The Citation Group got some stick from The Times for overzealous sales techniques. And offering a fixed term contract that rolls over into another fixed term if it’s not given notice of cancellation before expiry of the initial term. See the full article here: https://www.thetimes.co.uk/article/996afe06-6e99-49c8-a2dc-8567e80f406f?shareToken=6a536c433353dd022dd6dfee9b0dafca
I’ve got clients who have had a bad experience with Citation and others who rate them. The service Citation offer is well managed and good value for money for small businesses that cannot afford their own health and safety and human resources departments.
It’s in the rollover from one fixed period to another that the problem arises. But whose fault is that?
Fixed term service contract
If you are in business offering services, it’s always advisable to have an agreement in writing.
Specify the service you provide and the price to be paid for it. At its simplest that can be a few paragraphs signed by both parties.
But all sorts of other considerations can be relevant, and you may end up with reams of terms and conditions – usually in small print. It’s a hard read for a professional, let alone a hard-working businessman.
Despite what The Times suggests might be dodgy dealing, nearly all service agreements provide for a fixed term and a rollover into a new term if prescribed notice is not given to the contrary. The reason for this is obvious: the service provider is keen to tie its customer into an ongoing relationship. And, more subtly, it adds to the business value if it can show a potential purchaser a block of customers committed for years to come
The Times may have a point, though. That is in the fact that some of Citation’s customers were signed up for fixed periods of ten years. Citation answered that saying the customers in question were offered extremely competitive rates in return for the ten-year commitment. And they were in any event in a minority.
But, even so, ten years? How can anyone be certain what their business needs are going to be in three years’ time, let alone ten? Did the business proprietors have had their head in gear when they signed up for that?
Is it possible to cancel a fixed term service contract?
The short answer is: “no”. Not unless it’s in response to a breach or other failure to perform on the part of the service provider. If a breach has occurred what then often ensues is a claim for damages by the service provider which the service contract has anticipated and stipulates as “liquidated damages”.
And it’s then that the situation really descends into the mire.
Liquidated damages
Many service agreements will contain a clause specifying the amount of liquidated damages payable to the service provider if there is a breach of contract. The justification is that it’s a quick and simple means of fixing damages without the time and money involved in a court case. But the courts, ever jealous of their jurisdiction, have since the 17th century held that fixing a predetermined amount as “damages” was in fact a penalty and unrecoverable. Over the centuries since, that rule has been relaxed to the point where a “penalty clause” will be forgiven if it can be shown to be a reasonable pre-estimate of loss suffered as a result of a breach of contract.
The cost of cancelling a fixed term service agreement
And, so, you come to the inevitable response to a business asking the service provider to terminate the agreement. Very often, the short answer from the service provider is to accept the termination. They then point to their liquidated damages clause and demand payment of a sum calculated accordingly.
They will not even try and convince you to stay. That’s because the “liquidated damages” clause is the real money earner for them. It’s not liquidated damages at all. Very often, even a cursory glance at the wording of such a clause can show that it is not “a reasonable pre-estimate of loss” as stipulated by judicial authority.
What they are entitled to is their loss of profit from the bargain. And that, of course, means an allowance for overheads they will no longer incur as a result of cancellation. So “liquidated damages” shown as a high percentage of the contract rate will always be a giveaway.
The Good News
Sadly, if you get into this situation there is never any truly good news. But, if the service provider simply accepts your cancellation and points to the liquidated damages clause, you have at least jumped beyond an argument about whether you can cancel.
The service provider’s right is to insist on performance of the contract. If you can get past that, it’s then a matter of negotiating a reasonable settlement figure.
Best Practice
Best practice, though, is to limit the fixed contract period. Then make sure you put in place a reliable reminder to review the contract in good time to cancel it at the earliest opportunity if you wish. Most of the problems “The Times” is referring to in this article arise because the business failed to take elementary precautions in the first place.