Contractor Accountant

The UK's leading contractor site. 200,000 average monthly visitors.

Support ContractorCalculator

Contribute Membership

Terminating a contract when you have no termination or notice clause

Contractors have limited options when trying to exit a contract that has no notice or termination clause. By leaving the contract with the agency or client early, contractors run the risk of exposing their business to a claim for damages for breach of contract.

According to Roger Sinclair of contractor legal specialist Egos, where the contract does not give the contractor the right to give notice, often the only way to end a contract prematurely is through a negotiated settlement or by offering a substitute to complete the work, if the contract allows it.

“A client, who may only be interested in seeing the project succeed, could be persuaded to accept a substitute who has the rights skills and experience to complete the work,” says Sinclair. “Alternatively, it might be possible to come to a settlement with the agency, if it is prepared to accept compensation from a contractor for the margin it would lose as a result of a contract ending early.”

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 means what it says and should be treated as a binding legal agreement between the contractor’s limited company or umbrella company and the agency or client. In other words, the contractor’s limited company or umbrella company is obliged to fulfil the contract.

“Where the contract does not give the contractor the right to give notice, failing to deliver the services for the entire period specified in the contract would on the face of it put a contractor’s limited company or umbrella company in breach,” continues Sinclair. “Where there is a breach of contract, the innocent party can claim for damages that would put it into the position in which it would have been, but for the breach.”

Obviously, the contractor cannot be physically compelled to complete the contract, but the agency might sue the contractor’s limited company or umbrella company for its losses, such as its loss of margin for the broken period. If the contractor’s breach put the agency in breach of its own contract with the client, there could potentially also be a claim for a significantly much larger sum if the impact of the contractor’s early departure resulted in the client losing money, or having to pay over the odds to bring in a replacement contractor at short notice.

Withholding fees is unlikely to be an acceptable solution

Although it would not necessarily be entitled to do so, the agency might also try to withhold fees owed to the contractor for work completed but not yet paid. Rather than solve the issue, non-payment by the agency may further exacerbate an already tense situation.

“Breach of contract through failure to complete the contract and non-payment by the agency or client are, in the eyes of the law, two completely separate issues,” Sinclair says.

“If the contractor’s limited company or umbrella company is in breach, it can be sued by the agency for damages. On the other hand, the contractor has delivered services signed off by the client for which payment should be made, and the contractor’s limited company or umbrella company could sue the agency for non-payment of invoices.”

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

Negotiating a settlement or a substitute

Offering to waive some fees to compensate the agency for its loss of margin, or to cover any additional cost incurred in hiring a replacement at short notice, might be a negotiating ploy the contractor could use to try and exit the contract without legal action.

“If the agency or client is not amenable to a negotiated settlement, then an alternative solution might be for the contractor to offer to supply a substitute,” suggests Sinclair. “This could be a reasonable solution if there was a substitution clause in the contract and the contractor was not contractually obliged to provide his/her services personally.”

Breach of contract through failure to complete the contract and non-payment by the agency or client are, in the eyes of the law, two completely separate issues

Roger Sinclair, Egos

The worst-case scenario, in which the contractor walks away from the contract and the agency or client refuses to pay the last month’s invoice, could get messy. The contractor’s limited company or umbrella company would be in breach by not completing the project, and this could result in three, possibly more, legal actions:

  • The agency can sue the contractor for lost margin
  • If the agency was as a result in breach of its own contract with the client, the agency might face a claim for losses sustained by the client (possibly any additional cost of a replacement), and the agency would probably be entitled to pass this claim on to the contractor.
  • The contractor could sue the agency for non-payment of the invoice for time actually worked.

When the Conduct Regulations might apply

As Sinclair explains, if the contractor is contracting via an agency, and has not specifically opted out prior to being introduced to the client, then the Conduct Regulations will apply. And if the regulations do apply, then according to regulation 12, the agency would be obliged to pay the contractor for work performed for the client, without deduction, so no withholding – although this would not prevent the agency from bringing a separate claim for damages.

“However, the Conduct Regulations only apply when the contractor works under the control of the client,” he adds. “So, if they do wish to benefit from the regulations, contractors should examine the wording of their contracts before signing them. If the contract is clearly a business-to-business contract for services, with no personal service implied, and if the contractor is not working in any way under the control of the client, then the Conduct Regulations cannot be used to prevent the agency from withholding.”

Avoid persuading clients to terminate early

Sinclair warns contractors against persuading their client to terminate them early: “If the contract is via an agency, then it may 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, such actions might be open to challenge by the agency.

“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 his/her 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.”

Published: 13 September 2011

© 2019 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.

IR35 Shield for Business