How to terminate a contract

Not all contracts are terminated as a result of a breach of contract or dispute. However, many contracts do have legal terms and processes setting out rights to terminate based on breach or specified situations such as where the contract cannot be performed, insolvency of 1 of the parties or other event.

If you want to end a contract, there are often contractual stipulations requiring formal service of notice of termination of contract. Getting the formalities right to lawfully terminate a contract can be vitally important. This is especially the case when terminating an employment contract.

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How to terminate depends on reasons for termination

The main ways an agreement can be lawfully terminated under English law are :-

• Termination by Agreement - parties mutually agree to end the contract. May be done by a release clause, rescission, or new contract (novation).
• Termination by Performance - both parties fully perform their obligations and contract ends.
• Termination by Breach - Repudiatory breach (serious breach going to the root of the contract) and the innocent party may terminate or anticipatory breach (party shows before performance is due that they won’t perform) in which case the innocent party may terminate early.
• Termination under a Contractual Clause - by express termination clause (e.g. “termination for convenience” or “termination on 30 days’ notice”). or force majeure clause may also allow termination if performance is prevented.
• Termination by Operation of Law - contract is frustrated in legal terms and contract becomes impossible, illegal, or radically different from what was agreed. Contract is automatically discharged.

Grounds for termination due to breach?

Many contracts include express provisions whereby a breach will give the innocent party the contractual right to terminate. It may also be lawful to terminate based on repudiatory breach. Not every breach of contract gives the innocent party the right to terminate, so check the contract terms very carefully.

It is also important to understand the difference between terminating a contract and rescinding a contract. With rescission, which is often based on a pre-contract misrepresentation, the contract is treated as null and void. This is not the case with a termination.

Termination by consent

Some contracts are terminated by consent. This can mean agreed termination without any stipulations but equally there may be aspects for negotiation or pre-conditions. A common type of contract which may be cancelled by consent is a commercial lease. The mutual termination is usually in the form of a formal lease surrender deed or by a break clause in the agreement being correctly activated. The landlord may still insist on some concessions before agreeing to terminate by consent such as retaining the deposit or possibly even a payment from the tenant before agreeing.

Another common example of mutual agreement to terminate is an employment settlement agreement.

Termination by expiry

Some types of contract are fixed term. At the end of the agreed contract period the contract will often automatically terminate but this is not always the case.

Some fixed term contracts contain clauses whereby, notwithstanding a fixed initial agreed term of the contract has ended, the contract will continue on thereafter unless the contract is formally terminated by 1 of the parties. It is always important to check your contract even if it is fixed term so as to be clear and not risk unwanted implications or legal liabilities.

Process can also be very important. A contract may require a formal notice to be served, at a specified time or within a certain time frame. Failure to comply can result in losing the right to terminate. Some contracts also include stipulations whereby a party can only terminate if they are in full compliance with the agreement at the point of giving notice to terminate. A good example of this is a commercial lease break clause.

Consequences of incorrect contract termination

Short of a very clear contractual right to terminate and where facts are uncontested, there are risks of terminating a contract based on breach.

A common mistake is to believe that non-payment or delay in complying with obligations are always fundamental breaches of contract under UK law giving rise to the legal right to terminate. This may well not be the case - see more on this here.

Incorrect termination may also be procedural. If your contract has clauses which require you to serve notice to terminate or other requirements such as a time for service, failure to comply may mean you lose the right to terminate. If you proceed incorrectly, you may find the contract has not been lawfully terminated and you are in breach of contract.

Summary

• Don't assume you have the right to terminate just because the other party is in breach.
• Know what your business contract says about which situations give you the right to terminate  and any pre-conditions which may apply before termination, and ensure you are clear on the terms of your business contracts.
• If the contract is silent about events of termination or the other party is in breach but this is not included as an event of termination, you may still be able to lawfully terminate if the breach is fundamental or repudiatory.
• Be careful and vigilant about the process required to lawfully terminate. If there are any contractual procedural requirements to terminate and these are not complied with you may lose the right terminate.
• You may be able to negotiate to end the contract. Before doing so, have a strategy in place, and be careful that you do not prejudice your position legally. Get advice if in any doubt.