1. Include clear termination rights in your contracts
There are three main types of termination clause:
- Termination for convenience: This allows a party to terminate without giving an agreed period of notice and is also known as “termination without cause”. This can give ultimate flexibility to a contractual party to end the agreement. Think carefully about whether this clause applies to one or both parties, and the length of notice that should apply – for instance, a longer period is advisable if one or both parties need to invest in order to deliver under the contract.
- Termination for breach: Both parties usually agree that it’s reasonable to allow for termination where there has been a significant or repeated breach of contract – but the precise wording of these clauses is worth considering. If termination may only take place where there is a “material”, “substantial” or “repeated” breach, consider defining what this means to avoid disputes. If you are a supplier, consider including a specific right to terminate for non-payment.
- Termination for insolvency: Commercial contracts usually include a right to terminate when a party goes into an insolvency event such as administration or taking steps preliminary to a winding up. However, since June 2020 most termination provisions triggered by insolvency cannot be used by a supplier of goods or non-financial services against a corporate customer once the insolvency event has happened. An application to court is required before termination can take place. For this reason, if you’re a supplier, include provisions which allow you to terminate where your supplier’s financial health deteriorates so you can take action before a formal event of insolvency takes place.
2. Know when you have the right to terminate a contract without a written provision
There is no automatic right to terminate a contract in law simply “for convenience” or if a counter-party is insolvent. For this reason, most parties will seek to terminate based on a clearly worded clause in the contract.
However, even if it is not written into the contract terms, you do have a right to terminate where there has been a very serious breach of a contract term. This is known as a repudiation or repudiatory breach.
The law in this area is complex and cannot be easily summarised in this guide, so please do take advice if you think there has been a repudiatory breach of a contract and you wish to terminate.
In addition, where an indefinite contract has no written termination provisions at all, it may be possible to argue that there is an implied term that the parties did not intend it to last forever. In this case the parties would be entitled to terminate on ‘reasonable notice’. What is ‘reasonable’ would depend on the nature of the contract in question.
3. Act as quickly as possible if you wish to terminate a contract for breach
In all cases of termination for breach – but especially in cases of repudiation – speed is of the essence. When it comes to termination for breach you could inadvertently lose the right to terminate by not taking action promptly.
4. Follow the correct steps to terminate a contract
Assuming you’ve already decided to end the contractual relationship and do not wish to attempt to renegotiate the contract, you should follow these steps:
- Review the terms of the contract and assess your rights to terminate.
- Determine which method of termination you will be using.
- Review the notice provisions of the contract which sets out the procedure for serving legal notices.
- Prepare a termination notice clearly stating that you are exercising your right to terminate, referring to the relevant contractual terms and in compliance with the notice procedure set out in the contract.
5. Seek advice from a legal contracts specialist
Contracts are an especially complex area of law and the commercial stakes are often high. While this guide sets out the basics, they do not constitute legal advice and the intricacies of every business and every contract are unique.
We would recommend seeking specialist legal advice from a contracts expert when drawing up contracts at the start of a business relationship and prior to termination of a contract. This is especially the case if you wish to pursue a damages claim against the counter party.
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