April 22, 2020
The third chapter in the series ‘Contracts for Beginners’ looks at a topical issue a lot of Microsoft Partners and technology companies are dealing with in the COVID-19 environment, specifically, contract termination rights for you or your customer. We have a short Q&A below regarding specifically what termination means and how they may apply.
Q: What termination rights do you or your customer have due to COVID-19?
A: One of the primary issues you’re probably facing right now is, how easy is it for your customer to terminate your contract due to COVID-19?
There are various termination rights, which can include a termination for convenience rights and/or a termination for cause.
COVID-19 and Termination for Convenience
Simply put this clause deals with the ability of either party or just one party (typically the customer) from being able to terminate a contract for no reason at all upon giving the other party a certain period of notice. If you have this inbuilt into your contracts, your customer can trigger this right if it needs to pull out of the contract and will not need to give a reason to do so.
You may find that customers will look to a termination for convenience notice when they are prohibited from terminating for any other reason. If the customer doesn’t have a termination of convenience rights, we need to find out whether a termination for cause will allow the customer to terminate for COVID-19 reasons.
COVID-19 and Termination for Cause
This type of termination right is only triggered by a party if the other party has failed to do something – in other words, there is a ‘cause’ for the trigger. You usually will find this provision has a laundry list of reasons such as (1) material breach which is not remedied within a certain time frame (2) breach which can’t be remedied (3) persistent breaches (4) insolvency events; (5) Force Majeure events (in accordance with the specifics of that clause); (6) change of control events.
Besides Force Majeure which may trigger a termination right depending on a few things, it would be hard for the customer to deem events of COVID-19 to form a material breach. They may argue a breach which cannot be remedied but only if you’re unable to perform all of the Services rather than a part of the Services. It is unlikely though to be a favourable argument in a court of law for the reason that the intention of this clause goes to a service which can’t be fixed at all. As the circumstances around COVID-19 will not be indefinite, the issue has the ability to be ‘remedied.’
Conclusion: Therefore, the likelihood of the customer trying to trigger a termination for cause event will be limited but if any termination for convenience rights are offered in the contract to the customer, they may think about triggering these.
Other FAQS regarding contract termination
Q: Can I terminate a contract by email?
A: Check the termination clause or the notice clause (usually found towards the bottom of your contracts). This is usually where you’ll find the express terms of the contract, which may specify the timings, content, form and delivery method of a notice to terminate the contract (at common law or under a termination clause). They may specify requirements for all communications connected with the contract. The safest course is to comply with these exactly.
Absent any express wording, the aggrieved party need only communicate, clearly and unequivocally, that it is exercising its right to terminate.
An interesting question we’re often asked is whether “written notice” can be submitted by email instead of hard copy. The answer is usually, yes. Whether an email is “written” for the purpose of any specific contract depends on the interpretation of that contract, but an email can satisfy the statutory requirement for a guarantee to be in writing. So, in England and in English courts, in the absence of an express or implied contrary provision, an email probably satisfies most contractual requirements for writing in a notice of termination.
Q: When is notice by email deemed served?
A: The first place to look for this is usually in the ‘Notices’ clause of the contract and (if the contract requires a written notice) in any definition of writing.
If the contract is silent, there is no general principle of English law that deems emails to have arrived at any particular time. In principle, a notice of termination, whether exercising a common law right or a contractual one, takes effect when it is communicated.
Note: It may be hard to prove exactly how and when a notice arrived, and it may be arguable in some cases that real communication did not take place until sometime after arrival, for example, when an email arrives outside business hours, is sent to a spam folder, or lies unseen in an inbox.
Q: Must the other party acknowledge termination?
A: In a commercial contract there is normally no legal requirement to acknowledge the receipt or effect of a notice of termination. Termination is carried out by clear communication of the intention to terminate. No further action is needed by the receiving party to make it effective.
Do check the contract for any contrary provision. However, it would be unusual to make termination by one party (for a cause or convenience) depend, in effect, on the co-operation of the other party.
This is the third chapter in the series, contracts for beginners, please look at the others available.
- Chapter 1 in the ‘Contract for Beginners’ series: Time is of the Essence
- Chapter 2 in The ‘Contract for Beginners’ series: how to manage project delays
- Chapter 4 in the Contract for Beginners series: legal action for non-payment
- Chapter 5 in the ‘Contract for Beginners’ series: Force Majeure clause during a pandemic
At Law 365 we have created an eBook addressing the critical Coronavirus issues impacting our clients right now – These include:
- Force Majeure.
- Employment Issues.
- Business Contingency Plans.
- Insurance queries as well as project delays caused by COVID-19.
- Payment issues.
- GDPR and termination rights.
If you found this excerpt interesting, you’ll love our free eBook, download it now.
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