Contract termination: what to look out for

Sponsored feature | Emma Elston, dispute resolution lawyer, HCR Hewitsons

There are several reasons why you might want to bring a contract to an end – for example, lack of profitability or poor performance. However, while the commercial rationale might be straightforward, termination can be fraught with legal complications which may result in an unwelcome and costly dispute.

The most important risk to be alive to is that if termination is not done properly, you could be in breach of contract yourself and be vulnerable to a potentially substantial claim for loss of profits from the other party.

One of the reasons why termination can be complex is that its scope includes both contractual and common law rights. The first port of call is to check the circumstances in which termination is permitted by the terms of the contract - often called ‘Events of Default’. If there is not an applicable contractual right, you may be able to rely on the common law right to terminate for ‘repudiatory breach’.

Once the right to terminate has been established, it is important to ensure that it is exercised correctly by complying with any procedural requirements required by the contract. For example, while it may seem sensible to send a significant legal notice by recorded delivery, if the contract says first class post, then first class post it must be.

We often see issues arising where a termination notice is undermined by a company continuing to send out invoices – communication is required across the business to ensure that the contract is not treated as being in force.

Finally, if you intend to exercise a termination right, you need to be careful not to lose it by delaying or waiving your rights, for example by allowing more time for payment.

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These factors mean that termination disputes often cross my desk. For example, the following scenario is common:

Party A has purported to exercise a contractual right to terminate due to a breach by Party B.

Party B disputes the validity of the termination notice because it claims that either:

• It was not in breach
• The termination notice was sent to the wrong address
• The reasons relied upon in the termination notice were invalid
• Party A has waived its right to terminate.

B terminates on the basis that A’s purported termination communicated an intention to stop performing and that there has therefore been a repudiatory breach.

For more information, contact Emma Elston on 01223 447429, 07971 122628 or eelston@hcrlaw.com.

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