Termination of Contract: Legal Risks and Practical Steps for Your Small Business

Ending a contract might seem like a straightforward solution when things go wrong with your supplier projects, but it is rarely straightforward in practice. If your small business terminates a contract without valid legal grounds or mishandles the process, you may face problems such as breach of contract claims and costly disputes. This article explores why taking the proper steps to terminate a contract is crucial, the legal risks that can arise around termination, and how your small business can manage the process with careful planning and legal advice to reduce risk.

Why Your Business Must Understand Termination Rights

Before signing any agreement, your business should understand precisely what you agree to and whether you have a clear exit route. If you are a customer, reviewing the termination rights within a contract at the outset can help prevent disputes later. You must know when and how to terminate the contract, understand any restrictions that can apply, and know whether you have a right to terminate it for convenience. 

Many commercial contracts include termination clauses allowing you to end the agreement for a material breach that cannot be remedied or the other party’s insolvency. Still, they often lay out strict conditions for termination. Your business should ensure it is fully aware of the extent of your termination rights so you are confident about your exit route from the start.

Why You Should Negotiate Clear Contract Termination Rights

Managing termination will be easier and safer if your business agrees to clear rights from the start. For example, a right to terminate for convenience lets you exit the contract without needing to prove fault, but your contract will need to lay this out clearly. Or clear rights allowing you to terminate if the supplier commits a grave breach of their obligations, which can provide a clear framework for termination. 

Without such agreed-upon termination rights, your business may have to rely on common law grounds like repudiatory breach, which are more complicated to prove and more likely to lead to a dispute.

Can You Rely On Contract Rights Under Law?

Under English common law, your business may terminate a contract if the other party commits a repudiatory breach – for example, if it completely refuses to perform its obligations. You must assess carefully whether the breach meets this threshold and whether the contract excludes your common law rights. Many commercial agreements attempt to limit these rights, so checking the terms before acting is vital. 

In some cases, other legal grounds may also apply, which could allow you to terminate, but the law imposes strict and fact-specific tests, so legal advice is highly recommended.

What Steps Should You Take Before Terminating to Prevent Risk?

Your business must not treat termination as routine. Before acting, you must confirm whether a right to terminate exists and whether it has arisen. This means you need to carry out a careful review of the contract and assess the facts. 

Suppose you are relying on a breach of contract to terminate. In that case, you must check whether the other party has breached the contract, whether that breach is severe enough to allow termination, and whether the agreement allows them a chance to fix it. 

You also need to consider the commercial impact. For example, will termination affect your supplier chains or ongoing projects? Could you achieve a better outcome by negotiating? These are key steps before jumping to terminating.

If you decide to proceed to terminate, you must develop a clear plan and act quickly.  You can do so by assessing your grounds, ensuring you are permitted to terminate and serving a valid termination notice. The notice should identify the specific contractual clause or common law basis you are relying on and follow the exact procedure in the contract. Serving notice incorrectly can quickly escalate into disputes.

What Can Go Wrong If You Terminate a Contract Incorrectly?

If your business terminates without a valid right or fails to comply with the required process, you may end up in breach. For example, the other party may claim that you have committed a repudiatory breach and seek to claim damages from your business. 

Even if the other party does not bring a claim, mishandling a contract termination can cause stressful and challenging arguments and damage your commercial relationships. As such, it is vital to be extremely careful when terminating a contract and to take legal advice if unsure.

What About Risks After Contract Termination?

While you may sometimes want a fully clean break, unfortunately, termination does not always end all obligations. Some provisions, such as confidentiality clauses, may continue to apply even after you terminate a contract. It is, therefore, essential to check whether any of your obligations remain enforceable after the contract ends and comply with them to avoid further risk.

Key Takeaways

Contract termination carries various legal and commercial risks. Your business must understand its rights, assess its options, and follow the contract process properly. A solicitor will help you confirm whether a termination right exists, advise on a strategy for termination, and help you draft the correct documents to terminate a contract validly. Given the risks of getting this wrong, it is vital for a small business to take legal advice if unsure.

If your business needs legal advice on terminating a supplier contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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