Most businesses will want to take steps to terminate a commercial contract at some point during their lifetime. However, without proper consideration of the terms of the contract, how and when to terminate it and the consequences of termination, disputes can arise. 

Our experience suggests that all too often businesses give notice to terminate contracts without sufficient consideration of the procedural requirements and the consequences of termination resulting in a claim for breach of contract against the terminating party.

The aim of this article is to highlight how a business can terminate a contract and some of the common areas of dispute.  It is also intended to highlight a few points for businesses to consider when looking to navigate a safe exit from a commercial contract.

How can a business terminate a contract?

Most commercial contracts are in writing and the contract will often include a specific termination clause setting out the steps that need to be taken to terminate the contract and the grounds that can be relied on by the terminating party.  If the contract gives an express contractual right to terminate it is extremely important that the terminating party follows the procedure specified in the contract.

If the contract is not in writing, or it is silent on the question of termination, the party wishing to terminate the contract may be able to terminate the contract on notice relying on an implied term that the contract can be terminated on reasonable notice.  What constitutes reasonable notice will depend on the particular facts of the case and if required, specialist legal advice should be sought.

In addition to any express contractual right to terminate the contract, a business wishing to terminate a contract may also be able to rely on its common law right to terminate the contract.  Although the common law does not allow a party to terminate a contract without cause, it does allow a party to terminate a contract for serious breaches by the other contracting party. This includes breach of a condition, repudiatory breach, one party’s refusal to perform all or substantially all of its obligations under a contract and impossibility where the impossibility occurs because one party is at fault.

The consequences of terminating the contract may vary depending on which method is used and in some cases it may be advantageous to rely on more than one method. If in doubt, businesses should seek specialist advice.

Common areas of dispute

Our Litigation and Dispute Resolution Team see a number of common areas of dispute arising in relation to the termination of commercial contracts. These include the following:

• The terminating party gives the wrong reason, or wrong reasons, for terminating the contract resulting in the terminating party being treated as having terminated the contract without the right to do so.
• The terminating party does not follow the correct contractual procedure for terminating the contract which results in the termination notice being ineffective and a complaint that the terminating party has not validly terminated the contract.
• The terminating party making a mistake, or mistakes, in the termination notice, which results in arguments that the termination notice is ineffective.
• The business wishing to terminate the contract loses its right to terminate the contract by continuing to perform the contract, or demanding performance of contractual duties owed by the other party.
• The business wishing to terminate the contract serves notice to terminate the contract on the grounds of repudiatory breach and the other party argues that a repudiatory breach has not occurred and the notice is invalid.

These are just a few of the areas of dispute we see commonly arising in relation to the termination of commercial contracts, but they highlight the importance of businesses giving proper consideration to the terms of the contract and the consequences of terminating before serving notice to terminate. Getting it wrong can be costly and time-consuming so taking advice at the start, before a termination notice is served, is advisable.

Tips for businesses on navigating a safe exit

There are a number of ways that a business can protect itself and ensure it navigates a safe exit from a commercial contract without the risk of claims. 

Our top tips for businesses wishing to navigate a safe exit from a commercial contract are as follows:

• Carry out a detailed review of the contract (including any standard terms and conditions which apply) and check the terms of the contract before you take any steps to terminate.
• Be clear on the procedure you need to follow to terminate the contract, giving particular attention to any notice periods or deadlines, before serving notice to terminate.
• Make sure you analyse the risks of terminating the contract before serving notice, including consideration of any financial or other consequences which may apply on termination. Also check whether any clauses within the contract will survive contractual termination (for example, liquidated damages clauses, restrictive covenants or clauses in relation to confidentiality) and make sure you understand how these impact on your business.
• If seeking to terminate a contract on the grounds of repudiatory breach, make sure you seek specialist legal advice and can prove that a repudiatory breach has occurred.
• If you have any doubt about your right to terminate, the procedure you need to follow, the grounds you can rely on, or the consequences of terminating the contract, seek specialist legal advice.

We regularly advise businesses in a range of sectors on their rights to terminate contracts and the risks of terminating a contract. We can also assist with the resolution of commercial contract disputes as and when they arise.

If you have any queries about the contents of this article, or commercial contracts generally, please contact Rachel Brown (Senior Associate) within our Litigation and Dispute Resolution Team on 020 7216 5562 or by email at r.brown@druces.com.