How to get out of a contract

Most businesses will be familiar with this scenario: you enter into a contract and then later, for whatever reason you want or need to exit.

This may be because the other party is not performing under the contract, you may be in financial difficulties, have found a better deal elsewhere or simply no longer require the service.

There are several ways out of a contract and a lawyer will be able to advise you further on this. Usually this will depend on the type of contract, the terms of the contract and practical and tactical issues.

Think about getting out when you get in

It is always worth thinking about exit strategies when you start a contract, especially a fixed term contract such as a lease.

Where there are no exit provisions and you consider that the contracting party will not let you terminate the contract without repercussion then you will need to carefully consider the terms of the contract (with your solicitor) to consider what further action can be taken.

Breach of Contract

One way of coming out of a contract is where there has been a breach by the other party. However, a big note of caution – many people believe that any breach by the other party entitles the contract to be cancelled and this is a big mistake. If there has been a breach of contract by the other party then this does not automatically give the innocent party the right to terminate the contract; it will depend on which terms of the contract have been breached.

Only a fundamental breach of contract or other technical legal right (see below) gives the right to cancel. The best way of thinking about this is whether there has been a breach of a condition so severe that it deprives the innocent party of having the benefit of the whole contract it will most likely be a fundamental breach and entitle that party to terminate and this is known as “repudiation”. A contract does not become repudiated automatically and the party that seeks to repudiate the contract will have to service notice of its intention to do so on the other party.

Repudiation is a delicate matter as the innocent party has to take care that it does not do anything that could be considered as having affirmed the contract i.e. accepting the breach and continuing with the contract. If this happens then it will be too late to repudiate the contract.

Before repudiating the contract you should be sure that you are entitled to do so. Any attempt to repudiate the contract where it cannot be repudiated is in itself a breach and ironically you could find yourself being sued by the contracting party. For example, most people think that a delay gives rise to the right to repudiate, however, this is not the case as a delay will only be a condition if there is a clause in the contract that says “time is of the essence”.

Mis-selling / Misrepresentation / Fraud

A breach can take place either after the contract has been signed or before the contract has been entered into i.e. if the other party has made a misrepresentation that induced you to enter into the contract. Misrepresentation is a complex area of law and the rules differ depending on the type of misrepresentation. In some circumstances the party that is alleging misrepresentation may only be able to seek damages and therefore once again it is essential that the innocent party is certain that it is entitled to rescind the contract before attempting to do so. 

Practical and tactical considerations

It may be that not only you want out of the contract but the other party also wants out but neither of you realise it or you are both wary of the legal position. There could be a lengthy notice period on either side. In this situation, it may be possible to negotiate but negotiations should be carefully and skillfully planned, taking care to ensure discussions are without prejudice.

Even where you have no contractual right to terminate a contract, you may also be able to convince the other party that it would be better to release you from the contract on the basis that whilst you may be sued for damages, your business would be unable to pay any damages awarded. Again, care should be taken with such an approach, which is not uncommon where commercial leases are surrendered.

For more advice on this issue, get in touch with me or visit our website where we have additional resources on contract law and leases.

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