19th March 2020

Terminating commercial contracts

How to avoid the common pitfalls and costly mistakes

Should I stay or should I go? Its a valid question. There are many reasons why you may wish to terminate a commercial contract – especially in these uncertain times of Coronavirus.

When considering terminating, be careful to do it right, or you could open yourself up to serious consequences. This article addresses some of the common pitfalls that arise when contracts end (or don’t end!)

Do I have the right to terminate?

While you may want the agreement to end, and of course you have your reasons, if you are terminating before the term defined in the contract, it is likely that you will not have a contractual right to end.

There are various other ways that you may be able to argue the contract has been terminated: for example, if there is a repudiatory breach by the other side, this may have caused the contract to end. You could then accept the termination. However, repudiatory breach can be very difficult to prove, as it must be demonstrated that the breach goes to the heart of the contract, and is not just an inconvenience, or not ideal.

If you claim the contract has been terminated, and a Court later finds that it was not, then you yourself may be in breach of the contract. This could mean that the person you contracted with has a claim for damages against you. There may also be potential adverse costs consequences if the matter goes to Court.

Does the contract contain any notice provisions?

Notice provisions are some of the most frequently litigated issues in all types of disputes. Contracts often contain particular provisions for serving any notice relating to the contract, particularly termination. For example, a contract may provide that notices must be sent by recorded delivery, and that there will be deemed service two days after posting. Therefore, if you send an email terminating the contract, this will not have effect. This may be the case even if you elect to terminate after the initial term has expired.

Additionally, if a Court finds that you have terminated a contract incorrectly, they may apply sanctions by way of costs, meaning that even if you win your case you may not recover all your costs, or you may even be responsible for the other side’s costs.

Does the contract provide for costs?

You should always check if the contract in question makes any provision for costs in the event of disputes. Even if the contract is small, if it provides one party pay another’s costs in the event of dispute, then even if the matter is allocated to the small claims track (where costs would not normally be recoverable), the opposition could argue that you should pay their legal fees.

Coronavirus (Covid-19)

Coronavirus is affecting business in various different ways and may play a part in whether you have the right to terminate. The fact that more and more business are having to close, and people are increasingly less able to leave their homes, could make it significantly more difficult for contracts to be performed.

There is the possibility that contracts could be discharged by frustration – where performance of the contract is impossible; or force majeure – where the occurrence of an event outside of the parties’ control can mean they do not have to perform their contractual obligations.

Need advice on how to deal with terminating a contract, we’re here to help – get in touch.

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