Terminating a contract before it expires can be complex and should only be done once you have obtained professional legal advice. However, as long as you are well informed about the consequences of ending a commercial agreement, you can confidently do so. This article provides a comprehensive guide to terminating a commercial contract.
What are the types of termination clauses in contracts?
It would be rare for a professionally drafted commercial contract to lack an express termination clause. Therefore, your first step is to check the termination provisions in the agreement. Common grounds for ending a contract include:
- Breach of contract – permitting termination on the grounds of material breach, substantial breach, repeated breaches, or irremediable breach
- Providing notice – either party can end the contract if they provide the required notice
- Reputational damage – one party’s behaviour negatively impacts the other (this is particularly pertinent where a company contracts with another to manage its customer-facing roles or one party is a charity)
- One party becomes insolvent – there is no common law right to terminate a contract on the grounds of insolvency, so it’s vital to include this in any agreement
- Force majeure – one party is prevented from performing part of their obligations under the contract by events outside their control, e.g. an outbreak of war or natural disaster
A well-drafted contract should also include a clear dispute resolution clause. This will provide a solid set of procedures and methods, such as negotiation, mediation, or adjudication which must be used to resolve a dispute before litigation is contemplated.
Business dispute resolution advice
What is the difference between express and implied contractual terms?
Contractual terms can be express or implied. A term can be implied by looking at the parties’ intentions and industry norms when the agreement was made. For example, it may not be expressly stated that fresh produce delivered to a restaurant should be free from rot, but it is safe to say this is an implied term in supplier agreements of this nature.
It’s crucial to remember that, in breach cases, whilst an express or implied clause may provide a right to end the agreement, this does not mean that the other party cannot claim damages. However, should a contractual right to terminate which does not involve a breach be invoked, such as insolvency, there is no right to damages.
Can you terminate a contract without a termination clause?
There are several ways a contract can end, including:
- Expiry of the fixed term
- Both parties agree to end the contract, known as ‘release’
- Exercising a break clause included in the contract agreement
- If the contract was founded on a misrepresentation, error, or fraud, a party may rescind the agreement
- Where the contract is discharged due to a company merger or acquisition
- If you choose not to renew a contract following its expiry, then this is not classed as a termination of the agreement
Under common law, a contract can be terminated if one party commits a repudiatory breach (see below). If no termination provisions exist in the agreement and none of the above circumstances apply, you can end a contract provided you give ‘reasonable notice’.
What constitutes reasonable notice will depend on the contractual obligations of each party under the agreement and the ease with which the non-terminating party can get the benefits of the contract from other sources.
Including termination provisions in a contract provides all parties with certainty and mitigates the risk of contractual disputes concerning what constitutes reasonable notice.
Can a contract be terminated before it starts?
Technically yes; but remember, you are legally bound once the contract has been accepted (usually indicated by signing the document). Therefore, if you terminate the contract, you will probably be liable for damages unless you can rely on one of the termination clauses, repudiation, or rescission.
Does a breach of contract terminate the contract?
Minor breaches, which can be rectified by a robust email or phone call are not grounds for terminating a contract. To justify termination, the breach must be so profound that it goes to the heart of the agreement itself. This is known as a ‘repudiatory breach’.
The primary test for a repudiatory breach is whether the party in breach has rendered the contract effectively worthless, thereby depriving the injured party of any benefit of having entered into the agreement.
Can you terminate a contract without notice?
If the other party to a contract breaches the agreement, you need to decide whether to accept the breach or affirm the contract. This means that to terminate the contract, you need to inform the other party of your decision and provide a notice of termination.
Accept the breach
If you accept the breach, you can end the contract. Courts in England and Wales have held that whilst no particular form has to be adhered to, acceptance must be “clear and unmistakable”. Once repudiation of the contract is accepted, the aggrieved party can terminate the agreement and claim damages.
Affirmation of the contract
If you affirm the breach, the contract is deemed to continue. An affirmation can only happen where the aggrieved party:
- knows of the facts giving rise to the other party’s repudiatory breach, and
- understands they have a choice between affirming the contract and accepting the repudiatory breach
Affirming the contract does not preclude you from claiming damages resulting from the breach.
Get legal assistance from LawBite
Contracts are a complex area of business law and for a good reason. If parties were permitted to end contracts early or without notice, the economy would be in chaos, and no business would survive very long. The best way to ensure you don’t end up with a costly, stressful breach of contract or damages claim is to get legal advice before you end a commercial agreement.
If you need advice on terminating a contract, you can speak with one of our expert contract lawyers, who can review your agreement and suggest the best solution. Book a free 15 minute consultation with one of our lawyers today or call us on 020 3808 8314.
Additional resources
- How to novate a contract
- What is assignment in contract law
- What are the different types of business disputes
- Contracts - what is consideration
- The essential contracts every business needs
