Demystifying contractual terms for charities: understanding termination rights in charity contracts and avoiding the pitfalls

Explaining the pitfalls of contract termination for charities. The detail is important, and timing can be everything!

Background: how contractual relationships end: key termination scenarios 

It is somewhat unintuitive to be thinking, at the point of entering into a contractual relationship, about what happens if things go wrong and, if needs be, how you would extract yourself from it. However, having an eye to the future – accommodating both the good times and the bad - is an important part of contract negotiation and inception. This means that understanding how a contractual relationship ends, or is brought to an end, is of paramount importance.

How a particular contract comes to an end will depend on its terms. However, a contract might come to an end in a variety of ways, the most common of which are as follows

A contract comes to an end because, without need for any action by any of the parties, it expires on the occurrence of a particular date.

1.  A contract comes to an end because, without need for any action by any of the parties, it expires on the occurrence of a particular date.

2.  A contract is terminated without cause (fault of the other party), because a party to it has a unilateral and unfettered right to terminate it (usually having given a predetermined period of notice to the other party).

3.  A contract is terminated for cause (fault of the other party), because a party to it has a right to terminate the contract upon the occurrence of one or more events in respect of the other party, creating risk for the terminating party (e.g. because the other party  becomes insolvent).

In general terms, charities are highly collaborative organisations that seek to be supportive of the organisations they work with, both in the good times and the bad. They should be applauded for this. However, they need to be careful to ensure that their conduct and behaviour at times where a contractual relationship is souring, can prejudice their rights in relation to that contract at a later date. This is particularly relevant where the right for a charity to terminate a contract for cause (fault) arises, because there is a risk that the charity may forfeit its termination right if it just sits on its hand and does nothing in relation to that right.

As a side issue, we often receive queries from charities relating to the expiry of a contract, or their ability to terminate a contract without cause. Contracts can be drafted in a way which complicates the position for a charity. For example, a contract with a poorly performing services supplier might appear on its face to have an expiry date, but it might be the case that in order for the contract to come to an end on that date, the charity still needs to have served notice in advance otherwise the contract automatically renews for a defined period. Where notice to terminate a contract is required, a charity needs to be aware as to whether the contract stipulates anything as to the form that notice should take, or what that notice should contain. They also need to be aware as to what the contract stipulates by way of how and where notice is served. 

Recent developments - understanding waiver of termination rights: recent case law

URE Energy Limited v Notting Hill Genesis [2024] EWHC 2537 (Comm) involved a dispute in relation to an energy supply contract. Pursuant to the contract, the energy supplier was entitled to terminate the contact in the event that the customer (a housing association) was subject to an amalgamation (merger), and the supplier had not approved that in advance.

The customer underwent an amalgamation without seeking the prior approval of the supplier. However, it did give prompt notice to the supplier and the supplier continued to work with the customer for a period of eight months.

The question for the court was whether the supplier had effectively waived its termination right because, with knowledge of the facts giving rise to the right to terminate, and of the right to terminate itself, it had made a clear choice to continue the contract, and had communicated that choice to the customer.   

What does this mean for charities? - managing competing tensions in contract termination for charities 

Whilst the court found that the supplier had not waived its termination right, because it had not been advised by its lawyers of the existence of the right to terminate, the case raises the issue of charities needing to manage competing tensions when terminating a contract for cause (fault) as follows:

1. Be as sure of your facts as you can, ensure you have considered all potential termination rights, think about the practical consequences of termination and do not rush termination. The greater the uncertainty as to whether a termination right has arisen, the greater the risk that the other party will challenge the termination (effectively arguing that an attempt to exercise it amounts to a breach of contract).

2. Don’t delay. If you do, there is a risk of inadvertently waiving the right. In order to buy some time, it may be sensible to expressly inform the other party that you are aware of the circumstances giving rise to the termination and that you are reserving your rights in respect of it (e.g. to terminate the contract at a later date).

More generally, termination rights are a good example of when good contract management by a charity can pay dividends. That may include maintaining a schedule of key contracts and their key terms, such as when and how do the contracts come to an end in the ordinary course of events, and what KPIs do they contain.   

If you would like to discuss any aspect of this article further, please contact the charities and social economy team on 0113 244 6100.

You can also keep up to date by following Wrigleys Solicitors on LinkedIn.

The information in this article is necessarily of a general nature.  The law stated is correct at the date (stated above) this article was first posted to our website. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.