Breaking up is hard to do

Introduction

There are times, unlike in the immortal lyrics of Neil Sedaka, that we in fact want to say that this is the end to certain contractual relationships.

Two recent court decisions have highlighted the importance of anticipating the smooth ending of business relationships.

Most businesses are familiar with the obvious reasons a contract might come to an end for example, insolvency or a serious breach.

But the harder question is often more ordinary: what happens when one party simply wants to move on?

Perhaps the arrangement is no longer commercially attractive. Perhaps the business has changed direction. Perhaps the relationship has run its course or the other party wants to end things and you need to know where you stand. This is where things can become difficult especially if the contract is unclear or silent.

Long standing relationships do not always mean long notice periods

One recent case involved a Heineken subsidiary in the Bahamas. The subsidiary had an exclusive distribution agreement which had been running for around 40 years.

When it was terminated on 3 and a half months’ notice, the Heineken subsidiary challenged the termination arguing that a reasonable notice period should be 3 and a half years.

The Privy Council disagreed and confirmed that on the facts, a notice period of between 3 and 6 months was reasonable.

SME takeaway: For SME leaders the point is an important one. A long business relationship does not mean that a long notice period will be required.

What is “reasonable notice” will depend on the circumstances, including the nature of the relationship, the level of dependency, what was invested, what needs to be unwound and how easy it is for parties to make alternative arrangements.

The better approach is to not leave this to later. Address it upfront.

Sometimes the right to terminate is hiding in the contract

Another recent case, involved a renewable energy company. The contract included a right to terminate if there was an amalgamation affecting one of the parties. The energy company did not initially realise this right existed. It only became aware of it months later, after it had already tried to terminate on other grounds.

The question was whether it had lost the right to rely on this clause (which triggered a substantial payment).

The Court of Appeal said it had not. The key point was that a party can’t usually be treated as having given up a contractual right if it didn’t know that the right existed.

SME takeaway: For SME leaders, the practical point here is that it’s worth checking the agreement before terminating. There might be a specific right to terminate that isn’t immediately obvious. Equally, there might be consequences of termination that are not immediately obvious.

Why this matters for SMEs

Termination provisions can feel like boilerplate. But they are some of the most important provisions in an agreement.

The main lesson is simple: think about the exit before you need the exit.

For any important commercial relationship, SMEs should:

• Ensure you have a written agreement in place
• Check the agreement includes clear termination rights
• Agree notice periods up front
• Think about what needs to happen during any handover or wind down period
• Understand what payments are triggered on termination
• If there are multiple termination rights available, take expert legal advice

This isn’t about being pessimistic. It’s about being commercially prepared.

Because breaking up may be hard to do but it’s much more difficult when the contract does not set out how to do it.

If you’d like some advice on this topic, please feel free to get in touch.