The importance of well drafted suspension and termination rights – you don’t realise how important they are until you need them!

Those of you who deal with contracts might enjoy this update from informed Lawyers (ACN 635 862 145). informed Lawyers is the law practice owned by IBL Ltd, the company behind Planned Cover:


What’s the first clause you look at to make a preliminary assessment of a client-drafted contract?

The fee schedule and payment claim procedure, perhaps? Checking for a limit of liability clause? For some practices, it might be retaining copyright. For lawyers, it’s often glancing over the general indemnity clause or the main performance clauses as a barometer of overall risk allocation philosophy.

It’s usually not the termination clause, sitting near the end of the contract. And yet, in a worst-case scenario, when you want to extract yourself from one of those rare projects that is fundamentally flawed or badly managed, it’s the termination clause that will determine whether you can walk away, or have to remain shackled to a troubled project.

In our recent webinar for ACA, Felicity Dixon and Wendy Poulton on behalf of informed Lawyers (ACN 635 862 145), looked in depth at termination clauses and suspension rights, as well as ending contractual relationships on good terms.

Suspension

Most consultancy agreements contain termination clauses which give parties the right to terminate in certain circumstances. However, fewer entitle a party to suspend the performance of its obligations. Why is this?

Suspension under consultancy agreements is possible only if provided for in statute or under the contract. Suspension leaves the contract intact (unlike termination which brings the contract to an end). Courts consistently refuse to recognise a common law right to suspend a consultancy agreement. Therefore, if a consultant wishes to have the right to suspend performance, and there is no contractual right, then the party can only rely on statutory suspension rights such as those within Security of Payment legislation (which must be followed vigilantly). For this reason, it is incredibly important that any consultancy agreements you agree to contain a clearly drafted clause allowing the right to suspend in certain circumstances. Such as, in the instance of unpaid fees where it is not desirable to terminate the consultancy agreement.

Termination

Termination clauses on the other hand are standard within consultancy agreements, and usually in favour of the client alone in many instances. Contracts can be terminated in a number of ways and the manner in which a termination clause is drafted and how the contract itself is terminated have a vital impact on the costs associated with any such termination. This is because incorrect termination (or suspension) can give the other party a right to a claim for damages for breach of the agreement, repudiation or frustration relating to loss resulting from the termination as well as other project losses that the “innocent” party tries to recover.

We suggest that it is best practice to draft these clauses meticulously setting out, expressly and clearly, your termination and suspension rights, the related events and procedures. Having this contractual right avoids confusion, sets clear avenues of how these matters will be conducted between the parties and avoids the murky legal concepts of implied and intermediate terms, repudiation and frustration which mostly arise when matters are not clearly expressed or addressed within the consultancy agreement and/or in the event of the commercial relationship going south.

What to Look For

The ideal contract sets out a clear termination pathway, as well as the alternative option of temporary suspension of services, and provides:

• The client can only terminate you for a material breach, insolvency, or if the project does not proceed, and not simply for “convenience”;
• The client must give you notice of any alleged breach and a reasonable period (at least 14 days) to correct it before termination can occur;
• As a minimum, you are paid for work done up termination. Plus, for terminations that are not your fault, also a small percentage of the fee applicable to unperformed services, to cover your costs, handover, and commercial losses;
• As a minimum, you can terminate for the client’s breach of the consultancy agreement, plus specifically for non-payment of fees properly claimed by you; and
• You have the alternative option to suspend services until outstanding fees are paid, followed by the right to terminate if they are not.

Once these clauses have been considered and clearly drafted, they must be complied with to avoid wrongful termination. You will need to identify contractual obligation, identify breach of that obligation, consider whether the breach triggers a termination right (ie unpaid fees), then follow the required termination procedure.

How We Can Help

informed Lawyers (ACN 635 862 145) would be pleased to help with clearly and succinctly drafting or re-drafting these clauses, or in reviews identifying all the legal risks in your contracts. We can also draft pro forma contracts for your office, and help you in contract negotiations with your clients.

Operating since 2020, informed Lawyers is a subsidiary of IBL Ltd, the company behind Planned Cover. We now havelawyers based in Sydney and Melbourne, providing legal advice across the country.

In more good news, Planned Cover clients receive 20% off informed Lawyers’ prices, so get into contact with us today at general@informedlawyers.com.au should you want more information.

Felicity Dixon
Senior Legal Counsel
informed Lawyers Pty Ltd (ACN 635 862 145)

This article is only general commentary. It is not tailored to your individual needs or those of your business, nor is it intended to be relied upon as legal or insurance advice. For such assistance you should approach your legal and/or insurance advisors.