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When can I terminate a commercial agreement?

View profile for Thomas Emmett
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Yes, we are talking Brexit again, but not entirely. With Brexit practically upon us, businesses up and down the country might find themselves in unchartered waters wondering how easy or difficult it will be to get out of contractual obligations when the “unexpected” happens. As you might expect, the answer to this, at least from a lawyer, is not going to be straight-forward since it will very much depend on the particular circumstances.

However, I think it is fair to provide some basic “tools” at this point to put any concerned minds at rest, or alternatively to prompt you to seek legal advice, if necessary. 

If you are looking at your commercial agreement(s) in the hope of finding some answers, here is a basic guide to get you started.

A guide to terminating a contract

In most circumstances, an English contract can be terminated prior to the end of its term only in accordance with specific termination provisions within the contract. In other words, only examples and circumstances listed in your termination clause may give grounds for early termination.  

In the absence of such provisions, immediate termination may be possible under common law in limited circumstances (and provided that the contract has not excluded common law rights). However, such circumstances must be so serious so as to amount to:

  • Repudiatory breach – where a party has been deprived of substantially all of the benefit of the contract; or, in other words, where the breach frustrates the commercial purpose of the contract/venture (likely to include a series of repeated breaches)
  • Renunciation – where a party refuses to perform the contract
  • Breach of condition – where a party is in breach of provisions such as “time is of the essence” or statutory implied conditions for quality under the supply of goods legislation, etc

Coming back to contractual rights, set out below are circumstances which can provide grounds for termination only if they have been expressly provided for within the termination clause in the contract (which they usually are):

  • Material/substantial breach
  • Insolvency
  • Change of control (of the other party)
  • Convenience or contract is no longer profitable; the specified event must include the expiry of a specified termination notice period (this does not include fixed term contracts)
  • Force majeure
  • Frustration

Recently, I have been asked how useful (or not) a force majeure clause can be in a Brexit scenario.  Assuming this clause has been expressly included in the contract (since there is no concept of force majeure in English common law), it can effectively relieve a party from liability for what would otherwise be a breach of contract, in the event of terrorism, civil war, flood, earthquake, strike or similar, as defined. If triggered, parties are likely to be under a duty to communicate and take action to reduce the impact of the particular force majeure event. Whether this clause can be triggered by a Brexit-related event will largely depend on how force majeure has been defined in the contract and whether it can be interpreted to cover the particular set of circumstances.   

In the absence of a force majeure clause in the contract, where the party is unable to perform their obligations due to what might otherwise be regarded as a force majeure event, such non-performance will either amount to a breach of contract whereby the other party can claim damages and may have the right to terminate the contract under the common law; or the contract will be frustrated. 

A contract is frustrated when its performance has become physically or legally impossible. The contract ends automatically without any action by either party. If a party has suffered loss as a result, it will have limited statutory remedies.

If you are unsure about your commercial position in this regard, I will be happy to assist. I am based at our Basildon office and can be reached on 01268 244 141 or veronika.koenig-roach@birkettlong.co.uk.

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