Table of Contents
When entering commercial contracts, your business must know how to end the contract if a problem arises. Some methods to end a contractual agreement include using a termination clause, breach of contract clause, repudiation clause or a force majeure clauses. This article will explore these different termination and breach clauses to ensure your business can create contracts that support your commercial interests.
Do Termination or Breach Clauses Guarantee Litigation?
Many parties believe including a termination or breach clause in their contract will lead to expensive court proceedings. However, this is not necessarily the case. Provided the clauses are reasonable and you follow the contract’s wording, settling disputes out of court is possible. Moreover, a well-drafted termination and breach clause can give your company some valuable options under the contract. This includes being able to counter allegations of your organisation breaching the contract.
Let us now explore four clauses that allow a party to end a contract.
1. Termination Clause
Every commercial agreement should contain a termination clause detailing exactly how and when either party can terminate the contract. A suitable termination clause will make the following termination provisions clear to the parties:
- the exact circumstances in which your organisation or the other party can end the contract;
- how long a notice period parties must give to terminate the agreement; and
- how to communicate notice of termination.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
2. Breach of Contract Clause
This clause specifies the circumstances in which either party can end the contract for breach of a contractual term. Most breach of contract clauses will limit contract termination to situations where a major contract violation (otherwise known as a ‘material breach’ or ‘substantial breach’) occurs. Most companies do not want the agreement to fail due to a minor breach of the wording. For example, suppose one party makes their monthly payment to you at four o’clock instead of two o’clock (as per the contract) because of a banking error. It is highly unlikely parties will wish to use this breach to terminate the contract.
3. Repudiation Clause
A repudiation clause clarifies that your company can elect to end the contract in limited scenarios where a ‘repudiatory breach’ occurs. This includes when the other party to the contract:
- states that they have no intention to honour the contract; or
- acts in a way that makes it obvious they cannot fulfil the contract, such as selling the car you had planned to hire from them.
This is different to a breach of contract clause because you can only use it where it is obvious that the other party has no intention to honour the contract. In contrast, a breach of contract clause can punish a completely unintentional contract violation.
4. Force Majeure Clause
This is a less commonly used clause but still very useful. The clause provides a safety net for the parties if circumstances beyond everyone’s reasonable control make contractual performance impossible. So, for example, let us say that your hypothetical company provides catering services and agrees to deliver and serve a hog roast at an outdoor party. Unfortunately, the event is near the coast, and a severe hurricane is forecast on that date. Both your organisation and the other party can use a force majeure clause to reasonably argue that carrying out the contract is impossible in the circumstances. In this scenario, even though you have not delivered the agreed service and they have not paid, neither party is in breach of contract.
Key Takeaways
There will be situations where your company could use termination or breach-related contractual provisions. However, it is worth weighing up whether the contract could survive before doing so. You should consider the advantages of keeping the agreement in place regarding potential profit and an ongoing business relationship. Sometimes, it may not be clear whether it is legally safe to use the contract terms to end the agreement. In this case, it is helpful to obtain specialist legal advice on the pros and cons of doing so. This is particularly the case where the financial implications on your business of ending the contract could be significant.
If you need help negotiating and drafting termination and breach clauses within your commercial agreements, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
You may choose to continue if you reasonably believe, as the innocent party, that the breach will not reoccur. An example would include a company that persuades you that the breach was unintentional and explains the steps they will take to ensure the breach will not happen again. It will be different if the other party has already committed repeated violations of their major contractual obligations.
Unfortunately, companies can sue a terminating party for contract termination, even when their legal reasoning is sound. Therefore, you should consider how the other party will react before terminating.
We appreciate your feedback – your submission has been successfully received.
