Terminating supplier contract for poor performance

This is a common and important question, and the answer depends on several things, most of which will come down to what your contract actually says and what exactly the supplier has been doing wrong.

Legal position:

Under English law, your right to terminate a supplier contract generally arises in one of three ways.

1. Express termination rights in the contract. Most well-drafted commercial contracts include clauses that allow termination for cause, such as material breach, persistent breach, failure to meet service levels, or insolvency. Some also include termination for convenience on notice. The first thing to do is read your contract carefully and look for any termination clause, breach or default provisions, service level agreements with consequences, and any cure or remediation periods that must be given before termination is allowed.

2. Termination at common law for repudiatory breach. Even without an express clause, you have the right to treat the contract as at an end if the supplier commits a repudiatory breach. This means a breach that is sufficiently serious to go to the root of the contract, depriving you of substantially the whole benefit you were intended to receive. A pattern of repeated failures can amount to a repudiatory breach, but this is a high threshold and the assessment is fact-sensitive. The risk here is that if you terminate and a court later decides the breach was not repudiatory, you will be the party in breach for wrongful termination, potentially exposing you to a damages claim.

3. Termination for breach of a condition. If the term the supplier has breached is classified as a "condition" of the contract, rather than an intermediate term or a warranty, any breach of it entitles you to terminate regardless of how serious the consequences are. Whether a term is a condition depends on the contract wording and the surrounding circumstances.

Key practical considerations:

Before you terminate, think carefully about the following.

What does the contract require you to do before terminating? Many contracts require you to give the supplier written notice of the breach and a set period to remedy it. If you skip that step, you risk being in breach yourself.

Have you documented the failures? Good contemporaneous records of each failure, including dates, what was promised, what was delivered, any communications, and any losses you have suffered, are essential. If the matter later becomes a dispute, your evidence will matter enormously.

Have you been accepting the breaches? If you have continued to accept performance or pay without objection over a long period, you may be found to have affirmed the contract and lost the right to terminate for those earlier breaches. This does not mean you can never terminate, but it means you should not sit on the issue indefinitely without raising it.

Are there any consequences of termination built into the contract? Some contracts include exit provisions, minimum terms, early termination charges, or obligations to return property or data. Check these before acting.

What is your alternative supply position? Practically, you need to make sure you have a plan for what happens after termination, particularly if the supplier provides something critical to your business.

Sensible approach:

1. Review the contract in full, particularly any termination, breach, cure, and notice provisions.

2. Compile a clear written record of every instance where the supplier has let you down, with supporting documents and correspondence.

3. Write a formal letter to the supplier setting out the breaches, referring to the relevant contract terms, and either giving notice to remedy within the required period or, if no remedy period applies, giving notice of termination. Keep the tone professional and factual.

4. If the contract requires a cure period, allow that period to expire and only terminate if the supplier fails to remedy the issues.

5. If you want to preserve the relationship or are unsure of your legal ground, consider whether a negotiated exit or variation of the contract might be a better route, as this avoids the risk and cost of a dispute.

6. If the sums at stake are significant or the contract is complex, it may be worth having someone review the contract and your proposed termination notice before you send it, because getting it wrong can be expensive.

One important warning:

The most common mistake businesses make is terminating in the heat of the moment without following the contractual procedure. Even if the supplier is clearly at fault, a procedurally defective termination can hand them a claim against you. Take the time to get it right.

If you can share the relevant contract terms or describe the specific failures in more detail, I can give you a more targeted view of where you stand.