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As a business owner, you likely enter into contracts with suppliers and customers daily. When entering into these contracts, you must protect your business’ interests. Namely, you should consider instances where you need to terminate a commercial contract. For example, a supplier may breach its obligations, or the contract may no longer be profitable. As such, contract termination rights are crucial. This article will explore how contract termination rights can protect your business.
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What Are Contract Termination Rights?
A contract is a legally binding agreement between two parties that records the terms of their commercial deal or project. Due to its binding nature, a contract can provide commercial certainty for parties. On the other hand, it can bind parties to a potentially harmful or unuseful business arrangement. As such, a contract must be clear on how to end it. By terminating a contract, the contract will come to an end.
Businesses can end contracts under:
- common law; or
- express clauses.
1. Common Law
Under the common law, you can terminate a contract if:
- the other party breaches the contract; or
- the contract is frustrated.
For example, suppose Parties A and B enter into a contract for the supply of goods. Party A pays Party B for the goods, but Party B refuses to supply the goods to Party A. In this instance, Party B has prevented Party A from receiving the benefit of the contract. This amounts to a repudiatory breach, meaning it is so severe that it goes to the core purpose of the business contract. As a result, Party A can seek to terminate the contract.
There is also the law of ‘frustration’. A contract is frustrated when an unexpected event makes it impossible for the parties to perform their contractual obligations. As a result, the parties can seek to terminate the contract.
2. Express Clauses
In contrast to common law rights, contractual termination rights are rights set out in a contract that allows one or both parties to end the agreement. A contract will often contain express termination provisions. Common contract termination clauses include the following:
| Clause | Explanation |
| Termination of a contract due to a breach. | This clause allows a party to end the agreement where the other party has breached their obligations. Often, contracts will only let a party terminate if there is a major breach. |
| Termination of a contract due to insolvency. | This clause allows a party to terminate the agreement if the other becomes insolvent. |
| Termination for convenience. | This clause allows one or both parties to terminate the agreement by giving notice to the other. |
| Termination due to ‘force majeure’ events. | Depending on how it is drafted, this clause allows parties to end the contract if unexpected events occur, which makes contractual performance very difficult or impossible. |
How Can Contract Termination Rights Protect Your Business?
There are several benefits to including express contract termination rights in your contract. Here are some of the critical ways contract termination rights can protect your business:
1. Flexibility When Entering New Commercial Relationships.
Entering into new commercial relationships can be daunting. As a supplier or customer, you will need to learn what it is like to work with the other party and whether the contract will be viable in the long term.
As such, robust termination rights will give you comfort that you can exit the agreement if things do not go as planned in the future. In particular, a clause allowing you to end the contract for convenience can be a great reassurance.
2. Minimise Contractual Disputes
Including express contract termination rights will give you certainty about:
- which circumstances will allow you to end the contract;
- what you need to do to end the contract, such as which notices you need to serve; and
- what the consequences of termination are.
Contract termination rights will also give you certainty about the commercial and practical position after the contract ends. For example, the clause will specify any actions you will need to carry out when the contract is terminated.
If your contract does not include express termination clauses and you seek to rely on common law rights, this could lead to arguments between the parties and potential disputes. For example, you could find yourself in arguments with the counterparty over whether there has been a ‘repudiatory breach’ and if it entitles you to end the agreement.
Therefore, including clear contract termination rights can allow you to end the contract with ease and avoid issues with the counterparty.
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Key Takeaways
Although contract termination may be the last resort during a business dispute, it is an essential contractual right for businesses to have. Including express contract termination rights will give you peace of mind that you have an exit route if things do not go as planned. Contractual provisions on termination will also offer you certainty on what procedures to follow when ending a contractual relationship.
If you need advice on ending a contract, our experienced disputes 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.
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