The law has long recognised that a breach of certain types of obligations in a contract will entitle an innocent party to terminate that contract (and sue for damages).
But don’t rush in. Terminate with caution. No matter how bad a situation is, a wrongful termination can seriously backfire, and may entitle the other party to terminate the contract and sue you for damages.
When is it safest to terminate?
If you have the benefit of an express contractual right to terminate the contract in certain circumstances, you are generally in a good position. Make sure you have the evidence of breach and follow all the procedures set out in your contract.
What if I have no express right to terminate?
In the absence of an express right, a contract may be terminated if the term being breached is an ‘essential term’ of the contract – that it, a clause of such importance that you would not have entered into the contract unless you had been assured of strict or substantial performance of that clause. This will depend on the intention of the parties at the time of making the deal.
What about lots of little breaches?
If the breach is not of an essential term, there may still be a right to terminate, but you should carefully consider the implications of terminating a contract on these bases.
In everyday business, we often see the repeated series of small, perhaps inconsequential breaches that build up until there is a “straw that breaks the camel’s back”. Terminating in these circumstances, is often fraught and will require a careful demonstration of the impact and nature of these breaches such that termination is justifiable. if you want to rely on this right, best to get some good advice.
How to do it better next time?
Ideally, the contract itself should allow the parties to agree on which of the terms of the contract would entitle each of the other party to terminate the contract if breached.
Although breach and termination are not pleasant topics for negotiation at the commencement of a relationship, having that hard conversation with a counterparty is always a lot easier than having to take a high risk to terminate an unfavourable situation, or having to live with the ongoing breach (albeit minor) from a counterparty with no option to escape the contract.
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