All businesses should be clear in terms of what could trigger a termination right in a commercial arrangement and, equally, how to exit if required without unexpected liability. Termination notices cannot be withdrawn after they are served, and some mistakes are hard to rectify without financial consequences.
If your business is considering exiting a commercial arrangement, as an initial step you should identify any potential termination rights which are available in order to avoid an unjustified termination scenario, which could deem the contract repudiated and enable the other party to claim damages. Before taking any action, you should therefore consider:
- Any express termination rights.
- Unless expressly excluded within the contract, the common law right to accept a repudiation (i.e. in circumstances where the other party has acted in a manner which is so serious that it strikes to the core of the contract and is deemed to deprive you of the full benefit of the contract), giving you the right to terminate.
- Any implied termination rights where there are no other termination rights within the contract. However note that the test is unlikely to be met in circumstances where the contract is a fixed term contract or a contract with express termination provisions.
Termination for Convenience
Indefinite contracts: If a contract is in place between business parties which is for an indefinite period of time with no express termination provision, termination for convenience is usually permitted by way of an implied term allowing for termination on ‘reasonable notice’ (determined on a case by case basis taking into account the type of contract and circumstances). However, if such indefinite contract includes a clause that allows for termination on a specified event, the contract cannot be terminated for convenience unless such specified event has occurred.
Fixed-term contracts: If a fixed-term contract is in place between business parties which does not contain any termination provision, it is not possible to terminate the contract for convenience before the expiry of the fixed term. However, if such contract contains a clause allowing termination by notice at any time (whether before or after expiry of the fixed term), this express right to terminate for convenience by notice negates the fixed term. Any clause only allowing termination on specified events will prevent the contract being terminated unless such specified event has occurred.
Minor breach
Minor breaches do not usually give rise to an automatic right to terminate the contract, unless the contract expressly states that such type of minor breach triggers a termination right. This is because a minor or trivial breach of contract is not considered to be ‘repudiatory’ (ie. it does not strike to the core of the contract thus depriving you of the full benefit of the contract) and so, whilst the breach may justify financial damages, it will not entitle you to exit the arrangement.
Repeated breaches
In circumstances where contract breaches (even if minor or trivial) repeatedly occur in circumstances where the contract including is a clause that expressly allows for termination in the event of any repeated or persistent breach, then the non-breaching party will be able to terminate. However if there is no express termination provision, the contract cannot be terminated unless and until the cumulative effect of such repeated breaches is ‘repudiatory’ (ie. strikes to the core of the contract depriving the non-breaching party of the full benefit).
Substantial breaches
If a substantial breach of contract occurs and there is a clause within the contract which allows for termination in the event of a material breach, the contract can be terminated – the terms ‘substantial’ or ‘material’ are likely to be interpreted in a similar way.
If a substantial breach of contract occurs but the contract is silent on termination rights, the contract cannot be terminated unless the substantial breach is ‘repudiatory’ in nature – which is likely to be the case but not guaranteed.
Repudiation
Any contracting party is able to rely on the right to terminate a contract on the grounds of ‘repudiation’ unless such contract expressly excludes this right – which would be unusual. The right to terminate for a repudiatory breach is a common law right, hence rare for a party to forgo it.
An ‘anticipatory repudiation’ arises where a party refuses to perform the contract or makes it impossible to perform before performance is due. Even if there is no termination provision within a contract, the contract can be terminated for anticipatory repudiation.
Force majeure
Force majeure is usually defined as something other than a breach of contract as both parties to the contract are deemed to be innocent in these circumstances.
If a force majeure event occurs which has been specified in the contract and a contract contains a clause which allows for termination on the occurrence of this type of specified event, the contract can be terminated – usually on the expiry of a reasonable period of time during which the parties attempt to rectify the situation.
Other than this, no further termination rights are usually implied in the event of force majeure.
Insolvency
It can be difficult or impossible for businesses to terminate contracts on any grounds once such business has entered into formal insolvency proceedings. Insolvency itself does not end a contract or trigger a termination right at law. Therefore, it is important for parties to draft termination clauses which expressly provide a contractual termination right for the non-insolvent party in the event of insolvency. It is fairly common for contracts to list various insolvency situations triggering termination.
Please note that certain contracts to supply essential goods and services (such as utilities) are protected in law if the customer enters administration or a company voluntary arrangement.
Dissolution of a corporate party
When a company is dissolved, it no longer exists and so it cannot perform any obligations that it has not yet performed or demand or receive the other party’s performance. This makes termination impossible, unless the company is restored to the register of companies.
However, dissolution itself does not terminate or end a contract and if a contract has not been terminated before such dissolution and the contract does not include a clause which allows the other party to terminate in the event of dissolution or ceasing to trade, the dissolved company’s rights under the contract pass to the Crown as bona vacantia (i.e. ownerless property/goods).
Death and incapacity
Some contracts automatically end on a party’s death or loss of capacity under an express or implied term or under the law of ‘frustration’ (see below). Contracts for personal services are especially likely to end automatically.
Some other contracts may continue if they can be performed and enforced by a party’s: (i) personal representatives (if the party is deceased); or (ii) attorney, as appointed by a lasting power of attorney or an enduring power of attorney or a court appointed attorney (if the party has lost capacity).
If a contract does not contain a termination provision, it cannot be terminated on death or loss of capacity, unless a term can be implied which allows termination.
Change of control
A change in a corporate party’s ownership does not change its own identity or its contracts irrespective of how such change in control may impact the parties’ commercial relationship. If a contract does not contain any termination provision, it cannot be terminated for change of control. It is for this reason that termination clauses often expressly specify change of control as a termination trigger.
Frustration
A contract almost always ends on ‘frustration’, in which case neither party can usually terminate or preserve it without the other’s consent. In circumstances where a contract has been deemed ‘frustrated’, the party wanting to end the contract should contend that the contract is frustrated rather than serve a termination notice. If a contract does not contain any termination provision, a party may assert that the contract is ‘frustrated’ in order to exit without liability.
Supervening Illegality
A valid contract may be ‘frustrated’ (ie. discharged) if performance of that contract becomes illegal. Illegality also makes a contract unenforceable as a matter of public policy. Where this is the case, neither party can terminate or preserve the contract and a court would refuse to enforce it, even if neither party raises illegality as an issue.
A party wanting to end an illegal contract should contend that the contract is frustrated or unenforceable rather than serve a termination notice. Termination clauses do not usually cover illegality as a termination trigger on the basis that neither party is likely to be envisaging the subject matter of the contract to be illegal.
If you require any assistance in relation to a contract in any capacity, including termination, or any other commercial documentation, please don’t hesitate to contact the Roythornes Corporate and Commercial team.