So, the honeymoon’s over. The cracks have started to show. You’ve been arguing for months and performance has been, frankly, dismal. Let’s face it; you got into bed with the wrong partner and now you want out. For any company that has received less than it bargained for from one of its contractors, this may sound all too familiar. So what happens when you’ve reached the end of the road? This article considers how to put a broken contractual relationship out of its misery.

So you think you’ve had enough? Before you reach for that contract however, consider carefully the full commercial implications of severing the relationship. If, for example, continuity of service is key to your business and there is no ready option to bring on board an alternative supplier, it is likely that you need to find a way to bring performance back on track. Renegotiation, rather than termination, may be the better option.

If you really do want out however, then it is important to have a full understanding of the options available to you and the legal implications of each. Get it wrong, terminate without having established clear grounds to do so, and it will be you who is in breach and could even find yourself on the receiving end of a damages claim.

Most contracts contain express termination provisions setting out the grounds on which either party may terminate. Common examples include:

A clause allowing termination for any breach. Generally a term that allows termination for a single breach of any obligation, however minor, will not be enforceable (particularly in long-term contracts and/or where a party has invested substantially) if to do so would flout common business sense; in other words, if the breach is so trivial as to have no material impact and the party seeking to rely on it is effectively using it to escape the contract ‘by the back door’. In some circumstances relevant to supply contracts however, a party may be able to terminate for any failure, however minor, to deliver on time if the contract states clearly that for all deliveries "time is of the essence". Consider at the drafting stage which obligations should allow for no flexibility in timing, then word the contract accordingly.

A clause allowing termination for a "material" breach. Commercial contracts commonly contain a provision entitling a party to terminate when the other has materially breached its obligations. Usually the party in breach will then have a limited period of time to remedy the situation (assuming that this is possible) after which, if the breach remains unresolved, the contract will terminate with immediate effect. Check your contract; "material breach" may be expressly defined as the breach of a particular clause and if clear and unambiguous, this may even spare you a trip to court. Typically, however, "material breach" will be left undefined to allow flexibility and will need to be understood in the light of all the circumstances. Consider, therefore, what the other party is expected to deliver under the contract. Are they doing it at all or are they substantially failing to meet their end of the bargain? How serious is the impact on you? Finally, can you find evidence to substantiate your view?

A clause allowing termination on notice. Sometimes the parties will have negotiated a right to terminate the contract at will, for reasons of convenience, simply by serving notice on the other. Before giving any notice first check that there are no associated pitfalls contained in the contract – an early termination payment for example. Take care to observe the stated notice period and to send the notice to the right address and person and in the required form (there is usually a separate ‘service of notice’ provision included in the contract). Failure to comply with such requirements could render your notice invalid. Terminating on notice gives certainty because there is no need to prove a "material breach", a concept which is likely to be fiercely contested by the alleged breaching party. In addition, terminating on notice, rather than attempting to rely on the less certain outcome of a termination for breach, does not in itself preclude you (as the innocent party) making a claim for damages. However, it may be wise, tactically-speaking, to make any such damages claim before, or at the same time as, giving notice, so as not to jeopardise your chances of succeeding in that claim later.

A clause allowing termination because of certain specified events. Common provisions relating to the other party may include a change of control, insolvency and failure to continue a business relevant to the contract. Given the difficulties frequently involved in establishing a breach, even where the other side has failed to perform its obligations in this respect, it may not be easy to establish a breach. Nonetheless, and in the absence of a clear right to terminate for convenience, you may want to consider whether any of these specified events has occurred; they could be your most assured method of bringing the contract to an end.

Other escape routes

The contract’s termination clause may not be your only weapon when trying to see off a troublesome contractual partner.

Repudiation

Even where no express provisions exist, if the breach committed is so fundamental that it runs to the very heart of the contract, then the party in breach will be deemed to have committed a "repudiatory" breach. Here the general rule is that the breach must have deprived you of the very benefit that the contract was intended to deliver. If a repudiatory breach is established you are entitled to treat yourself as having been discharged from your obligations and from accepting further performance under the contract. You will still need to communicate clearly to the other party your decision to bring the contract to an end, and this should be done as soon as possible since failure to act promptly may result in you seeming to "accept" the breach and so forfeiting your right to terminate. If the contract allows termination for material breach then it should not be necessary to rely on repudiation, but this fall-back may be needed in a contract which lacks proper termination for breach provisions.

Misrepresentation

If you can show that you were induced to enter into the contract by a misleading statement (oral or written), you may have a claim for misrepresentation, in which case you could be entitled to ‘rescind’ (ie, terminate). For example: a software provider bidding to sell you a software system seals your purchase by telling you that the system performs a function that would meet your particular business needs. If this assertion later turns out to be false, you may have the right to set the contract aside (in other words, to treat yourself as never having entered into the contract in the first place). In practical terms, this may entitle you may also be able to recover any sums paid to the provider on condition of returning the system. Whether or not this remedy is available to you will depend on the way in which the misleading statement was made. Was it:

fraudulent – ie, did the contractor know that the statement was false, did not believe it to be true, or was he reckless in that he did not care whether it was true or false?;

negligent – was the contractor careless in making the statement or had he no reasonable grounds to believe it was true?; or,

innocent – did he simply get it wrong but had reasonable grounds to believe the statement to be true?

If the representation was made fraudulently or negligently you may be entitled to ‘rescind’ the contract as well as to claim damages for any loss sustained as a result of having relied on the misrepresentation. If, however, the false statement was made innocently then the court can decide whether to set aside the contract or to award damages, but it cannot do both.

Check your contract for express 'non-reliance' clauses in respect of pre-contractual misrepresentations. These are included in many commercial contracts and they could defeat any potential misrepresentation claim. The purpose of such a clause is specifically to exclude any liability for all but the worst (ie, fraudulent) types of misrepresentation it is illegal to exclude liability for fraudulent misrepresentations.

But, be warned; any right to have the contract set aside may still be lost if:

  • you decide to carry on with the contract in spite of the misrepresentation;

  • it is no longer possible to treat the contract as never having existed and to restore the parties to their original position;

  • a third party has acquired rights under the contract; or,

  • too much time has passed.

Mistake

Finally – though this one is rare in mainstream commercial dealings – you may be entitled to walk away from the contract on the basis that the parties were mistaken as to some important fact at the time it was entered into. For example, a mistake may have been made about the very subject matter of the contract itself. Such a 'mistake', if substantiated, attacks the validity of the contract and may entitle you to have the contract held void.

In the next update we will look in detail at rights to seek damages and other remedies where a contract is no longer working for you.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.