October 2012 - How to escape from a legally binding contract


Business Law Update
October 2012

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As a litigation lawyer dealing with disagreements between businesses, I frequently find I’m called upon to help business owners who have broken or ignored the terms of a legally binding contract. As with anything concerning the law, there’s a right way and a wrong way of going about this and the clients who end up spending a lot of money with me have often tried to do things the ‘wrong way’.

You can’t get out of a contract just because you’ve changed your mind. If you try to, you are likely to find that you are in breach of the contract and are likely to have to pay damages.

So, what can you do if you are committed to a legally binding contract and want out?

The first thing to say is that a great deal will depend on the terms of the contract plus the reasons and circumstances for wanting out. It will be important that you fully understand the terms that you are bound by and the potential damages for breaking the terms of the contract. You should certainly not take any action until you have had some legal advice from a solicitor experienced in commercial contracts law.

There are three ways you might be able to secure release from a commercial contract:

  1. Ask to be released
    As simple as this might seem, it is often the one thing that business owners often don’t consider. Instead they employ tactics like delaying or stopping payment, failing to supply goods or services, or simply being what I’d call commercially awkward to try and force the other party’s hand. This rarely, if ever, works and it’s not to be recommended.

    It’s much better to talk to the party with whom you are bound by the contract, perhaps via your solicitor and certainly having taken their advice. Sometimes neither party is really happy with the agreement and how things are working out, and by raising the point you can agree a mutually acceptable way to sever the agreement.

  2. Termination clauses
    Look at the termination clauses in your contract as there may be an opportunity to come out of the contract early. Even so, there are potential dangers to watch out for. There are often clauses in contracts such that you may have to pay a considerable sum to end the contract early. Whilst this might not be the preferred option, it could be a suitable one if being bound by the contract is holding you back or costing you money in other ways. Any extra sums payable under the contract need to be part of the negotiations and you will need a carefully-drafted settlement agreement to avoid paying these or reduce what you would otherwise have to pay.

    You may also be able to exit the contract by giving suitable notice, which again might not be a perfect solution but could prevent you entering into a full scale commercial dispute.

  3. The small print
    You will definitely need a lawyer to help you with this because essentially what you are looking for are any mistakes, unfair clauses or loop-holes which will allow you to exercise a right to terminate the contract legally and without it costing anything.

You may have very legitimate reasons for wanting to terminate a contract, which might for example include a breach of contract by the other party but, as with any legal document, it’s really important to take proper advice and act within the law. Failure to do so can be costly, both in terms of cash and reputation.

Gary Cousins
Litigation solicitor, Birmingham

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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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