How to terminate a contract

Not all contracts are terminated because of a breach of contract or a dispute. However, many contracts contain legal terms and procedures governing termination, including rights to terminate for breach or in specified circumstances, such as insolvency or where performance becomes impossible.

If you want to end a contract, you may need to serve formal notice of termination in accordance with its terms. Getting the formalities right can be essential to terminating a contract lawfully, particularly when terminating an employment contract.

We can advise you on your options and help you navigate the termination process. Please get in touch.

How to terminate depends on reasons for termination

he main ways a contract can be terminated under English law include:

• Termination by agreement – the parties mutually agree to end the contract, for example through a release, rescission or novation.
• Termination by performance – both parties fulfil their contractual obligations, bringing the contract to an end.
• Termination by breach – a party may be entitled to terminate following a repudiatory breach, or an anticipatory breach where the other party indicates before performance is due that it will not perform.
• Termination under a contractual clause – an express term may allow termination, for example on 30 days’ notice or for convenience. A force majeure clause may also provide a right to terminate in specified circumstances.
• Termination by operation of law – a contract may be discharged by frustration where an unforeseen event makes performance impossible, illegal or radically different from what was agreed.

Grounds for termination due to breach?

Many contracts contain express provisions allowing a party to terminate if certain breaches occur. It may also be lawful to terminate based on repudiatory breach. However, not every breach gives the innocent party the right to terminate, so the contractual terms and circumstances must be carefully considered.

It is also important to distinguish between termination and rescission. Rescission, which may be available in cases involving pre-contract misrepresentation, seeks to unwind the contract. Termination generally ends the parties’ future obligations but does not necessarily undo rights and liabilities that have already accrued.

Termination by consent

Some contracts can be terminated by mutual agreement. The parties may agree to end the contract without further conditions, or negotiate terms and preconditions.

A commercial lease, for example, may be ended by mutual agreement, usually through a formal deed of surrender, or by exercising a break clause in accordance with its requirements. A landlord may seek concessions before agreeing to surrender a lease, such as retaining the deposit or receiving a payment from the tenant.

Another common example of termination by agreement is an employment settlement agreement.

Termination by expiry

Some contracts are for a fixed term and will end when that term expires. However, this is not always the case.

Some fixed-term contracts continue after the initial term unless one of the parties gives notice to terminate. Always check the contract, even if it is described as fixed-term, to understand whether further action is required and avoid unwanted obligations or liabilities.

The termination process can also be important. A contract may require formal notice to be served at a specified time or within a particular period. Failure to comply may mean losing the right to terminate. Some contracts also require a party to have complied with certain obligations before exercising a termination right. A commercial lease break clause is a common example.

Consequences of incorrect contract termination

Unless there is a clear contractual right to terminate and the relevant facts are undisputed, terminating a contract for breach can carry risks.

A common mistake is to assume that non-payment or delay in performing contractual obligations will always amount to a fundamental breach giving the right to terminate. This may not be the case. Read more about repudiatory breach of contract.

Termination can also fail because of procedural errors. If the contract requires notice to be served in a particular way or within a specified period, failure to comply may mean that the termination is ineffective. You could then find that the contract remains in force and that your actions amount to a breach of contract.

Summary

• Do not assume you have the right to terminate simply because the other party is in breach.
• Check which events give you a contractual right to terminate and whether any conditions must be satisfied first.
• If the contract does not expressly provide for termination in the circumstances, you may still be able to terminate lawfully for a fundamental or repudiatory breach.
• Follow the required termination procedure carefully. Failure to comply with contractual requirements may mean you lose the right to terminate.
• You may be able to negotiate an agreed termination. Have a strategy in place and take care not to prejudice your legal position.