Insights

How do you Terminate a Contract?

September 30, 2022

Bringing any relationship to an end can be a tricky business, and a professional relationship is no different. So, whether you’re sick of broken promises or you’ve had your head turned by another business, here’s our guide on how to break up with your professional partner with minimal risk.

Alternatives to termination

First of all, consider how bad is it? Is termination necessary? Or could you work through this together? Some contracts require that dispute resolution is attempted before either party serves notice to terminate, so you will need to check whether this is the case.

Many contracts allow for a contract variation (an agreed change to the original terms), subject to certain requirements – for example, that changes must be made in writing. It is important to comply with any specific contractual requirements.  

Measure twice, cut once. Or, in other words, read your terms carefully

If you feel termination is your only option, it is vital that you understand what the contract requires in the context of termination.  A sensible place to start is with the termination provisions.

Your contract may permit termination in a number of circumstances. The following are the most common contractual rights to terminate:

  • Termination for convenience – an express right to terminate, simply because you choose to, usually by providing a period of notice;
  • Termination for breach – where the other party has not complied with the terms of the contract;
  • Termination triggered by a specific event – for example, insolvency or force majeure.
  • Termination for convenience

On the face of it, providing notice to terminate for convenience can appear straightforward. However, such clauses can be restrictive, with notice being required at very specific times. Provide notice too early or too late, and your notice may be invalid - we’ll explore the potential consequences of providing invalid notice more below, but at the very least you could find yourself tied into the contract for longer than you would like.

Termination for breach

If the other party has committed a breach, does the contract specify that the breach needs to be ‘material’ (which, very broadly, means ‘serious’) to warrant termination?

Are you required to give the breaching party notice of the breach and allow them time to remedy it?

Occasionally, a contract may allow termination for cumulative breaches, where a number of minor breaches give rise to the right to terminate. If you are seeking to rely on this right, keep a record of the breaches, so you can provide evidence if required.  

A party may also be entitled to treat a contract as at an end if a breach is a ‘repudiatory’, meaning that it goes to the heart of the contract and deprives the innocent party of the benefit of the contract. This right exists in addition to any express right in the contract to terminate. However, what amounts to a repudiatory breach is subjective and will depend on the contract terms and the particular circumstances. Where there is both an express right to terminate and a possible repudiatory breach, legal advice should be sought to determine the basis for termination, as this may affect the amount of losses you are able to recover.

Termination for insolvency or force majeure

Contracts often include a right to terminate due to insolvency or where there has been a force majeure event, being a circumstance that has occurred beyond the reasonable control of the parties, resulting in a party being unable to fulfil its contractual obligations.

On 20 May 2020, the government introduced some changes to the Insolvency Act to restrict contractual termination provisions on insolvency. Reliance on a force majeure clause is likely to affect liability and recoverable losses. Legal advice should be sought before attempting to rely on these clauses.

Time is of the essence

Not all rights to terminate under a contract are set out in the termination provisions. Contracts may state that time is of the essence with respect to certain obligations – for example, where the contract states that delivery of goods/services must be made by a certain date. It is commonly accepted that where ‘time is of the essence' in relation to an obligation, if this date is not met, the innocent party may have the right to terminate.

What if there are no termination provisions?

In these circumstances, ‘reasonable’ notice to terminate may be given. What is reasonable will depend on the specific circumstances; relevant factors to consider will include the nature of the goods/services and the value and duration of the contract. You may want to speak to a legal advisor to hash this out.

Notice requirements

Whatever your grounds for termination, specific requirements around how you give notice are likely to apply. For example, must notice be given in writing? Must it be sent to a nominated individual at a specific address, using a particular delivery method? When will the notice be deemed to be received?

So, what happens if you get it wrong?

You could be forgiven for thinking that if you get it wrong, you can just re-serve the correct notice; however, this is not the case. If your notice to terminate is not correct, it will be invalid and, worse still, the other party may claim that the invalid notice amounts to a breach of the contract on your part. In this scenario, the other party may turn the tables on you, serve their own notice to terminate and sue for damages.

With that in mind, it is very important that you have the right support to ensure you get it right the first time. Are you preparing to terminate a contract? Discover how our corporate law experts can help.


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