When can you end a commercial contract early?
Businesses may need to exit contracts when circumstances change. Getting it wrong can lead to costly disputes or breach of contract claims.
This article explains when you may lawfully terminate an agreement, the key risks, and the steps to take to reduce liability.
Need tailored advice on any aspect of commercial contracts? Please contact John Wiblin who will be happy to help.
Key points to know about exiting a commercial contract early
- There are various potential grounds for exiting a commercial contract early, including mutual agreement with other parties and breach of contract.
- There can be legal, financial, and reputational risks when ending a contract early which must be carefully managed.
- Following the right process can help you to end a contract early while minimising the risks.
Grounds for lawfully terminating a commercial contract
Possible routes for ending a commercial contract early include:
- Mutual surrender – Where the parties to the contract all agree to end the agreement early.
- Break clauses – The contract may include a clause allowing the contract to be ended early under certain circumstances (this is common in commercial leases).
- Serious breach by the other party – If the other party seriously breaches the contract, or makes clear that they will not perform it, you may be able to treat the contract as ended and claim damages. Not every breach is serious enough to justify termination, so the facts and contract wording need careful checking.
- Unenforceability – If the original contract was written in a way that makes it, or key clauses, legally unenforceable (e.g. where “unusual or onerous” terms have not been clearly drawn to your attention)
- Force majeure – A force majeure clause may allow suspension or termination where specified events beyond a party’s control prevent or delay performance. Its effect depends on the wording of the clause; there is no general English law doctrine of force majeure – you cannot rely on it unless the contract says you can.
- Frustration – Frustration may arise where, after the contract is made and without fault by either party, an unforeseen event makes performance impossible, illegal, or radically different from what was agreed. It automatically brings the contract to an end.
- Assignment or subcontracting – In some cases, it may be possible to pass the contract to someone else (assignment) or subcontract fulfilment of your obligations to another party. This option is commonly used with commercial leases.
Take professional advice before acting, as ending a contract without proper grounds could put you in breach instead.
Risks when exiting a contract early
When exiting a contract early, you need to be aware of the following potential risks:
| Risk | Applicable situations | Potential harm | Possible mitigation strategies |
|---|---|---|---|
| Exit payments | Where the contract allows early termination on payment of a fee, or where the parties agree a payment as part of a negotiated exit | The payment may reduce or remove the commercial benefit of ending the contract early | Check when any fee is payable, whether the clause is enforceable, and whether a lower payment can be agreed |
| Damages for breach of contract | Where you terminate without a contractual or common law right to do so | Wrongful termination may expose you to damages and reputational harm | Confirm the right to terminate and follow any notice requirements; consider negotiating and agreed exit |
| Reputational damage | If it becomes public knowledge that you ended the contract without proper grounds | Loss of confidence from other industry partners and customers | Ensure legitimate grounds for exiting the contract – include an NDA in any mutual surrender agreement |
Key steps to minimise your liability when ending a commercial contract or agreement
If you wish to end a commercial contract or agreement early, you should take the following steps:
- Seek professional legal advice. A commercial contracts lawyer can review the agreement and advise on the safest route.
- Identify the best ground. Contractual rights, serious breach by the other party, frustration, and negotiated exit all have different consequences. Choose the route that fits the facts and your commercial objectives.
- Assess the risks. Consider damages, notice requirements, operational disruption, and reputational issues before acting.
- Consider an agreed solution. A negotiated termination, variation, assignment, or subcontracting arrangement may be quicker and less contentious than relying on breach.
- Take court action only where necessary. If agreement cannot be reached, litigation or another dispute resolution process may be needed, but the costs and prospects should be assessed first.
- Record the outcome. Keep clear written evidence of termination, settlement terms, and any release from future obligations.
- Use confidentiality terms where appropriate. Confidentiality and non-disparagement wording can help manage reputational risk in an agreed exit.
The right advice at the outset can help you protect your position and avoid turning a manageable issue into a dispute.
How Longmores can help with exiting commercial contracts
At Longmores, our lawyers advise businesses on all aspects of commercial contracts, including early termination. We can help you identify the right route, manage risk, and protect your commercial position.
Our expertise has been recognised with strong rankings in leading legal directory the Legal 500, offering independent assurance of our services.
For specialist advice on commercial contracts, please contact John Wiblin who will be happy to assist.
Please note, the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
