuart Price, provides some insight into some of the legal implications.
Unlike consumer contracts where a statutory cooling off or cancellation right can apply in many circumstances, there is no similar right to cancel in a “business to business” contract unless this has been agreed upfront. Clients therefore need to review the contractual terms that they have previously agreed. These terms may be contained in the “terms and conditions” which accompanied the original quotation or order, or attached or referred to in an email. In long term supply arrangements, there might be a long and detailed contract signed by all parties. Equally, many contracts come into effect in far less formal ways.
Can I cancel?
In the first instance, we need establish if the parties have expressly agreed cancellation terms. Such a clause will often give a date by when a party wishing to cancel a contract, or an order, must notify the other party. We often see a sliding scale, so the closer the cancellation is to the delivery date, the more of the purchase price the customer will have to pay. However, you should be mindful that there is a risk that a cancellation fee could be interpreted as a penalty and as such difficult to enforce under English law. That risk can be mitigated with suitable drafting.
What about termination?
If there is no cancellation right, we next need to look to see if any of the termination clauses apply. Termination clauses are commonly seen in properly drafted contracts. They differ from a Cancellation clause, in that they give a party the right to terminate a contract when a defined situation arises, as opposed to for the convenience of either party. A termination clause may trigger if one of the parties breaches the contract, suffers an insolvency event or where there is a change in the ownership of the party. This may give the innocent party the right to terminate, but caution must still be exercised as failing to exercise the notice to terminate properly could render that termination unlawful, giving the defaulting party the right to claim compensation for its financial losses arising from that termination.
What does “Force Majeure” mean?
If there is no effective contractual right to cancel or terminate the contract, we then need to look for a “Force Majeure” clause. Once again, in a properly drafted contract, there is often a clause that will relieve a party or the parties from their performance obligations where factors beyond their control arise. Unlike in other countries (as you might expect, the concept of Force Majeure is from French law) there are no established rules implied by English Law which means the parties are either left to negotiate their own terms, or be dictated by the party whose terms are incorporated into the contract (which is another briefing note in itself!). Whether the Force Majeure clause is triggered will depend upon the words used, and not just the general intention of the parties to give an affected party an excuse to suspend or terminate.
Some Force Majeure clauses are extremely detailed and will set out each circumstance that will cause the clause to trigger e.g. storm, flood, fire, epidemic, strike etc. Even if the trigger arises, most clauses still require a party to link the triggering event with the party’s failure to perform. By way of example, a party might have been inflicted with strike activity in one of its departments or factories, but unless that strike has a direct effect upon the party’s ability to supply the goods to the customer, then there is no link to the performance of the contract and the clause is unlikely to assist a defaulting party.
Even if the Force Majeure clause is triggered, what rights does it give to a party affected by a triggering event? Again, this all depends upon the wording of the clause. Often a right to suspend delivery or performance is given for a period of time, but it doesn’t always follow that a party is entitled to be released from its obligations entirely, or to terminate.
What if it was all done informally?
Regrettably, many business contracts lack formality and yet remain legally binding; verbal agreements, agreements arising from an exchange of emails, previous dealings, a quotation or purchase order with no terms and conditions attached etc. Here, the law does very little to assist the business parties, particularly when one party has taken the decision to vary or cancel the contract without a thought to the impact this might have on the other party. This takes us to the nub of the problem in many disputed cases. Where a situation arises that makes it difficult, or inconvenient for a contract to be performed, the knee-jerk reaction is sometimes just to cancel it. But what about the other party that has kept up its side of the bargain? It may have ordered raw materials from their supplier, designed and manufactured the goods to order, stored and packaged them in readiness for delivery? Is it right that an innocent party is, effectively forced to underwrite the customer’s unilateral decision?
To be clear, if there is no prior agreement between the parties that gives a party the right to cancel or terminate a contract, or to be excused from its performance where factors beyond their control arise or at all, then in the vast majority of cases, that contract must be performed. The goods must still be delivered, the services must be provided and the price paid in full and on time. A party’s failure or refusal to allow this to happen without making any effort to engage with the other party and explain the difficulties, puts itself at serious risk of being in material breach of the contract, rendering it liable to compensate the other party for its financial losses arising from that contract.
In the next article in this series, Stuart will focus upon attempts by parties to vary existing terms. Can one party vary the terms, or do both parties need to agree? How should the parties make changes? Will verbal changes be enough or must they be in writing? Is even that enough to make variations legally binding? We will also start to look at some case studies to see how these factors come into play in a real context.
Whether you are a supplier or customer, you would be well advised to take advice well before taking any action, either to enforce, cancel or vary a contract. Any advice we would give is highly fact dependent, and the implications arising from taking a particular course of action could be long ranging and quite unpleasant if not thought through properly. If you would like any advice on a specific contract, whether as a supplier or customer, please do not hesitate to contact Stuart Price on 0121 227 3371 or via email