Chapter 11
All good things come to an end — termination of contracts
There are three general ways in which a contract can be terminated:
1 by the term or period of the contract concluding
2 by the termination of the contract before its natural expiration by one or both parties
3 by termination of the contract at law for breach of it.
Most commercial contracts have a limited duration. They run for a set period of time.
A limited duration has a number of benefits. It creates a sense of accountability in the person delivering the good or service. If they know they have to ‘audition’ for more business. It will tend to promote in them a higher service ethic and a stronger desire to keep the other party happy.
It also allows a party to exit an unsatisfactory or uncommercial deal. It is a common feature in commercial contracts that circumstances change during the course of them. Depending on whether the parties can agree a variation, they are generally bound even in circumstances where, with hindsight, they would not have entered into the deal as they have. A contract of a limited duration gives some hope that the pain will end and it will simply be necessary to grin and bear the unsatisfactory part or parts to the relationship until the contract ends.
On the other hand, in a contract that has worked well and the parties are happy, it allows negotiation for better or more satisfactory terms. This may be for the benefit of the buyer or the seller or both parties. In many ways this is the high point of contractual life. Both parties have had a relationship for a period of time in which they have achieved positive results. They wish to enter into a new arrangement on better and more commercially advantageous terms for each of them.
Once a contract ends, it is effectively dead. It is open to the parties to do what they want to. That may range from a parting of the ways to doing a new deal. The parties can revive the contractual terms in a separate agreement for a further period of time.
Generally speaking, contracts that reach their expiration date do so without there being any disputes or assertion of claims by one party against the other.
Termination of the contract by a party under its terms
The rights and entitlements of a party to terminate the contract by operation of a default or termination clause depend entirely on what the contract says. As indicated, there may be a demarcation of rights. One party may have a wider ability to terminate the contract than the other. Your rights in terminating the contract during the course of it will depend on what you have negotiated and how you have expressed those negotiations.
It is obvious that the maximum amount of flexibility you can import into the contract is desirable. On the other hand, you may want to make termination by your counterparty as difficult as possible.
There are many contracts that can still be performed adequately and satisfactorily even if there has been a souring or even a breakdown of that relationship. This is particularly so when the contract is for providing a good or commodity. Once the good or commodity is manufactured, it can be provided without the necessity for there to be amity or friendship between the parties.
In contracts for services where there is still human interaction as the cornerstone in the agreement, this is less regular. Often a breakdown of trust and affinity between the parties will cause the contract to be unworkable.
In broad terms, there are two types of term that are available:
1 the termination of the contract for no cause at all on an agreed period of notice (which can actually be nothing)
2 termination for breach of a term (be it fundamental or otherwise).
A clause of the second type is a limitation on your ability to terminate the contract. This is because you need to identify a breach on the other side before you can terminate. This does not allow termination on a whim.
A clause of the first type allows you to terminate the contract subject to whatever notice you need to provide.
Depending on the way in which the contractual term is constructed, there may or may not be residual claims and disputes arising from the termination of a contract by one of its own terms.
Obviously, if a breach needs to be identified before the contract can be terminated, residual unhappiness is a real possibility.
On the other hand, a contract that can be terminated without cause may be ended because of a change in commercial direction or there no longer being a need for the good or service. It does not necessarily mean anything adverse nor is it a negative reflection on a party’s performance.
In general terms, termination at law only arises for breach of a fundamental term. When faced with a breach of a fundamental term, the victim can elect to continue or to terminate the contract and sue for damages.
The law of termination of contracts for breach is a detailed and complex set of principles and practices. It requires a precise analysis of the:
- terms of the contract
- subject matter of the contract
- conduct of the parties under the contract
- alleged breach of the contract
- implications of the breach of the contract.
There is no general rule applied to breaches of contract. Every breach is as different as each contract that in turn is as different as the parties to it.
Generally termination of a contract for breach at law will confer on one or the other party a right to make a claim against the counterparty for damages. This is because a breach needs to be identified before the right to terminate is triggered. Depending on the particular circumstances, it may be that the breach is extremely serious and the termination paves a way for the replacement of the contracting party with another and for a damages claim.