When can I terminate a commercial contract?


19 January 2022

Before you decide whether to terminate a contract with another business, you should first ensure that you are clear about the law relating to the termination of contracts and your contractual termination rights. This article summarises the most common circumstances in which you might seek to terminate a contact with another business.

What is 'termination'?

Termination means bringing the contract to an end, upon which the parties’ future obligations are usually discharged. The contract does not, however, cease to exist and some terms and obligations in the contract may survive (for example, restrictive covenants).

Can I terminate a contract for convenience?

If your contract is for a fixed length of time (term) and there is no termination provision, it will not be possible to terminate the contract for convenience before the fixed term expires. However, if there is a clause within your contract which allows termination upon certain specified events, you may terminate the contract if such circumstance(s) arise, but not simply for convenience. If your contract is open ended (i.e. for an indefinite term), you may be able to terminate the contract if the contract includes a clause which allows termination on the expiry of a specified termination notice period or in the absence of such clause, if it can be demonstrated that the parties intended that the contract could be terminated on reasonable notice.

Can I terminate a contract for breach?

Whether you can terminate the contract for breach will depend on the type of breach and whether or not the contract includes a clause that allows for termination in such instances.

A minor / trivial breach or ‘any breach’ does not give rise to a right to terminate a contract unless the contract specifically provides for it.

A series of repeated breaches would need to amount to a ‘repudiatory breach’ to give rise to a right to terminate the contract unless there was a specific clause within the contract which allowed termination for such repeated breaches.

A ‘material breach’ or ‘substantial breach’ is usually still considered to be less than a repudiatory breach and therefore would not give rise to a right to terminate unless the contractual termination provisions included a right to terminate for a material breach or substantial breach.

A repudiatory breach is an extremely serious breach which goes to the very root of the contract. A repudiatory breach will give the innocent party the common law freestanding right to elect to terminate the contract. You may also be able to elect to terminate the contract for ‘anticipatory repudiatory breach’, i.e. where one party indicates its intention not to perform its obligations under the contract or otherwise make the contract impossible to perform. A repudiatory breach does not automatically terminate a contract – the innocent party must elect whether to terminate or otherwise affirm the contract. The innocent party must be careful not to take any steps which might affirm the contract (such as continuing to perform its obligations after the breach has occurred) which may then waive its right to elect to terminate.

Can I terminate a contract for force majeure?

Force majeure events should be defined within your contract and are usually defined as acts, events or circumstances beyond the reasonable control of the party concerned. You can only terminate a contract for force majeure if it includes a force majeure clause that provides for termination in the specific circumstances which have arisen.

Can I terminate a contract on the insolvency of the other party?

Yes, if the contract includes a termination provision that provides a right to terminate in an insolvency situation that has arisen, and subject to the Corporate Insolvency and Governance Act 2020.

Can I terminate a contract on the dissolution of the other party?

Yes, if the contract includes a termination clause that contains a provision entitling a party to terminate if the other party ceases, or threatens to cease, or to carry on trading. A dissolved party no longer exists and is therefore not capable of performing its obligations or benefiting from obligations performed by the other party. Under the common law rules, notice of a party’s dissolution may constitute a repudiatory breach of contract and ground for termination.

Can I terminate a contract on the change of control of the other party?

Only if the contract includes a termination clause that includes a provision for termination on change of control.

Can I terminate a contract if it is frustrated?

Yes, with or without a termination provision, if a contract has been frustrated i.e. when something occurs which renders the contract physically, legally or commercially impossible to fulfil it, it is automatically discharged.

Can I terminate a contract if performance of the contract becomes illegal?

Yes, with or without a termination provision, if its performance becomes illegal under English law, the contract is discharged.

You can still terminate a contract without an express contractual or other legal right to do so, but in doing so you would be committing a breach of that contract, and the innocent party would be entitled to seek compensation (damages) for the consequences of that breach. There are, however, limits to the amount of such damages which might be recoverable – for example, the claiming party would be under a duty to mitigate such loss, and would have to prove that such loss was actually caused by the other party’s breach(es).

Each contract is different, as are the factual circumstances in which a right to terminate might arise. It is, therefore, always sensible to seek legal advice to try to ensure that you terminate a contract lawfully, and reduce the risk of a claim against you for breach.

If you have a dispute which relates to the termination of a commercial contract or any of the issues outlined above, then please contact Emily Broadrick or another member of the Litigation and Dispute Resolution Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at January 2022.

Author

Emily Broadrick

Trainee Solicitor

+44 (0)1603 756478

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