How do I negotiate early contract termination?

Negotiating early contract termination and exit is challenging and emotions often run high. If you have concerns about how to negotiate an early contract termination, there are steps you can take that will smooth the process and increase your chances of a successful outcome. If your strategic supplier has breached both its express contractual KPIs and its implied ‘Expert Responsibilities’, and you have had the evidence independently validated, then the negotiation process will be much swifter.

How Do I Negotiate Early Contract Termination?

In this FAQ response we guide you through the following considerations:

Preparation for your negotiation.
How to communicate with your supplier:
- Letter to the supplier.
- Meeting(s) with your supplier.

As this article is just one area of consideration for an early contract termination, further resources to guide you have been supplied at the end of the article.

Preparation for Your Negotiation

Understand your audience. You need to understand the attendees you will be presenting your arguments to. What are their own interests in dealing with this dispute? Research this before you get into the negotiation meeting with them.

Thoroughly prepare your case. Having gathered and validated your evidence, be clear on your primary purpose for presenting your case and every point you want to make so that you are not easily side-lined during the negotiations. Ensure each point is in context and be aware of how your points interact, so you don’t have conflicting points that make you look ill prepared. Rehearse your arguments with your colleagues. Play devil’s advocate and counter-argue each of your evidence points and causes of service failure. This will help you anticipate any objections or rebuttals.

Know the difference between valid and sound arguments. When you negotiate an early contract termination and present the strategic supplier with evidence of poor performance, you must know the difference between valid and sound arguments.

A valid argument is when there is a point of merit to be discussed.
A sound argument is when there is a valid point of merit but you also have irrevocable evidence to support it.

Be careful that you understand what is irrevocable evidence. It is not that you are experiencing a symptom. Many issues can contribute to a symptom, including those that have no bearing on your strategic supplier.

Consider your fall-back position. Give though to your tactics and timeframes if the strategic supplier does not accept responsibility for the service failure. If the strategic supplier plays ‘hard-ball’, what is your plan ‘B’ to achieve an early settlement?

How to Communicate with Your Supplier

Communicating your intention to terminate has two main parts – a pre-termination letter to your strategic supplier and follow-up meetings to agree the termination and exit process.

Pre-termination letter to your strategic supplier

The letter to the strategic supplier sets out the issues you’ve experienced with its service levels and performance. You should have a good handle on these issues, as they should already have been provided to your strategic supplier through your contract escalation process.

The letter should clearly indicate that you are going to terminate the relationship, but also state that this particular letter is sent ‘without prejudice’, so you and the strategic supplier can try to reach a practical working agreement for the termination and exit.

The letter should contain the following information:

The context – the business outcomes you expected at the outset of the relationship, ideally cross-referenced to the contract schedules, if they were correctly documented.
What has gone wrong, including what you believe to be the causes, as well as the symptoms.
The effect on your organisation of the strategic supplier’s failure to achieve your business objectives.
The work you have done to evidence that the service is not suitable and is causing fundamental operational, financial and reputational damage to your organisation.
What you want and why you want it. Outline any costs you want to claim against the strategic supplier for unachieved outcomes and for the cost of engaging a replacement strategic partner or bringing the services in-house (or a combination of both). These costs should have been independently forensically assessed so they are, and are perceived to be, legitimate and not exaggerated.
The timeframes by which you want to exit from the agreement.
The dates when your senior officers will be available to meet the strategic supplier and agree a final termination date, exit process and timeframes.
A timetable for your strategic supplier to respond and the consequences if it does not. Note that these dates must be ‘reasonable’ and take account of statutory holidays.

Meetings with your supplier to agree the termination and exit process

When you meet your strategic supplier, ask it to ‘replay’ to you its understanding of what you perceive the issues to be. Also ask the strategic supplier if there are mitigating factors as to why it has not performed. This will usually involve why it thinks your staff have prevented it from dealing with the issues, which may or may not have merit. Ensure that the strategic supplier can provide unequivocal and documentary evidence to support its argument. If it is only verbal or an assumption, that is an opinion, not evidence.

You should then agree the timeframes and milestones for an early termination and less-contentious exit from the agreement. You should explain to your strategic supplier that if this can be achieved:

Costs will be lower for all concerned.
The strategic supplier’s poor performance will remain confidential and it will avoid bad publicity.
The strategic supplier can target business with clients that are more suited to it.
You can get on with running your business.

Ideally, during the meeting you should draft and agree a ‘terms of exit’ document that takes precedence within the existing agreement. Although not an exhaustive list, this should include:

The date the termination will take effect from.
The exit points you have agreed, how and by when.
What behaviours by both parties are considered reasonable during the exit process, that you both agree do not inadvertently constitute or imply that the relationship has not been terminated.
The ‘business as usual’ transition process and the support the strategic supplier will give you during the transition, including bringing alternative strategic suppliers or your in- house team up to speed on the services and delivery mechanism.
The costs that you and the strategic supplier have agreed in full and final settlement to remedy the situation. Full and final settlement should only activate if the strategic supplier discharges all of its obligations through each milestone, otherwise all bets are off.
Confidentiality between both parties, but only if the resolution is complete and to your satisfaction. The trigger point can be agreed through a third party to avoid future disagreements.

Controlling emotions during the meeting. When you are in a difficult and contentious situation, meetings sometimes do not go as you expect. You can touch a raw nerve with your strategic supplier or feel that the strategic supplier isn’t showing you enough empathy for your difficulties. In these situations, you are better off leaving the room to compose yourself, then returning. Displaying your emotions can work, but you should only use them when you are on the front foot and have strong evidence.

Confirm the termination in writing and in line with the written contract terms. Any formal communication with the strategic supplier that confirms termination is a very significant step. You need to be absolutely certain that your behaviours, evidence and termination procedure all align with the written contract terms. If your termination procedure isn’t aligned, your strategic supplier can claim that you have wrongly repudiated (i.e. wrongfully discharged your obligations under) the contract. This can open you up to a significant financial damages claim.

Conclusion

Setting out your arguments clearly, with solid and independently validated evidence, will help your strategic supplier to understand that it will cost them more to resist the termination and exit than it will to comply, agree and support the process.

Always be sure to align your termination and exit negotiation strategy with the written contract terms, and always seek independent and qualified advice in respect of formal termination. Damages for adopting the wrong termination and exit procedure can be costly.

Want to Learn More?

This is a high-level response to the question of “How to negotiate early contract termination of a strategic supplier contract?”. You may also find value in the associated FAQ responses below:

Need Some Advice?

If you are considering how to negotiate an early contract termination and need some assistance or would see value in a confidential (no obligation) chat about your project, call 0845 345 0130 or you can book a call directly with Allan Watton (BPG’s CEO) using the calendar feature here.