What is Contract Termination in England?

As a business entering into contracts with other parties, you may find yourself needing to terminate your contract. It is important that you undergo contract termination only if you have the right to terminate. Failure to do so can mean that you are in breach of contract. This could make you liable to pay compensation to the other party.

There are a number of ways to terminate a contract, for example by:

• activating a termination clause; or
• the law of frustration.

In some cases, you can also terminate a contract if the other party has breaches its conditions. This article will elaborate on what contract termination is, how it works, and when you can terminate a contract.

What is Contract Termination?

Termination of a contract is when the parties to a contract excuse themselves from their obligations under the agreement from the point at which the termination occurs. The obligations that you had to the other party before the termination date may still be binding. 

Terminating a contract can be useful in a number of situations. Some common reasons for terminating include, for example, if the other person is refusing to perform their obligation, the contract is not profitable for you, or the other party is acting in a way that you think may damage your business’s reputation. 

However, you can only terminate your contractual obligations if you have the right to do so. That is, if you simply change your mind or no longer wish to fulfil your obligations, you may find yourself liable for wrongful termination. The consequences of wrongful termination are severe and, in most cases, you can be liable to pay the other party significant amounts of compensation. As a result, it is important to understand when you can terminate.

Termination Clauses

First, it is worth checking if your contract contains a termination clause. A business contract will often contain express termination provisions which allow the parties to terminate a contract in certain situations. 

If your commercial contract does not contain an express termination clause, then you may be able to make use of an express condition in your contract. If a party breaches a contractual condition, courts will usually grant you the right to terminate the contract. 

To decide if a contractual term is a condition, the first thing to do is check how the words in the contract have labelled it. If it is referred to as a ‘condition’ consistently throughout the contract, you can likely interpret it as such. If, however, the contract does not expressly refer to the term as a condition, you may interpret it as one regardless. You can do this if the term, and it’s breach, are particularly vital to the overall contractual agreement.

Notably, if the injured party chooses to not terminate the contract but instead to carry on with performance (in other words, to ‘affirm’ the contract), then they will lose the right to terminate.

Frustration 

You may also terminate a contract under the law of frustration. This is where it becomes impossible to carry out the obligations under the contract because an important fact has changed since the contract was made. Some examples of this include where:

• the subject matter of the contract no longer exists or is destroyed;
• a party to the contract can no longer complete their obligations (for example, if they die); or
• the contract becomes illegal because of a new law.

Termination by Agreement

Alternatively, the parties to a contract could agree to terminate by entering into a separate and new contract, or by varying the existing contract. If both parties to a contract come to a termination agreement, then the original contract could be brought to an end. 

For both variation and creation of a contract, you will need to have consideration (unless you make the contract in a deed). Consideration is the requirement that both parties to a contract exchange something of value. This is usually not an issue, but it is worth keeping in mind if you plan to come to a termination agreement. 

Disputing Formation of the Contract

Finally, you can achieve the same effect of a contract termination if you can successfully argue that the contract was never formed validly in the first place. A contract has a number of requirements to be valid. These requirements include:

• an offer followed by an acceptance;
• consideration; and
• an intention to create legal relations.

If you can dispute any of these points, your entire contract will be deemed to have never existed and all of the obligations (from the very beginning) will extinguish.

Key Takeaways

As a party to a commercial contract, you may wish to argue for contract termination. Common reasons for a contracting party to do this include the contract no longer being profitable, or the other party being in breach of contract.

As the terminating party, it is important that you terminate correctly. You may have the contractual right to terminate if the other party has committed a material breach of a condition. Alternatively, you may have an express termination clause or an argument under frustration. 

If you wish to put an end to your future obligations by using a termination argument, 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 at 0808 196 8584 or visit our membership page.

Frequently Asked Questions