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While contracts are agreements that detail the relationship between two parties, they also entitle you to remedies if there is a breach of the contract. A breach can happen in relation to the entire contract or just a contract term. If you are planning on terminating a contract for breach, you must first make sure that you have the right to terminate the contract and that you terminate the contract according to the contractual terms. If you fail to do this, you may find yourself in breach of contract, which can be very costly and counter-productive. This article will outline when you have the right to terminate a contract and explain the process for terminating a contract for breach.
When Do I Have the Right to Terminate a Contract?
First, it is good to understand the legal terminology. A ‘right to terminate‘ means that you have the power to discharge future obligations under the contract and replace them with an obligation on the other party to give you a remedy. This remedy is usually in the form of damages. Damages are a monetary sum (like compensation).
The overall effect of terminating a contract is that both parties will no longer have to perform their original obligations under the contract. This is true unless you enter into a new, similar contract at a later point.
The Difference Between a Condition and a Warranty
It is also worth knowing how a contract has been breached. The term ‘breach’ refers to when a party fails to fulfil its promises per its contractual obligations. A breach of contract will not always give you the right to terminate the contract. Only breaches concerning certain terms will give you the right to terminate. Namely, the breach must be a ‘fundamental breach’ of the contract.
Breach of a Condition
For example, if there is a breach of a ‘condition’, you may have the right to terminate the contract. A term is a ‘condition’ if it is a vital term of the contract. In other words, if the breach of a term deprives you of the entire benefit of the contract, then it will automatically be a condition. Additionally, the parties can state that a term is a condition. Therefore, if they do so, a breach of that term will always be a ‘fundamental breach’, allowing for termination.
Warranty
However, if there is a breach of a ‘warranty‘, you will not have the right to terminate the contract. A term is a ‘warranty’ if it is not a vital term of the contract. A breach of a warranty will not allow you to terminate the entire contract. Instead, you will be able to claim damages.
Usually, the contract will state whether a term is a condition or a warranty. However, if it does not, you should seek legal advice to help determine whether a court is likely to interpret it as a condition or a warranty. In addition, the classification of the term will be useful to know if you want to take the issue to court.
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Breach of an Innominate Term
Breach of an innominate term can also give rise to the ability to terminate the contract. An ‘innominate’ term is a term that is not quite a condition, nor is it a warranty. To determine whether a term is innominate, you will have to seek professional legal advice.
A court will have the discretion to terminate a contract based on the breach of an innominate term, but you will not have it as a necessary legal right. This is because determining whether a term is innominate and whether you can terminate for its breach is always done by reference to previous legal decisions.
Repudiatory Breach
Finally, an innocent party may be able to terminate if there is a repudiatory breach. A repudiatory breach is where the contract is breached in a ‘sufficiently serious’ manner to justify the complete termination of the contract. For example, if a party refuses to perform their obligations under the contract.
What to Do if You Wish to Terminate
If you have discovered that you have the right to terminate and you wish to exercise that right, then you can communicate your intention to the other party through written notice. In doing so, you will not have to fulfil your obligations.
However, before you do so, it is highly recommended that you seek professional legal advice to help determine whether you do have the right. As the terminating party, you will want to ensure that this is the best course of action before exercising your right to terminate.
Key Takeaways
As the injured party of a contractual breach, you will be able to terminate the contract if the breach gives you the right to do so. The breach may give you the right to terminate if, for example, it is a:
- breach of a condition;
- repudiatory breach; or
- breach of an innominate term which a court decides is sufficient to justify termination.
Before you serve written notice of your decision to terminate a contract, you will want to make sure that you definitely have the right to terminate. The law in this area can be quite technical, so it is a good idea to seek professional legal advice so that you do not risk being in breach of the contract yourself.
If you need help determining if you have the right to terminate a contract, 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
If the contract has valid termination provisions, then you may be able to exercise them if the situation falls under the termination provision. Remember: so long as there is mutual agreement, parties have great freedom to create terms of the contract as they wish. Because of this, you will want to make sure that you are familiar with all of the provisions of a contract, including termination provisions.
A breach of a condition is a ‘fundamental breach’ as it is a vital term of the contract, allowing termination. A breach of a warranty, on the other hand, is not a fundamental breach as a warranty is not a vital term of the contract.
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