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how do i get out of a bad deal?

February 2007

At some point in the life cycle of a company, managers will enter into a commercial arrangement which turns out to be unprofitable or which restricts the growth of the business. Rather than continuing to perform the unwanted contract until it expires, the company may consider ways in which the contract can be challenged or look to minimise the risks of walking away from a bad deal.

A court will not overturn an arrangement made by two companies if it represents a bad commercial deal for one of them; on the contrary, if there is an agreement between the two (whether written, oral, or one which can be inferred by conduct) then a court will look to enforce it. However, if no valid agreement is shown to exist, the parties are not bound.

It is essential to identify on what terms the arrangement has been made. Often, each party to the arrangement will try and insist that its standard terms will apply. This may degenerate into a “battle of the forms” with each party sending the other its own Ts & Cs with each piece of correspondence. If no work has begun at this stage then, arguably, there is no contract as neither party has accepted the other's terms.

Even if the terms of the contract have been agreed, if they are expressed so unclearly that a court could not enforce the agreement, there will be no binding contract.

If the deal is a contract to negotiate in good faith or, essentially, an agreement to agree at some point in the future, it will not bind the parties. Also, if the contract was signed by a person without authority to bind the relevant company, it will not be enforceable against that company (save that the contracting party is entitled to believe that such person has authority, unless it knew to the contrary).

On the basis that a binding contract exists, a party could look to exit the arrangement (or, at least, open the way for renegotiation) in a number of ways:

terminate the agreement on reasonable notice (if the contract does not expressly prohibit this or provide for a mechanism to terminate on specific notice).
set the contract aside if the other party is in serious breach of any of its obligations.
discharge the contract on the basis that there has been a change to a fundamental aspect of the contract which renders performance impossible (where such event is not the fault of either party).
challenge the validity of the contract where both parties made a mistake as to a fundamental aspect of the agreement (or one party made such a mistake which the other knew about).
if it breaches competition law (for example, a distribution agreement where a resale price is fixed).

An alternate strategy is to simply refuse to perform the contract. Such refusal will usually amount to a breach of the agreement and give the other party a right to claim for damages. In such circumstances, any exclusion or limitation of liability clause in the contract will be key. Although a claim for damages due to a breach can, in theory, be successful even if the party bringing the claim has not suffered any loss or is unable to show the amount of his loss, only nominal damages would be awarded. It would rarely be advantageous for the claimant to bring such a claim, given that he will have wasted time and expense on the litigation process.

Even if the party bringing the claim can show he has suffered loss, there are a number of rules which seek to limit the damages he may claim:

damages cannot be claimed in respect of losses which did not arise naturally out of the relevant breach (or where not reasonably contemplated by the parties at the time).
the claimant must take reasonable steps to avoid loss and if he is able to do so, he cannot claim for the avoided loss.
any contract which seeks to impose a fixed financial penalty for breach may be unenforceable unless the amount is a genuine pre-estimate of the loss which will be suffered.

In many cases, then, agreements may not be as binding as the parties first believe. Even if the agreement is inescapable, it can be very useful to be able to accurately assess the potential costs of walking away from a bad deal and minimise the damage if attempts to renegotiate are floundering.

If you have any questions or would like to discuss anything in this article in more detail, please contact Andy Moseby at Kemp Little LLP on 020 7600 8080.