An increasingly common problem our clients are confronting right now is having a supplier of goods or services who has fallen into default.

There may be applicable force majeure provisions or the contract may be frustrated. If neither of those apply, then you might be thinking about terminating for breach, but there is always a risk of a wrongful termination claim and subsequent (costly) litigation.

If you want to try to work things out, before you start negotiations with your defaulting supplier, consider what actions might cause you to lose your termination right and what you can do to protect that right.

How can you lose your right to terminate?

  1. If you unambiguously represent that you won't exercise the termination right (e.g. by assuring your supplier that you won't terminate), your supplier acts in reliance on that representation (e.g. they order the next round of goods they need to deliver to you), and as a result the supplier will suffer material prejudice if you then terminate (e.g. they will be left with the goods), you may have lost your right to terminate.
  2. If you choose to undertake an action which is inconsistent with your right to terminate (e.g. you continue to receive rent under a lease) then your right to terminate may be extinguished.
  3. If you fail to exercise your right within a 'reasonable time' (this will vary depending on the particular contract and circumstances), then you may also have lost the right to terminate.

What can you do to protect your termination rights?

  1. Be careful with your emails! Emails tend to contain pleasantries and informal language and any comments, promises and assurances you make to the supplier can be later relied upon by it.
  2. Make it clear in all correspondence that you reserve your rights under the contract but remember, actions speak louder than words to a court.
  3. Understand that marking correspondence as 'without prejudice' doesn't necessarily give it this character.
  4. If possible, enter into a standstill agreement (which will preserve everyone's contractual rights during negotiations).

We do not disclaim anything about this article. We're quite proud of it really.