The pitfalls and requirements to ensure your exit is valid
Imagine a contract you entered into 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. Ending a contract cleanly is, therefore, probably just as important as putting a contract in place at the outset.
Types of contract termination
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, and usually these clauses allow parties to terminate immediately with notice. For the most part, these are standard clauses though some parts may be subject to negotiation.
Key questions
The key questions to consider when seeking to terminate a contract would be:
- 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 actually exists before you can follow the steps of giving notice. This is discussed more below.
However, in both of the 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.
Establishing the cause
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; or
- when a contract-specific clause, that was 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 strictly. 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 of time?
- next, send a notice informing them that they are in material breach and have 30 days to remedy it; and
- only once the first two have passed, then a notice of termination should be issued.
Why getting the notice correct is vital
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.
Common pitfalls to look out for include:
- ensuring the form is correct (for example is email acceptable?);
- addressing the notice to the person or using the correct contact details set out in the notices clause; or
- adhering to timelines prescribed in the contract, for example are they working to business days or calendar days, and how to confirm receipt.
- All of the foregoing issues could be contested to show notice was not given in accordance with the contract and is therefore invalid. For example, establishing if notice has indeed been received would be a prudent step to take especially if the contract is silent on this point.
- The recent case of Struthers v Davies (2022) highlighted the importance of strict and precise adherence to how notice is served and when. This case involved a claim for damages from homeowners against their building contractor for defective and incomplete work. In assessing if the homeowners were eligible, the court first considered if termination was actually effective. The impact of ineffective termination was considered in this case and the consequences highlighted as a possible repudiatory breach, which means the terminating party could be liable for rejecting a contract without proper basis.
How we can help
As you can see, getting this intricate network of notice, termination and effects of termination clauses tightly and clearly drafted and in sync with each other greatly improves the chances of parties being able to terminate easily and correctly. This is why it is important to seek professional legal advice to protect your right to exit the contract, and to ensure you have a clear method in place for doing so to prevent further problems.
Our team of experts can help you navigate this important element of any commercial contract. For further information, please contact Olivia Chalmers in the corporate and commercial team on 01733 882800 or email [email protected].
Olivia Chalmers LLB
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