There are a number of reasons why a business may decide to terminate a supplier’s contract. Usually, these will involve a failure by the supplier to meet the terms they agreed in the contract. They may fail to deliver the service or product, may deliver it late or may achieve only an unacceptably low level of quality.
In financial terms, the supplier can fail, resulting in a bankruptcy or company closure, or there may be a management takeover, resulting in a different set of priorities.
Some business find themselves locked into an expensive contract when cheaper services or products have become available elsewhere. Ending a supplier’s contract can be risky and expensive, with penalties in the contract for early termination. Here are five tips for managing this difficult issue.
1. Check Business Continuity
Make sure you have a new source of supply in place before terminating the existing supplier’s contract.
2. Document Everything
With Contract Management Software from contractswise, you have a ready-made source of documentation on the supplier’s poor performance and will have all the information you need in one place.
3. Review the Contract’s Termination Clauses
Check the Service Level Agreement for details of how the supplier should have performed. The contract may give acceptable grounds for termination and state how much notice you need to give the supplier. If there is no termination clause, you need to give “reasonable” notice, depending on factors such as the length of the contract. Check here for a summary of what the High Court has defined as “reasonable”: http://www.magrath.co.uk/high-court-considers-what-is-reasonable-notice-where-contract-is-silent-on-termination-rights.
4. Resolve Any Outstanding Items
Either party may need to return assets, stock may need to be sent back and third party and subcontractor agreements may need to be renegotiated. There may also be outstanding invoices or other issues such as intellectual property ownership.
5. Consider Taking Legal Advice
Many suppliers will resort to legal action if they feel the contract has been unfairly terminated, and it may be advisable, if it is a large contract, to have the whole termination process professionally handled by a solicitor.
The best time to consider how to end a supplier contract is before it is agreed. Make sure that any new contracts allow the business to terminate and are explicit about grounds for doing so, notice periods and other details.