Are You Thinking of Terminating a Contract Early?
Due to the impact of coronavirus (COVID-19) and the uncertainty created for the supply of services to schools, we have recently been working with a number of schools and academy trusts on termination clauses within their contracts.
It seems as though the current lockdown has encouraged many schools and their providers to consider the options they have to end their existing contracts before they are due to expire. In this context it is worth considering some of the different issues that can apply here.
Can You Serve Notice to Terminate Contracts?
The most straightforward option is where a contract includes a right for one or either party to bring the contract to an end by serving notice on the other party without requiring any reason - a unilateral break clause. Sometimes this type of clause can be exercised at any time, sometimes it can be exercised on a specific date. Usually a minimum period of notice is required, and this can vary from a matter of weeks to a matter of months. If the break clause can only take effect on a specific date it is vital to ensure that notice is served in enough time, otherwise the opportunity to end the contract on the break date could be lost.
Termination for Breach
Contracts will invariably include clauses giving the parties a right to terminate for breach by the other party of its contractual obligations, and the way the specific clauses are drafted are critical to how this option could be exercised. In some contracts a breach must be material in order for it to give rise to termination right, other contracts can include the concept of repeated minor breaches giving rise to a right of termination. In most instances the party 'at fault' must be given an opportunity to remedy the problem before the contract can be terminated.
Seeking to end a contract as a result of breach by the other party can be a risky approach and should be approached carefully. Providers will often seek to dispute an academy trust/school’s right to terminate as a result of breach, and this can therefore lead to protracted and costly disputes. Another risk is that if the attempt to terminate is unsuccessful, it can lead to the provider being able to end the contract for 'repudiatory breach' and claim damages from the trust.
The 'Force Majeure' Clause
Of particular relevance to the pandemic is that most, but not all, contracts include force majeure terms which often include a potential termination option. Again, these clauses vary significantly and therefore the wording should be reviewed carefully. Sometimes a contract can be ended only after the force majeure event has continued for a period of time, in other cases it can be ended when the event will continue into the future. In many cases the affected party would have had to notify the other party at the point the force majeure event started.
Serving Your Notice
In all circumstances, particular care should be given to how notices of termination should be given to the other party - what format they should be in, where they should be sent etc. Getting this wrong can invalidate an attempt to end the contract.
Lastly, Beware Rolling Extension Provisions
It is surprising that the education sector is one of the few areas where contracts often include a rolling extension provision, so that they are deemed to automatically extend and continue unless one party serves notice in the appropriate way and at the appropriate time so as to prevent this. This type of clause should generally be removed. If the parties wish to extend the contract they can of course do so, but this should be a proactive step and the situation should not arise where one party finds itself having had a contract extended when it would not wish to have done so.
