Can I Terminate a Commercial Contract?

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Table of Contents

• 1. Establish Whether You Have a Binding Contract
• 2. Look at the Contractual Terms
• 3. Consider Whether You Have a Contractual Right to Terminate
• 4. Consider Other Non-Contractual Rights to Terminate
• 5. Assess Your Risks and Consider Your Approach 
• Key Takeaways

Commercial contracts play a vital role in defining the terms of a business deal. Whether it is agreeing to terms and conditions for a purchase or signing a service agreement for services, they are essential. Sometimes, these agreements no longer serve your business goals, or the other party falls short of expectations. If you are thinking about terminating such a contract, it is crucial to grasp the legal ramifications beforehand. This article will help you understand whether you can terminate a commercial contract.

1. Establish Whether You Have a Binding Contract

In most cases, contracts do not have to be written down to be legally valid. They can incorporate terms and conditions, verbal communications and implied terms. A contract might have some parts written and some parts spoken. To be  legally binding, a contract requires five key elements:

• Offer – one party offers to provide goods or services and communicates to the other party who is looking to acquirethose goods or services. It needs to be in clear and precise terms;
• Acceptance – the party receiving the offer communicates their agreement. This can occur verbally, written or through actions. Usually, people accept by signing a document; 
• Consideration – a contract only exists and will be binding where something is being offered in exchange for another, usually money;
• Intention – for a contract to be binding, both parties need to demonstrate that they intend to be bound by the contract and there are consequences if they do not follow through;
• Certainty – the contract terms are clear, and all parties agree on all terms within the contract.

2. Look at the Contractual Terms

Often, the contract itself tells us when and how a party can terminate a commercial contract. In particular, your contract might detail:

• whether specific reasons must arise before a party can terminate, such as a contract breach;
• how your business should communicate to the other party;
• how much notice you must give the other party;
• the correct processes to terminate the contract.

In November 2023, rules about unfair contract terms came into force. Under the new rules, some termination clauses may be deemed unfair, making them invalid and unenforceable. Here are some examples: 

• if one party has more rights to terminate the contract but the other party cannot;
• a clause that punishes a party for ending the contract;
• allowing one party to end the whole contract for breaking a single term;
• giving one party more time to fix a breach before the other can end the contract;
• clauses that stop a party from giving notice to end a contract until a set time has passed; and
• clauses that do not let a party to end with written notice, making them go in person to end it.

If any of these apply to your contract, it is wise to talk to a commercial lawyer before terminating or giving notice to terminate your contract. 

3. Consider Whether You Have a Contractual Right to Terminate

You should check if you have the right to terminate your contract, as terminating without such a right could lead to the other party making a breach of contract claim and potentially seeking damages from you. In Australia, there have been many cases related to alleged breaches of contract, specifically how these breaches are legally defined. It is essential to understand that not every breach allows you to terminate the contract. It depends on the significance of the breach and if the contract terms allow for that breach to terminate the contract. A breach is usually one that seriously underestimates the contract.

4. Consider Other Non-Contractual Rights to Terminate

In some cases, you might have the right to end a contract. This could happen if the other party: 

• breaks the contract; 
• lies about something essential to get you to agree to it; or 
• shows no intention to follow through. 

In such situations, you have the right to terminate the contract even if it is not explicitly outlined. Sometimes, the contract may never have been legally created from the start.

5. Assess Your Risks and Consider Your Approach 

Courts are filled with cases over contract disputes. Such cases cost all parties involved a lot of money. You need to be aware of the potential risk of legal action that could arise from a termination before taking steps to terminate. Whilst termination may be tempting, it is not as simple as walking away from the agreement. There can be significant consequences that you need to consider carefully. 

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Key Takeaways

A legally binding contract contains key elements such as offer, acceptance, consideration, intention, and certainty. When the other party breaches the contract, it depends on whether the contract allows for termination and, if so, only for serious breaches. If there is a significant breach, you can often terminate the contract and seek legal action against the other party, claiming damages within a certain number of days.

Before terminating a contract, you should consider a significant risk, refusing to accept it. If you refuse a contract, the other party may be able to bring a claim against you for damages. However, the contract does not clearly outline termination rights, and you cannot resolve the dispute; this could lead to costly and time-consuming legal proceedings.

If you have any questions about commercial contract termination, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.