Contract Termination

We have been asked a question around contract termination a couple of times recently. Although the facts were slightly different in each case, the general principle behind the issue was the same. So we thought it might be helpful to write a blawg on the subject!

So here’s the picture… You have a client who signs up to your services for a fixed period of time for a fixed price or fixed monthly instalments. If they then cancel or you terminate for their breach (e.g. non payment) you’re entitled to all of the sums due under the whole contract, right?

Unfortunately, the answer is probably not.

It would be different if the outstanding fees related to services which had already been provided. For example, if you carried out all the work upfront and agreed to split the fee over 12 months. But if you haven’t completed all the services, then it’s unlikely you would be entitled to all the fees.

What you can recover should be to compensate you for what you have lost. Rather than penalise the client (even though they may be in breach). So for example, it should take into account:-
• the services provided to date
• your time spent in preparation for providing future services
• income you could have earned providing services to other clients which you had allocated to the client in question

Whilst this may be one of the cases where a written contract would help add certainty (i.e. if you set out cancellation provisions), this would still need to be reasonable to reflect “a genuine pre-estimate of loss”. So the contract couldn’t simply say that if the client cancels, 100% of the fees would be due.

In law you have a duty to mitigate (minimise) your losses, which means that if someone wrongly terminates, you can’t sit back and keep the money and attempt to get work to try and replace the cancelled services.
Unfortunately the law doesn’t allow you to get “money for nothing”.