Times are tough – terminating a contract early and dealing with late payments

Times are tough – terminating a contract early and dealing with late payments


As economic conditions alter, it sometimes becomes necessary for businesses to reassess their existing trading arrangements. Two areas on which we are regularly asked to advise are whether it is possible to exit a contract early and how to deal with late payers. This article considers the options.

The early exit route

Half way through the contract term, a business considers whether to renegotiate early to reflect the pricing pressure it is under.

* The legal position

It is not possible to break or renegotiate a contract before the end of the contract period, unless it allows you to. Early renegotiation clauses are unlikely. More likely are clauses that allow for price variation as supplier costs fluctuate.

Contracts do often include a right to terminate early. This could provide leverage to open negotiations. Common termination clauses operate after a breach of contract or the insolvency of one party. Termination may also be possible by giving notice. Consider whether any of these rights can be triggered.

* The commercial position

Ultimately it will be necessary to approach the other party in order to renegotiate. The aim should be to maintain a good relationship with them. Where contracting parties are anxious to preserve their relationship, a sensible commercial discussion may be possible.

If early renegotiation is not possible, action can be taken at renewal time. Termination rights, flexible pricing clauses or pricing linked to minimum orders could be negotiated at this time.

Strategies for renegotiating and, possibly, exiting unprofitable contracts should only be carried out with legal help. The repercussions of getting it wrong are serious and could have a negative effect on the profitability of your business.

Dealing with late payers

A business’s terms and conditions require payment within 60 days. Despite this many customers pay late, with the resulting negative impact on cash flow.

* The legal position

There is an EU Directive in place intended to help with this very scenario. The Directive creates a mandatory 30 day period for most payments. In addition, it sets a statutory rate of interest at 8% above base rate. Defaulting customers are liable to pay compensation and reimburse reasonable recovery costs, if they have to be pursued for payment.

* The commercial position

In practice, it is hard to enforce these rights against important customers. Even so, it is important to put down a clear marker in relation to payment periods and interest at the outset.

Be consistent in pursuing late payers and debtors. Terms should be amended to require payment within the shorter 30 day period. Remember to ensure that your existing customers receive a copy of any revised terms, with the changes highlighted.