Contracting parties should always have an eye on the potential exit routes when starting or continuing a contractual relationship. The team at Thomson Snell & Passmore LLP share their advice on ending contractual relationships.
A contract may be brought to an end in a number of ways, with different consequences, depending on the nature of the right being invoked. However, caution should be exercised, because attempting to bring a contract to an end without the right to do so, can be a breach of contract in and of itself. With this in mind, what are your options?
Termination for breach
If a counterparty breaches its obligations under a contract, then you may (but will not always) have the right to terminate the agreement. This could be based on a term of the contract that provides the right to terminate for breach, or under common law for “repudiatory breach”, where the breach deprives you of the benefit that the contract was intended to provide.
In certain circumstances, you may even be able to terminate for repudiatory breach where the breach has not yet occurred, but the counterparty has shown an intention not to perform.
Your contract may include a clause that provides you or the counterparty with an option to terminate, without the requirement for a breach. This right may be exercisable at or after a prescribed time period or other milestone, or some other specified event.
The impact of insolvency
Becoming insolvent does not normally terminate a contract or excuse either party from performing – unless the contract contains a clause to that effect. The same is true if a party gets into financial difficulty. Commercial contracts therefore typically contain an insolvency-triggered termination right.
However, there are limitations on the application of these clauses under insolvency legislation, and the Corporate Insolvency and Governance Act 2020, which was introduced to offer protection to finically distressed businesses in the wake of the Covid pandemic.
Rescission of a contract
Rescission is a remedy that can be claimed to extinguish a contract and to put the parties into the position they were in before contracting. It can apply if you entered into a contract on the basis of a false statement of fact made by the counterparty (a misrepresentation) if you made a mistake as to the terms of the contract and the other party was aware of that (mistake), or if you were unfairly persuaded to sign the contract (undue influence).
You may have the right to claim that a contract is void (i.e. of no legal effect). A void contract is deemed never to have existed, as opposed to a contract which exists and has legal effect unless it is rescinded.
A contract may be declared void where the parties have entered into it under a common mistake that is fundamental to the contract, or where there has been a unilateral mistake i.e. if a counterparty were to accept a promise knowing that the terms stated differ from what you actually intended. It can also apply if you are mistaken as to the identity of the other contracting party, or if you are misled into signing a contract which differs from what you had intended to sign.
Release and discharge by agreement
The discharge of a contract by agreement involves the parties agreeing to the release of their obligations to one another. However, it can also encompass a partial release by way of variation of an existing contract, or the release of specific obligations.
It is also open to the parties to a contract to modify or alter its terms by mutual agreement. A variation will only be effective if it is supported by consideration, which is essentially the assumption of additional obligations by one party to the other.
Waiver occurs when one party agrees to the other party’s request not to perform their obligations under the contract. The party giving the waiver will be bound by it, and unable to rely on or enforce the terms of the contract, provided they gave clear and unequivocal agreement to the party making the request, and the party making the request relied on that agreement to alter their position.
A force majeure clause is a contractual term under which one (or both) of the parties is entitled to cancel the contract or be excused from what would otherwise be a breach on the occurrence of specified events, or events beyond their control.
You may be able to argue that a contract has come to an end because it has become “frustrated”, if, through no fault of either party, something occurs that makes it impossible physically, or commercially, to fulfil. Frustration can also apply if something happens that transforms the obligation to perform into a radically different obligation from that undertaken at the start of the contract. However, questions of foreseeability and fault make the threshold for frustration a high one to meet.
Termination rights in contracts with consumers
If you enter into a contract with a consumer away from your premises or without meeting them, it is likely that they will have cancellation rights under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. The Consumer Rights Act also provides safeguards for consumers faced with termination; if your termination rights are deemed to be unfair they may be invalid.
Practical steps on how to end contracts
If you are reviewing the exit routes, there are a number of important factors to consider. Termination is usually the most draconian step and may be the choice of last resort, particularly in high-value, complex commercial relationships, or where there have been long-established trading practices.
Therefore, as soon as problems begin to materialise, you should start to consider what other options are available to manage the relationship. This might be with a view to preserving contract, but perhaps in a varied form, or at least ensuring that an exit is as painless as possible.
Where termination is the best or only option, it is important that you get it right. Relying on an express contractual term to terminate for breach, or the common law right to do so can be fraught with difficulty. Not all breaches of contract give rise to a right to terminate and if you get it wrong, you could find yourself liable for terminating (or purporting to terminate) unlawfully.
Evidence will need to be gathered and a careful analysis of the facts, and the law, will need to be carried out at an early stage, before choosing the basis on which any termination right is exercised.
Aside from the strict legal considerations, what steps need to be taken on the ground to ensure a smooth transition? Does the counterparty have materials, equipment, confidential information, or IP that belongs to you? Could the failure to return this impact your ability to trade? What will the impact be on your other commercial relationships and your employees?
You need to assess all the risks and have a contingency plan in place at the start of any contractual relationship, and regularly review the position and key milestones, to help inform and effectively manage its end.
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