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Termination of a Contract or Agreement – Common Traps, and Tips on How to Avoid them

If you have a written contract, it will often contain a clause which allows either side to terminate the contract if a certain condition is not met. It would usually be supply of goods and services or payment by some specific date. If the condition is not met by the other party, you can choose to terminate the contract under that clause, though you may choose not to. This is called termination for breach of contract.

If you are in a position with a commercial contract where you are considering terminating, either relying on the termination clause or other means, or where the other party is misbehaving or breaching the contract, you should consult a business contract lawyer immediately. Commercial litigation over contracts is surprisingly tricky, because courts also consider what each party has done since signing. It could be, for example, that if you overlook some breach, you may not be able to terminate for that same type of breach further down the track. Or, if you terminate a commercial contract without good reason, you might be held to have ‘repudiated’ the contract and be up for damages.

Where the written contract has no termination clause, the courts will still read into it the right to terminate the contract on breach, or if the other party repudiates the contract. Repudiating a contract is where you do or say things which show you will not carry out your side of the contract. The court can also declare the contract to be terminated because it is ‘frustrated’, which is where something not the fault of either party prevents the contract from being carried out. Every natural disaster produces a long list of frustrated contracts!

Even where you only have a verbal agreement, or a series of letters or emails which show you making an agreement, the law still calls that a contract. If you go to court in a situation like that, the court will apply the old ‘common law’ and any relevant Acts of Parliament to the situation. Basically, they will call something a contract if there is an offer to do something in exchange for money or something else, and that offer is accepted. And, as usual, the courts are quite pushy and nosey with this stuff and will always be considering the reasonableness of your conduct and whether the breach you are using to terminate is really bad enough to end the contract.

So What Are the Most Common Traps?

  1. Terminating without sufficient reason: You may be very upset with what the other party has done, or not done. You may be quite certain that they have breached the contract, but is that breach bad enough to terminate? If something is expressly stated in a written contract to be good cause to terminate, a court will usually agree. Otherwise, if it’s a breach of the written contract and the court thinks it is not a matter which is ‘essential to the contract’, then it may decide you had no good reason to terminate. If the court decides that, it may also decide that you have repudiated the contract by wrongly terminating it and it may make you pay damages for that.
  2. Terminating sloppily: You must specify exactly what the breach is, referring to the written contract if there is one. If the contract lays out a procedure for termination, like giving notice etc., be careful to follow it to the letter. Although a court may not knock out a sloppy termination if it basically identifies the situation, even so it will only lead to greater costs of legal advice or commercial litigation if it is not precise.
  3. Waiving the right to terminate: The law calls overlooking a breach and continuing with the contract, ‘waiver’. Sometimes you may be happy to waive your right to terminate because you think that the other party won’t provide red cars next time when you stipulated white cars. However, be very careful with this one, as sometimes waiving your right to terminate for that reason once may be interpreted by a court as waiving your right to terminate over red cars for ever. In this case, you should have a contract lawyer draft something saying you do still demand white cars from now on.

Terminating commercial contracts is quite a tricky area of law, and should be approached with great caution. You should never try to terminate a commercial contract without comprehensive legal advice which takes the whole situation into account.

 

Disclaimer: N.B. The articles published on this website are general information only and are not intended to be definitive advice on the subject area. They do not constitute legal advice and should not be relied upon as such. For legal advice relating to your particular situation, please contact us today and talk to a business lawyer.

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