How to Terminate a Contarct

June 5, 2020

Whatever the reason – a contract becoming unprofitable, your counter-party failing to meet its obligations, new working practices making previously critical services obsolete (goodbye physical office?) – you might be thinking that now is the right time to end one of your contractual relationships.

However, knowing you want to do this is one thing. Knowing how and when is a different challenge entirely…

The first step is to check the duration of your contract and whether it might naturally be expiring soon anyway. Beware though that you do not find yourself unwittingly committing to a longer relationship than you thought; some contracts provide for the automatic continuation of the contract or even a total renewal of the term if notice to terminate is not given within a certain period before expiration. Even if the contract is due to expire soon, you may therefore need to take action quickly.

If a natural end to the contract isn’t on the horizon, then you will need a legal right to bring it to an end early. Most long-term commercial agreements contain express termination provisions that allow one or both parties to terminate in certain circumstances.

Sometimes these will include a straightforward right to terminate upon the giving of notice without the need for a specific reason. In this situation, the key will be simply to ensure that you comply with the letter of the requirements in the contract for giving the notice (see further below).

In many situations you won’t have a right to terminate for convenience just because a contract is no longer commercially viable. In these situations, in order to terminate under the terms of the contract, you will need to identify a specific event or reason that gives you the right to do so.

Typical examples of easy to spot events that can lead to a right to terminate for cause are a party’s insolvency, a change in ownership of a company, failure to make payment for goods or services or (although far less straightforward) a continuing force majeure event.

Beyond this, businesses are likely to find themselves grappling with the slightly ambiguous concept of a ‘material’ breach of the contract. Broadly speaking, this will be equivalent to any significant breach of a key obligation in the contract. What constitutes a ‘material’ breach may be defined in the contract but without a clear definition, it is a question of interpretation and worthy of careful attention before pulling the proverbial trigger.

What if the other side are at fault but you cannot find a basis for termination in the contract? All is not lost; you may still have a legal right to terminate outside the terms of the contract if the other party has committed a particularly serious breach, known as a ‘repudiatory breach’ – in essence, the breach must be so serious that it deprives you of substantially all the benefit you would receive from the contract or such that the other party is effectively refusing to perform its obligations.

Even with a clear right to terminate identified, you are not quite riding off into the sunset yet. If you have identified a ‘material’ breach of the contract, you will often need to give the other party a certain period to remedy the breach before you can terminate.

In addition, once you have got over that hurdle, you will still need to take positive steps to bring the contract to an end. This will usually involve notifying the other party unequivocally that you are exercising your right to terminate and on what grounds.

To ensure termination is effective, you must comply strictly with any contractual notice requirements. For instance, do you need to give a certain period of advance notice? Does notice to terminate have to be in writing and when is it deemed received? Can notice be served by email?

Job done? Maybe but it's pays to be aware of the consequences of getting it wrong.

If you fail to follow the correct procedure, termination may well be ineffective and, similar to a game of snakes and ladders, you could be back to the beginning. Potentially more seriously, if you seek to terminate when you aren’t entitled to do so or on the wrong grounds, you yourself could be in repudiatory breach of the contract and risk being sued for damages. The old adage of look before you leap certainly applies here.

Finally, if you do think that you have a right to terminate, it is important not to delay or lead the other party to believe you will not exercise your right to terminate. Otherwise, you might inadvertently waive your right and be stuck where you are.

If you’d like to discuss ending any of your contractual relationships with one of our commercial lawyers, please contact us.

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