A Litigator's Guide to... Terminating Contracts
There will be times when your client wants to terminate a non-performing business relationship. Whether this deterioration happens slowly or due to a catastrophic event, the immediate focus is typically on bringing the relationship to an end.
As litigators, we see the problems that can occur when businesses terminate contracts hastily which can lead to serious consequences. So, we are sharing our advice about how you can best bring a business relationship to an end, whilst minimising the risk to your client.
Termination under the contract
The first port of call when considering whether a client can bring a contract to an end is examining the contract itself. Contracts often include provision for termination on notice or simply run their course, either at the end of a defined time period or following fulfilment of obligations and, in those circumstances, it usually isn’t necessary to consider the mechanics around termination.
You will also need to consider what implied terms might be read into the contract. What that means will vary, but generally we look at those terms required to give the contract business efficacy, and it’s crucial to understand the context of the contract and the commercial relationship it seeks to govern.
Contracts don’t tend to run in perpetuity and so for example have implied terms regarding ‘reasonable’ notice and what is reasonable will need to be inferred from the particular circumstances at play.
Care is needed to determine whether, notwithstanding termination, any obligations are intended to survive, as these will need to be adhered to. Examples might include around protection of confidential information and data or non-poaching/solicitation provisions.
Termination for breach
Where termination arises because of a perceived breach, the position can be more complex. Not all contractual obligations are equal, and different consequences can flow from breaches of particular terms. Breach of a very serious obligation can give a right to terminate whereas others would only give a right to claim damages. Sometime a contract may define a list of scenarios that constitute breach and which allow for termination.
Sometimes terminology – such as a ‘material’ breach – is used and this might either be defined in the contract or if not, a body of case law has built up to give guidance on what those terms mean. Contracts will sometimes prescribe what steps are required following discovery of a breach, to include defined notice periods or an opportunity to remedy before termination rights arise.
Overarching what is expressly written in a contract, parties can usually terminate if there has been a repudiatory breach, namely a breach of a term that goes to the very root of the agreement and where non-performance by a party is considered a substantial failure to perform the contract.
We cannot overstate the importance of forensically examining evidence of breach. No breach should ever be taken at face value as being a fundamental breach giving your client rights to terminate.
Wrongful termination can in itself amount to repudiatory breach, and can expose a business to a potential claim in damages for wrongful termination. This is an area that warrants formal legal advice before notice of breach is given, so do get in touch with us if you would like our input.
Losing the right to terminate on breach
It’s important to deal with matters promptly after discovery of a perceived breach. An innocent party’s entitlement to terminate can be lost where no action is taken in response to a breach, or alternatively the parties agree to continuation of the relationship in spite of earlier breaches. Additionally, parties may inadvertently incur additional obligations, depending on what was agreed, so the period immediately following discovery of a breach is a key stage for clients to take legal advice.
An innocent party often has a choice whether or not to accept the breach by affirming the contract and continuing to perform their end of the bargain. Silence on the matter may be taken as affirmation. It also raises additional issues around the potential waiver or compromise of rights, which again highlights the importance of taking decisive action promptly.
How we can help
In many cases early strategic input from us will go a long way towards ensuring the business relationship is brought to an end smoothly, minimising the risk of a dispute developing. We encourage our partners to reach out and get some early advice before making a decision as this will very often improve your client’s rights and save both time and money in the long run.
We are always happy to speak informally in the first instance and help where we can. If the case warrants a formal instruction, we can advise your clients directly or support you in the background, depending on what is more appropriate. Our fee structures are transparent, and we offer a high level of service from our experienced team. So, please get in touch if you would like our help.