Workshop: Advising on walking out of a contract

The deteriorating economic climate is forcing a greater number of business owners and entrepreneurs to walk away from deals, leaving practitioners facing this question: how do you advise a client who no longer wishes to proceed?

Whether it’s a client who has decided to cancel the purchase of a new car, a factory refurbishment or even a planned social function the problem the client faces is a worrying one – can he walk away from the contract perhaps simply losing a deposit which has been paid, or will he run the risk of being sued for the balance of the price?

Much will depend upon the actual wording of the contract but there are some key questions to address which may affect the outcome:

? When dealing with a contract between two businesses, where the contract contains a requirement to pay a specified sum on voluntary termination this is not caught by the rule against penalties, so care has to be taken in reviewing the terms and conditions to see whether such a clause exists.

? Look to see whether the clause requiring the payment is triggered by a breach of contract by the potentially liable party, or by some other event, the former may well result in liability while the latter may not. This is ultimately a matter of contract interpretation so again review the agreement carefully.

? Look to see if the contract expressly provides for the payment of a specified sum, is the sum classified as liquidated damages (recoverable) or a penalty (not recoverable). Yet again it’s really a question of interpretation on facts of each case judged at the time of making the contract.

? You can be fairly comfortable if your client is terminating because the other party is already in breach or demonstrates that they will not be able to fulfil their part of the bargain but ensure the facts are adequately documented.

? Don’t overlook the Unfair Contract Terms Act 1977 (UCTA) which requires one to address the test of unreasonableness.

?While the Act deals with terms or clauses concerned with attempts to exclude or limit liability, it could be worth arguing the point. While the above applies to a B2B ?contract the position of the parties may well be different if it’s a B2C contract – say someone deciding not to proceed with an impulse purchase and starting to regret it. Here, consumer protection law then comes into play.

Cancellation rights

Check with the client to see whether it is a so-called doorstep selling contract, defined as one conducted away from the seller’s place of business. In this case the seller must provide a consumer with the right to cancel within seven days without even having to give a reason. No contractual provision can circumvent it.

With a huge upturn in online transactions bear in mind the distance selling regulations, which override any contract restriction preventing a seller from cancelling a contract entered into by distance means, e.g. mail order, telephone, text or online. Generally the right must be executed within seven days or receipt of goods; although if the goods were bespoke then the rights are severely restricted.

The general principle remains that the loss which can be recovered is that which could have been in the reasonable contemplation of the parties as a probable result of a breach when the contract ?was made.

Whether a seller will press home a potential claim for the balance of the purchase price may depend on whether he has the stomach for a fight. When acting for a buyer who has changed his mind, a thorough investigation into the terms of the contract and the actual facts of the case could pay dividends and save your client from being significantly out of pocket.