Contracting parties should always have an eye on the potential
exit routes, when starting, or continuing, a contractual
relationship. A contract may be brought to an end in a number of
ways, with different consequences, depending on the nature of the
right being invoked. However, caution should be exercised, because
attempting to bring a contract to an end without the right to do
so, can be a breach of contract in and of itself. With this in
mind, what are your options?
Termination for breach
If a counterparty breaches their obligations under a contract
then you may (but will not always) have the right to terminate the
agreement. This could be based on a term of the contract that
provides the right to terminate for breach, or under common law for
“repudiatory breach”, where the breach deprives you of
the benefit that the contract was intended to provide. In certain
circumstances, you may even be able to terminate for repudiatory
breach where the breach has not yet occurred, but the counterparty
has shown an intention not to perform.
Contractual termination
Your contract may include a clause that provides you or the
counterparty with an option to terminate, without the requirement
for a breach. This right may be exercisable at or after a
prescribed time period or other milestone, or some other specified
event.
The impact of insolvency
Becoming insolvent does not normally terminate a contract, or
excuse either party from performing, unless the contract contains a
clause to that effect. The same is true if a party gets into
financial difficulty. Commercial contracts therefore typically
contain an insolvency-triggered termination right. However, there
are limitations on the application of these clauses under
insolvency legislation, and the Corporate Insolvency and Governance
Act 2020, which was introduced to offer protection to finically
distressed businesses in the wake of the Covid pandemic.
Rescission of a contract
Rescission is a remedy that can be claimed to extinguish a
contract, and to put the parties into the position they were in
before contracting. It can apply if you entered into a contract on
the basis of a false statement of fact made by the counterparty (a
misrepresentation), if you made a mistake as to the terms of the
contract and the other party was aware of that (mistake), or if you
were unfairly persuaded to sign the contract (undue influence).
Void contract
You may have the right to claim that a contract is void i.e. of
no legal effect. A void contract is deemed never to have existed
(as opposed to a contract which exists and has legal effect unless
it is rescinded).
A contract may be declared void where the parties have entered
into it under a common mistake that is fundamental to the contract,
or where there has been a unilateral mistake i.e. if a counterparty
were to accept a promise knowing that the terms stated differ from
what you actually intended. It can also apply if you are mistaken
as to the identity of the other contracting party, or if you are
misled into signing a contract which differs from what you had
intended to sign.
Release and discharge by agreement
The discharge of a contract by agreement involves the parties
agreeing to the release of their obligations to one another.
However, it can also encompass a partial release by way of
variation of an existing contract, or the release of specific
obligations.
Variation
It is also open to the parties to a contract to modify or alter
its terms by mutual agreement. A variation will only be effective
if it is supported by consideration, which is essentially the
assumption of additional obligations by one party to the other.
Waiver
Waiver occurs where one party agrees to the other party’s
request not to perform their obligations under the contract. The
party giving the waiver will be bound by it, and unable to rely on
or enforce the terms of the contract, provided they gave clear and
unequivocal agreement to the party making the request, and the
party making the request relied on that agreement to alter their
position.
Force majeure
A force majeure clause is a contractual term under which one (or
both) of the parties is entitled to cancel the contract, or be
excused from what would otherwise be a breach, on the occurrence of
specified events, or events beyond their control.
Frustration
You may be able to argue that a contract has come to an end
because it has become “frustrated”, if, through no fault
of either party, something occurs that it makes it impossible
physically, or commercially, to fulfil. Frustration can also apply
if something happens that transforms the obligation to perform into
a radically different obligation from that undertaken at the start
of the contract. However, questions of foreseeability and fault
make the threshold for frustration a high one to meet.
Termination rights in contracts with consumers
If you enter into a contract with a consumer away from your
premises or without meeting them, it is likely that they will have
cancellation rights under the Consumer Contracts (Information,
Cancellation and Additional Charges) Regulations 2013. The Consumer
Rights Act also provides safeguards for consumers faced with
termination; if your termination rights are deemed to be unfair
they may be invalid.
How to end contracts – practical steps
If you are reviewing the exit routes, there are a number of
important factors to consider. Termination is usually the most
draconian step and may be the choice of last resort, particularly
in high value, complex commercial relationships, or where there
have been long-established trading practices.
Therefore, as soon as problems begin to materialise, you should
start to consider what other options are available to manage the
relationship. This might be with a view to preserving contract, but
perhaps in a varied form, or at least ensuring that an exit is as
painless as possible.
Where termination is the best or only option, it is important
that you get it right. Relying on an express contractual term to
terminate for breach, or the common law right to do so, can be
fraught with difficulty. Not all breaches of contract give rise to
a right to terminate and if you get it wrong, you could find
yourself liable for terminating (or purporting to terminate)
unlawfully. Evidence will need to be gathered and a careful
analysis of the facts, and the law, will need to be carried out at
an early stage, before choosing the basis on which any termination
right is exercised.
Aside from the strict legal considerations, what steps need to
be taken on the ground to ensure a smooth transition? Does the
counterparty have materials, equipment, confidential information,
or IP that belongs to you? Could the failure to return this impact
on your ability to trade? What will the impact be on your other
commercial relationships and your employees? You need to assess all
the risks and have a contingency plan in place at the start of any
contractual relationship, and regularly review the position and key
milestones, to help inform and effectively manage its end.
This article first appeared in South East Business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.