Quick Guide on Contract Termination
Contract termination describes a contract expiring or being brought to an early end. There are four main ways of terminating a contract, such as follows:
This blog aims to provide a short overview and explanation of contract termination with key considerations for those creating contracts. Throughout this blog, we reference an article by Kira Systems on ‘How to Terminate a Contract’, which includes several useful infographics that demonstrate how to include a termination clause within a contract.
Termination by performance simply means the contract has run its course. In other words, the responsibilities of each party to the contract have been fulfilled and the purpose of the contract has been carried out (these responsibilities include all express and implied terms of a contract).
It is advisable that parties keep documentation showing that they fulfilled their contractual duties as this is helpful if the other party goes on to later dispute the fulfilment of your contractual obligations.
To get a deeper understanding of the types of terms in a commercial contract, please visit our blog post about ‘Understanding Commercial Contracts in the United Kingdom’.
Contracts may be terminated by way of agreement between the contracting parties. Termination by agreement constitutes a variation of the contract which, in turn, must be supported by fresh consideration to be legally binding. Consideration refers to a benefit which is passed between the parties as the essential reason for entering a contract (e.g. money, property rights etc.).
This method can, sometimes, be referred to as ‘termination by consent’ as it often follows negotiation and is decided by the parties – more or less – by their own freewill.
If a party fails to honour the contract, this will constitute a breach.
However, this breach must constitute a repudiatory breach of contract – that is, a serious breach of the contractual relationship. The legal test of the presence of a repudiatory breach is to discern whether, from the perspective of a ‘reasonable person’ in the position of the innocent party, looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform the contract.
The confirmation of such a breach raises a right for the innocent party to decide whether to treat the breach as ending the contract, or affirm the contract so that it continues regardless. The innocent party is also afforded with the opportunity to claim for compensation.
Contract termination by way of frustration relates to instances where the underlying circumstances alter the possibility of the performance required by the contract. It can sometimes be referred to a ‘Impossibility of Performance’.
For example, if a company hired a public speaker to speak at an event but, a week after signing the contract, they were seriously injured (unable to speak or move). The company has the right to terminate the contract in this scenario, the speaker’s obligation to perform is removed (by way of frustration) and the contract is terminated.
Drafting a correctly worded termination clause, upon forming a clear understanding of legal consequences is significantly important since it defines the manner in which a commercial transaction may be brought to an end and also improves certainty by specifying clear triggers for termination where there might otherwise be doubt.
Virtually all contracts have a termination clause that sets out a mechanism which the parties shall follow while terminating the contract. These may fall in the following categories:
- Termination for cause clauses relate to instances where the termination of a contract is a result of the other party’s actions, misconduct, inaction or a breach of contract. These clauses are often seen in employment contracts where employee’s contract may be terminated due to misconduct or a failure to fulfil their responsibilities.
- Termination for convenience clauses allows one or both parties to terminate a contract without a specific reason for doing so. For example, such a clause may state that: ‘Any party may terminate this agreement at any time for any reason by giving at least thirty days’ written notice’.
For infographics as to how to make use of the termination clauses and more detail on their applicability, please visit Kira Systems’ article on How to Terminate a Contract. The article also examines causes for terminating a contract and explains how to create and identify termination clauses, as well as writing a termination of contract notice.
How can we help?
We regularly advise businesses in a range of sectors on their rights to terminate contracts and the risks of terminating a contract. We can also assist with the resolution of commercial contract disputes as and when they arise.
If you would like to discuss drafting and/or terminating a commercial or employment contract, we offer a 20-minute no cost, no obligation call as a starting point. If this is of interest, please get in touch via the email@example.com email address to schedule a call with one of our experienced fee earners.