February 2013 - How to get out of a contract


Business Law Update
February 2013

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It often happens in business: you signed a contract that you later regret. Sometimes it’s because the other party is not performing as expected but, at other times, it’s just because you’ve changed your mind.

It’s usually not easy to get out of a contract but what follows are things to consider.

Has there been a breach?

The first point to consider is whether the other party has done anything wrong. They might, for example, be in breach of a term in the contract or maybe they misled you into signing it in the first place.

If not, and you’ve simply changed your mind, it may be more difficult to get out. You will need to look at the contract terms carefully to see whether any allow you to end the contract. If you’re lucky, there may be a clause that allows you to get out simply by giving notice.

Breach of contract

The next thing to consider is whether the other party has breached any of the terms and, if so, which ones.

Not all breaches will allow you to terminate a contract. In English law, some terms are more important than others (the important ones are called ‘conditions’ while the less important ones are called ‘warranties’). Sometimes, contracts state which terms are conditions and which are warranties. If not, a rule of thumb is that, if the term is fundamental to the contract, then it’s more likely to be a condition.

If a breach is so serious that it deprives you of “substantially the whole benefit of the contract”, then generally this would also allow you to terminate the contract.

If there has been a breach of a condition, or a very serious breach of a term, then the contract can be brought to an end (called ‘repudiation’). It doesn’t happen automatically: you must end the contract by giving notice of the breach to the other party and electing to end the contract.

There are many dangers for the unwary here. You must not do anything to suggest that you have “affirmed the contract”, i.e. act in such a way that you accept that the contract is continuing. If you do so, you will lose your rights to end the contract.

In addition, you need to be certain that you can repudiate the contract. If you are wrong, then you will be the party in breach of contract and end up with a hefty damages bill.

Unfortunately, breaches of warranties do not allow you to end the contract but just to claim damages for their breach.

One thing that often causes problems is delay in a party performing its duties. As a general rule, delay does not amount to a condition and allow you to end the contract. To be a condition, the contract needs to state that “time is of the essence”. The good news is that you can make time of the essence by writing to the other side, giving them a reasonable deadline in which to perform and stating that “time is of the essence”. If they then miss this deadline, you can bring the contract to an end.

Mis-selling - Misrepresentation & Fraud

Legally this is a complicated area as there are different types of misrepresentations and different rules apply depending on what type it is. In general terms, a misrepresentation is a statement made by one party to another before the contract was signed that was untrue. Some misrepresentations will allow you ‘rescind’ the contract, i.e. treat it as if it never existed in the first place, particularly if it was fraud. Others only allow you to claim damages and, for some, you might need a court order to end the contract.

Other ways out

There may be other ways you can get out of a contract depending on what type of contract it is and the particular events that led up to the contract being signed in the first place.

Get timely legal advice

The best time to get legal advice is before you even sign the contract. Your solicitor will make sure that the contract allows you to get out easily if things go wrong.

The next time to get legal advice is when there has been a breach of contract and you want out. Soldiering on with the contract is likely to mean that you lose any rights you did have to terminate the contract, but acting to rashly to end it could leave you with a large claim for damages. Understanding your legal position early on will allow you to end the contract, or negotiate an exit, quicker, cheaper and with far less stress.

Gary Cousins
Business Solicitor and Dispute Management Expert

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The Cousins Business Law Team

Gary Cousins
Sue Mann
Nigel Musgrove
Steve Petty
Gary Cousins Dispute Resolution Solicitor

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Sue Mann Commercial Solicitor
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