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Terminating a business contract can be risky. This is mainly because a ‘wrongful termination’ can land you in an even more complex situation. When you terminate a contract, you relinquish yourself from some of your contractual obligations before the contract period comes to an end. However, some of your existing obligations will survive the termination. Therefore, before you terminate a contract, you should consider:

  • whether you can rely on a force majeure clause;
  • whether your contract has been frustrated, particularly in light of the COVID pandemic; and
  • whether you have any express rights under the contract to terminate.

This article outlines key questions to ask yourself before terminating a business contract. However, if you are ever unsure, you should always seek legal advice for clarification.

Can You Rely on A Force Majeure Clause? 

Sometimes it is not in your best interest to terminate a contract. After all, contract termination can lead to:

  • the end of a commercially viable transaction; and
  • the break of a commercial relationship that took time to build. 

Consequently, you may not have to resort to terminating the contract immediately. Instead, your contract might contain a force majeure clause.

A force majeure clause can relieve you from performing your obligations if you cannot do so due to an event outside of your control. A force majeure event is typically an event beyond the parties’ reasonable control, such as a global pandemic. If you can rely on a force majeure clause, you will not be in breach of the contract.

You should note that many force majeure clauses do not apply to any payment obligation. This is because if your primary contractual obligation is to make a payment, it would be unfair for a force majeure clause to waive your obligation whilst the other party fulfils their contractual obligation. 

Whilst relying on a force majeure clause does not necessarily mean that you terminate the contract in full, your contract may state that either party can terminate the contract if:

  • the event beyond your reasonable control continues beyond the specified period; or 
  • a party to the contract cannot remedy or fix the event within the specified period.

However, you should note that COVID is now widely considered a foreseeable risk that is within your reasonable control. Therefore, you should clarify what events your force majeure clause would cover and whether you can subsequently rely on it with an experienced lawyer.

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Has Your Contract Been Frustrated?

You may be able to terminate a contract if frustration has occurred. Contract frustration occurs when there is:

  • an unforeseeable event that either party does not cause; and 
  • this event renders your contractual obligations “radically different” from what you had initially agreed to do. 

Example

Say you have agreed to supply 500 widgets to a small business, and have signed a sale of goods contract. However, successive lockdowns have meant that your overseas supplier shuts down, stopping you from manufacturing your widgets. With no other available supplier, your obligations can be said to be “radically different” from what you had initially agreed. On the other hand, if successive lockdowns only mean that you will incur a greater cost but can still deliver the widgets, the contract is not necessarily frustrated.

Your contractual obligations will radically change if there has been an unforeseeable circumstance that is typically beyond the control of either party. What is considered an unforeseeable circumstance will depend on your specific commercial context.

For instance, if you entered into a 10-year contract in 2017 for the supply of goods, you would not have reasonably foreseen that a global pandemic would impact your ability to perform your contractual obligations. On the other hand, if you entered into the same contract in late 2020, a lockdown would be reasonably foreseeable.

Ultimately, there are no clear-cut rules for determining whether frustration has occurred in commercial contracts. For this reason, you should seek a lawyer’s advice, as they can provide you with a better assessment of your circumstances.

Do You Have An Express Right to Terminate The Contract?

Parties will have an express right to terminate in many commercial contracts if specified circumstances arise. An express right to terminate should be clearly written into your contract. Additionally, this right usually arises when a party fails to perform their contractual obligations on time. For example, in a contract for the sale of goods, you may have the right to terminate the contract if your supplier does not deliver goods within specified time.

Typically, you will have to give the other party a certain amount of notice if you want to rely on this express right. Additionally, you should have a lawyer review your contract before you decide to rely on an express right to terminate. 

Additionally, you may be able to rely on a right to terminate for convenience. In this instance, a party can terminate the contract for any reason, even where the other party has done nothing wrong.

No matter what, you should seek legal advice if you are unsure how to rely on a right to terminate. 

Key Takeaways 

When you terminate a contract, you relieve yourself of your contractual obligations before the contract period comes to an end. However, before terminating a business contract, you should clarify whether:

  • you can instead rely on a force majeure clause, which can allow you to remain bound by the contractual relationship;
  • an unforeseeable event has frustrated your contract; and 
  • you can rely on an express right to terminate your contract. 

If you need help with terminating a business contract, 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.

Frequently Asked Questions 

Can I have the right to terminate a contract under contract law more broadly?

If you do not have an express right to terminate in your contract, you may be able to terminate the agreement under contract law if the other party has: breached an ‘essential term’ in your agreement; committed a sufficiently serious breach of a term that is not essential in your agreement; or repudiated your agreement, meaning they have indicated that they no longer want to be bound by the terms of the agreement either by their words or conduct.

Do I have to provide written notice when I terminate a contract?

Depending on your specific termination clause, you may have to give the other party written notice of your termination. Even if you do not have to, it would be wise to do so.

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