"Small firms pressured into long business support contracts" – but whose fault is that?

What is a liquidated damages clause?

A liquidated damages clause is a pre-estimate of the loss that a party will suffer if the other party breaches the contract. It is a genuine pre-estimate of loss, not a penalty.

The Citation Group's contracts contain a liquidated damages clause. If a business cancels the contract early, it has to pay the remaining fees for the rest of the contract term.

Is the clause enforceable?

The Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 reformulated the test for penalty clauses. The question is whether the clause is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

The Citation Group's liquidated damages clause is likely to be enforceable. The remaining fees are a genuine pre-estimate of the loss that the Citation Group will suffer if a business cancels the contract early.

But whose fault is it?

The businesses that sign the Citation Group's contracts are not without fault. They should read the contract before signing it. They should understand what they are signing up to.

If they don't understand the contract, they should take legal advice before signing it. If they can't afford legal advice, they should at least read the contract carefully.

The rolling contract

The rolling contract is a particular problem. If a business doesn't give notice of cancellation before the end of the initial term, the contract rolls over into another fixed term.

This is a common feature of many commercial contracts. It is not unique to the Citation Group. Businesses should be aware of this feature and diarise the notice date.

What should businesses do?

Businesses should read the contract before signing it. They should understand what they are signing up to. If they don't understand the contract, they should take legal advice before signing it.

If they are already locked into a contract, they should take legal advice about their options. They may be able to negotiate a settlement with the Citation Group.

Conclusion

The Citation Group's sales techniques may be overzealous. But the businesses that sign their contracts are not without fault. They should read the contract before signing it and take legal advice if they don't understand it.