How to… Get out of a contract - avoiding common pitfalls

It’s a common problem … you’ve entered into a contract but you’re not happy with how things are going and want to get out of it.

Terminating a contract is, however, a serious step and should not be taken lightly. If you get it wrong, you open yourself up to the risk that the other party will challenge your termination and claim that you yourself are in breach.

So, what can you do to protect yourself from this risk?

Set out below is a useful checklist of some of the key points you should consider before terminating:

1. Check the contract

Often contracts include a termination provision allowing the parties to terminate in certain circumstances. If so, you must ensure that you strictly follow any requirements under the contract, for example:

i) Do you have a right terminate - e.g. has the other party breached certain obligations which the contract states would entitle you to terminate? Can this be proved?

ii) Is there a two-stage process? If so, this normally requires a party to notify the defaulting party of its breach and request that it be remedied within a specified period, failing which that party will be able to exercise its right to terminate by giving a second notice;

iii) The form of any notification of breach or termination notice – normally written notice is required;

iv) Any time limits for serving such notice(s); and

v) How the notice(s) should be served on the other side (i.e. by post, email and/or fax) and whether it should be addressed to a particular individual.

2. No contractual right to terminate?

Consider whether there has been a “repudiatory” breach (i.e. a breach that the law regards as sufficiently serious to entitle the innocent party to bring the contract to an end). If so, you will have the right to choose either to i) end the contract or ii) to affirm it, and claim damages. This “common law” right exists alongside any contractual right to terminate, and generally you don’t have to choose between the two. If, however, they offer you (as the injured party) alternative rights with different consequences, you will have to choose and the precise terms in which you inform the defaulting party are significant. You could, however, terminate by relying on contractual and common law rights in the alternative.

3. Drafting the Notice

You should ensure that any notice:

i) Is clear and unambiguous;

ii) States that it is intended to be a warning / termination notice and is titled as such;

iii) Refers to the contractual clause the notice is given under (if applicable) and mirrors the wording of that clause; and

iv) If it is a warning notice, gives details of the specific default, states that the party in breach has to take steps to remedy its breach within the specified timeframe (if applicable), and clearly states the consequences of failing to comply.

Beware – if you want to terminate, you need to get it right … Wrongful termination of a contract is in itself a repudiatory breach of contract, giving the other party the right to terminate and claim damages from you.

In reality, therefore, although the above can act as a guide to some of the key considerations, as termination is such an important step, you should consider taking legal advice to ensure:

a) that you have a right to terminate in the first place and,

b) if so, that it is done properly to minimise the risk of any negative ramifications in exercising that right.

Georgina Long, Associate, Harbottle & Lewis LLP