Terminating a contract: Rights, procedures and aftermath
29 Feb 2024
Introduction
Delving into the intricacies of contract termination unveils a unique and powerful recourse available exclusively to the innocent party under specific and exceptional circumstances. Unlike specific performance, the act of terminating a contract is a profound step, abruptly concluding the transaction against the initial intentions of the contracting parties. This exploration navigates through breach materiality, the critical role of cancellation clauses (lex commissoria), the process of termination, and the ensuing legal consequences.
1. Evaluating breach severity
The threshold for justifying contract termination revolves around the materiality of a breach and the contextual specifics. Upholding the common-law principle, breaches must be of sufficient gravity to warrant termination, safeguarding the innocent party from premature contract dissolution.
2. Clause empowerment: Lex commissoria
Frequently embedded in contracts, the lex commissoria, or cancellation clause, stands as a pivotal element. It not only outlines conditions but also establishes procedures for terminating the agreement in response to a breach. In stark contrast to common-law norms, a well-crafted lex commissoria can confer the authority to terminate for breaches that might fall short of the traditional materiality threshold. As expressed, “even a minor breach that would not justify termination at common law may grant a right to terminate if falling within the scope of the cancellation clause.”
3. Decisive action: Termination protocols
In the aftermath of a breach justifying contract termination, the innocent party is confronted with a crucial decision: to affirm the contract or to proceed with termination. Once the choice is made, it stands as final and irreversible, save for the consent of the other party. The notice of termination must be explicit, effectively communicated to the breaching party, and adhere to any stipulated formalities.
4. Forfeiting the right to terminate: Choices and waiver
Opting to affirm the contract inevitably leads to relinquishing the right to terminate. Manifestations, whether expressed or inferred, of an intent to abide by the contract waive the right to terminate. Unreasonable delays may not automatically forfeit the right but can signify waiver, and accepting performance post-breach awareness may imply a similar waiver.
5. Ramifications of termination
Termination extinguishes primary obligations completely for indivisible obligations and partially for divisible ones. Ancillary obligations, including penalty clauses, arbitration clauses, exclusion clauses, and the obligation to pay damages, may endure even after termination.
6. Restoring equilibrium: Restitution realities
Contract termination not only dissolves obligations but also instigates a new phase – restitution. The goal is to restore parties to their pre-contractual positions. However, restitution can be excused under specific circumstances, such as inherent defects, force majeure, or third-party acts. The innocent party might be exempt from restitution if it becomes impossible due to reasons beyond their control.
Conclusion
Terminating contracts is a potent yet exceptional remedy, demanding a nuanced comprehension of breach materiality, the pivotal role of cancellation clauses, and the legal intricacies that follow. This awareness is indispensable for adeptly navigating contract disputes and preserving the rights of all parties involved. Contact an expert at ScheomanLaw should you need assistance with the cancellation of an agreement.
Written by Johan de Lange, Senior Professional Assistant – Attorney at SchoemanLaw Inc.
See also:
- Early agreement termination and reasonable termination costs
- Failure to follow a cancellation clause in a contract
- Beware – Pre-contractual negotiations can affect your written contract
- Is your word your bond? The enforceability of verbal agreements
