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29 April 20209 minute read

WIN Wise: Termination of Technology Contracts - On a need to know basis

The COVID-19 pandemic is causing untold, and unprecedented, uncertainty to businesses across the globe, and both technology suppliers and customers are considering their existing contractual obligations to identify whether:

  • they (and from a supplier’s perspective their own sub-contractors or partners) or the other party can meet their contractual obligations to perform (i.e. deliver services or pay for their services) or whether the contracts have been frustrated or performance has otherwise become problematic;
  • the pandemic is a force majeure event under the relevant contracts; and
  • there are any other routes to exit/terminate contracts to minimise costs and risk going forward.

Other articles on DLA Piper’s Coronavirus Resource Center cover these first two points (see Coronavirus COVID-19 and frustration: Is your contract at risk? (United Kingdom), Coronavirus COVID-19 and force majeure: How are your contracts being affected? (Europe) and What if the coronavirus leads to an interruption of your company’s IT functions? (Belgium)). But it’s important to keep considerations about other contractual and common law mechanisms of existing agreements in mind, not least given the potential pitfalls in seeking to rely on a force majeure clause or (for those jurisdictions where this could be relevant) on frustration arguments or which may not cover current events.

In normal circumstances, the most common reasons for terminating a contract include unsatisfactory performance of the whole or part of the contract, a refusal to perform the contract at all, or a breach of some other provision of the contract. However, other potential reasons arising from the COVID-19 pandemic include:

  • the contract being no longer commercially beneficial for one party to continue (for example, the party can get the goods/services more cheaply elsewhere in light of restrictions in certain jurisdictions);
  • the party no longer requiring the goods or services or not being able to fulfil the contract; or
  • one of the parties becoming insolvent (or simply having cashflow issues).

In any event, the decision to terminate should not be taken lightly. Get it wrong and you may inadvertently provide the other party with an opportunity to terminate and claim damages from you.

As such, other options should be considered, depending on your particular circumstances:

  • Is the commercial relationship such that you could re-negotiate the contract with a view to varying its terms by following the change control mechanisms?
  • Are there other legal principles or mechanisms which could be used to re-negotiate the contract (e.g. in certain (in particular, civil law) jurisdictions, general principles such as abuse of rights or good faith might be used as ‘leverage’ to force the other party to accept to re-negotiate the contract)?
  • Are there any other contractual mechanisms you could use to protect the business’ interests (for instance, applying service credits or exercising step-in rights)?
  • Is there a prescribed escalation procedure (or could one be instituted) to try and achieve a mutually acceptable solution?
  • Nevertheless, if you have explored all the alternative options, and termination still appears the preferred option , it is important to keep the following “top tips” in mind:
  1. Consider the contract carefully. What mechanisms are there to enable termination, for instance:

    • is there a right to terminate for a material breach (i.e. a serious, more than trivial breach) or (for those jurisdictions where this could be relevant) is the breach so serious that there is repudiatory breach (in that it goes to the very heart of what the parties originally agreed to contract for) which may entitle you to terminate under common law;
    • are common law termination rights excluded;
    • are there any steps which need to be taken before a termination notice can be served. For instance:
      • do you have to give the other party an opportunity to remedy the breach; and
      • many contracts will include a dispute resolution procedure which the parties may need to follow before court or arbitration proceedings are commenced or even before a contract can be lawfully terminated. Check the provisions carefully. They may require the parties to discuss all disputes informally before any formal action is taken and in some instances may also require the parties to participate in a mediation.
    • Consider any contractual consequences which flow from termination. For example, are any payments due, will the limitations of liability still apply, what about TUPE rights and is one of the parties obliged to provide exit assistance?
  2. Play devil's advocate. Are the breaches you are alleging really that serious? Can the problems be overcome?

  3. If serving a notice of termination, keep in mind the “top tips” on serving a notice set out below.

  4. Consider carefully whether contractual termination suits your purposes better than other available mechanisms (e.g. common law rights). This can have a big impact on the level of damages you may eventually recover.

  5. Depending on the jurisdiction, it can be acceptable to exercise both contractual and common law rights of termination at the same time.

  6. Take steps to mitigate your loss. A party cannot recover damages for losses which could have reasonably been avoided, so consider how you might be able to prevent or reduce loss.

  7. If you are the customer will you need another supplier to take over the services or provision of goods following termination. Will other parties be available readily (especially given the restrictions arising from the COVID-19 pandemic)?

  8. Termination under the contract may appear the least risky option but equally certain damages (e.g. in certain jurisdictions, loss of bargain damages) may then not be recoverable. As such – balance the risk of exercising the termination right against your potential recoveries in damages.
Top tips when serving notice of termination:
  1. Check the notice provisions in the contract.

  2. State that you are terminating under the contract, and if so the provision on which you rely, or (for those jurisdictions where this could be relevant) state that the breach is repudiatory, entitling you to terminate, or (if applicable) both.

  3. State when termination is effective from. This can be immediate, or state the notice period required in the contract.

  4. Set out comprehensive details of the alleged breach by the defaulting party. Be as specific as possible, including dates of key incidents and correspondence. In undertaking work to locate and identify the comprehensive details, take steps to maintain privilege to limit the potential for any unhelpful documents being disclosable at a later date.

  5. Be as specific as you can be in relation to details of the monies claimed or loss suffered.

  6. Include provision for claiming interest and costs.

  7. If the defaulting party has indicated that it will not comply with future obligations, your notice should also:

    • include references to this indication, and
    • state that you wish to terminate the agreement as a result of this confirmation (in some jurisdictions, this could amount to an anticipatory repudiatory breach).
  8. Consider sending a separate without prejudice letter at the same time as the notice suggesting a meeting or dialogue to attempt to resolve the matter. Without prejudice correspondence and negotiations are not admissible as evidence in court and, therefore, will not prejudice your case in respect of termination.

In summary, termination can be a high risk strategy and can inevitably lead to escalation and litigation. Consider the above WIN Wise Top Tips before exercising rights of termination. Specific requirements may apply depending on the applicable law and each agreement should be assessed and reviewed on the basis of the background law applying to the agreement. Please do also contact the DLA Piper Tech Disputes Team for further advice.

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