The path of contracts does not always run smoothly, be it an agency agreement, distribution agreement or some other species of agreement, the parties will not always see eye to eye. While disagreements and disputes can be resolved through negotiation, when a sufficiently serious breach has been committed by a party to a contract, the innocent party may be entitled to treat the contract as being at an end.
Not every breach of contract will result in the right to terminate arising. As a rule the breach concerned must go to the heart of the contract. For example, being 3 days late in paying commission would not (except in the most unusual circumstances) be serious enough. However, the individual facts will be crucial in assessing any breach. If one party to a contract has committed continuous breaches which, when assessed alone, would not be sufficient to bring the contract to an end, together the final breach may be viewed as the “straw which broke the camel’s back”.
Further, where one party terminates the contract, if the opposing party considers that that party had no proper basis upon which to do so, then the invalid termination itself can amount to a fundamental breach of contract to be accepted.
From a commercial standpoint, given that the decision to walk away from the contract may have a wide-ranging effect on your business, it is important for you to be confident about the breach being relied upon. Otherwise, you could leave with nothing!
A time for action
The right to terminate a contract does not last forever. The innocent party stands at a cross roads and must choose whether to turn left, treating the contract as being over and claiming damages or right, confirming that the contract continues.
A reasonable period of time is allowed for a party to make up its mind but what is “reasonable” will vary on the individual facts of each case. In one situation 2 weeks could be allowed, in another 2 days.
If a party waits too long to make its choice then it will lose its right. Making a choice is not a case of having to say to the other party, you’ve breached the contract but I’m going to let you off. What is required is a clear and unequivocal representation that you are not going to walk away from the contract. This could be continuing to accept orders for a lengthy period of time. It could be attending a meeting with a new client. As with all elements of repudiation and affirmation, it will depend on the individual circumstances and the parties.
Whilst making up its mind, the safest course may be for an innocent party to hold off all actions as far as possible. However, as with standing at the cross roads, commercially this cannot go on forever. If any general rule should be applied, it is take advice and take it quickly. The potential commercial and legal impact is too great to do otherwise.
This article was written by Rachel Cook, an associate in the dispute resolution team at Fox Williams LLP.
Written by Agentlaw Team