Contract termination
Terminating a contract, also commonly referred to as ‘discharging’ a contract, is the act of excusing all contracting parties from their contractual duties prior to the expiry of the contract. The contract is effectively brought to an end.It is important to distinguish termination with the concept of ‘rescission’, which like termination frees the parties from their obligations. However, while rescission seeks to restore the parties to their original position prior to the contract, termination does not.
How a contract may be terminated
A contract cannot be terminated automatically. Rather, a positive action such as giving notice is required. The terminating party can seek to rely on a variety of grounds depending on the circumstances.For example, contracts typically confer rights of termination which allows termination by one party if certain circumstances have been met. These are contained in termination clauses in contracts and are usually easily identifiable.Contracts can also be terminated if a repudiatory breach occurs. This is a breach of the contract grave enough to justify termination by the innocent party.
Getting a termination wrong
If a party wishes to terminate a contract it is important they proceed with extreme caution and it is unwise to terminate a contract without seeking legal advice first. Failure to terminate correctly usually invalidates the termination. Common mistakes made by a party seeking to terminate a contract include:
Terminating without the right to do so.
In almost all cases is not black and white as to whether a party has the right to terminate the contract. Parties often invalidly terminate contracts after mistakenly believing they have the right to do so, either by misinterpreting a terminating clause or incorrectly attempting to rely on a repudiatory breach.
Giving the wrong grounds for termination.
Even when parties do genuinely have a right of termination another risk is giving the wrong grounds for termination in the termination notice. For example, in Phones 4U Ltd (v EE Ltd [2018] EWHC 49, EE lost out on a claim of £200m because they relied on incorrect grounds in the termination notice.
Not following the correct termination procedure.
Termination clauses often contain complicated instructions which must be adhered to to the letter. Failure to follow the correct procedure means the termination is unlawful.
Damages
In addition to invalidating the termination, failure to terminate correctly also exposes the terminating party themselves to a claim in damages. This is because the terminating party typically ceases to continue their contractual obligations after incorrectly terminating the contract meaning the other party can sue for breach of contract.
If this is the case, the non-terminating party could sue for damages stemming from the loss caused by the breach. As this can include loss of revenue, the cost of rectifying the breach, and any reputational damage, this can be extremely costly for the terminating party.Additionally, the terminating party could be held liable for damages caused by the termination of the contract. Thus, the terminating party could be forced to compensate the non-terminating party for all the profit it would have made had the contract been fulfilled.
Contract termination is a complex area of law. Careful consideration is required before terminating a contract as invalid termination can lead to serious consequences. Those considering terminating a contract should always seek advice from a legal professional before proceeding.
Here at Barnes Law we can provide you guidance on how to navigate in situations where you need to terminate the contract or feel that you are entitled to terminate it by helping you to understand you rights and obligations under the given contract and, if you are entitled to terminate it, how to do it correctly so it does not expose you to a legal claim.
Please contact our team for more guidance on info@barnes-law.co.uk.
