Termination of contract
If you want to end a contract, there are often contractual stipulations requiring formal service of notice of termination of contract. Consequently, it’s very important to get the wording and format exactly right, as required by the contract or you might fail to terminate the contract lawfully.
In this insight we
- Set out the consequences if termination is incorrectly handled.
- Address practical issues relating to the termination of a business contract.
- Tell you how to avoid those issues in the first instance.
Terminating a contract based on 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. See our detailed page on this topic for full details.
Termination by consent
many contract are terminated by consent. This can mean agreed termination without any stipulations but equally there may be aspects for negotiation. A common type of contract which may be cancelled by consent is commercial leases. If a tenant is unable to pay rent and the landlord accepts this the contract can be terminated, often by the formal mechanism of deed of surrender.
The landlord may still insist on some concessions before agreeing to terminate by consent such as retaining deposit or possibly even a payment from the tenant before agreeing.
Termination by expiry
Some forms 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 the fixed agreed term of the contract has ended, the contract will continue on thereafter after the contract is formally terminated.
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.
Consequences of incorrect contract termination
Short of a very clear contractual right to terminate and where the facts of a breach of that clause 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 are always fundamental breaches of contract under UK law giving rise to the legal right to terminate. This may well not be the case.
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.
Early termination by break clause
Commercial leases commonly include break clauses. For a tenant to lawfully terminate a lease using a break clause things are rarely straightforward legally. A tenant will usually have to ensure that all procedural requirements in the lease contract are strictly and fully complied with. A defective notice may invalidate the ability to terminate early. Leases often also include clauses whereby if the tenant has breached any aspect of the lease, the right to terminate early is voided.
Lessons in correctly ending a contract
- 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
- 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.
John Deane is a partner in the commercial team. John drafts and advises on commercial contracts for corporate clients, including where disputes arise. If things do not pan out as intended, we ensure that you are extracted with minimal cost and exposure.