Breaking up with a supplier

Hopefully, the working relationship you enjoy with your suppliers will go well, always and forever. But things don’t always go as smoothly as you hoped, and the time may come when you feel you have to part from a supplier. In this case, you’d want to extricate yourself from the relationship in the best way possible.

This article includes some of the issues to consider.

What does the contract say?

To start with, turn to the contract you have with the supplier in the first place. It should include agreed terms covering lots of the issues. At the very least, it should provide the main pathway for termination. This includes:

• Notice period required: That may be a minimum e.g. “service of no less than x days’ notice” or a defined period e.g. “service of x days’ notice”
• Where and how you should serve notice: Whether the agreement demands it is served in hard copy only or allows other choices such as fax or email

It’s important to get this right. If the notice you give the supplier is non-compliant and doesn’t follow the mechanics set out in the agreement, they are entitled to ignore it. It won’t have the effect of termination on the date you want, if at all. The end of the arrangement might be delayed, or even fail entirely (until you re-send the notice correctly).

Friendly parting

In many cases, clients talk to suppliers about their plans to move on, and together they agree exit arrangements in a friendly manner. This is usually the most efficient way to proceed.

Even if you part in a collaborative way, I’d strongly advise you to keep a correct record and serve notice in line with the agreement. Alternatively, get the supplier’s written agreement to notice being served and accepted with the contract terminated on a certain agreed date.

Issues to resolve

Here are some of the questions to ask:

• Are any payments outstanding?
• Will there be a final payment on termination of a long-term contract? With a long-term contract, it’s not unusual for a supplier to want a balloon payment from a client who leaves early
• What (if any) handover arrangements are detailed in the contract? Consider whether these are adequate or if you need to negotiate additional arrangements and support

Why are you leaving?

Your needs in respect of all the above – particularly the arrangements for notice and handover – may be driven by whatever is prompting you to exit from the contract.

If it’s simply that your need for the supply has diminished, then it’s likely that a polite notice under the terms of the contract will be appropriate.

If you’ve had problems with the supplier, before you serve notice you should consider (as a matter of some urgency) whether there’s likely to be a dispute about charges, or if you are looking for damages or a refund from the supplier for their failure. This may affect the way you approach termination.

Usually, the contract will provide a shorter notice period for situations where the supplier is in breach. However, your understanding of whether they have failed may be different to theirs – and different again to the interpretation of the Court – so this would be a good moment to take legal advice about handling the termination of the contract.

Your exit needs to be managed in a way that is consistent with any legal claims that might be made later. To be blunt, to terminate on notice for convenience without ever mentioning dissatisfaction will be a poor position from which to try and strike up a claim for breach of contract later.

Arranging a handover

Obviously, all this needs to be considered against the disruption that can be caused by the termination of a supplier agreement. This will differ according to the nature of the supply and the degree to which that supply is critical to your business.

Even if the supplier is in breach, if the value is small and the disruption is minor, you may opt for polite termination under the contract rather than an abrupt termination for breach. Arranging an orderly handover may be more important to you than claiming what might be a limited refund from them.

Dealing with TUPE

TUPE regulations might apply. This may be covered by the contract, however, TUPE is not dictated by what’s written in the contract but by the set of facts in place at the time you terminate. It’s very much worth checking.

If you are transferring the work to another supplier, or in-house to your own employees, relevant employees at the outgoing supplier may be entitled to be transferred along with the work. If you fail to consult them or you don’t undertake the transfer process properly, they may be entitled to claim significant damages from you.

Work in progress and Intellectual Property (IP)

You need to get the benefit of work you’ve paid for that’s not yet been completed. If there is any work in progress being done by the supplier, and if that is useful to you, you need to ensure it’s delivered to you by the termination date.

If there is IP produced by the supplier, you need to be clear who owns it and ensure you get what you’re entitled to. In practical terms, you would probably want this delivered to you along with confirmation that the supplier has not retained any of your IP.

Communicating the change

There may be third parties who need to know you’re changing suppliers, perhaps including your own clients, especially if they have to approve any sub-contractors that you use.

When you want a supplier contract to end, any of your own customers, staff and other suppliers who deal with the outgoing supplier will need new contact details. To avoid hiccups, I recommend you only tell them the new details once the arrangements for termination are in place.

Dealing with the legals

If you agree terms of early release from a long-term contract, it may be best to execute this as a deed. This will ensure the original contract is validly closed off from a legal perspective.

Alternatively, it might be that the agreement between you and your outgoing supplier includes some consideration from both parties – this might mean some extra work to be delivered by them, or some extra payment to be made by you.

What this means to you

As a commercial lawyer, I help clients to set up their contracts with suppliers, to manage them effectively, and to end them in an orderly fashion. If you’re in this situation, do give me a call on on 020 3609 8764. I’ll be happy to help.

Next time, I’ll write about how to sack a client (something that can happen to all of us).

Related reading

If you found this information useful, you may like to read my other articles on similar subjects:

• How much do you know about your new supplier?
• When the going gets tough (part 1)
• When the going gets tough (part 2)