10 March 2022

Recent world events have caused many businesses, big and small, to re-assess who they do business with. This has given rise to a number of legal issues, one of which pertains to the early termination of commercial contracts. Geo-political events are just one example of an extraneous circumstance that can trigger early termination of contracts, others may include developments in business or legal and environmental factors.

Most contracts will include a termination clause which will stipulate which party is able to end the contract and the circumstances in which the said clause will be effective. Contracts such as commercial leases or licence agreements will often contain a form and period of notice that must be given to the other party.

Notwithstanding the terms of the contract, it may simply come to an end when there is mutual agreement between parties.

A more complex cause for early termination of a contract is that of frustration of performance. Frustration occurs when some supervening event results in a party being unable to perform its contractual obligations. Where this occurs, parties may be automatically released from future obligations under the contract. The Covid-19 Pandemic provides the perfect example of this doctrine. Due to the unforeseeable nature of the pandemic and strict government regulations, many individuals and businesses e.g. musicians and concert venues were unable to perform their contractual obligations as intended.  

The situation is more problematic where both parties remain able to perform their obligations but one no longer wishes to contract with the other. Big brand companies will often include clauses in contracts with their distributors or licensees giving them the ability to terminate the contract in cases where the other party brings that company into disrepute. However, those clauses will rarely allow for termination where the distributor or licensee has done nothing wrong.

Where a contract is to be terminated early, it is important to carefully consider the terms of the contract and whether there are grounds to break off relations.

While the law will allow a contract to be terminated in some circumstances without a corresponding clause in the written contract (for example, a serious breach of the contract), a clear ground for terminating the contract should be established before withdrawing from the contract.

In some cases withdrawing from an agreement without any proper basis will, of itself, constitute a breach of contract.

Any business considering ending a contract early should carefully consider the legal basis for doing so in order to avoid or at least minimise potential risks.

Lynn Richmond, Partner: lyr@bto.co.uk / 0131 222 2939
Ibinabo David-West, Trainee Solicitor (Author): ida@bto.co.uk / 0141 221 8012