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 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.
The implications for the sender as a result of serving a non-compliant notice were that it:
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.
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 court held that where a party wishes to terminate a business contract, the notice giving the intention to terminate the contract must comply:
The notice served by the terminating party did not comply with the terms of the contract. Therefore:
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:
If the matter proceeds to trial, the serving party should:
All will depend on the facts of the case, although the court is generally reluctant to enforce defective notices.
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.
There are two lessons to be learnt from the court’s decision:
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.