K3 Insights

Termination of business contracts can be complex. Here are some handy pointers.

When can contracts be terminated? The common situations include:

• Where the contract permits it: All good contracts will set out the circumstances in which a party can terminate. Such circumstances include where a party to the agreement:
  - commits a “material breach” and does not remedy that breach; or
  - goes into liquidation or suffers a similar insolvency event.
• Where the other party commits a breach: If a party breaches a term in the contract, or it is clear a party will breach a term in the contract, this can be grounds for termination under the Contract and Commercial Law Act 2017 (CCLA). Care should be taken, however – not every breach justifies termination. Only breaches agreed to be essential by the innocent party, or those with significant consequences, rise to the necessary level of seriousness.
• Where the other party repudiates: Under the CCLA, when one party makes it clear to the other, whether by words or conduct, that they do not intend to perform their obligations under the contract, this may be considered repudiation. This gives the affected party the right to cancel. Note, however, the bar for repudiation is very high. There must be an unequivocal assertion of an intention not to be bound by the contract.
• When they expire: Is there a maximum term?
• When a right of renewal is not exercised: Aligned with the last point, some contracts offer a right to require/request a renewal. Sometimes there are multiple rights, sometimes either party can exercise them. It is best to know when those rights arise, how to use them, and what happens if you do not. Equally, there may be conditions and/or consequences attached to a renewal. Good contract discipline will see a calendar of key dates being created and monitored by more than one person in your business.

What else should I be mindful of?

• Giving notice: The exercise of a termination right usually requires notice to be given. Adhering to your contract's terms or legal requirements in respect of this is crucial to ensure a valid termination.
• Mandatory dispute resolution: You should check the dispute resolution clauses in your contract before you take steps to cancel. These provisions sometimes address how to handle disputes, often through negotiation, mediation, or arbitration. Depending on your specific contract, you might need to follow these steps before moving to terminate.
• Survival: Which rights and obligations should survive a contract’s expiry or termination? Confidentiality and restraint and/or non-solicitation are common examples. However, there are many others that should also survive. Think carefully before including some but not others in a ‘survival’ clause.

If you’d like further information or assistance navigating termination, get in touch with a member of our team for expert legal advice.

This article is part of our Business Toolkit series, where we explore key legal issues affecting businesses and offer practical insights aimed at strengthening businesses' foundations.