The right to terminate a contract does not automatically arise because one party has not discharged all its obligations under it. There has to be more than that. There must be a breach which deprives the other party of all the benefit which it was intended that, at the time the contract was made, the injured party would receive.
By way of simple example, if there is a contract under which A will build a wall for B and in return B will pay A, but A fails to build the wall, then B may terminate for breach.
If, however B builds the wall but it is five centimetres taller or shorter than the agreed height, A’s remedy would normally be to claim damages for loss suffered – but see below. In these second circumstances, if A terminated the contract, such action would be unlawful and A itself may have to pay damages to B as a result.
It is therefore imperative that if A considers that B has not done, or has wrongly done, something A expected B to do, A must be absolutely certain whether or not it has the right to terminate for breach.
This task is made easier if A and B have a well-drawn contract that provides specifically for what breaches give rise to a right of termination and what breaches do not. If, in the contract to build the wall, it was specifically provided that failure to build it to a precise height would be a breach giving rise to a right of termination, then that is the end of the story.
But it may also be possible to terminate a contract because of an anticipatory breach, such as A telling B half way through the construction of the wall that A will not pay for it. So if you have reasonable grounds to believe that your contracting party is about to do, or fail to do, something that is fundamental to the contract, it may be appropriate to take pre-emptive action.
Having decided it is entitled to terminate for breach, A must then consider whether the consequences of such termination are stipulated in the contract. A well-drawn contract will provide for return of confidential information, for example, but do consider carefully provisions imposing continuing obligations irrespective of whether the contract is terminated for breach or not. An example would be a non-competition clause.
It is also vital to ensure that the injured party fully observes any provision in the contract for how notice of termination must be given to the other party; often service by email is specifically excluded by the contract.
It is relatively unusual for the right to terminate for breach to arise out of the blue. It is far more common for there to be a gradual deterioration in the relationship between the parties and eventually one of them wants out, or one fears that the other may not be able to deliver their part of the bargain. In such circumstances it is well worth seeking professional advice with a view to developing a termination strategy and avoiding the risk of giving a wrongful notice of termination.
For advice, please contact David Ashcroft on01432 349 670 or at DAshcroft@hcrlaw.com.