Home / Exploring a Contract: Termination
14th November 2024
Associate, Laura Crowe
By terminating a contract, parties are typically excused from their main obligations to pay or perform from that point onward. However, some contractual duties often survive termination. Termination may be achieved in two main ways: accepting a repudiation or exercising a contractual termination right.
There are various reasons why you might consider terminating a contract. A common cause is a breach of contract by the other party. This could include outright refusal to perform, unsatisfactory performance, or a breach of a specific term, such as a confidentiality clause within the contract. A breach triggering the common law termination right is generally called a repudiation or a repudiatory breach and includes a breach depriving the aggrieved party of substantially all the benefit of the contract, including a party’s refusal to perform all or substantially all its obligations under a contract.
Another reason might be if the contract has become financially unviable. For example, the cost of fulfilling the contract might have increased significantly, or similar goods or services might be available elsewhere at a lower price.
Business needs can also change over time. A customer may find they no longer require the goods or services the contract covers. Additionally, if the other party is facing financial insolvency, or if they’re acquired by a competitor, it might disrupt the original intention of the agreement. Finally, you might consider termination if the other party’s actions could harm your business’ reputation.
If you’re planning to terminate a contract, it’s essential to review your legal grounds for doing so. These could include a common law right to accept a repudiation, which is valid unless specifically excluded in the contract, or contractual rights to terminate for cause or for convenience, as specified in the contract.
You should check that any termination rights you intend to use are still valid and applicable to the current situation. Some contracts might also require that termination must be carried out reasonably and according to certain conditions. For example, there may be a requirement for notice periods or specific forms of notice, such as three months’ written notice, which must be strictly followed to avoid any potential disputes.
Before deciding to terminate, consider the practical effects. Termination may require transitional arrangements, such as selling off remaining products or switching to a new provider. You should also think about the impact on any equipment, data, or licenses that were in use during the contract.
Moreover, consider the surviving duties that may apply even after termination. For example, are there obligations to return or destroy confidential data or sensitive information? It’s also important to evaluate whether termination will affect your staff, including TUPE considerations if there are implications for employee transfers. And lastly, assess the risk to your business if the termination is later found to be unjustified, which could result in reputational or financial repercussions.
While termination may seem necessary, consider if it might be more beneficial to keep the contract alive. Sometimes, continuing to perform under the contract can be more profitable, particularly if the contract includes specified payments or beneficial terms. Weighing these potential gains against the issues prompting you to consider termination can help you make a balanced decision.
If you wish to preserve the business relationship, explore alternatives before moving to terminate. You could discuss a contract variation with the other party, adjust terms, or consider using a dispute resolution process, such as mediation or arbitration. Sometimes, simply threatening to terminate may prompt the other party to address the issues that are affecting the contract’s value.
If termination is indeed the best choice, you’ll need to ensure the process is handled correctly. Review the contract carefully to confirm the requirements for giving notice, and make sure that the notice itself contains all the information specified in the agreement. Many contracts also mandate a minimum notice period, so be sure to observe this timeline accurately.
The method of notice is also essential. Under English law, termination notices can be communicated by any means that clearly convey the intent to terminate. However, some contracts specify acceptable forms of notice, like email, text, or even social media, so it’s wise to confirm and follow these requirements.
It’s equally important to state the grounds for termination in cases where the contract requires this. Failing to state a valid ground or misidentifying the grounds can invalidate the termination notice. If this happens, the termination may not be legally recognised, leading to further complications or disputes.
Finally, document the entire termination process. Keep written records of everything: the grounds for termination, the date and method of notice, any opportunities given to the other party to remedy the situation, and all related communications. Once termination is communicated, it’s typically final and cannot be reversed.
Be cautious when deciding to terminate, as getting it wrong can lead to unintended consequences. You may lose the right to certain contractual payments or financial claims, and an unjustified termination can even be seen as a repudiation by the party giving notice. Without valid grounds, the termination notice might not end the contract legally, leaving you vulnerable to further legal action.
Termination clauses in contracts can often create rights that wouldn’t exist under common law. For example, many contracts allow for termination based on insolvency or financial difficulties, material breach of the agreement (if the breach is serious enough), or even for convenience, where termination is allowed without cause. You might also find that contracts specify what delay in payment or other events can trigger a termination right.
Terminating a contract is more than just deciding it isn’t working—it requires a careful review of the legal, practical, and procedural implications. Whether you’re considering termination for breaches, financial reasons, or a change in business needs, it’s essential to understand the right grounds, follow the steps required, and keep thorough records to protect your business from potential repercussions. If managed correctly, termination can be a valuable tool; if mishandled, it could bring unnecessary complications and legal risks.
If you’re considering terminating an existing contract or need help reviewing a termination provision to consider the options available, or if you are facing a dispute, feel free to reach out to a member of the Commercial Team or the Dispute Resolution Team at 0161 832 3434 or info@kuits.com.