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Termination of supplier contracts

This guide looks at the important issues to be considered if your company is terminating existing supply contracts and transferring the services to a new supplier.

Notice provisions

How should termination be communicated? Communicating your intention to terminate your existing contracts should be carefully considered and managed. You will need to maintain relationships with your existing suppliers during any notice period in order to maintain a quality service.

How much notice should you give? Most formal written contracts will specify the period of notice which must be given in order to terminate the contract. Check this and ensure that sufficient notice is given, as failing to do so could result in a breach of contract claim from the existing supplier.

In the absence of a formal written contract English law requires that 'reasonable' notice is given to terminate a contract. What is reasonable will depend on the specific circumstances of the relationship, including:

  • the length of your relationship with the supplier;
  • how much your business contributes to the overall business of the supplier;
  • how quickly the supplier may be able to replace your business;
  • the original intention of both parties when you entered into the relationship.

In relation to overseas relationships or agreements not governed by English law, local legal advice may be required.

When should you give notice? Ideally, termination of the contract with the existing supplier should coincide with the start of the new supplier contract. Where a formal contract contains a minimum contractual notice period, this should be given. You may be able to commercially negotiate a shorter notice period by agreeing payments for early termination.

However, you will not want to give notice to terminate your existing arrangements before you have a replacement supplier in place and ready to begin providing the services. If this is not done there is a risk that you could face a period without a supplier to provide the service, or that your existing supplier will demand a premium to continue to provide the service after your agreement has ended.

How should you give notice? Formal contracts may contain certain conditions in relation to how notices should be served - for example, in writing or delivered to a specific person. In the absence of a formal contract, it is still advisable to give notice of termination in a formal written document or letter.

Stock

If the existing supplier is holding any stock, or any deliveries are only part-transferred, you need to agree with the supplier how this will be dealt with. This may be tied to the transition of the services to the new supplier. For example, the existing supplier may complete any deliveries already in progress but transfer any stock held in warehouses or distribution centres to the new supplier for future delivery.

Assets and equipment

If your existing supplier has or uses any of your assets, these will need to be returned or transferred to the new supplier. Also consider whether the existing supplier uses any of its own assets, such as custom equipment, that you would want it to transfer or sell to the new supplier.

Third party contracts

Does your existing supplier have any contracts, whether with other suppliers or subcontractors, that the new supplier will need to benefit of in order to perform the services? If so, arrangements will need to be made to transfer or assign these contracts to the new supplier.

Outstanding payments

Are any payments outstanding to or from existing suppliers? Are any payments disputed, or are you withholding any payments? If so, all such issues will need to be addressed.

Exit arrangements

If the existing supplier is a major supplier of services it may be advisable to negotiate an exit agreement dealing with the handover of supply and other post-termination issues, including their cooperation with your new supplier.

Handover

Will you need your existing supplier to assist your new supplier in taking over the services? Does it have any information that your new supplier will require - for example records, contact information, processes or procedures? How will the costs associated with the handover process be dealt with? The existing supplier may expect you to meet any costs it incurs in cooperating with the handover.

Confidential information

The existing supplier should return or destroy and confidential or commercially sensitive information. This will need to be carefully monitored.

Employees

If the existing supplier has any employees who are solely dedicated to providing the services to you there is a risk that TUPE will apply and the employees will transfer to the new supplier.

Intellectual property rights

If the supplier is authorised to use any of your intellectual property rights – for example, standard specifications or company manuals – you should make sure that these are returned and will not be used by the supplier once your agreement finishes.

The position with regards to any jointly developed intellectual property - for example, a specific invention or design that you and the supplier developed together – should be addressed in the initial contract and will vary depending on the circumstances.

Foreign suppliers

Even if your contract is governed by English law, where the existing supplier is foreign there may be local laws that override your contractual terms. These may imply terms into the contract on termination to protect the supplier's position.

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