Getting out of or varying business contracts

We help businesses manage contractual liabilities and protect their commercial position. If you have entered into a business contract and need a way out, options may include negotiating an agreed termination, renegotiating the terms or, after carefully assessing the potential consequences, considering whether to breach the contract. There may also be a contractual provision or procedural requirement that provides a lawful route to termination.

We can advise you on the available options and help you assess the risks. Contact us for clear, practical advice to help you determine the most appropriate course of action.

How to get out of a business contract

The main ways to seek to exit a business-to-business agreement include:

• Misrepresentation (a false statement that induced the agreement).
• Mistake (a fundamental error affecting the contract).
• Duress or undue influence (where consent was not freely given).
• Illegality (where the contract involves an unlawful purpose).
• Frustration (where an unforeseen event makes performance impossible or radically different from what was agreed).
• Repudiatory breach (a sufficiently serious breach by the other party).
• Lack of capacity (where a party lacks the legal capacity to contract).
• Lack of consideration or required formalities (where the agreement may not be legally enforceable).
• Mutual agreement (ending the contract by consent).
• Renegotiation or variation of the terms.
• Settlement (agreeing compensation or other terms for an early exit).
• Waiver (where the other party agrees not to enforce a particular right).

The availability of each option depends on the contract, the circumstances and the applicable law.

Negotiating exit from contract

If either or both parties consider varying the contract preferable to termination, several key issues and clauses require careful consideration:

• Timing – Timing is often critical. Delivery dates, deadlines and the consequences of non-compliance can be central to a contract. Any extension should be carefully considered and documented.
• Payment terms – Cash flow can be business-critical, particularly in difficult economic conditions. A variation might, for example, provide for payment upfront or revised instalments.
• Future review and termination rights – Where circumstances are uncertain, a variation could include agreed review dates, termination rights or milestones. The parties should consider likely scenarios and ensure they do not inadvertently accept obligations or surrender rights they may later need.
• Reservation of rights – If the other party is already in breach and asks you not to enforce your rights immediately, care is needed to avoid unintentionally waiving rights or affirming the contract.
• Negotiating position – One party may have a greater commercial need for the contract to continue. Understanding the parties’ relative bargaining positions can help shape negotiations. Any agreed variation should be properly documented.

Take the risk of breaching the contract?

A sufficiently serious breach of contract may give the innocent party the right to terminate the contract and claim damages. Whether the breach entitles the innocent party to terminate depends on the contract and the applicable legal principles. Where a right to terminate arises, it must generally be exercised clearly and in accordance with the relevant requirements.

If the innocent party does not terminate, the contract may remain in force, although a claim for damages may still be available. Care is needed when deciding how to respond to a breach: affirming a contract, waiving a particular right and accepting a repudiatory breach can have different legal consequences.

Where a party breaches a contract deliberately to secure an exit, it risks a claim for damages and potentially other remedies. The commercial benefits of leaving the contract must therefore be weighed against the potential liabilities and the likelihood of a successful claim.

Mitigation of loss

A party claiming damages for breach of contract is generally expected to take reasonable steps to mitigate its loss. This does not remove the other party’s liability for breach, but it can affect the amount recoverable.

This area involves both commercial and legal considerations. Before taking action, it is important to assess the contractual terms, the available termination rights and the potential financial consequences. Force majeure and frustration may also be relevant, depending on the circumstances, but neither provides an automatic route out of an unprofitable or difficult contract.

How we can help

We help businesses assess their contractual rights, manage liabilities and explore practical routes to termination or renegotiation. We can review the contract, evaluate the available options and help negotiate a resolution that reflects your commercial objectives.

Contact us on 020 7438 1060 to discuss your options.