Fright night exits: ending or pausing a contract without the scares

Halloween is the one night of the year when ordinary people dress up as something far more frightening than they really are. Termination clauses do much the same thing.

On first reading, a clause full of ‘repudiatory breach’, ‘irremediable default’ and ‘insolvency events’ can look like something that crawled out of a crypt. Look underneath the costume, however, and it’s usually answering three perfectly sensible questions: who can end the contract, when and how?

This article looks at where the right to end a contract comes from, the trap that catches out even experienced businesses and two limits worth knowing about before you head for the door.

Pick your costume: the many ways out

Under English law, a right to end a contract early comes from one of two places: the contract itself or the common law.

The contract is always the first place to look. Most commercial agreements contain several exit routes, and businesses are often surprised by how many options they actually have. The most common are:

• Termination for convenience, which allows one or both parties to leave for any reason, usually on a fixed period of notice
• Termination for breach, which is often limited to a ‘material’ breach and may only arise if the breach is not remedied within a set cure period
• Insolvency triggers, where the other party enters administration, liquidation or a similar process
• Change of control, where the other party is sold to a new owner
• Prolonged force majeure, where an event outside anyone’s control stops performance for longer than an agreed period.

Contracts can also end in quieter ways. They can expire at the end of their term, or the parties can simply agree to part company. In that case, the agreement should be documented properly so that outstanding payments and potential claims are dealt with.

Outside the contract, the common law allows a party to treat the agreement as at an end where the other side commits a repudiatory breach. That means a breach so serious that it goes to the root of the contract, or a clear indication that the other party will not perform at all.

A single late invoice will rarely meet that test. A flat refusal to deliver anything almost certainly will.

Separately, a contract may be ‘frustrated’ where an unforeseen event makes performance impossible or radically different, but the courts apply that doctrine narrowly and it should not be treated as a convenient escape hatch.

It’s behind you: the classic trap

The real horror story is the business that terminates without a valid right to do so. A wrongful termination can itself amount to a repudiatory breach. The other side can then accept it, end the contract and claim damages. The party who thought they were escaping the monster turns out to be one in the final scene.

Notice is where this most often goes wrong. Termination provisions usually specify exactly how notice must be given: in writing, to a particular address, by a particular method and within a particular timeframe. The courts expect those requirements to be followed.

A termination email sent to a general inbox, where the contract requires delivery by hand or recorded post to the registered office, may not be effective at all.

Timing matters too. If you know about a serious breach but carry on as normal, accepting deliveries and paying invoices, you risk being treated as having affirmed the contract and losing the right to terminate for that breach. A reservation of rights letter can buy some time, but it’s not a substitute for making a decision.

Things that go bump: two limits worth knowing

Insolvency

Since June 2020, a supplier usually cannot end a contract just because its customer has gone into administration, liquidation or another formal insolvency process. This also applies to earlier problems, such as a missed payment, if the supplier had not already acted on them.

Nor can the supplier refuse to keep supplying until old bills are paid. There are limited exceptions, for example where the insolvency practitioner agrees or a court accepts that carrying on would cause the supplier real hardship. If your customer is in financial trouble, take advice before relying on your insolvency clause.

Suspension

Many businesses assume they can stop work until an invoice is paid. In most cases, they cannot. English law doesn’t give a general right to suspend performance, and doing so without a contractual right can itself be a repudiatory breach.

Construction contracts are the main exception, as legislation provides a statutory right to suspend for non-payment. Elsewhere, suspension is only available if the contract expressly allows it.

Before you press the exit button

• Read the whole contract, not just the termination clause. Notice, cure period and survival provisions all matter
• Identify your right. Check whether it’s contractual, common law or both, and whether the breach meets the required threshold
• Check for cure periods and make sure the other party has been given any time the contract requires to put things right
• Watch your conduct, avoid anything that looks like carrying on regardless and reserve your rights in writing if you need time
• Consider insolvency. If the other party is in financial difficulty, check whether the statutory restrictions apply before acting
• Serve notice correctly. Follow the required form, method, address and timing, and keep proof of service
• Plan for the aftermath, including payments due, return of property and data, confidentiality and any handover arrangements.

The bottom line? Termination provisions are rarely as frightening as they first appear, but acting without checking them can turn a clean exit into a dispute. Take the mask off early, read what’s really there, and the only thing left to haunt you after 31 October will be the leftover sweets.