When can a business terminate a contract?

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There can be many reasons why a business or individual may need or wish to terminate a contract, often due to changing circumstances and unforeseen events.

There are several ways by which a contract can be terminated – but whatever the reason may be, it is important that the correct procedures are followed. These are often set down in the contract governing the parties’ relationship to avoid any potential claims from the other party.

Terminating a contract on performance of the terms

This is the most straightforward way of terminating a contract – and it applies when both parties have satisfied their obligations under the contract. In most cases this means the job is done – everyone is happy, and the arrangement has come to a natural end.

Contracts can also be ended on performance where one party has in some way prevented the other from fully discharging their obligations. In this situation it may be possible to argue that the contract has still been fulfilled.

Terminating a contract by agreement

In cases where the parties mutually agree that it is best to terminate the contract, the parties could terminate by agreement.  There may be a term in the contract which allows for termination by agreement.

If not, a variation of the contract will need to be drawn up which should include some form of consideration/ payment to ensure it is valid, if that is suitable. Or the parties will need to enter into a deed to mutually release each other from their obligations under the contract. Formally varying the contract by agreement will limit the parties’ exposure to potentially being liable in the future for any breach of contract.

Termination for breach of contract

This happens when one party is not satisfied that the other has fulfilled their side of the bargain. To terminate a contract in this way the breach needs to be sufficiently serious – known as a repudiatory breach.

The term that has been breached must have been essential to the performance of the contract for it to be repudiatory. If it is so serious, then the contract can be terminated, and damages can be claimed. Assessing this is not entirely straightforward, so we recommend seeking advice at this stage.

What do I need to terminate a contract on a repudiatory breach?

To successfully terminate a contract in this way requires clear and convincing evidence of a serious breach. The non-breaching party must then tell the breaching party that they deem the contract to have terminated as a result of their repudiatory breach.  Again, it would be advisable to seek legal advice before making the decision to terminate the contract.

Generally, late payment, delayed delivery, poor customer care etc are not normally considered to be repudiatory breaches. However, interpretation is very much dependent on contract wording, so we would encourage you to seek legal advice on these areas if they are in fact vital to the performance of the contract.

Various lesser breaches can sometimes form a repudiatory breach, depending on how those breaches affect the performance of the contract as a whole.

What if a party refuses to perform the contract?

If the breaching party refuses to perform the contract, then the non-breaching party can deem the contract to have terminated. This is known as an ‘anticipatory breach’ and it must be shown that one party has no intention of performing the contract.

Termination of a contract under ‘the law of frustration’

A contract can also be terminated if performance of the contract has become impossible – known as the law of frustration. By way of an example if the parties have agreed a contract for party A to perform at an agreed venue for a fee of £XX amount and it becomes impossible to perform due to the venue burning down, the contract could become frustrated as the obligations are impossible to perform.

Ideally the parties will recognise the circumstances and will mutually agree to terminate the contract and/or agree a variation to the terms. Have a look out for a Force Majeure term in your contract as this may allow for a suspension of the contract upon certain events occurring. 

Terminating a contract prematurely can have serious implications if not done correctly and may expose the terminating party to a breach of contract claim, and ultimate liability for damages, if not carefully thought through. Our experienced Dispute Resolution team are here to help – for more information on the team see here.

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