Contract termination is a critical aspect of business operations that requires careful handling. Whether due to changing market conditions, breach of terms, or mutual agreement, ending a commercial contract improperly can lead to significant legal and financial consequences.
When contemplating contract termination, it is important that you explore the initial considerations for your business. Then you should consider what options you have and how to terminate a business agreement under English and Welsh law. This article provides further guidance for your to consider.
Seeking legal advice will help you to understand the potential risks involved in contract termination and ensure that you terminate a contract correctly. If you need support with terminating a contract, contact our commercial law team for advice.
Contents:
- How can a commercial contract be ended?
- Why are the grounds to terminate a commercial contract important?
- Should you terminate a commercial contract under contractual provisions or common law?
- What are the grounds for termination of the contract?
- What paperwork do you need to terminate a contract?
- Can a contract be ended if there is no termination clause in the contract?
- Do you have to allow a breach of contract to be remedied?
- Can you terminate a contract for a breach of contract that has been remedied?
- How do you terminate a commercial contract?
- Are there time limits to terminate a contract?
- Conclusion
How can a commercial contract be ended?
Under English and Welsh law, commercial contracts can end in different ways, such as:
- When a fixed-term contract comes to an end.
- By mutual agreement.
- Giving notice according to notice clauses.
- Due to performance issues leading to contract termination, or problem issues such as insolvency of the other party.
- By recission of the contract.
- By frustration, where the contract becomes impossible to perform.
- Force majeure, where outside events prevent the parties from fulfilling their obligations.
- Through legal processes, such as company mergers and ending contracts.
Why are the grounds to terminate a commercial contract important?
When ending a contract, it is important to check if you have valid reasons to do so. For instance, do you wish to terminate the contract on notice because you no longer need a supplier’s services, or have they committed a breach of the contract which has compelled you to terminate? Always check the position and seek legal advice – the other party breaching the contract does not mean you should assume you have the right to end the contract straightaway.
Consider the following:
- If you are terminating due to a breach, does the breach of contract give you the right to terminate? You might think you have multiple reasons, but choosing one without a termination right could backlash, leading to damage claims against your business.
- Does the other side have the right to remedy their breach before you can proceed to terminate?
- Note that timing is key. If you delay, you might lose your right to terminate, along with any financial claims you may have.
Should you terminate a commercial contract under contractual provisions or common law?
Under English and Welsh law, you can terminate a contract either through contractual provisions or common law (i.e. an unwritten legal right). You should include tailored contractual termination clauses in your agreements to align with your business requirements and the contract's nature. Relying solely on common law might hamper your termination rights or result in different remedies and uncertain outcomes. It is advisable to have your commercial contracts solicitor draft or negotiate agreements with robust termination clauses specific to your industry and potential contract termination needs. Where you are seeking to end a contract, always ensure you thoroughly check your contract from the outset to understand what it says about termination.
What are the grounds for termination of the contract?
While you may think you have clear reasons for ending a contract, it is crucial to state them correctly. Sending an email without legal advice could be costly because:
- You could unintentionally repudiate (seriously breach) the contract by your email or notice, placing you in the position of attempting to terminate a contract when you do not have the right to do so.
- The notice you give may not comply with the contractual requirements for notice and therefore be ineffective.
If you have multiple reasons for ending the contract, assess which one is most beneficial for your business to ensure you take the best route.
What paperwork do you need to terminate a contract?
When terminating a contract, it is important to maintain necessary documentation, including:
- Evidence of the reasons for termination, such as failure to meet agreed product or service standards or deadlines outlined in the contract.
- Documentation showing the opportunity given to remedy the breach of contract.
- Records of communication, especially if discussions were verbal. These should be confirmed in writing to avoid disputes over what was communicated and when.
- Preservation of evidence even after termination. Though a contract may seem to have ended, issues might resurface, leading to claims.
Can a contract be ended if there is no termination clause in the contract?
If your contract does not have a termination clause and is not for a fixed term, the law generally allows you to end it with reasonable notice. What counts as reasonable notice varies based on factors such as how long you have been in the contract and the obligations of each party. However, relying on common law for termination can lead to uncertainty and disputes. To avoid this, it is highly advisable to include clear termination clauses in contracts. These clauses will provide certainty and help prevent costly disputes if there is a disagreement over ending the contract.
Do you have to allow a breach of contract to be remedied?
The ability to terminate a contract or the requirement to allow a breach to be remedied depends on both common law principles and the specific terms of the contract itself. Under common law, you may terminate a contract immediately if there is a repudiatory breach (a very serious violation that goes to the heart of the agreement), without giving the other party an opportunity to rectify the situation. However, the terms of your specific contract may override this common law principle. Your business agreement might include provisions requiring you to give the other party a chance to correct the breach before you can terminate. To prevent disputes, it's crucial to ensure your contracts clearly specify which breaches are considered remediable and which are grounds for immediate termination.
Can you terminate a contract for a breach of contract that has been remedied?
Whether you can terminate a contract for a breach that has been remedied depends on both common law and the contract terms. If a breach has been rectified, you may still have the right to end the contract, but it is important to seek legal advice quickly. A commercial contract solicitor can assess the position and advise you on your options.
How do you terminate a commercial contract?
If you have decided to terminate a contract after checking the legal reasons and business needs, follow these steps:
- You will need to give notice to say you are terminating the contract and explain the reasons why.
- If there are specific rules about how you should give notice to terminate in the contract, make sure you follow them. For instance, make sure you give notice within the time specified in the contract and it is sent to the correct person.
- Keep records of all communication about the termination. This is important in case the other party challenges the termination.
Are there time limits to terminate a contract?
If you want to end a contract, you cannot take too long to decide. If you delay too much, you might lose the right to end the contract, because:
- If the contract has specific rules for ending it, you must follow those rules.
- If there are no specific rules, assuming you are terminating for breach, you have a reasonable amount of time after finding out about a breach to decide if you want to end the contract. If you wait too long with no action, the law might deem that you are agreeing to keep the contract.
Conclusion
To terminate contracts correctly, it is essential to carefully review the relevant contract terms, identify grounds for termination, provide accurate notice, document all steps taken, and seek legal advice for strategic planning.
Effective contract lifecycle management can also proactively help with this process, by encouraging businesses to regularly focus on understanding and reviewing their contract termination clauses, enabling proactive preparation for termination events which might arise. This pre-emptive approach can help to minimise risks and facilitate a smoother exit process when terminating contracts.
Understanding the risk and pitfalls of terminating a business contract is crucial to avoid costly mistakes and legal disputes, as is seeking legal advice. Without legal advice, businesses risk misunderstanding contract terms, breaching their own contractual obligations, and facing litigation. For advice on strategy and support with contract termination, get in touch with our experienced commercial contracts team .
