Businesses will need to terminate their contracts from time to time for various reasons. It is very important that you get the termination right to avoid problems. For example, if the court disagrees with your assessment of your right to terminate then you may be held to have acted in breach yourself when serving your termination notice and providing the other party with the right to terminate and claim damages. This note focuses on certain limited legal issues you will need to consider carefully before you proceed with the termination of your contract. When we use the term “terminate” in the following, it means that future obligations owed by the parties fall away but the contract does not cease to exist. This note is limited to contracts governed by English law.
Right to Terminate under Contract and Common Law
It is common for commercial contracts to contain an express provision for termination in certain specified circumstances. Express termination rights in a contract will operate alongside common law rights to terminate unless such common law rights are excluded (expressly or impliedly).
Electing to terminate an agreement pursuant to an express contractual termination clause may prevent you from bringing certain common law claims and so careful attention needs to be given in these situations. The decision to terminate, and the manner in which you express that decision, is complicated when a party has contractual and common law termination rights as there may be a difference in the amount / types of damages you can recover depending on whether termination is contractual or pursuant to common law.
Generally, you will have the right to terminate the contract where the contract expressly gives you the right to do so and certain breaches of contract will give you the right to terminate your agreement. If there has been a breach of a term that constitutes a condition i.e. the term is vital for the contractual relationship, you can terminate. You can also terminate if the breach “goes to the root of the contract”, “frustrate the commercial purpose” of the contract or “deprive the innocent party of substantially the whole benefit” of the contract. You may also terminate where the other party declares its indisputable intention to cease future performance of the agreement. The court will look at the nature and consequences of the breach to decide whether termination is justified. Where there has been a breach of contract outside these situations, the parties remain bound to perform under the contract and are left with a claim for breach of contract and damages. Where the parties expressly identify a term as a condition, the courts will generally treat it as such but that is not always the case.
Where the contract contains no express termination right, a termination right providing reasonable notice may be implied by the courts. It is a question of fact what constitutes reasonable notice in the circumstances to be determined by the courts that will consider amongst other things how much the parties have invested in the contract and the duration of the parties relationship – generally speaking, the longer the term of the agreement the greater the notice period is likely to be.
Finally, it is important to follow any specific requirements for notification and applicable time limits when you are terminating the agreement pursuant to an express termination clause.
Considerations Before a Decision to Terminate
Prior to terminating your agreement, it may be worth considering whether you want to renegotiate the agreement or let the relationship come to an end. Alternatively, you could let the agreement continue but express that you retain the right to claim damages where there has been a breach of contract.
The decision to terminate should not be left for too long where there has been a breach of contract as you may lose the right to terminate as you conduct could be viewed by the courts as your affirmation of the agreement. It is important to note that once communicated, a termination notice cannot be withdrawn without the other party’s consent and so you must word it carefully if you wish to include language where you reserve your rights.
For further information about the issues in this note and how Redfern Legal can assist you please feel free to contact Tom Redfern.
Please note that this information is only for information purposes. And does not constitute legal advice. As this area of law is complex, we would suggest that you seek legal advice for your specific matter. Redfern Legal will be happy to assist you.