If you want to end a contract, you serve a notice of termination of contract.However, get the wording and format exactly right, as required by the contract, else you might fail to terminate the contract.

In this insight we

  • Look at Court of Appeal guidance on effective termination.
  • Set out the consequences if termination is incorrectly served.
  • Address practical issues relating to the termination of a business contract.
  • Tell you how to avoid those issues in the first instance.

The Court of Appeal’s position

In a recent case before the Court of Appeal, the party serving the notice of termination of contract was prevented from asserting that the business contract had been terminated because of a simple oversight in non-compliance.

The court held that where a business contract between two parties contains conditions attached to the exercise of termination rights, such as particular wording or formatting, the conditions have to be strictly complied with to ensure the effective termination of the business contract.

Consequences of incorrect contract termination

The implications for the sender as a result of serving a non-compliant notice were that it:

  • Remained bound by the business contract from the date of the defective notice until the date of trial;
  • Was ordered to pay the recipient’s costs in contesting the termination;
  • Had to comply with the terms of the business contract despite the dispute; and
  • Had to serve a new notice terminating the business contract.

The court stated that: “if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.”

The attitude of the court was that it could not be a case of almost complying. Either you comply or you don’t. There’s no room for middle ground.

Notice of termination of contract: the background facts

The case concerned a dispute between a landlord and its tenant. For the tenant to end the contract, then under clause 19 of the lease between the parties, the tenant must state in the break notice that the notice was given pursuant to a particular section of legislation.

However, the tenant’s notice merely referred to clause 19, and not to the particular section of legislation. Hence, the dispute arose as to whether the notice was effective.

The landlord resisted the tenant’s notice. The landlord could then keep the tenant in the premises and continue to receive rental income. The landlord succeeded and the tenant’s notice was considered defective.

The outcome

The court held that where a party wishes to terminate a business contract, the notice giving the intention to terminate the contract must comply:

  • With any strict requirements imposed under the business contract,
  • Whether the requirements are wording or otherwise.

The notice served by the terminating party did not comply with the terms of the contract. Therefore:

  • The notice had no effect;
  • The serving party had not effectively terminated the contract;
  • The serving party had to remain in the contract from the date of the notice to the date of conclusion at trial.

Enforcing termination of a business contract

All is not lost. If it comes to light that a notice terminating the business contract is defective, then there may be practical steps that can be taken, such as:

  1. Serve the notice again, but ensure to comply with the conditions of termination included within the business contract;
  2. Reserve the right to defend the initial notice; or
  3. Argue that the receiving party is prevented from its contractual right to a fully compliant notice, either through an implied waiver of the right, lapse of time or some other course of dealing, such as previously accepted defective notices.

How to prepare for trial if the notice is ineffective

If the matter proceeds to trial, the serving party should:

  • Argue that the recipient understood the notice and that there was no confusion;
  • Argue that any reasonable reader would have understood the notice;
  • Argue that the notice was effective given the parties’ relationship developed through the duration of the business contract; and
  • Rely on any correspondence surrounding termination, particularly correspondence evidencing an intention.

All will depend on the facts of the case, although the court is generally reluctant to enforce defective notices.

Avoiding termination of a business contract – considerations

If a party receives a defective notice, it may wish to resist termination. Base your decision on commercial factors, i.e. is it really worth resisting? If the serving party wants to terminate then the business contract’s continuance is forced. No business relationship that is forced is desirable.

A recipient may claim that the server’s defective notice breaches the business contract. Legally, this is a valid argument. But commercially? Usually it is not worth the paper it’s written on, unless there are potentially substantial damages. In practice, the claim will be for any damages incurred from the first notice to the second, usually effective, notice. There will be few cases where the legal costs outweigh the benefits.

Lessons

There are two lessons to be learnt from the court’s decision:

  1. Know what your business contract says about pre-conditions to certain rights, notably termination, and ensure you are clear on the business contract’s drafting; and
  2. If you are considering terminating a contract, particularly one where the recipient of the notice is receiving a premium sum, make sure you comply with the pre-conditions or face sanctions. A recipient may resist termination and insist on cost recovery for your own default.

The relevance of the decision to commercial contracts

Most business contracts contain conditions attached to termination. As can be seen, compliance with such conditions is considered strict. This is even so where the oversight has no detrimental effect on the recipient. This is welcome news for lawyers, as it provides certainty to the law, but unwelcome news for the litigant in person or a party thought to be taking the initiative by embarking on the complex task of terminating a business contract on their own accord.

The decision will have a ripple effect to additional terms which impose obligations on a party to a business contract, such as the time, date, and method of delivery of certain documents. We find that most disputes over a business contract boil down to the drafting of particular clauses and a party’s obligations. When drafted correctly, the result of a dispute over a business contract’s terms can usually be foreseen.

John Deane is a partner in the commercial team. John drafts commercial contracts for corporate clients. If things do not plan out as intended, then we step in to ensure that you are extracted with minimal cost and exposure.

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