Terminating contracts – Look before you jump…

Making the proactive decision to terminate a contract can be a daunting one as getting it wrong could lead to the other party claiming damages against you for wrongful termination.

The following pointers should be borne in mind when considering whether or not to terminate a contract:

  • How confident are you of your right to terminate and the consequences of getting this wrong?
  • How long has it been since the breach occurred? If some time has passed, could the other party argue that you have waived your right to rely on the breach or acquiesced in the conduct?
  • Carefully check whether any procedural requirements are specified in the contract for serving notice of termination, including notice periods, form of notice, and means of service. Make sure that you comply strictly with those requirements and that you do so in a way that allows you to demonstrate compliance if required later. A clear paper trail will be invaluable in the event of subsequent dispute.
  • If in doubt as to whether a breach is remediable, consider writing to the other party to propose that they cure the breach and gauge their response.
  • Where the breach is capable of remedy, consider whether the contract requires that the opportunity to remedy be provided and, if not, whether you in fact wish for the breach to be remedied so that the contract can continue.

Always document your grounds for termination clearly and, in the event of any doubt as to whether the breach is “material”, make sure that you take steps to measure and are clear as to the impact of the breach on your business. This will ultimately form the evidence as to whether or not the breach was “material”.

Where you are dealing with a foreign party or the contract is or has been performed out of jurisdiction, check whether there are any local law peculiarities that may override your rights. Even if the contract is governed by English law, there may be foreign mandatory laws that apply to protect a foreign contracting party, for example, Italian insolvency laws override English law contractual rights of termination once an Italian counterparty enters administration.

Bear in mind that, if you attempt to terminate a contract without a valid right to do so (for example, because the breach was not in fact material), that wrongful termination may itself amount to a repudiation of the contract. This would entitle the other party to elect whether to accept your repudiation (and sue you for damages for wrongful termination) or affirm the contract and insist on continued performance.

It goes without saying that, if unsure at all on your contractual rights and obligations, seek professional advice before taking the (often irreparable) step to terminate.

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