The Must-Know Elements You Need to Build a Strong Case for Contract Termination

Terminating a strategic supplier contract early isn’t something you should do lightly. It poses a great many risks, not only disrupting how your teams, but it is also possible to have your decision challenged by the supplier in court. This article, lays out in clear terms what evidence you need to identify and the degree to which it justifies a termination.

Has your supplier?really?failed to deliver?

When considering what you need for your early contract termination evidence and to make the process as smooth as possible, you will need robust evidence that your strategic supplier has failed to achieve the business outcomes you expected. In preparing this evidence, it’s vital that you focus on the right elements.

First, clients frequently overlook their strategic supplier’s ‘Expert Responsibilities’. We have outlined some key elements below, but our Strategic Supplier Responsibilities guide contains a more comprehensive view. The main point to note is that if, during procurement, you relied on your strategic supplier’s expert advice as to how it could improve service delivery and/or reduce service costs, then the strategic supplier has clear obligations towards you.

The advice you received from your strategic supplier is critical here. When you procured the service, you are likely to have relied as much on this pre-contractual advice as you subsequently did on the service itself. Ideally, you should have contracted for this advice separately from the solution provided. This helps prevent the strategic supplier arguing that it misunderstood your requirements at the outset or that you have changed your requirements, when, in real terms, you have not.

Second, clients often only remember the situations where the strategic supplier has fallen short. However, the strategic supplier will often have delivered some good service and may at times have gone beyond its contractual requirements to help you. The strategic supplier might also have examples of where it has rescued you from the consequences of your own mistakes.

You might consider engaging an external specialist to assess the evidence from an independent and ‘critical friend’ perspective to ensure you are adopting the most effective approach. See Step 10 in the Strategic Supplier Responsibilities guide for further information about the pros and cons of this.

Understand your strategic supplier’s Expert Responsibilities

During the procurement process, your strategic supplier is likely to have represented to you that it specialises in delivering particular types of outsourced services or systems. This means that your strategic supplier has specific responsibilities to you that it should have carried out. In particular, an expert strategic supplier is responsible for:

• Ensuring that its service/system solution is fit for your purpose, before it is delivered.
• Validating your requirements before embarking on the relationship. If it does this and then challenges arise during service delivery, your strategic supplier cannot claim that your pre-contractual requirements were ambiguous.
• Making clear what process it will go through to validate that its services will meet your expectations. Your strategic supplier cannot expect you to validate whether its service is appropriate for your requirements.
• Ensuring that, where it provides specific products, the warranty periods are fair and reasonable.

These hidden contractual obligations are known as ‘implied’ terms. In other words, they are usually legally binding if your strategic supplier acts as an expert, whether or not the expert obligations are documented in the written contract. These implied terms have both statutory and case law supporting their relevance.

When gathering your evidence for early contract termination, you need to assess the extent to which your strategic supplier carried out its expert responsibilities. It is worth noting that your strategic supplier is often unable to practically ‘contract out’ of these responsibilities in the written contract terms. More importantly, if your strategic supplier has tried to contract out of their expert obligations to you, it is unlikely a court would allow it to rely on these exclusions to avoid its expert responsibilities.

Understand your responsibilities

While your strategic supplier has specific responsibilities, the onus is on both parties to establish and maintain a working relationship. In particular, the case of Anglo Group Plc v Winther Browne & Co Limited [2000] 72 Con LR 118, established some clear responsibilities on the purchaser’s side.

When agreeing the contract, you should have clearly communicated any special needs to your strategic supplier and taken reasonable steps to ensure that the strategic supplier understood those needs. You should also have devoted reasonable time and patience to understanding how to work with the strategic supplier and worked with your strategic supplier to resolve problems.

While the strategic supplier is ultimately responsible for delivering the services and achieving your business outcomes, it is unreasonable as a client to ‘abdicate’ responsibility. Abdication is often mistaken for delegation but the two are very different. Abdication is when the client does not stay in the management feedback or information loop, so the strategic supplier finds it difficult to engage with the client and deal with issues. Delegation is staying in the MI loop, so you can work with the strategic supplier to resolve issues and partner on innovation.

Gathering evidence

Once you understand your strategic supplier’s responsibilities (and your own), the next stage is to gather your evidence of your strategic supplier’s non-performance to support your case for early contract termination. There are five key steps to go through when gathering your evidence:

1. Gather the basics

Determine which business benefits and operational improvements you were expecting from the outsourcing agreement/system solution. Check your original business case for details and to understand your expectations at the time.

Create a complete list of the difficulties that are affecting your business and highlight the key issues that are having the most material impact. Make sure you know the dates you experienced these issues. This shows how long the issues have been outstanding.

2. Validate key items in the contract

Next, check whether all of the schedules (for example your quantified business benefits, requirements, expectations, implementation plans, time scales and so forth) are specifically referenced in the contract. If they aren’t, are you assuming they are implied?

The origin of the written contract terms will also have a bearing on your case. Is the written contract:

• Your own contract terms, which you provided to the strategic supplier and then negotiated? If so, then the contract terms are unlikely to help you if they can be interpreted too widely.
• The strategic supplier’s standard terms without modification? If so, then it is easier to deal with the ramifications of terms that might not work in your favour. This is due to the Unfair Contract terms Act 1977 (UCTA), which often leads Courts to take a dim view of strategic suppliers that have represented themselves as specialists, but then try to avoid obligations in written contract terms due to poor or wide drafting errors.
• The strategic supplier’s standard terms with some modification? If so, then it can involve more detailed work on the ramifications, but these can often still be overcome by the protections you would normally have in the UCTA, subject to the amount of negotiation that was undertaken.

You should also check whether the contract is actually signed by you and the strategic supplier. This is important because strategic suppliers often try to argue that the written terms weren’t finalised, are therefore invalid, and that it can’t be held to account for them. However, strategic suppliers often don’t realise that the lack of a signed contract usually works against them, due to their expert responsibilities, and puts the client in a much stronger position. However, a signed version of the agreement can significantly reduce the arguments, and therefore any legal/expert fees.

3. Quantify your costs and losses

To quantify your costs and losses, begin by ascertaining whether the key operational and financial benefits you expected from this partnership were clearly quantified during your pre-contractual discussions with the strategic supplier. If they were, which of these benefits are not being achieved? What evidence do you have to support this?

Produce a schedule of the key financial and operational impacts of the poor service you are experiencing. This might include reduced operating margins, more complaints from your customers, higher levels of refunds or not meeting your statutory obligations (in the case of public sector or financial services organisations).

If you, your management team or staff are spending time working around the problems with the service, you should keep a reasonable record of that time and its cost to you. Similarly, keep records of the cost and operating impact of hiring temporary staff or contractors to work around the problems.

There may also be other costs you should document, according to your particular circumstances. For example: Did you have to hire external advisors to help with the issues?

Have you had to purchase equipment, take on additional permanent staff or invest in IT systems you wouldn’t have had to invest in (legacy IT systems for example), if the levels of service from the partnership had been achieved? If so, keep a note.

4. Review the contractual obligations and responsibilities

The next step is to understand who was responsible for key aspects of managing the contract. In particular:

• Who was responsible for the outcomes management in the written contract terms or the schedules attached to the contract?
• What did the strategic supplier actually do (as opposed to what it was responsible for doing) to manage the service delivery outcomes?
• How did your people participate in managing the relationship? Was it considered a true ‘partnership’ approach to managing the outcomes from the agreement? Did either the strategic supplier or you neglect your responsibilities in working together? If so, what do you think was the practical business impact of this on the services delivered?

You should also check whether there were any significant change controls or formal variations to the agreement, either through written correspondence or on-the-ground behaviours. Both of these may take precedence over the written contract terms.

5. Validate the ‘Expert Responsibilities’

The final stage in gathering your early contract termination evidence is to validate your strategic supplier’s expert responsibilities. This means that if you relied on the strategic supplier’s advice about the benefits you would get from the outsourcing agreement, you need to document your evidence that you had this reliance. Did your strategic supplier exercise its duty of care and duty to warn? (See earlier in the Step or in our guide on Strategic supplier Responsibilities for more information.)

Alternatively, were you happy that you undertook enough due diligence on the strategic supplier that you didn’t need to rely on its advice?

Make your strategic supplier aware of the problems

Documenting the strategic supplier’s contract breaches or failed expectations can help you to avoid expensive early termination fees. It can also give you a strong defence against any legal action by your strategic supplier, in the event that you refuse to pay for poorly delivered services.

It’s important to have evidence that you informed your strategic supplier of its contract/service delivery breaches or its failure to achieve your expectations, in line with the escalation process in the written contract terms. If you communicated these verbally, did you follow up by email or in writing? There are other ways to deal with legitimate non-compliance with contractual escalation processes, but it’s better to avoid the cost and protraction of such arguments.

Maintain focus on early contract termination evidence preparations

Make sure you focus on the correct elements of evidence for your early contract termination. You need to eliminate the ‘noise’ and focus on the issues with the most material impact on your organisation, both operationally and financially.

Test your early contract termination evidence

Once you’ve gathered your evidence, the next step is to evaluate whether it shows what you thought it would and that it’s strong enough to proceed. Evidence is often imperfect. A thorough review of your evidence should confirm whether or not it shows your strategic supplier failed to deliver to your expected business outcomes. You will need to be certain that you have interpreted vital elements of your evidence correctly, such as your strategic supplier’s expert responsibilities and how they should be benchmarked against what is reasonable.

Understand the strengths and weaknesses of your early contract termination evidence

After you have reviewed your evidence, you need to be able to answer the following key questions to highlight the strengths and weaknesses of your position:

• Did your staff contribute to the service delivery problems and prevent the strategic supplier from performing as you expected? If so, how material were your team’s actions in preventing the expected business outcomes?
• Did you resource the relationship management correctly and as agreed with the strategic supplier at the outset, or could your actions have prevented the strategic supplier from meeting its obligations to you?
• Have you considered why misunderstandings arose over your expectations? Could the problem have more than one cause?
• Should the strategic supplier have asked more questions about your requirements, to ensure your expectations could be fulfilled? If so, in which areas?
• Could the strategic supplier have looked at how you operate in more detail, so it could advise you of the compromises you would have to accept when outsourcing your services?
• When the strategic supplier asked what you expected from its solution and how the solution might operate, were all of your responses factually correct? If your strategic supplier didn’t ask the right questions, this is not usually your responsibility. The strategic supplier should deal with the consequences of not asking you the right pre-contract questions, in its role as your ‘expert advisor’.
• What is your relationship currently like with your strategic supplier? Do you owe the strategic supplier any money? If so, for what specifically?
• Was ‘time of the essence’ to get benefits from the agreement and was it an express part of the written contract? Again, not having a specific written contract term to say that ‘time was of the essence’ doesn’t mean you cannot contractually rely on time actually being of the essence, but having a written contract term does help to reduce the potential argument.
• Have you been communicating the problems you’re experiencing to the strategic supplier on a regular basis, in writing or by email, in line with the escalation process in the written contract terms?
• Do you have a formal log, with strategic supplier acknowledgements, of the problems being experienced?
• Have you had your: expectations, contract terms, requirements, schedules, your own performance and the strategic supplier’s externally and independently validated, by someone who can provide you with ‘critical friend’ advice, challenge your assumptions and provide counter-arguments so you know what likely issues you will be up against??

You may be convinced of the merits of your case, based on the undeniable stress and inconvenience it has caused you. However, strong emotions can make you overlook weaknesses in your evidence and reduce your chance of a successful outcome.

The safest and most cost-effective way to check your evidence is to have someone independent undertake a ‘critical friend’ challenge, so they can advise you of what works, what doesn’t and where your focus of evidence should be, according to the business outcomes you are trying to achieve.

Do not be tempted to skimp on your evidence preparations. Unless you fully understand which aspects of poor delivery your strategic supplier is responsible for, and which aspects your team are responsible for, then it’s likely you will not have the appropriate contractual or practical protection for a quick and effective termination. If you’re unsure, get professional advice to see how you could reduce the steps needed to successfully exit your outsourcing relationship.

Discover more crucial intelligence on how to successfully manage relationships with strategic suppliers in our knowledge bank. I regularly update it with relevant and necessary information that helps you across every stage of the partnership.