When negotiating a contract it is easy to become fixated on the terms governing who will do what, by when and for how much. However, equal thought needs to be given to what happens if things go wrong and in particular your rights of termination.
There are a limited range of circumstances in which a contract can be brought to an early end legitimately. That is why, before you sign on the dotted line, you need to ensure that you have negotiated a good set of ‘get out of jail’ cards and understand your options for escape.
Grounds for termination
A contract can only be terminated if:
- An event has occurred which according to the terms of the contract will result in termination;
- A term of the contract, which is vital to its performance and can therefore be classed as a condition, has been breached;
- There has been a serious breach of some other fundamental term which goes to the root of the contract, renders it impossible to achieve the contract’s commercial purpose or has the effect of depriving the other party of substantially all of the contract’s benefit; or
- A party has indicated, through an express declaration or course of conduct, that they no longer intend to perform their contractual obligations or essential elements and a reasonable person would conclude they no longer intended to be bound by the contract.
Contrary to popular belief, breach of a warranty within a contract will not give rise to a right of termination although it will entitle you to claim compensation.
Negotiating the inclusion of key contractual terms as conditions and attaching termination rights to serious events likely to have a significantly detrimental effect is the best way to secure a way out if things go wrong and can be achieved through careful drafting when the contract is being prepared.
Trying to effect termination on any other basis will be more difficult given the need to persuade the other party that the consequences of a breach are so severe, or the course of conduct complained of is so clearly indicative of an intention not to honour agreed obligations, that it justifies you treating the contract as being at an end.
You also need to be mindful of the fact that non-contractual rights of termination, which can be implied by the court depending on the circumstances, are often excluded by standard and bespoke contracts to ensure certainty over when an early exit will be possible.