A commercial contract, in simple terms, is a legal binding agreement between at least two parties and is an essential element of any business. Such contracts are entered into by parties in order to protect their interests and to guarantee that their mutually agreed obligations are enforceable by law.

However, with time, circumstances and business needs change and as a result, one party may seek to absolve any continuing obligations. For instance, one party may not be fulfilling their duties, or the contract may no longer be commercially beneficial. Either way, it is important to carefully consider the legal and commercial consequences of terminating a contract and it’s not quite as simple as walking away…

 

First Things First…

Upon terminating a contract, whilst all future primary obligations come to an end, secondary obligations continue to arise. An example of this would be having to pay damages for breach of contract. However, secondary obligations are not the only element of the contract that will remain in operation. From the outset of a contract, it is essential to consider any survival clauses that have been put into place, such as confidentiality or non-compete clauses. From the very beginning of the contract, these set out any legal obligations which are to apply if the contract is terminated.

 

Grounds for Termination

The terminating party must elect to exercise their right to bring the contract to an end. This right either arises either by express terms of the contract or by common law. Common law is the part of English law that is derived from custom and judicial precedent rather than statute.

Contractual Right to Terminate

The contract itself may include a specific provision, for instance where there has been a ‘material breach’ of the contract terms, which give the parties the express right to terminate.

Common Law Right to Terminate

At common law, parties will have the right to terminate the contract on the grounds of a serious breach:

  • A term allowing termination on reasonable notice in commercial contracts may (and will only) be implied where it is obvious and necessary to give business efficacy to the contract.
  • A right to terminate may arise in common law if the term breached is categorised as a condition – that is, a term of the contract that goes to the root of the contract, If a condition is breached (no matter how small the breach), this gives the other party the right to either terminate the contract and claim damages, or affirm the contract. Affirming the contract means the right to terminate is lost but not the right to claim damages for losses caused by the breach. It is important to act quickly in these cases if you wish to terminate.
  • Where a term is not a categorised as a condition but a breach is so serious so as to have the effect of depriving the other party of substantially the whole benefit of the contract, that party can treat the breach as a repudiatory breach and terminate the contract as if it were a breach of a condition.

Other options?

Contractual and common law rights to terminate are not the only methods which allow a contract to be brought to its end. The contract may be terminated by agreement of both of the parties – which is exactly what it says on the tin! Any discussions should be treated with care and early advice and help with negotiation should be sought.

Proceed with Caution

Terminating a contract should not be taken lightly. It can be a very drastic step. If a party gets it wrong and terminates the contract without the right to do so, it may amount to a repudiatory breach. This will give the other party the right to claim for wrongful termination. This means that once the contract has ended, they will be able to sue for damages.

Here’s where 2020 Business Law comes in…

Nobody enters into a commercial relationship assuming that it will fail. In an ideal world, contracts would end when they are supposed to – after both parties have fulfilled their obligations, but this is not always the case. Unfortunately, the business world is complicated, and it is important that your required contract reflects this.

 

At 2020 Business Law, we help business owners make the right decisions for their business. If you would like to know more about business contracts, or just want to discuss your options, then please get in touch with us today.  Email info@2020businesslaw.co.uk, or call : 01980 676875