Bonfire of the dismissed: termination disputes

There can be severe consequences if you terminate a contract incorrectly. If you get it wrong, the non-terminating party may be entitled to bring a claim against you for damages, to put them in the position they would have been in had the contract been properly completed.

Contracts can be terminated without cause – that is, on notice and without any allegation of wrongdoing. Where there’s a written contract between the parties, there’s usually a termination clause specifying the notice period and the form and method of giving notice. If there’s no such clause, reasonable notice must be given. What counts as reasonable notice will depend on the length and nature of the contract.

Before terminating a contract with cause – on the basis that the other party has committed a repudiatory (material) breach of contract – it is crucial to establish:

• There has been a material breach of contract
• There is clear and unequivocal evidence of the material breach
• You have adhered to the termination and notice provisions in the contract.

Getting this wrong may mean the terminating party is themselves at risk of being in repudiatory breach for unlawfully terminating the contract. This could allow the innocent party to accept the breach and claim damages for losses, such as loss of profits and the costs of remedying the breach. The innocent party must also mitigate their losses by taking reasonable steps to minimise the financial impact of the breach.

Commercial considerations

Unlawfully terminating a contract can lead to other unintended consequences:

• The parties will be released from future obligations, so the terminating party may lose the protection of post-contractual provisions, such as enforcing restrictive covenants
• Prejudicing the wider business relationship with the non-terminating party
• Potential reputational damage
• Lost management time dealing with a claim for unlawful termination
• Litigation costs.

If the parties wish to preserve the business relationship, key practical solutions to consider before terminating a contract include:

• Reviewing the contract to establish whether there are any obligations to negotiate or mediate. If not, still consider alternative dispute resolution methods such as mediation
• Re-negotiating key terms to reach an amicable agreement that works for both parties
• Early, documented communication of issues (which, in isolation, may not be material but cumulatively may amount to a repudiatory breach) to give the non-terminating party an opportunity to remedy them.

Terminating a contract can be a minefield. When considering whether to terminate, seek early legal advice. The consequences of getting it wrong can be severe, so it’s essential to ensure that your legal and commercial interests are protected.