Termination of Commercial Contracts

There are many reasons why commercial contracting parties may which to terminate a contract early. Common reasons for terminating a contract include:

• unsatisfactory performance,

• the contract is no longer practical for one party to continue (for example, the party can get the goods/services more cheaply elsewhere), or

• one of the parties has gone into or is about to go into insolvency.

It is always important to assess the relationship between the parties before terminating – if there is an on-going relationship renegotiating the contract or instituting a dispute escalation procedure may result in a more satsfactory solution for the parties.

Termination means that the contract is ‘discharged’. The contract does not actually cease to exist, but the future rights and obligations of the parties fall away.

Contractual Termination

Contracts usually make express provision for termination in certain specified circumstances and the steps that should be followed in order to effect termination. Some contracts will expressly come to an end after a fixed period of time. Others will require some positive step to be taken by one or both parties to bring about termination.

Contractual termination rights will operate in addition to common law rights to terminate unless they are expressly or impliedly excluded.

Common Law Termination

If the contract contains no express provision on termination, a term allowing termination on reasonable notice may sometimes be implied. What is reasonable notice in the circumstances is a question of fact to be determined at the time of the termination. Additionally, at common law a contract may be terminated due to specific breaches. The following breaches justify termination at common law:

breach of a condition of the contract

• repudiatory breach of an ‘intermediate’ or ‘innominate’ term of the contract

• a party’s outright refusal to perform all or substantial parts of its obligations, or

• where one party makes it impossible (by act or omission) to perform the contract.

In the absence of express termination provisions, when considering whether or not a breach gives rise to a right of termination, it is relevant to consider the classification of the term(s) breached. Even if not expressly labelled as such, contractual terms can be classified as:

• ‘conditions’ (a term, the breach of which entitles the aggrieved party to terminate)

• ‘warranties’ (a term, the breach of which does not entitle the aggrieved party to terminate, but which could lead to an award of damages); or

• ‘intermediate’ or ‘innominate’ terms (the remedy for breach of which depends on the nature and effect of the breach at the time it happens, but which may amount to a repudiation of the contract).

The label given to a particular term of the contract is not determinative. If termination seems too drastic a remedy for a breach of a term that is labelled a condition, the term may instead be interpreted as an intermediate term not justifying termination.

Terminating The Contract

If the aggrieved party opts to terminate the contract, it should check what the contract says about termination and what procedure must be followed. The contract may stipulate that a termination notice must be served in a particular way. Termination notices need to be drafted carefully, otherwise they may be considered invalid.

It is acceptable to exercise both contractual and common law rights of termination at the same time.

Practical Points

If you are thinking of exercising a contractual termination right:

• consider carefully whether contractual termination suits your purposes better than the common law right, as you may be making an irrevocable election

• read all the relevant contractual provisions very carefully and follow them exactly. For example, are you obliged to give the party in breach an opportunity to remedy?

• take steps to mitigate your loss. A party cannot recover damages for losses which could have reasonably been avoided, so consider how you might be able to prevent or reduce loss.

If you receive a notice of termination:

• consider in detail whether it complies with the contractual requirements, and

• decide what (if any) use you can make of it to advance your position, for example service of the notice could itself constitute a repudiatory breach.