Terminating A Contract Due To Breach

Terminate.  It is such an aggressive word, evoking images of Arnie shooting good and bad guys (depending on which movie you watch) and a muscled Linda Hamilton doing an impressive number of pull-ups.  Termination is also a legal term applied to ending a contract, and thankfully, things usually never get as unpleasant as the word suggests.

Few things are as frustrating to a busy, productive business than another organisation breaching a contract in place between them.  And when a breach of contract occurs, often the most pressing thought, before even contemplating seeking damages is, “how can I extract myself from this mess?”.

You may believe that another company is not performing their contractual obligations in a way that satisfies the agreement between you, being able to end the arrangement should be simple.  Unfortunately, the law provides strict rules on when a contract can be terminated.  And rightly so.  Contracts are the fundamental documents on which the commercial world is built; if businesses could exit them on a whim, without justifiable reason, few companies would survive the anarchy.

Can I terminate my contract if the other party commits a breach?

It depends on the severity of the breach.  Most breaches of contract are minor breaches, which are usually remedied by a polite email reminding the other party of their contractual obligations and the expectations you have in regard to them.  Minor contractual breaches do not normally permit you to terminate the agreement.

A repudiatory breach of contract is a different matter.  Such a breach strikes at the heart of the agreement.  The basic test for a repudiatory breach is whether the breach had deprived the injured party of substantially the whole benefit of the contract.  An anticipatory breach, where one party concludes it cannot complete the contract and notifies the other party of that fact, is another situation where the affected party can end the contractual relationship.

It is important to note that a contractual term can be expressed or implied.  An express term is one that is written down in the agreement, for example, company A will deliver fruit and vegetables to company B at 7am Monday and Thursday.  An implied term is not stated in the contract but arises by implication to reflect the parties’ intention at the time the contract was made; i.e. the fruit and vegetables delivered will be free from rot.  A repudiatory or anticipatory breach can cover both express and implied terms.

Before rushing to end a contract due to a breach, you need to check your right to terminate under both the contract itself and common law.

It is very important to consider your position on loss and damages before taking formal action to terminate. Time is also a key factor and so advice should be sought sooner rather than later.

Terminating a contract in accordance with contractual terms

If the contract between your organisation and the other company has been expertly drafted, it will have a clause outlining how and when either party can end the agreement.  In addition, it should also have a clear disputes resolution clause, providing a solid set of procedures and methods, such as negotiation, mediation or adjudication which must be used to resolve a dispute before litigation is contemplated.

It is crucial you check the terms of your contract before jumping to any sudden decisions.  For example, the contract may state that the agreement can only be terminated in the case of a breach if the party at fault fails to remedy the situation within a certain time period.

If you do terminate it may affect your ability to rely on certain provisions in the contract itself, and this may not work to your advantage in certain circumstances.

Common law rights to end a contract

Under common law you have two choices in the face of a breach of contract: either to accept the breach or affirm the agreement.  Both roads lead to very different destinations.

Accept the breach

Accepting a breach means the contract will be ended by the affected party.  In Shell Egypt West Manzala v Dana Gas Egypt [1] the court stated that although there was no particular form which must be followed, acceptance must be clear and unmistakable.  The injured party may communicate directly its decision to terminate the agreement; however, any clear act which is inconsistent with the continued survival of the contract is also sufficient.  Once repudiation is accepted by the other party, the company injured by the breach is excused from further performance of the contract and can pursue a claim for damages.

Affirmation of the contract

Affirmation is where the innocent party to a breach elects to treat the contract as continuing.  It can only occur if the company on the receiving end of a breach:

  • is aware of the facts giving rise to the other party’s repudiatory breach, and
  • understands its legal right to choose between affirming the contract and accepting the repudiatory breach

If the innocent company has this knowledge and carries out an action from which the breaching party can infer the contract will continue, the innocent party has affirmed the contract.  This means the contract will continue; however, the affected company can sue for damages relating to the breach.

In summary

Ending a contract legally is not as simple as you might imagine.  If the contract is one of high value, it always pays to seek legal advice before terminating the agreement.  A small investment in obtaining certainty that you have the legal right to end a contract is well worth it, especially if it saves you from a costly dispute further down the line.

Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring.  Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner.  Our commercial department is able to advise and assist you in relation to all business contract matters and company disputes.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

Please note this article does not constitute legal advice.

[1] [2010] EWHC 465 (Comm), [2010] All ER (D) 156 (Mar)