Common reasons for terminating a contract include unsatisfactory performance of the whole or part of the contract by the other party, refusal by the party to perform the contract at all, or that the other party has breached some other provision of the contract. Other reasons might include:
Some contracts will expressly come to an end after a fixed period of time. Others will require some positive step to be taken by one or both parties to bring about termination.
Contractual termination rights will operate in addition to common law rights to terminate (see the 'Termination at common law' section) unless they are expressly or impliedly excluded.
Contracts usually make express provision for termination in certain specified circumstances and the steps that should be followed in order to effect termination. The circumstances specified may include, for example:
If the contract contains no express provision on termination, a term allowing termination on reasonable notice may sometimes be implied. What is reasonable notice in the circumstances is a question of fact to be determined at the time of the termination but the courts have considered the following matters relevant:
Termination at common law
The following breaches justify termination at common law:
Whether or not a breach is repudiatory in nature (so as to justify termination) depends on a number of factors. The approach of the courts is firstly to consider what benefit the injured party was intended to obtain from the performance of the contract and secondly to consider the effect of the breach on the injured party and whether it operates to deprive the aggrieved party of substantially all of the benefit the parties intended that party to obtain under the contract, for example:
When faced with a repudiatory breach by the defaulting party, the aggrieved party may elect either:
Anticipatory repudiatory breach
An anticipatory breach (or renunciation) is where one party, by words or conduct, demonstrates its intention not to perform either all of its obligations under the contract, or to perform them in a way that is substantially different from the requirements in the contract.
If the anticipated breach can be shown to be repudiatory in nature then the aggrieved party is entitled to terminate the contract at that point, even though the actual date for performance has not yet been reached.
In order to prove this, it is necessary to demonstrate that the defaulting party has made it clear, beyond reasonable doubt, that it no longer intends to perform its side of the bargain.
In such a situation, it is possible to choose either to accept that the contract has been repudiated and terminate at that point, or wait until the date for performing the obligation passes and treat the defaulting party as being in actual breach at that juncture. It is often easier to justify an actual breach rather than an anticipatory breach as being repudiatory.
Affirming the contract
If the aggrieved party elects to affirm the contract, it is important to:
If the aggrieved party opts to terminate the contract, it should check what the contract says about termination and what procedure must be followed. The contract may stipulate that a termination notice must be served in a particular way.
Termination notices need to be drafted carefully, otherwise they may be considered invalid. See section 10 below for key points to include.
Many contracts will include a dispute resolution procedure which the parties will need to follow before court or arbitration proceedings are commenced. Check the provisions carefully. They may require the parties to discuss all disputes informally before any formal action is taken and in some instances may also require the parties to participate in a mediation.
If you are intending to serve a termination notice then consider sending a separate without prejudice letter at the same time suggesting a meeting or dialogue to attempt to resolve the matter. Without prejudice correspondence and negotiations are not admissible as evidence in court and, therefore, will not prejudice your case in respect of termination.
It is acceptable to exercise both contractual and common law rights of termination at the same time.
Termination notice requirements
State whether you are terminating under the contract, and if so which provision, or state that the breach is repudiatory, entitling you to terminate.
State when termination is effective from. This can be immediate, or state the notice period required in the contract.
Set out comprehensive details of the alleged breach by the defaulting party. Be as specific as possible, including dates of key incidents and correspondence.
Be specific in relation to details of the monies claimed or loss suffered.
Include provision for claiming interest and costs.
If the defaulting party has indicated that it will not comply with future obligations, your notice should also:
If you are thinking of exercising a contractual termination right: