Key considerations when terminating a contract

There has been an increase in the number of clients seeking to terminate contracts recently. It is important to remember that terminating a contract requires careful consideration to avoid legal risks, financial losses, or damaging business relationships and guidance should be taken to navigate the termination process.

The first element to take into consideration is whether there are any express grounds to terminate the contract on its terms. Examples of typical termination clauses include:

• Termination for cause: when one party fails to meet its contractual obligations (a breach of contract).
• Termination for convenience: giving a party the right to terminate without cause, often referred to as “termination for convenience”.  This could include the right to prevent a contract renewing for a further period.
• Force majeure: contracts may allow termination in circumstances where unforeseeable events like natural disasters, pandemics, or government actions that make performance under the contract impossible for a prolonged period.

Whether the above, or any other termination rights apply will depend largely on the contract’s wording. Before taking steps to terminate, it’s essential to carefully review the contract terms, which will usually cover:

• Grounds for termination: see above for examples. It is critical to ensure that all requirements of the ground you seek to rely on have been satisfied, including any cure periods have expired.
• How the termination should be communicated: often, parties are required to provide written notice of termination. Most contracts include a separate ‘notices’ clause which dictates how such notice should be communicated i.e. first-class post or email.
• When the termination would take effect: termination may be immediate on receipt of the notice or there may be a notice period (this often depends on the reason for termination).
• The consequences of termination: this clause would usually cover what is expected of the parties once the agreement ends e.g. payment of invoices or returning of materials belonging to the other party. Parties should also consider whether any clauses, such as Confidentiality or Non-Solicitation, survive termination and therefore impose ongoing obligations post-termination.

What if you get the termination wrong?

This will largely depend on the circumstances surrounding termination, but some examples are:

• Losing the termination right: if the termination right has an expiry date, missing that deadline could result in losing the right to terminate altogether with the result you remain bound by your contractual obligations.
• Risking financial claims against the business:

If you are seeking to terminate due to the other party’s breach, you may face the risk that your attempt to terminate is deemed invalid if the correct process isn’t followed. This could result in the other party treating your failed termination as a repudiatory breach—a fundamental breach of contract that entitles them to terminate and seek damages. Essentially, the party that has underperformed may reframe the situation, accusing you of breaching the agreement. If not handled carefully, attempting to terminate for breach can inadvertently expose you to this risk.

If you are looking to terminate in less contentious situations than mentioned above, the danger lies in assuming your termination was valid when, in fact, it wasn’t. This misunderstanding can lead you to inadvertently breach the contract by failing to meet your ongoing obligations, leaving you vulnerable to claims from the other party. For example, if you stop delivering goods or services under the mistaken belief that the contract is no longer binding, you may find yourself in breach and liable for damages.

To ensure that termination rights in a contract are clear, aligned with your interests, and to help avoid the potential issues mentioned above, it’s essential to (a) review and negotiate your termination rights carefully before signing and (b) seek advice when looking to exercise those rights to ensure you do so effectively.

Further guidance and support

Brachers can assist in drafting and negotiating agreements to protect your business and to allow for termination to be triggered by circumstances that are important to your business.

If an agreement is already in place, Brachers can help interpret ambiguous clauses, assess potential liabilities, and ensure that the termination process is correctly followed.

Our Commercial solicitors are based in Maidstone and Canterbury and are ready to help with any legal advice you need. If you are thinking entering into a new agreement or of terminating an existing one, you can call us on 01622 690691, email us or use the contact form on this page.

This content is correct at time of publication