Contractor Doctor: Can I escape a contract for services with no termination clause?

Dear Contractor Doctor,

I am a financial IT contractor working via an agency for a client in London on a four-month contract. For personal reasons, I need to terminate the contract two months early. However, when I tried to hand in my notice, I discovered that the contract was very clearly a business-to-business contract for services. Its terms stated that I had no notice period, no termination clause and no right to end the contract unless I had not been paid or was unable to access my work premises.

My agency has told me that, although ideally it wanted to hold me until the end of my contract, it would be willing to let me go if I worked a 20 day notice period. My client has even said that I can work out the notice period as unpaid ‘holiday’, if that helps me. The problem is that I cannot work 20 days notice due to my personal circumstances, so the agency is also threatening to withhold outstanding payments if I don’t work the notice period.

Can I get out of a contract for services with no termination clause?



Contractor Doctor says:

“Unless the agency agrees to terminate the contract early, the contractor will be in breach of contract,” explains Roger Sinclair of contractor legal specialist Egos. “That means Claire would be exposing herself to a claim for damages by the agency if she fails to provide her company’s services for the entire duration of the contract.”

And according to Sinclair, because the contractor has a purely business-to-business contract for services, which makes it clear that the contractor is not under the control of the client, the Conduct Regulations will not be available to help her out.

“However, as it is the contractor’s company that has the obligation to provide the services, and not the contractor personally, if the agency won’t negotiate then a potential solution might be for Claire to provide a substitute,” adds Sinclair.

If you enter into a contract, you must honour it

In Sinclair’s experience, it is not unusual for contractors to unwittingly enter into a contract that has no express rights to give notice to terminate. But, except to the extent that the contract comes under other legislation (such as the Conduct Regulations) that might take precedence over contract law, a contract is a binding legal agreement between the contractor’s limited company and the agency or client. The contractor’s limited company is obliged to fulfil the contract.

The contract expressly states that:

‘This Agreement shall begin on the Commencement Date set out in the Schedule and shall remain in force until the earliest of the date the Project is completed, or where the Project is for a fixed term, on expiry of that term.’

The ‘Project’ is separately defined in the contract.

Claire’s contract schedule specifies a fixed term. If the project is incomplete, even if the client is happy for Claire to leave early by taking the notice period as unpaid holiday, she won’t be delivering her services over the entire term according to the contract she has with her agency.

The wording of the contract does suggest that if the project as defined in the contract is in fact completed earlier than the contractual end date, then she will have fulfilled her contractual obligations.

Whether the project as so defined is completed will be a simple question of fact. If Claire and the client were to conspire and pretend to the agency that the project was completed (and so to let Claire go early), when in fact it remained incomplete, the agency might have something to say about that.

Failing to deliver the services for the entire term is breach of contract

“Failing to deliver the services for the entire period specified in the contract puts a contractor’s limited company in breach,” continues Sinclair. “The innocent party, in this case the agency, can claim for damages that would put them into the position they would have been in if not for the breach by the contractor’s limited company, and if the contract had been performed for the full term.”

Obviously, the agency cannot physically force the contractor to complete the contract, but it might sue Claire’s limited company for its losses – such as its loss of margin for the unworked period. Although it would not necessarily be entitled to do so, it might also withhold her unpaid fees to compensate it for the financial loss. Should that happen, Claire could then sue the agency for not paying her invoices for work she has completed.

And the client’s offer to allow Claire to end the contract early by taking ‘holiday’ would still leave her in breach. Claire’s contract is with the agency and not the client, so any agreements she might make with the client would not be relevant to or affect her agreement with the agency. The contract makes no provision for absences for holiday. And because the contract is clearly a business-to-business contract for services, the contractor would of course have no statutory holiday entitlements under employment law.

Clearly, it could all get expensive, and so alternative solutions should be explored that would suit all parties.

Negotiation or provision of a substitute

In fact, offering to waive some of her fees to compensate the agency for its loss of margin might be a negotiating ploy Claire could use to try and get the agency to back down. However, Sinclair stresses that non-payment by the agency and Claire’s breach of contract are two separate issues in law.

If the agency is not amenable to a negotiated settlement, then an alternative solution might be for Claire to offer to supply a substitute

Roger Sinclair, Egos

“If the agency is not amenable to a negotiated settlement, then an alternative solution might be for Claire to offer to supply a substitute,” suggests Sinclair. “In this scenario, her business-to-business contract for services works in her favour, as her personal services are not specified in the contract. It would therefore seem reasonable that she could supply a substitute.”

Simply walking away is not an option

The worst-case scenario, in which Claire walks away from the contract and the agency refuses to pay her last month’s invoice, could get messy. Claire’s limited company is in breach, so the agency can sue for lost margin, but probably not for as much as Claire’s last month’s worth of fees. Claire has presumably received sign-off from the client, and so could sue the agency for non-payment of the invoice.

Sinclair warns against contractors persuading their client to terminate them early: “It is dangerous in this context to attempt to influence a third party, such as the client, to terminate a contract early. Should the matter come before the courts, this might be open to challenge by the agency.”

Why the Conduct Regulations don’t apply

As Sinclair explains, if the Conduct Regulations applied to Claire’s engagement with the agency, then according to regulation 12 of the Conduct Regulations, the agency would be obliged to pay Claire her fees for work she has performed for the client. But Claire has explained that her contract is clear about the nature of the relationship between the contractor, the agency and the end-user client.

“The Conduct Regulations only apply when the contractor works under the control of the client,” he adds. “Claire’s contract is clearly a business-to-business contract for services, with no personal service implied, and even goes so far as to specifically state that Claire is not under the control of the client.

“When there is no termination or notice clause in a contract and the contractor wants to exit early, the realistic options are to negotiate a settlement or provide a substitute,” says Sinclair. “Alternatively, the contractor could rearrange their personal circumstances to ensure that they can complete the entire project as originally agreed and required by the contract; after all, the contractor did freely enter into it.”

Good luck with your contracting!

Contractor Doctor

Published: Thursday, June 16, 2011

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