Wrongful termination of a contract can have severe consequences. For example, the counterparty may bring a claim for loss of profit which could lead to a long and expensive legal dispute.
Unfortunately, it isn’t always easy to know when you can rightfully terminate. We have set out below some of the key questions you need to consider when deciding whether to terminate a contract. As you will see, this is a complex area of law and there are lots of potential traps you could fall into. If you are considering terminating a contract, you should always take swift legal advice before doing so.
Once you have an understanding of the type of breach you are dealing with, you should then consider the potential responses and, vitally, which is the most commercial approach for your company.
No: Even if the breach does not seem remediable, there may still be time restrictions or obligations on the party to try and resolve the breach before termination can take place. You should always cross-check against any termination clauses in your contract.
Yes: Whether it is a repudiatory or material breach, if it can be remedied then you should consider providing a cure period to the other side. You should always cross-check this against any termination clauses in your contract.
Yes: Every termination is time sensitive. After you become aware of your right to terminate, time starts to run. After this point, you have a reasonable period to act. If you do not act within this period, you are at risk of waiving the breach and losing your right to terminate. For example, if you identify a material breach and confirm you have the right to terminate but continue to perform the contract by paying the counterparty, this could waive the breach. This is, of course, very fact dependent, as it is not always possible to stop performing a contract.
No: You have a duty as the innocent party to take reasonable steps to mitigate your loss. Mitigation options need to be seriously considered. Are you sure there is nothing you can do to try and mitigate losses you have/will/might suffer due to the breach?
Yes: Action the mitigation and keep a clear note of why and how this is being done. If the counterparty were to challenge you on mitigation further down the line, this will be helpful evidence for your case.
No: Some alternatives to termination include negotiating variations to the contract, affirming the contract or bringing a claim for damages. If your relationship with the counterparty is vital to successfully continuing your operation, termination may not be the most commercial option. For example, you may not want to terminate a contract with an IT software provider unless there was another appropriate provider you could enter an agreement within time.
Yes: If you are happy that terminating the contract is the most commercially beneficial option, then continue to the next step.
No: As can be seen from the above, determining whether there is a right to terminate is not an easy question. The law hangs heavily on the context and circumstances of each individual contract and there are many reasons a termination that may, on the face of it, seem correct, be deemed wrongful. You should therefore always consider taking legal advice before terminating a contract.
Yes: If you have taken legal advice, you will be considered as aware of your right to terminate, and time will have started to run (see the information above on time sensitivity to act).
If, after considering all the above steps, you have decided to terminate the contract, ensure the termination is in accordance with any termination or notice clauses within the contract. The termination notice must be properly served.
Once termination has taken place, there may still be some obligations that outlive the contract. For example, these could include obligations regarding confidentiality, destruction or retention of records or IP rights.
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