Commercial contracts are of course designed to protect a company’s interests. But when one party needs or wants to terminate a commercial contract, how do you ensure a safe exit for both parties?
In this advice article, our dispute resolution solicitor, Ian Carson, explains more about terminating commercial contracts.
The desire of one party to get out of a commercial contract is a common cause of disputes. The reasons for termination are numerous. For example, one party may feel that the other is not fulfilling their side of the bargain; the commercial terms may no longer be acceptable or one party’s business strategy may have changed.
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Terminating commercial contracts with reasonable notice
When entering into a contract, particularly one that is expressed to run for a length of time, it is vital to provide for and understand how and when it can be brought to an end. If the contract is not for a fixed term and there is no express termination clause, the general rule is that the contract is terminable on reasonable notice.
What constitutes reasonable notice depends on the facts and circumstances. Where this is disputed, the Court will have regard to the length of time the parties have been trading; the nature of each party’s obligations and the ease with which the other party can go elsewhere. This gives rise to inherent uncertainty which is why it is much better to define the circumstances in which a contract can be terminated.
Grounds for lawful termination of a commercial contract
When the contract does set out the grounds for termination, it is vital that the party seeking to terminate follows the termination provisions. Failure to do so is likely to render the termination unlawful and expose the terminating party to a claim for damages for breach of contract.
Common grounds for lawful termination include:
- The exercise of a break clause subject to notice;
- A defined event;
- A material breach by one party;
- The insolvency of one party.
Where notice is required to trigger a right to terminate it is surprising how often the party seeking to terminate does not take the trouble to go back to the contract to check how notice should be given under the contract. Where notice has to be given by a specific date and served at a specific address, if this is not done there is a serious risk that the termination will be unlawful.
Terminating commercial contracts because of contractual breaches
Where one party is relying on the other party’s breaches, it is highly advisable to keep evidence of the alleged breaches and their consequences. It is common for the contract to allow the party in breach an opportunity to remedy the breach if required to do so. In such circumstances, due notice of the requirement to remedy must be given and a record kept of the other party’s response.
With the day to day pressures of running a business, it is all too easy to overlook the express requirements which need to be followed to terminate a contract lawfully without liability to the other party. If you are contemplating bringing a contractual relationship to an end, you are strongly advised to take legal advice before embarking on the termination process so that you understand the options available and the correct procedures to be followed.
How we can help
Of course, having termination clauses written into your commercial contracts is always the best way to go. It is better to be prepared and protected in advance. That’s why we offer comprehensive legal advice and services for your business’s commercial contracts. However, we also specialise in dispute resolution, so even if your agreements are watertight, we can help resolve conflict about terminating commercial contracts.
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