Terminating Contracts – Common Law
Generally, most parties have a right under common law, to terminate certain contracts for a breach that is repudiatory, even where the contract does not specify such right. In this note we explore what that right is, and what the courts look at to determine whether there is a valid cause for termination.
Legal basis for termination
Before terminating a contract, it is very important that you consider the legal basis upon which you are seeking to terminate.
The contract may provide you with an express right to terminate due to an event of default, for example because the other party is subject to an insolvency event. Alternatively, you may have an implied right to terminate the contract, for example, due to material breach. It is important to understand that there is no strict legal definition of what constitutes a “material breach”. Often parties look to define this in the contract, otherwise, it is subject to the court’s interpretation.
If there is no contractual right of termination, then you will need to consider whether you have a common law right to terminate. This right is available to all parties who have entered into contracts whether or not a contractual termination clause exists (unless of course, it is expressly excluded). There is generally a right to terminate a contract pursuant to the common law if there has been a repudiatory breach of that contract.
What is a repudiatory breach?
Generally, a repudiatory breach is a breach so serious that the court considers it goes to the root of the contract, or it deprives the innocent party of substantially all the benefit it should have received via the contract.
There is also a common law right to terminate when one party refuses to perform its obligations under a contract (this is called renunciation).
What if I get it wrong?
Sometimes the terminating party sets out the wrong grounds for termination or, does not even have the right to terminate, but attempts to do anyway. If this happens, the innocent party has the right to terminate the contract for repudiatory breach and claim damages from the party who wrongfully terminated.
Also, if a party serves notice to terminate the contract but fails to give clear and unequivocal notice in accordance with the contractual notice provisions, this may result in the termination being ineffective and the contract continuing with the right to terminate being lost.
It is therefore extremely important to assess the legal basis of termination and check the notice provisions, prior to serving a termination notice.
If you require any advice on what your termination rights are under a contract, please get in touch with the Commercial Team who would be happy to explain these to you.