Terminating a Contract: Grounds and Practical Tips
During this unprecedented economic environment, one would need to take proactive actions to protect one’s position when things are going the way they should be. In this article, we will explore some of the commons grounds of terminating a contract and other commonly seen issues when terminating a contract.
Grounds for termination
There are two main grounds for termination of a contract.
- Common law; and
- Terms of the contract.
Common law
A breach that gives one’s right to terminate a contract is generally called repudiation or a repudiatory breach. Some types of repudiatory breach include:
- Repudiatory breach of a term: Whether a breach of a term in a contract amounts to repudiation depends on the gravity of the breach. The more serious of the breaches, in particular, those that deprive the aggrieved party of substantial benefit intended under the contract, may trigger the right to terminate at common law.
- Renunciation by a party: When a party, either by words or by conduct, refuses to perform the contract in a material respect or indicates an intention to not perform, renunciation occurs and allows the other party to terminate at common law.
- Impossibility caused by a party: When a party, either by his own act or omission, disables himself from performing the contract in some material respect, or prevents the other party from performing the contract.
- Anticipatory repudiation: When a party in advance refuses or makes it impossible to perform the contract before it is due.
Terms of contract
As illustrated above, there is a limited number of grounds that one can rely on in terminating a contract at common law. Incorporating an express termination provision in a contract would provide more certainty and clarity to the parties.
- Material breach: There is no common law right to terminate for a material breach. A breach could be material even if it is not repudiatory and more than trivial. Yet, the term ‘material’ is subject to interpretation.
- Repeated breaches: Unless the cumulative effect is repudiatory, repeated breaches do not usually allow termination at common law. This can be addressed by expanding the termination provision in a contract to capture situations where repeated breaches would give right to one party to terminate a contract (e.g. failure to perform certain number of tasks within a specified period of time).
- Non-payment: Depending on facts, non-payment may not be repudiatory or even constitute a material breach. To offer more clarity, parties may want to include a provision stating that any delay in payment would trigger termination.
- Express right to terminate for convenience and without cause: Parties may also agree to the contractual right to terminate by giving an agreed period of notice.
Other Common Issues
Insolvency
There is no common law right to terminate a contract in the event that one party has become insolvent. As such, it is advisable to state in the contract that if the other contracting party is having certain financial difficulties or becoming insolvent, and/or similar events that affects a party’s ability to continue performing the contract, it would become an event of default thereby allowing the other party to terminate the contract.
Exclusive remedy provision
Some contracts include an exclusive remedy clause which limits a party’s right to recover in the event that the other party breaches the contract. Whether such clause removes the right to terminate depends highly on facts. Having an exclusive remedy for a specified breach may exclude the contractual right to terminate under that specific kind of breach. If clearly drafted, an exclusive remedy clause in principle may also exclude the common law right to terminate. One should also be careful that an exclusive remedy clause does not amount to a penalty which may affect the operation of the provision.
If you wish to know more about how we can help or any issues raised in this article or more information, please contact:
Alfred Leung, partner (alfredleung@hkytl.com)
Eunice Leung, trainee solicitor (euniceleung@hkytl.com)
This article is general in nature and is not intended to constitute legal advice. Please seek professional advice before taking any action in relation to matters dealt with in this article.
