Termination – An overview

Introduction

Termination of a contract is when a contract is brought to an end.
The decision as to when, how and on what grounds to terminate a contract is often complex and a party's right to terminate is often not clear-cut and may be disputed.

Contract termination excuses all parties from further performance of their primary obligations under the contract, from the termination date and there may be many reasons a party may want to terminate, including:

• Breach of contract by another party.
• Contract is no longer profitable.
• Customer no longer needs goods or services.
• The other party becomes insolvent.
• One party is acting in a way that the other fears will damage its reputation.

What are the ways I can terminate?

The way in which you can terminate a contract will depend on the exact wording of the contract itself. However, at a general level, there are several common ways in which a contract may be terminated, including:

1. Performance. This simply means the contract has run its course, the responsibilities of each party to the contract have been fulfilled, and the purpose of the contract has been carried out.
   Make sure to keep documentation showing you have fulfilled your     contractual duties as this could be helpful if another party to the contract goes on to allege a breach of contract for failure to fulfil your contractual obligations.
2. Expiry. This is common with fixed term contracts. For example, a business has a contract to provide its services to another company for 12 months. The contract may then expire automatically at the end of that 12-month term. You should make sure to check with this type of contract whether there are any auto-renewal clauses, meaning that the fixed term may renew automatically unless the parties take steps to terminate the contract.
3. Agreement. Contracts may be terminated by agreement between the parties. This usually constitutes a variation to the contract and so should meet all the necessary legal criteria for a valid variation, as well as any relevant contract terms on variation or duration.
4. Breach. If a party fails to honour its obligations under the contract, this will constitute a breach and may give rise to the right for the other party to terminate. This area can be complex as there are different types of breach which may or may not allow the contract to be terminated. Look out for our next article in this series where we will cover termination for contractual breach in more detail.
5. Recission. Recission is a specific remedy to terminate a contract and cancels it as if it never existed, restoring the parties to their pre-contract positions. This means that all obligations and rights under the contract are cancelled, and the parties must return any benefits received. This can be achieved by i) agreement between all parties or, ii) as an equitable remedy awarded by a court in cases of misrepresentation.
6. Frustration. Frustration is a rare form of termination which terminates the contract instantly without giving either party a right to keep the contract alive. Frustration relates to instances where the underlying circumstances alter the possibility of the performance of the contractual obligations. For example, if a company hired a singer for an event but, a few weeks after signing the contract, they were seriously injured and were unable to speak or move, the company would have the right to terminate as the singer’s obligation to perform is removed by way of frustration and the contract is terminated.

Should I terminate?

A party’s right to terminate is often not clear cut and may be disputed. A party wishing to terminate should take care, and, before it acts, the aggrieved party should take legal advice about the strength of its position to terminate and the potential consequences of getting it wrong.

Some of the main points to consider when looking to terminate a contract are:

1. Identify all possible termination rights available so that you can make an informed choice about how you terminate the contract. This will help minimise the risk of invoking an unavailable right or losing an available (or preferred) right.
2. Check it is still safe to rely on a termination right if some time has passed since the event giving rise to the right to terminate, including any statutory limits on termination rights.
3. Check for any express limits on termination rights set out in the contract.
4. Check whether the contract contains a cure procedure which allows the party who has breached a contract a period of time to rectify their breach before termination is possible.
5. Assess the practical implications of termination. For example, what duties might arise on termination? Are there any contractual duties which survive termination? What are the risks for the business of getting termination wrong?

Giving notice of termination

If, having reviewed the situation, you have made the decision to terminate, you should check the contract for any provisions as to how your termination notice should be communicated. Whilst English law does not prescribe any particular form of notice to terminate a contract, contracts often add requirements for the form, content or method of giving a termination notice.

Typically, a termination normally requires clear, unequivocal communication that a party is terminating the contract. A termination notice is not a demand for compliance or a threat or warning. Many termination clauses require a minimum period of notice such as “not less than” a certain number of weeks or months, and the termination notice should identify clearly the length of the notice or its end date and state the grounds for termination.

Alternatives to termination

It is not always appropriate to terminate the contract, especially if the parties want an ongoing relationship, so you may wish to consider alternative options. This may include:

• Variation. The parties may renegotiate the contract to reflect changed circumstances.
• Dispute Resolution. The parties may negotiate informally, or with the help of lawyers or a mediator to attempt to resolve a dispute, following a dispute escalation procedure laid down in the contract.
• Threat to terminate. The mere threat of termination alone could bring the parties to the table to renegotiate the relationship.

Conclusion

Termination can be a tricky area of contract law and the consequences of getting it wrong can be serious.

We regularly advise businesses and individuals on their rights to terminate contracts and navigating the risks involved in doing so. We can also assist with the drafting of termination clauses and with the resolution of contract disputes as and why they arise.