In brief - Business relationships and dealings should be set
out in writing
Having a written contract which clearly articulates the
circumstances in which the business relationship can end ensures
that everyone is aware of their rights and minimises uncertainty
between the businesses.
Business relationships should be recorded in a written
At the heart of most business relationships is a contract which
governs the parties' rights and obligations, including their
right to end their relationship. A business contract can be in
writing, oral, by conduct or a combination of the three. Whereas a
written contract will ordinarily set out all of the parties'
rights and obligations, an oral contract or contract by conduct
will rarely contemplate all aspects of the business
As a result, businesses that enter into an oral contract or
contract by conduct are often unsure of the circumstances in which
they can bring the contract to an end and the process for doing so.
This often leads to a business which is seeking to bring a business
relationship to an end being threatened with claims that it has
acted unlawfully. To prevent this, business relationships should be
recorded in a written contract.
Contractual right to terminate
A contract governing a business relationship can ordinarily be
brought to an end:
automatically at the expiry of the term of the contract
by one party giving the other party reasonable notice
by a party electing to terminate the contract when the other
party has breached a fundamental term of the contract
Automatic expiry of a contract
Some business contracts are for a fixed period and will expire
at the end of the period unless the parties agree to continue the
business relationship, in which case it will be governed by the
terms of the original contract unless a new contract is entered
into. In these circumstances, the relationship can be ended by one
of the parties giving the other reasonable notice of its decision
to terminate the contract.
Ending contracts pursuant to their terms
In situations where contracts are not for a fixed term, the
parties' right to terminate the contract will be governed
either by the conditions of the contract or the common law. If the
contract contains a procedure for ending the contract, it is
essential that the procedure is followed. Failure to comply with
the specified termination procedure could expose the party seeking
to terminate the contract to claims for damages.
Ending contracts with reasonable notice
If the contract is not for a fixed term and is silent on the
circumstances in which a party can end the contract, either party
may terminate the contract by giving the other party reasonable
notice. Reasonable notice will depend upon the nature of the
For example, a motor dealership which has sold a particular
brand of vehicle for 15 years could expect the supplier of that
brand of vehicle to give the dealership at least six months'
notice of its intention to terminate the contract, whereas a
homeowner may only need to give the local newsagency that delivers
the weekend newspaper 24 hours' notice of his or her decision
to terminate the service.
Termination following a breach of an essential term of the
Written contracts often contain clauses which stipulate the
circumstances in which the parties can terminate the contract. In
most cases, it is when a party has failed to fulfil a condition
which goes to the heart of the contract, e.g. the motor dealership
refuses to pay the manufacturer for the cars that it has supplied
to the dealership.
If the contract is silent on what constitutes a terminable
event, the right to terminate the contract will be governed by the
common law (law developed through court cases). At common law, the
right to terminate a contract will arise where a fundamental
condition of the contract has been breached, or the other party has
demonstrated that it does not intend to fulfil its obligations.
Again, the innocent party needs to be satisfied that the other
party has breached a fundamental condition of the contract or
repudiated the contract before it terminates the contract and ends
the business relationship. Notice of the breach or repudiation
should be given to the other party to terminate the relationship
Put it in writing
It is in a business's best interests to ensure that its
relationships and dealings are set out in writing. This ensures
that everyone is aware of their rights and obligations and
minimises uncertainty between the businesses. Ideally, the contract
should clearly articulate the circumstances in which a party can
end the business relationship.
Finally, you should always follow any process set out in the
contract for ending the relationship. If in doubt, always give the
other party reasonable notice of your decision to do so.
On 12th November 2016, new laws will commence to protect small businesses from unfair terms in standard form contracts.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).