Contractual Termination – Termination Notices – Five Observations

When terminating, it is important to ensure that the termination notice contains the correct information and has been issued correctly, as otherwise there may be unintended consequences. This article considers five important points to consider for those seeking (or facing) termination pursuant to a contract’s termination clause(s). 

1.       Requirement for election within termination notice

There are two usual routes for termination under common law, either acceptance of a repudiatory breach (“general law termination”) or termination pursuant to the terms of the contract (“contractual termination”).

In certain contracts, the consequences of both forms of termination may be identical. However, in many contracts, the consequences of termination between these two routes may vary. In particular:

  • The remedies of termination may differ; and
  • Under general law termination, the contract necessarily comes to an end, whereas with contractual termination, the parties may still be required to perform various obligations, in which case it is more accurate to state that the employment/execution (as opposed to the contract) is terminated (Laing Management & Ors v Aegon Insurance (UK) Ltd[1]).

Where the consequences are identical, it is not necessary to specify within the termination notice which right is being exercised to bring about an effective termination. However, where the consequences are different, it is necessary to make clear which right is being exercised, otherwise there may not be the certainty required for an effective termination (Newland Shipping and Forwarding limited v Toba Trading FZC[2]at paras 53 and 54).

2.       The terms used in the notice are important in establishing election

Where the two forms of termination provide different consequences, the precise terms upon which the terminating party informs the other party of his decision will be significant in establishing whether there has been contractual termination or general law termination (Stocznia Gdynia SA v Gearbulk Holdings Ltd[3] at para 44).

If a notice makes explicit reference to a particular contractual clause and nothing else, this may illustrate the terminating party was only intending contractual termination (Shell Egypt West Manzala GMBH & Ors v Dana Gas Egypt Limited[4] at para 31). Conversely, if a notice does not reference any contractual clause and is couched in terms of accepting repudiation, this is more likely to illustrate general law termination.

3.       Strict compliance with conditions precedent required

If the contract sets out any conditions which need to be fulfilled to effect termination under the contract, these must be strictly complied with under the common law. As stated by Lord Hoffman in Mannai Investments Co Ltd v Eagle Star Assurance[5] at 776:

if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease

4.       Requirement to specify which contractual ground relied upon

In many contracts, there will be different grounds upon which a party is entitled to terminate. It is important that a termination notice adequately specifies the correct grounds.

The general principle is that a notice must be sufficiently clear and unambiguous to enable a reasonable recipient to understand the contractual basis for the notice and the nature of the breach alleged to have occurred (QOGT Inc v International Oil and Gas Technology[6]).

Whilst this does not necessarily require reference to the exact clause, for certainty it is preferable that notices refer to the applicable contractual clause and identify the breach.

The general rule is that if a party refuses to perform a contract giving a wrong reason, he may yet justify refusal, if at the time of refusal there were facts which would have provided a good reason (Chitty on Contracts (34th edn) at para 27-067). However, the true meaning of the words used in a termination notice can potentially be critical where further potential reasons for termination are discovered at a later stage. In particular, most determination clauses will not allow the determining party to rely at a later stage on a reason not specified in the notice (Hudson’s Building and Engineering Contracts (14th edn) at para 8-048).

5.       Failure to terminate properly may be repudiatory breach

If a termination notice is issued which later transpires to be invalid, this of itself is likely to constitute a repudiatory breach upon which the other party can rely (Hudson’s Building and Engineering Contracts (14th edn) at para 8-068).

This underscores the importance of issuing valid termination notices: if this is not done properly, it can backfire on the terminating injured party. Parties considering terminating a contract should ensure they obtain proper and comprehensive advice as to their rights and how to go about terminating their contract.

[1] (1997) 55 ConLR 1; 86 BLR 70.

[2] [2014] EWHC 661 (Comm).

[3] [2009] EWCA Civ 75; [2010] QB 27.

[4] [2010] EWHC 465 (Comm).

[5] [1997] AC 749.

[6] [2014] EWHC 1628 (Comm).