The spark before the fire: grounds for termination

When a party to a commercial contract decides to end the contract before its natural conclusion, they must identify the legal grounds for termination. This article explores some of the most common grounds for termination.

A discussion on termination rights can be broken down into two categories: common law rights and contractual rights.

Common law rights

A party wishing to terminate may have a right to do so if the other party:

• Breaches a condition of the contract – for example, if the time for delivery is “of the essence” of the contract
• Seriously breaches a term which goes to the core of the contract
• Refuses to perform or indicates they will not perform.

In some cases, a right to terminate on reasonable notice may be implied into the contract – for example, if the contract is not for a fixed term and includes no other express termination rights.

Contractual rights

Parties can negotiate and include a wide range of clauses that give one or both of them the right to terminate the contract on certain trigger events.

The most common include:

• Termination for convenience: this is a “no fault” ground that usually just requires a specified amount of notice
• Termination for breach: this typically covers “material” (or serious) breaches that can’t be fixed, or are not fixed within a specified period, repeated or persistent breaches, or other specified breaches. For example, the contract may expressly state that non-payment or failures to meet agreed service levels give the innocent party the right to terminate
• Termination for insolvency: if the other party becomes insolvent or is unable to pay its debts, this will commonly give rise to a termination right – although there are limits on this to protect supplies to corporate customers in difficulty
• Termination on a change of control: businesses may reserve the right to terminate if a counterparty is sold or otherwise acquired, to avoid being contractually bound to provide or receive goods or services from a competitor or party they do not wish to be associated with
• Termination due to a force majeure event: contracts often provide the right for parties to terminate if obligations can’t be met or are delayed due to circumstances beyond the party’s reasonable control, with classic examples being due to natural disasters.

Remember, remember…

This article provides a high-level summary of some commonly used grounds for termination. It is by no means intended to be an exhaustive explanation of all grounds for termination. Complex contracts, for example, may include termination rights linked to specific obligations or compliance points.

Legal grounds for termination may exist outside of the express provisions of the contract. That said, any party considering termination should consult the terms of the contract carefully to identify whether a ground to terminate has arisen and, if so, what process must be followed to exercise that right.

Unilateral termination may not be the best solution. It’s worth considering whether it may be possible to negotiate a solution or mutually agree to bring a contract to an early end, rather than exercising one of the common law or contractual grounds to terminate.