Posted: Monday, 2 September 2013 @ 11:17
Are you bound by a contract and need to get out of it? The options available to you depend on the terms of the contract and any relevant legislation.
You must first look carefully at the terms of the contract and identify the type of contract and any provisions for termination.
Is it a fixed term contract?
If it is a fixed term contract you will not be able to cancel before the terminal date unless there is provision allowing you to cancel, for example on a specific date or event and/or on written notice. The other option is the right to terminate on a serious breach by the other party (see below).
If it is not a fixed term contract, and is not for a specific purpose (see below), you will be able to terminate by giving notice to the other party.
Is it a contract for a specific purpose?
If the contract is for a specific purpose, normally it will not be possible to get out of the contract until the purpose has been fulfilled, again unless there is specific provision for doing so or the other party is in serious breach (see below).
Does the contract have any provision for termination?
Look carefully at the terms. Even if there is provision for terminating for a breach of contract, the courts will look at the wording and will not allow termination for minor breaches unless the contract is clear on the issue. The type of conduct specified in a contract as allowing the other party to terminate is known as “material breach”.
A party cannot terminate for its own breach of contract unless the contract itself makes it very clear that it can do so.
Is the contract of a type governed by legislation?
Some types of contract are subject to legislation which dictates when and how they can be terminated. An obvious example is contracts of employment. Another is commercial agency contracts governed by the Commercial Agency (Council Directive) Regulations 1993.
Is the other party in breach of contract?
It is important to look at the terms of the contract which may dictate what can and cannot be done in the event of breach of contract. This may depend on whether the breach is minor or serious.
If the contract does not say anything affecting the right to terminate for breach, an innocent party may terminate the contract if the other party is in breach, but only where the breach is serious. This is known as repudiatory breach. This is the type of breach which goes to the heart of the contract. Mere non payment or exceeding a time limit for performance (unless time has been made “of the essence”) will not of themselves amount to a repudiatory breach, but multiple breaches could amount to repudiatory breach.
If the other party is in repudiatory breach it is important that you do not do anything to affirm the contract, or you may have lost the right to treat the repudiatory breach as terminating the contract. Look carefully at the contract terms. Do they restrict or in any way affect the right to terminate for repudiation? If you cannot repudiate, or you affirm the contract by conduct after knowledge of the repudiation, you may still have a claim for damages for breach, but not the right to bring the contract to an end.
To accept a repudiatory breach as terminating the contract, there must be a clear communication of the acceptance of the breach to the other party. But be careful because if you get it wrong, for example if the other party is not in repudiatory breach, it is you who could be in breach of contract for unlawful termination!
It is a very difficult area of the law and you should get early and urgent expert advice if you have a situation where you wish to repudiate for breach of contract.
Where you have brought the contract to an end by accepting the other party’s repudiatory breach, you may still have a claim for damages for loss of bargain.
Has there been some unforeseen event which makes the contract impossible or difficult to perform?
Although the usual rule in commercial contracts is that they must be performed, if something unforeseen has happened since the contract was agreed, then in certain circumstances (called “frustrating events” by the courts), businesses are free to treat the contract at an end.
As can be expected, only certain events are legally classed as frustrating ones:
• When it’s impossible to perform the contract – e.g. a person vital to the contract has died or has been rendered incapable of performing the contract.
• Destruction of the subject matter – e.g. if you have agreed to sell your vintage Bentley and it is destroyed by fire.
• Frustration of purpose –for example if an event such as a festival has been cancelled, and accommodation booked by those specifically for an event, it may be possible to recover booking deposits if say hoteliers knew that the sole purpose of the booking was associated with the event.
• Government Intervention – e.g. where Parliament brings in new laws which make a contract illegal or affect its performance.
If performing a contract becomes much more difficult or expensive than you expected, then this will not be enough to let the parties off the hook. Insolvency or a stock market crash or global financial meltdown will not usually be held to be frustrating events entitling a party to treat the contract at an end. Nor will unusual or unforeseen acts of nature.
It is good practice for businesses to specify as a contractual term what events will frustrate a contract and exactly what the consequences will be.
These terms are known as ‘Force Majeure’ clauses. They allow the parties to back out of a contract in circumstances such as ‘Acts of God’, war, riot, labour disputes, failure of communications, and failure of vital utility services. ‘Acts of God’ are extraordinary physical circumstances, such as the eruption of the Icelandic volcano in 2010, which had a massive affect on travel, which could not have been foreseen.
Business and Litigation Solicitor
Tel: 0845 003 5639
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation
to discuss your particular circumstances.