Early termination of IT contracts

IT contracts are often on the receiving end of bad press, particularly in relation to public sector IT systems. Media reports often lament spiralling costs, delays in delivery and, quite often, the failure of the IT system to perform the tasks it was commissioned for. Many IT contracts will contain a term allowing for one party to terminate the contract prior to its fulfilment, often in consideration for a set sum of money. Sometimes, however, a party will be unwilling or unable to pay such a sum and will instead rely on other terms in the contract to justify early termination.

A contract may be prematurely ended by a party under a set of pre-defined circumstances incorporated into the contract. These might include the other party becoming insolvent, committing a material breach which is incapable of remedy or where remedial action in respect of a breach is not carried out within a predefined time limit.

As with most contracts, the devil is in the detail and it is vital that a party takes the time to consider the precise wording of any termination clauses, together with the implications of such action. When considering, for instance, whether a breach can be properly deemed to be material, due consideration must be given to the commercial impact of the breach and the circumstances in which it arose. The agreed licensing terms will also need to be reviewed, as the commissioning party will want to ensure it has the right to commission a third party to continue work on the system once the contracted party is released from its obligations.

Where a party is unable to rely on the terms of the contract to terminate the contract, it may be possible to terminate under common law provisions. This will, however, require the terminating party to demonstrate that the breach was sufficiently serious to justify termination, which is difficult in many circumstances. The traditional common law test to gauge whether a repudiatory breach has occurred is, in the words of Lord Wilberforce in his judgment in The Nanfri [1979] AC 757, to determine whether a party has been “deprived of substantially the whole benefit of the contract” to the point that it would be unfair to hold them to the contract. In circumstances where one party is anticipating a breach from the other party, the point to be determined is whether one party has demonstrated it intends to “abandon and altogether refuse to perform the contract”, as per the judgment in Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168.

In any event, relying on a repudiatory breach is never an ideal situation for a party to find themselves in and such action should only be relied on as a last resort. In the event the other party affirms the contract (i.e. does not accept that it has come to an end) then that party may be able to sue for damages stemming from the terminating party’s actions.

In summary, termination provisions should be given due care and attention at the outset and the importance of expert advice from an experienced solicitor at early stage is crucial.

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