The 4 ways to legally terminate a contract: breach of contract, performance and agreement
Disruption is common in the business world, with unforeseen events or difficulties meaning that contracts sometimes cease to be beneficial or even possible. We take a look at various ways in which a contract can possibly be legally terminated.
If you have entered into a contract that you later wish to terminate, it is important to follow the correct procedure. Failure to do this could constitute a breach of contract which could result in liability for damages. Even if the other party is initially at fault, there is still a risk that you could incur sanctions if you do not adhere to the contract yourself until it is officially at an end.
There are a number of ways in which a contract can be terminated, from a simple agreement by all of those involved to a serious breach of the conditions.
1. Termination of contract for breach
Where a contract is substantially breached, then it may be possible to claim termination. The breach needs to be sufficiently serious, a so-called repudiatory breach.
In determining whether a breach was repudiatory, the court will look at whether the term that has been breached was vital to the performance of the contract. If it is, then termination is permissible, and damages can be claimed.
If an intermediate term is not complied with, it will only justify termination of the contract if the breach goes to the root of the contract, frustrating its commercial purpose or depriving the other part of substantially the whole of the benefit of the contract.
If one party refuses to perform the contract or part of the contract, then the other party can hold the contract to be terminated. If this happens before the contract has been performed, it is referred to as an anticipatory breach. Non-performance exists where a reasonable person would conclude from the conduct of the party in breach that there is no intention of carrying out the contractual obligations.
Several smaller breaches can together be serious enough to constitute a repudiatory breach, even if singly they would not.
Issues such as poor performance, late payment or delays will not normally be held to be repudiatory breaches unless the contract states otherwise, for example, if strict deadlines have been included. There will usually be other remedies available for these failures, however. For more information, see our Guide to remedies for breach of contract.
2. Termination of contract by performance
A contract will automatically end once all of the contract terms have been performed. This means that the obligations under the contract must have been satisfied. The contract may include provisions for partial performance for a reduced payment.
Where one party has hindered the other so that they cannot fully discharge their obligations, it may be possible to argue that the contract has still been satisfied.
3. Termination of contract by agreement
It may suit both parties to end the contract. To ensure this does not leave either party open to a later claim of breach of contract, a variation of the contract should be drawn up. To be legally binding, a contract must include some consideration or payment between the parties, so it is essential that this is included.
Alternatively, a deed can be entered into whereby all parties release each other from their obligations under the contract.
A contract may also include ways in which it can be terminated by agreement, in which case that can be used. It is important that the contract is terminated properly to avoid any future claims.
4. Termination of contract by frustration or force majeure
If something happens which makes it impossible for a party to the contract to fulfil their obligations, then a contract may be terminated on the grounds of frustration. This can also apply if events alter an obligation so that it is substantially changed from what was initially intended.
Frustration will not be as a result of any action by the parties but could be as a result of an unforeseen event such as a fire or the cancellation or unavailability of something.
A different way of ending a contract because of an unforeseen event is by relying on a force majeure clause, if one has been included in the contract. This will specify certain circumstances under which the parties will be excused from fulfilling their obligations. Typically, a force majeure clause will include so-called acts of God such as floods or natural disasters as well as terrorist activities, fire or an epidemic. Generally, a force majeure clause will allow for suspension of the contract, but in some cases, termination may occur after a set period of time.
Ending a contract can have serious implications and must be approached carefully to ensure that innocent parties do not inadvertently end up with liability for breaching contract terms.
If difficulties in fulfilling a contract are being experienced, it is advisable to seek legal advice. Negotiation may be possible, to avoid ongoing difficulties or litigation, and to allow the parties to focus on moving forward.
Get in touch with us
At Lincoln & Rowe, we understand the importance of helping our clients keep their businesses running smoothly. We have extensive experience in dealing with contract difficulties across a range of sectors.
We can also work with you to put the right contract documentation in place for future transactions to ensure that your business has a solid legal foundation. We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at firstname.lastname@example.org or fill in our contact form and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.