Table of Contents
Your commercial contracts will include several kinds of clauses. In particular, you will likely have clauses detailing what you should do if the business relationship turns sour. These include repudiation, cancellation and dispute resolution clauses. This article will explain these clauses and how they can protect your business.
Repudiation
You can claim a repudiation or ‘anticipatory breach’ of a contract where the other party refuses to honour the obligations set out in your business contract. This usually enables your company to end the contract and consider whether to bring a legal claim against the other party for damages.
Two common scenarios in which your business may elect to do this include when the other party:
- tells you that they have no intention of honouring the contractual provisions; and
- does something that makes clear they cannot fulfil their contractual obligations, such as selling their only printing machine when under contract to print materials for your company.
It is important to note that your business does not have to repudiate the contract when the other party commits a serious breach. Instead, you can elect to continue it if the other party shows remorse or believes they will not commit another violation.
Cancellation
Terminating a contract by way of cancellation differs from a contract’s repudiation.
You can consider the termination of a contract where there has been a breach of a contractual term. This is a much wider window for your business, so you mainly hear of contracts being ‘cancelled’ or ‘terminated’ rather than ‘repudiated’.
However, it is essential to note that you cannot usually cancel a contract in response to minor breaches of the contract. If the other party has only committed a minor or unintentional violation of a contractual term, you may be in a situation where you cannot cancel the deal. Your company may face a wrongful termination claim if you do so.
A court will ask:
- how serious the breach is;
- whether it is likely to happen again; and
- the financial consequences of the breach on your business.
Below are two examples:
- You provide goods to another company. It fails to pay the first three monthly payments despite your business providing the goods on time and in excellent condition.
- You provide goods to another company. It pays the first two monthly payments, but the third is one working day late because their bank suffered a cyber attack which prevented money transfer on the due date.
While both scenarios are breaches of contract, the first scenario is a more significant breach, whereas the second is not and is unintentional.
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Dispute Resolution
A dispute resolution clause aims to prevent the abrupt ending of a contract or a dispute from ending in court. It does this by setting out a process in which the parties attempt to resolve their differences.
However, you should note that dispute resolution clauses can delay any court proceedings. So, where they have not been successful in relieving the dispute, they may add time between the initial issue and a judgement by a court. However, in most circumstances, dispute resolution clauses are seen as a positive measure enabling parties to consider resolving the situation.
Your company should also be aware of the risk of ignoring a dispute resolution clause. These clauses tend to be legally binding. So if your business ignores one and quickly sues the other company, the aggrieved party is likely to bring a claim for breach of contract due to your violation of the dispute resolution contract terms.
Key Takeaways
In situations where you may need to end a contract, it is crucial to understand how to do this and let the other party know. You may terminate the contract through repudiation or cancellation. Different written agreements will give your company additional termination rights, so it is always helpful to obtain legal advice when bringing a contract to an end. It is also worth being aware of any dispute resolution clause within a written agreement. These must be adhered to and can help towards the possibility of resolution, but they can also cause a delay if the companies are unlikely to agree to a solution.
If you are considering using repudiation, cancellation or dispute resolution clauses, our experienced commercial 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 usually have a choice as to whether to continue the contract or decide to end it. If the agreement contains large sums, it is advisable to obtain legal advice to assist with this decision.
A dispute resolution clause in your contract sets out the process to follow where there is a dispute between you and the other party.
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