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Imagine a contract you entered is not going as expected and you want to terminate. All you want is to get out of this contract but, if not terminated properly, this could end up causing you more issues than necessary.
Termination provisions are standard in contracts but ensuring they are properly drafted and parties are aware of the steps involved in terminating without any adverse consequences is important to give peace of mind.
“As staple as termination clauses are in contracts, if a party wishes to exercise their right to terminate, there are actually several key questions to consider and work through to ensure that both the termination and provisions are followed strictly,” said Tom Bodkin (pictured above), a solicitor in the corporate and commercial team at Borneo Martell Turner Coulston Solicitors.
“Triggering termination (without triggering an inadvertent breach of the contract) can be a tricky process for parties to follow and getting legal advice to navigate this is prudent.”
Commercial contracts generally have two types of termination: ‘at will’ and ‘for cause.’
Terminating at will gives one or all parties the right to exit a contract upon giving a certain amount of written notice to the other party.
Terminating for cause gives one party the right to terminate if a condition of some form of breach has been triggered. Usually these clauses allow parties to terminate immediately with notice.
The key questions to consider when seeking to terminate a contract are:
- Does a right to terminate actually exist?
- What is the method to issue an effective notice of termination?
Termination at will is probably the easiest to deal with because each party should have the right. The method would be prescribed as a notice (usually written) to be provided to the other party within a certain number of days before the termination is expected to become effective.
Termination for cause requires one to determine if a cause exists before you can follow the steps of giving notice.
However, in both above cases, the ‘notices’ and ‘effect of termination’ clauses will also be pertinent in ascertaining how notices should be served and what the parties’ obligations are post termination. Clearly, reading the termination provision in isolation will not suffice and this is why professional legal assistance is strongly encouraged.
Typical examples of termination for cause would be:
- A material breach which subsists even after a grace period is given or if it cannot be remedied at all;
- Insolvency proceedings commencing;
- When a contract-specific clause, negotiated between the parties to address particular risk exposure, has been triggered.
The first step in establishing whether a cause under this type of termination provision exists is to interpret the clause. For example, if the clause states “a material breach which is not remedied after 30 days of being given notice of such breach”, it would be imperative to:
- First, decide if the breach by the other party would be considered material. Did it impact you financially or did you not receive their services for an extended period?
- Next, send a notice informing them that they are in material breach and have 30 days to remedy it;
- Only once the first two have passed should a notice of termination be issued.
Termination can be invalid when a party does not serve a notice in the method, form, or time frame as strictly prescribed in the contract. If in doubt, always consult a lawyer to ensure you do not inadvertently invalidate your right to terminate. Contact Tom Bodkin on 01604 622101 or email