Termination of business contracts

Termination is the term used to describe a contract coming to an end or being brought to an end. In other words, termination is given its ordinary meaning. It can be applied to ending a contract at common law or under a termination clause. Termination under the rights discussed in this note, unlike rescission, does not undo the contract as if it had never existed. Instead, it excuses all parties from further performance of their main obligations. Secondary duties survive, including the duty to pay damages for a breach already committed. 

A party to a contract might wish to terminate it for any one of a number of reasons. Common reasons include: 

• Breach of contract by the other party because the other party's performance is unsatisfactory or because they refuse to perform the contract.
• The contract is no longer economically viable.
• The customer no longer requires the goods or services.
• A party has gone into insolvency or is nearly about to do so.
• A party has been bought by a competitor.
• One party is carrying on its business in a way that the other fears will damage its own reputation.

Termination may not be appropriate if the parties want or need an ongoing relationship. There are alternative options to not terminating a contract or agreement and they include:

• Variation of the contract to match the changed circumstances, perhaps as a result of a renegotiation.
• Dispute escalation under a designated dispute resolution clause in the contract.
• A threat of termination designed to instigate a renegotiation of the relationship.

To terminate a contract, positive action is generally needed. It is rare for a contract to provide for automatic termination. Similarly, some positive action is required to end a contract at common law. A party wishing to terminate a contract should assess the legal grounds on which it can terminate the contract and consider the practical and procedural implications of termination. It must also fully comply with any procedural requirements for terminating under a contractual right or at common law. It should also document the grounds and process of termination.