With the financial pressures on healthcare bodies continuing to increase, we are seeing a growing number of clients seeking to terminate contracts which are not considered cost-effective or affordable.
Although the commercial rationale for terminating those contracts is sound, care should be taken when determining whether termination is viable, as getting that decision wrong could cost more than simply allowing the contract to run.
When considering termination of any contract, it is crucial to first examine whether the agreement contains an express right of termination, and in what circumstances. It may be that the contract provides a right to terminate in the event of a specific breach of contract, for example failure to comply with timescales, or to hit KPIs. If a contract contains such a clause, and you can demonstrate a breach by the other contracting party, the case for termination is likely to be strong.
Our recent experience however is that clients are seeking to terminate where there is no express termination clause but where the other party has committed breaches of contract.
In that situation, termination will only be possible if you can demonstrate that the other party has committed a ‘repudiatory breach of contract’; a breach which is so serious that it allows a party to bring a contract to an end, even though the contract itself does not allow for early termination. The problem is that identifying a ‘repudiatory breach’ in any given case is challenging, and guidance from the courts is usually difficult to interpret in practice.
A recent case will help to explain this demanding area of law:
We were recently instructed by a healthcare body to advise on the proposed termination of a long-term service contract worth around £35 million over 10 years. The contract had only been running for six months, but it was already clear that the services were sub-standard and did not represent value for money. In particular, the service provider was failing to attend site as often as the contract required, was not hitting KPIs and was making a series of smaller administrative mistakes which were causing delays, adding to costs and creating negative publicity for our client. Unfortunately, the contract did not allow our client any right to terminate and our client’s only option if it wished to terminate was to argue ‘repudiatory breach’.
In order to mount a case for ‘repudiatory breach’, we advised that it was unlikely that any of the individual breaches of contract were sufficiently serious to justify termination, but that the courts were willing to consider the cumulative effect of a series of smaller breaches. We therefore worked with our client and embarked on an evidence gathering exercise designed to identify examples of the service provider failing to comply with the contract.
We provided our client with a checklist of areas to keep an eye on, created a spreadsheet which could be populated with examples of breaches and set up an email address which employees of our client could use to notify us of breaches. Ultimately, we identified hundreds of service failings and used those to compile a letter to the service provider notifying it of the breaches and advising them of the legal consequences. That letter, and some without prejudice discussions between the parties, resulted in our client terminating the contract without penalty less than nine months into the term.
When considering whether to terminate, use the following checklist:
- Does the contract contain an express right to terminate?
- If so, does that clause cover our situation?
- If not, can we evidence a breach of contract which is ‘repudiatory’ in nature? Consider the following questions:
- Are we getting any benefit from the contract?
- Is the other party failing to deliver the services?
- Are the services repeatedly substandard?
- Are we incurring wasted time and cost in putting things right?
If the answers to (3) are ‘yes’ then you may have the right to terminate either for one substantial breach or for a series of smaller breaches.
Extreme care should be taken when making this assessment however, because if you get that decision wrong and you terminate, that decision will constitute a breach of contract and you will be liable to compensate the contracting party for all the profit it would have made had the contract run its course.
In the above case, the client managed to terminate without paying any compensation, even though under normal circumstances the penalty for termination was the service provider’s lost profit of in excess of £10 million.
If you are considering whether to terminate a contract, please do not hesitate to contact us so that we can guide you through the process.
This article originally featured in the summer 2015 'healthcare bulletin NHS Confederation focus' .