notice of termination

Contracts may be terminated by agreement, by breach, by frustration, by effluxion of time (the contract runs its term), or by both parties performing their obligations under the contract. Notice of termination may be issued by a party where they have right to do so under the express terms of the agreement, or where they are otherwise entitled to do so under the general law. Whether a party to a contract has a right to terminate depends upon the express and implied terms of the agreement, the compliance by the parties with the terms of the contract (and more to the point, otherwise).

Contractual Rights: Notice of Termination

Most business contracts provide that notice of termination may be issued by an innocent party where the other party is in irremediable breach of a condition of the contract, or where the party is in material breach of contract and does not rectify the breach within a specified period, such as 28 days. This is known as a termination clause, and often provides a suite of grounds which may be relied upon to terminate the contract.

In order to bring the contract to an end so as to validly and lawfully terminate the contract, express terms in the contract must in most cases be complied with. This is not to say that the grounds specified by the termination clause are the only grounds that may be relied upon to terminate the contract. If a right to terminate exists under the general law, then that may also be relied upon.

The contractual rights of the parties remain in force during the term of the notice period. Many professional drafted contracts expressly provide for the contractual provisions which will remain in force after termination; even if it is does not, provisions of the contract may impliedly continue after the contract has ended, such as confidentiality clauses, choice of law clauses, jurisdiction clauses, retention of title clauses, dispute resolution clauses and arbitration clauses.

In addition, the contract may expressly provide for events to take place at termination (especially in outsourcing agreements and supply agreements), such as handover of unsold goods to the supplier; lending reasonable assistance to the customer or a new supplier where the services (such as IT services) are to continue; express termination of licences granted between the parties; handover of confidential information and other commercially sensitive materials, and certification by the delivering party that this has been done; dealing with jointly owned intellectual property rights.

Common law Grounds of Termination

Where a contract does not specify its duration (known as the ‘term of the contract’), it may be terminated on reasonable notice. Reasonable notice depends on the particular contract and the factual background to the contract; namely what the parties had in mind as at the date the contract was formed.

There are indicia that may be used to assess what a reasonable time would be in the circumstances, such the frequency of payments made under the contract or deemed automatic renewal periods specified in the agreement. Equally, contracts where licenses are granted to do something may be terminated on reasonable notice. If the licence is gratuitous, it may even be able to be terminated without notice, however whether it can or not will rely on the facts of the particular case.

Consequences of Wrongful Exercise

Issuing notices to terminate is a serious business. If it is not done correctly (for instance, a failure to set out the grounds for termination, giving reasonable notice or issuing notice in accordance the terms of the contract) terminating a contract can be disastrous, and severely compromise an otherwise perfectly legitimate right to terminate, and in the worst cases give rise to a repudiatory breach.