A counterparty delivers late, delays payment or fails to honour its commitments. A common response is to email an immediate notice of termination. However, a counterparty's breach does not automatically entitle a business to terminate the contract immediately.

If termination lacks proper grounds or fails to comply with the applicable conditions or procedure, the party sending the notice may itself be found in breach.

1. Does the contract or the law permit termination?

First, check the contract's termination clause: which circumstances give rise to termination rights, which party may exercise them and what conditions apply? If the contract is unclear, review the law applicable to that type of contract.

Do not rely solely on a perception that the counterparty's conduct is "serious". The right to terminate must have a contractual or legal basis.

2. Is the breach sufficient to justify termination?

Some contracts permit termination only where a breach reaches a specified threshold, is repeated or prevents the contractual purpose from being achieved. Businesses should assess the actual conduct, evidence and consequences before deciding.

3. Must the other party be given a chance to remedy the breach?

The contract may require the aggrieved party to issue a notice requiring the breach to be remedied and allow the other party a reasonable period to do so. Skipping this step may expose a later termination notice to challenge even where the original breach genuinely occurred.

4. Have you followed the notice requirements?

Check the notice address, authorised recipient, delivery method, effective date and evidence of receipt. A notice sent to the wrong email address or in the wrong form may be invalid under the agreed terms.

Consequences of termination without proper grounds

Depending on the contract and circumstances, the party terminating wrongfully may have to:

  • Continue performing its contractual obligations.
  • Pay a contractual penalty where validly agreed.
  • Compensate actual, direct losses and the direct profit the other party would otherwise have earned.

Before issuing a termination notice, businesses should review the contract, organise evidence of the breach and identify the required procedure. A short notice can have long-lasting legal consequences.

This article provides general legal information, not advice on a specific matter. NORIS LAW can assist with contract review, assessment of termination grounds and an appropriate response to breach.