When two parties do business together, working with a written contract can help avoid misunderstandings between them. A contract specifies important details such as deadlines, prices and specifications. The termination clause in an agreement establishes how the parties end their business relationship and what their respective responsibilities are when the relationship ends.
What is a termination clause?
Termination clause is a written provision in an agreement that defines the circumstances under which said agreement can be terminated. Termination can happen before the duties outlined in the agreement are fulfilled. Termination clauses can always be customized but standard ones are included in almost every agreement.
Terminating a contract, also commonly referred to as ‘discharging’ a contract, is the act of excusing all contracting parties from their contractual duties prior to the expiry of the contract. The contract is effectively brought to an end.
It is important to distinguish termination with the concept of ‘rescission’, which like termination frees the parties from their obligations. However, while rescission seeks to restore the parties to their original position prior to the contract, termination does not.
Grounds of Termination
Generally, an agreement can only be lawfully terminated if there is a legitimate reason to do so. This can be one of the following:
- Mutual agreement – both parties reach an understanding and agree to nullify the agreement and all duties defined by it.
- Fulfillment – an agreement dissolves when all the parties involved have performed their duties as required by the agreement.
- Impossibility of performance – due to unforeseeable and uncontrollable circumstances, it can become impossible for the parties of an agreement to perform their respective tasks.
- Mistake, fraud or misrepresentation – if the agreement does not include all necessary information or misrepresents certain circumstances that are important to its completion, this represents a valid reason for termination.
- Breach of contract – if one of the agreement’s parties does not perform their contractual duties, this constitutes a breach. As a result, the non-breaching party is entitled to recover their losses.
- Termination clause – if the agreement includes a termination clause, it can determine special circumstances under which the agreement may be terminated.
Getting a termination wrong?
If a party wishes to terminate a contract it is important they proceed with extreme caution and it is unwise to terminate a contract without seeking legal advice first. Failure to terminate correctly usually invalidates the termination. Common mistakes made by a party seeking to terminate a contract include:
Terminating without the right to do so. In almost all cases is not black and white as to whether a party has the right to terminate the contract. Parties often invalidly terminate contracts after mistakenly believing they have the right to do so, either by misinterpreting a terminating clause or incorrectly attempting to rely on a repudiatory breach.
Giving the wrong grounds for termination. Even when parties do genuinely have a right of termination another risk is giving the wrong grounds for termination in the termination notice.
Not following the correct termination procedure. Termination clauses often contain complicated instructions which must be adhered to the letter. Failure to follow the correct procedure means the termination is unlawful.
Can we terminate contract without such a clause?
The seeming answer to this question is, Yes, you can, if reasonable notice is provided.
The Court of Appeal in Masjaya Trading Sdn Bhd v. Kedah Cement Sdn Bhd [2004] 4 CLJ 18 made it clear that a contract which does not consist of a termination clause can be terminated. This first requires the issuance of a ‘reasonable notice’ to the other party. This requirement of notice appears to be mandatory. Failure to give such notice could even amount to a breach of contract where the Court of Appeal stated:
…“In the present case it is beyond dispute that the defendant did not give the plaintiff any notice to terminate the contracts. On the other hand, it withdrew the notices it gave upon being challenged by the plaintiff. Since the defendant was under an implied obligation to terminate the contract only upon giving reasonable notice, its failure to give any notice constitutes a breach of contract.”
Hence, any party is entitled to terminate a contract, even if their contract does not have a termination clause. But reasonable notice must be given, and if there is a dispute, the reasonableness of that notice will be the subject of court review.
