When commercial contracts stop working

Ignoring the early warning signs

Contractual problems rarely appear overnight. More often, there are gradual signs that the relationship is beginning to break down.
These can include:

1. Missed delivery deadlines;
2. Failure to meet agreed service levels or KPIs;
3. Payment disputes;
4. Repeated complaints;
5. Poor communication; or
6. Informal changes to the scope of work that were never properly documented.

One issue we frequently see is a lack of contract management. Contracts are signed, filed away and forgotten until something goes wrong. By that stage, renewal dates may have passed, obligations may have changed in practice, and valuable leverage may have been lost.

Our tip: Ensure you have a contract management process which includes a regular review your key commercial contracts. Don’t wait until a serious dispute arises before checking whether the agreement is still meeting your business needs.

Assuming you can simply walk away

When a contract is no longer working, the natural reaction is often to terminate it and move on.

Unfortunately, it’s rarely that straightforward.

Many businesses mistakenly assume that poor performance automatically gives them the right to terminate. In reality, the contract may only allow termination in specific circumstances and after following a prescribed process. Wrongfully terminating a contract can expose your business to claims for damages, even where the other party’s performance has been disappointing.

Our tip: There are helpful actions that a wronged party can take to take control of the contract, even before getting to termination rights. You should ensure that you have early warnings on service level failures, KPI breaches etc, appropriate service credit or liquidated damages remedies, default interest, the right to withhold payments, suspend performance or have appropriate termination rights that can be enforced when things start to go wrong – these are all helpful rights and remedies that we often see have been missed in contractual negotiations. The consequences of only having limited termination rights in a contract can be significant when things go wrong.

Inadvertently waiving your rights

Another common mistake is allowing breaches to continue without taking action.

For example, if a supplier repeatedly misses deadlines and you continue accepting late deliveries without objection, you may weaken your ability to rely on those breaches later. Similarly, informal discussions and “one-off exceptions” can sometimes create uncertainty about what the parties have agreed.

Our tip: Document concerns as they arise in writing and ensure the non-performing party is notified of any service level failures, KPI breaches and any other failure to comply with contractual obligations. Make it clear when performance is unacceptable and reserve your rights wherever appropriate so you are not deemed to have waived any breaches.

Failing to follow the contractual process

Most commercial agreements contain detailed provisions governing notices, disputes, remedies and termination. It is easy to focus on the commercial issues and overlook the procedural requirements. A notice sent to the wrong address, failure to follow a contractual dispute resolution process, or missing a notice deadline can undermine an otherwise legally valid position.

Our tip: Check the contract before taking formal action. Notice provisions and dispute resolution clauses are often overlooked but can have a significant impact on the outcome of a dispute.

Losing commercial leverage

Contract disputes are not purely legal issues – there are always commercial, relationship and reputational issues to consider too.
Your bargaining position may depend on factors such as:

1. Whether the other party relies heavily on your business;
2. The value of the ongoing relationship;
3. Upcoming renewal dates;
4. Availability of alternative suppliers or providers;
5. Supply chain requirements and customer obligations; and
6. The practical impact of termination on both parties.

Taking action too quickly can sometimes weaken your negotiating position.