Video

Wragge & Co experts take a look at topical issues in contract law. Covering everything from competition law and boilerplate, to trends in liability law and how to terminate a contract, they outline the main issues in-house lawyers should consider.

Termination

We all hope nothing goes wrong with our contracts, but Nicola Lynch will be asking Clark Sargent how to manage it if we have to terminate our contracts.

Nicola Lynch: So how important is it to plan for the worst when drafting a contract?

Clark Sargent: It's absolutely imperative, if you're the in-house lawyer, to make sure that you've covered off what might go wrong. Because what's certain is, when it does go wrong, they're going to come to you and ask what to do about it.

Nicola Lynch: And how does the law allow for termination?

Clark Sargent: You can just rely on your rights at law can't you? Because any contract can be terminated at law if the other side breaches a condition. The difficulty on that is of course that you've got to know what's a condition in your contract, and that can be difficult to spot. And we know it's difficult to spot because there's absolutely stack loads of case law on this stuff, about when you can terminate a contract.

And the reason that there's so much case law is because of course it's uncertain. Because you're always arguing about whether somebody's committed a repudiatory breach or not, or whether they've done something that's sufficiently serious that you're allowed to terminate the contract. And that's all got touch and feel about it hasn't it? And touch and feel means risk when it's gone wrong.

Nicola Lynch: So why should contracts include a termination clause?

Clark Sargent: Well, it's exactly to answer that point that we're really just looking at. You can put whatever you like into the contract; you know there's an area that you can deal with at law but it's risky. So you can provide in the contract for what you want, what you need, to determine when you think something sufficiently bad has happened.

Nicola Lynch: So what really needs to go into a termination clause?

Clark Sargent: Well, the primary thing you're looking for is you want to put in as much certainty to answer that point as you can. So you know what you think will be your termination event, so you've just got to write them down but with clarity, so that people understand what you mean. And on that of course in these clauses you will see - I can terminate for material breach - a sort of sweeper upper at the end.

And again, even when you're doing that, you can look at where am I setting the bar here? What do I mean by material breach? For example, missing a payment by this many days. That would do. That would be a material breach in the context of this contract. So you get the freedom to put all of that in.

Nicola Lynch: So could you tell me a little bit more about the consequences of an early termination?

Clark Sargent: You've just got to think about and plan for what you're going to need back. You also want to think about - and this is very pertinent and we've seen people get this badly wrong - is how much time is it going to take me to get somebody else in to do what they're doing for me. Because obviously I can terminate them now, but I need somebody else to do that instead. So you've got to plan for that as well.

Nicola Lynch: I know a lot of in-house lawyers will be interested in damages, how do you deal with damages in a termination clause?

Clark Sargent: You can try and rely on your rights at law, that you're terminating contracts under law and you can go after your loss of profits claims. And those are always very big numbers. But you've got to remember that when you're going after loss of profits, your view of what your lost profits are and the other side's view are going to be very, very different. And that means there's uncertainty there as well and you've got to go to court and get somebody to assess it for you. You've got to get a judge, you probably need expert accountants, and it's all expensive and it takes a period of time.

So you can try and deal with that in your contract by setting out in the contract what you think the formula is for what you should get back if certain events happen. You can provide for it, you can say specifically, you can put in liquidated damages clauses. And again worth bearing in mind, you say that to an in-house lawyer, liquidated damages, they'll be thinking about penalty. The courts have been really narrowing those recently in commercial contracts. So much less risk around those. So the opportunity to use them is much wider now than it might have been say 10 years ago.

Nicola Lynch: And what about using a termination clause, once drafted?

Clark Sargent: You always end up again back with these questions from when we were at law school really isn't it, about whether you should be terminating contracts at law or whether you should be terminating contracts under the termination clauses that you've written, and that's a really complex area now because there are some cases that have come out of the House of Lords and Court of Appeal over the last few years. And the courts have got us to a place where you sort of have to make a selection.

You can terminate at law, but we know that if we terminate at law you've got some of that risk and challenge around what you've done. If you go after the contract clause, you've got a lot more certainty around that you're entitled to terminate, but you might be going after a lesser number. And you've got to take a view, which one do I want?

But of course actually then as the in-house lawyer, you've got to look at whether there's an option to try and get both, and there is, under the cases there is actually still an opportunity to use both, if you go in the alternative. So try and terminate at law first, knowing that's a bit risky, and then to cover your risk, you terminate in the alternative under the contract. And you know if you have to come back and rely on that you're going to get something, you're safe. But you try and get this as well just in case.

And then the second area that you've got to check that you've got covered off is you have a period of thinking time. The courts allow you that. Of course you've got to have, something's happened, what am I going to do about it. But you've got to be wary that the courtss time thinking time.

There is a limit to it and you've just got to be wary that you don't go outside the time period they're going to allow you in the context of your contract, and then end up having the contract affirmed by what you've done, by not terminating. And then you've lost the opportunity and of course if you then try and terminate, you can get into trouble. So you've got to make sure you go within what's a reasonable period.

This video may contain information of general interest about current legal issues, but does not give legal advice.