10 key things you should consider before terminating a Commercial Contract
Sometimes in business things don’t go as planned; partners may not meet expectations, revenue targets aren’t achieved or circumstances simply change.
Whatever the reason, moving on may require you to terminate any contracts you’ve put in place and if that is the case, here are 10 questions you should ask yourself before taking any action:
1. What do I want to achieve?
Do you want to end a relationship or just renegotiate the terms? The answer will dictate your next step. And always remember, while termination might excuse the parties from their primary obligations, it won’t release a party from obligations that have already arisen and some obligations may survive even after the contract is terminated.
2. What does the contract say?
The right to bring a contract to an end could either be stated in the terms of the contract, implied by the wording of the contract or exist under common law.
You need to know exactly what your contract says it’ll usually set out the terms under which one of the parties can terminate it, e.g. if one party was to enter insolvency.
3. What do I do if there are no grounds for termination?
In some (but not all) contracts it may be possible there is an option to terminate the contract if one party gives reasonable notice.
4. Do I have a common law right to terminate?
Even if the terms of the contract don’t include an express and/or implied right to terminate, you may have a right to terminate it under common law if one party has committed a breach so serious that it goes to the very heart of the contract (a breach often referred to as a ‘repudiatory breach’).
If one of the parties has committed a repudiatory breach, the innocent party can choose to “accept” the breach and bring the contract to an end and sue for damages.
5. How long have I got?
If relying on a repudiatory breach then act quickly! Never delay your decision to terminate a contract as you may lose your rights and the longer you leave it, the more likely it is that you’ll “affirm” the contract (i.e. doing something inconsistent with exercising your right to terminate).
6. How do I serve notice?
If you believe you are entitled to terminate make sure you serve notice in accordance with all of the requirements set out in the contract. For example some contracts stipulate notice cannot be given by email and must be served to an address other than their regular or office address.
7. How will the termination affect my business?
Will you be left with excess stock? Can this be easily sold? Will you need a new supplier and, if so, what lead time will they need? How will the termination affect your staff? Will TUPE apply? What will happen to confidential information shared by the parties during the life of the contract?
8. If I am terminating because of the other party’s breach, will I need evidence?
It is good practice to keep evidence of the other party’s breaches and to document your grounds for termination. In the event of a dispute this evidence could be very useful.
9. What if I get it wrong?
Determining whether or not a party is entitled to or a breach is serious enough to terminate a contract is not always clear cut.
Moreover, if you try to terminate when you’re not entitled to do so, you could end up committing a repudiatory breach that will allow the other party to terminate and sue you for damages so always take legal advice as the consequences of getting it wrong can be extremely serious.
10. Do I need help?
When it comes to terminating a contract, the law is complex and these tips only skim the surface. As the potential consequences of getting this wrong are so serious, you should always take specialist legal advice before taking any steps toward terminate.
If you are considering terminating an existing contract or would like to discuss any other dispute you or your business might soon face please contact Michael Peacock on 0114 290 6287 or email Michael on Michael.firstname.lastname@example.org.