10th April 2023
10th April 2023
Many contracts will specify a termination date which will define the term (duration) of the contract. Sometimes, contracts may last for an indeterminate period of time.
This guide will outline some useful factors to consider where either or both parties to a contract believe that it may be necessary to terminate a contract before its anticipated termination date or, in the case of a contract with an indeterminate duration, to terminate the contract generally. This guide is relevant to contracts which are governed by the jurisdiction of England and Wales.
A party may wish to terminate a contract where the other party has breached the agreement in some way. Generally speaking, a breach of a contract means a failure of a party to comply with it. For example, this might include where the other party has:
A party may also wish to terminate the contract where there has not been a breach to the agreement. For example, this might include a situation where:
There are several scenarios which may give rise to the right to terminate a contract where there is not an ongoing dispute surrounding a breach of the contract. Some of the common grounds are summarised below.
Many contracts provide a 'convenience clause' which conveys the right to either or both parties to terminate the contract at their convenience. There may also be other types of clauses which give rise to the right to terminate an agreement, for example upon the occurrence of a certain event. For example, the contract might provide for termination where one or both of the parties enter into an insolvency process (although recent legal restrictions have been introduced that limit the application of these types of clauses).
Where a termination clause exists, this means that a party may terminate the contract at its own option, even where there has not been a breach of the contract. This will not require the agreement of the other party.
If a convenience clause or other form of termination clause does exist and a party wishes to exercise a right under this clause, then it is important to notify the other party properly. Our document 'Notice to Terminate Commercial Contract' may be used to terminate a commercial contract in this situation. It is very important to check any service requirements surrounding the service of notices in accordance with the contract, to ensure that any such notice can be effective.
Service:
A contract will often stipulate how notices must be served to the other party in connection with the contract. The requirements will often stipulate the method by which a notice must be sent (for example, by post or email) and the timeframes for the service of a notice.
It is possible that the parties may mutually agree to terminate the contract, where there is no ongoing dispute regarding a breach of the agreement. Typically, this situation would arise when one party releases another party from any outstanding obligations under the contract.
Often, an agreement to terminate a contract in this way is created through a 'deed of release'. Our document titled 'Agreement to Terminate a Contract' takes the form of a deed and will confirm the details of the release of the liabilities of the parties under the agreement. Importantly, a deed of release can confirm any terms which may still exist and survive following termination (such as confidentially requirements, for example).
Form of a deed of release:
A legal contract in England and Wales comprises of some key elements, one of which includes 'consideration'. The consideration element of a contract deals with what one party gives to the other party in exchange for the promise/performance of obligations for the other party. It requires 'something of value' to be given in exchange for the contractual promise. A common, simple example of consideration working in a contract is the exchange of money for goods.
Where one party (A) releases the other party (B) from their obligations, there will commonly not be any consideration given from party B to party A in exchange for the release. The agreement to terminate the contract (and to release the party from their obligations) must therefore be made by deed, which will ensure that the agreement can be legally binding without the need for consideration. Deeds are enforceable without any consideration.
If the parties did wish to agree for party B to pay or provide something to party A in consideration of them being released from their obligations, this would be known as 'accord and satisfaction' and would be contained in a different form of agreement to a deed of release.
Deeds:
A deed is a written instrument which is executed in a particular way. A deed must:
(1) be in writing
(2) state that it is intended to be a deed
(3) executed correctly. This will depend upon the nature of the parties, but will usually require a witnessed signature (information about this can be found on the government website)
(4) delivered as a deed. This does not mean physical delivery. It means a party making clear its intention to be bound by the deed.
The parties may also terminate a contract, through 'rescission by agreement'. Rescission means that a contract will be cancelled and treated as though it has never existed. The parties will be put back into the position that they were in before the contract was made. The parties can reach this type of agreement where neither party has performed its obligations, or where one party has partially performed its obligations. Importantly, there would be no terms that would survive, given that the contract shall be treated as though it did not exist.
A contract can be terminated when an unforeseen event occurs which, through no fault of either party, makes it impossible to fulfil the obligations under the contract or otherwise transforms the obligations under the contract which radically changes the original obligations set out in the contract. This is known as 'frustration'. Under the doctrine of frustration, the contract will be discharged.
Events which may constitute a frustrating event could (but will not always) include the death of a party or the illegality of a contractual provision. However, determining whether frustration will apply can be complicated because frustrating events will vary depending upon the nature of the contract and the terms within the contract.
Many contracts will contain a 'Force Majeure' clause which will make specific provisions in the event of an unforeseen event which is beyond the control of the parties, such as a natural disaster. This type of clause might include an express termination right (see 'Termination Rights in the Contract' above).
It is common for a party to seek to terminate a contract where there has been a breach (or an anticipated breach) of the terms by the other party.
Commonly, there will be a right contained within the contract which permits a party to terminate an agreement where the other party has breached a term. It is important to check the terms of the contract carefully because the termination provisions may specify the types of breaches which will entitle a party to terminate a contract. Sometimes, there might be a statutory provision which applies to a contract and which will apply terms into the contract.
It is also common for termination provisions to stipulate that a notice of breach must be sent before a contract can be terminated. This notice would be sent to provide the defaulting party (the party in breach) with a timeframe to remedy the breach or to perform the required actions under the contract. As above, it is also important to ensure that this type of notice is sent in accordance with any requirements for the service of documents, as defined in the contract.
If, after the given timeframe has passed, the innocent party may then serve a notice to terminate the contract, to effect termination. Sometimes, a contract might specify which specific types of breaches are considered 'remediable' (it can be fixed by the other party) and 'non-remediable' (it cannot be fixed) which will assist an incident party in identifying whether a breach notice should be sent before termination.
Alternatively, or in addition to, the above there can be cases where the breach of a term to an agreement will give the innocent party the right to treat the entire contract as though it has been disregarded. This is known as repudiation. This right has been developed through case law (it is not contained in statute).
A breach to a contract will not automatically constitute a repudiatory breach. A repudiatory breach goes to the core of the contract and must substantially deprive the innocent party of the absolute benefit that the contract was originally intended to provide. This will apply where:
It would also be considered repudiatory when a party has refused to perform or has indicated it will not perform an obligation of the contract in the future, in a way which would place them in breach of a condition or in breach of a serious breach of an intermediate or innominate term.
Conditions:
Where a term of a contract is a condition, any breach (no matter how small) will trigger the right to termination. Identifying whether a term is a condition is a matter of interpretation, but these are terms which are so essential to the nature of the contract. Where a condition is not complied with or performed, this will be regarded as a general failure to perform the contract.
For example, this could include a situation where 'time is of the essence' in relation to the performance of the obligation within the condition, meaning that there is a contractual requirement for the performance of an obligation to be within a specific timeframe. There are also certain statutory provisions which imply conditions into contracts (such as the Sales of Goods Act 1989, for example).
Serious breaches of intermediate or nominate terms:
An intermediate term is not a condition (as above) or a warranty (a minor term taking the form of an assurance or promise). It is therefore somewhere in between the two. A contract may only be terminated as a result of a breach to an intermediate term where that breach is sufficiently serious and goes to the root of the contract, and deprives the party of the full benefit it was due to receive under the contract.
In contrast, a warranty will not allow the innocent party to terminate a contract if it is breached, but the innocent party may claim damages in respect of a breach of a warranty.
As can be seen above, determining whether a breach of a term constitutes termination can be quite complex. If terminating a contract by way of a repudiatory breach, it is very important that the innocent party is certain that the breach constitutes a repudiatory breach. This is because any party wrongfully terminating a contract using the grounds of repudiation could then be accused of committing a serious breach of the contract for which they may be liable to pay damages.
Where both rights are available, it is possible to send a breach notice and/or notice to terminate which relies upon both a specific contractual right to terminate and a right under common law, where the innocent party understands those two circumstances to be applicable but only where the consequences of termination under each right are not inconsistent with the other. Therefore, if the remedies provided for under the contract are different to those which may be available under the common law, then it will be necessary to choose which right to rely upon. This is a complex legal issue and it may be appropriate to seek legal advice where the innocent party is unsure about this.
There are also situations where the parties to a contract might wish to end part of the contract, but not the whole of it. For example, this will be the case where the parties decide that they would like to change the content of that part of the agreement. This is often called a variation or amendment. In these circumstances, the parties will wish for part of the contract to be terminated and replaced with some new terms.
A contract will commonly stipulate how a contract may be varied. In many cases, it will be acceptable for one party to write to the other party to request an amendment. The parties should carefully check the contract to see what provision is made for the variation of the contract.
It is often acceptable to document an agreed amendment (and partial termination) in a written agreement provided that there is consideration (see above for a definition of this). For example, this may include the abandonment of rights in exchange for the new rights which will be granted. However, where it is unclear whether any consideration exists, the parties may wish to execute the partial termination and variation via deed.