Does Failure to Pay Trigger a Termination Right?

Failure to pay may seem like grounds for termination, but this isn’t always the case. Acting prematurely could backfire, potentially putting you in breach of the contract.

Do You Have a Contractual Right to Terminate?

In cases of late payment, parties typically have two legal routes to consider:

  • Repudiatory Breach
  • Material Breach

However, neither guarantees an automatic right to terminate the contract immediately following a late payment.

Repudiatory Breach

Under English and Welsh law, termination for repudiatory breach requires a serious violation that deprives the innocent party of the contract’s primary benefits. Missed payments rarely meet this high threshold unless they represent the contract’s total value or fundamentally undermine its purpose.

For example, in OCA v. Novans, the High Court ruled that a missed £200,000 payment was insufficient to justify termination in a £14.4 million contract where £9.6 million had already been paid. OCA’s willingness to resolve the issue by offering escrow further demonstrated no intent to abandon the agreement.

Material Breac

Material breach clauses, often found in contracts, allow termination for substantial breaches but typically come with specific conditions, such as:

  • Notice Requirements: The breaching party must be informed of the issue.
  • Remedy Periods: The breaching party must be given time to correct the problem.

For instance, in Dalkia v. Celtech, termination was justified after three consecutive months of non-payment under a material breach clause.

Pro Tips for Suppliers and Customers

Suppliers:

  • Define non-payment over a specified amount as a material breach.
  • Include provisions allowing suspension of services for non-payment.
  • Tie payments to milestones like quality checks.
  • Require a parent company guarantee from subsidiary customers.
  • Mandate insurance coverage for unpaid amounts.

Customers:

  • Make timely payment a clear contractual obligation.
  • Avoid making time a condition unless essential.
  • Include provisions suspending penalties for disputed payments until resolved.

Considerations Before Triggering Termination

Wrongful termination can itself be a breach, leading to significant costs. Carefully assess:

  • Required notice periods.
  • The severity of the breach—whether repudiatory or material breach offers stronger grounds.
  • Whether affirming the contract might be more beneficial.
  • Any ongoing insolvency issues affecting the parties.

Conclusion

Whether termination is justified depends on the specific terms and circumstances of the contract. Thoughtful drafting and a careful analysis of the situation are essential to safeguarding your legal and commercial interests.

For further advice, contact us at 029 20 34 55 11 or commercial@berrysmith.com.

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