Introduction
Contracts form the backbone of both daily transactions and intricate commercial relationships. Whether the informal sale of ugu in an open market or a multimillion-dollar deal between multinational corporations, the underlying features remain the same: offer, acceptance, negotiations, consideration, capacity, and legality. These features are central to the life of any contract.
Yet, what is often overlooked is how a contract ends. While parties typically focus on performance and enforcement, the capacity to exit the contract, lawfully and tactically, is just as crucial.
Terminating a contract is the conclusion of the agreement, whether it is an early termination, before one or more parties fulfil their contract obligations, or the natural end of a relationship between the parties1. Understanding how and when to terminate a contract is an essential tool for legal advisers, corporate entities, businesses, and contract managers. This article examines the foundational principles of contract termination, some grounds for ending contracts, key elements of properly drafted termination clauses, risks of improper termination, and guidance for handling the termination process suitably.
Foundation of Contract Termination in Nigerian Law
Contracts in Nigeria are recognised and enforced by Nigerian courts based on the general principles of common law. When validly formed, contracts create obligations that must be abided by the parties, and their termination must be properly grounded in the principles of common law or the contract's express terms.
Additionally, termination of contracts by companies operating in certain regulated sectors could attract statutory or regulatory obligations. Subject to the industry, parties to a contract may be required to notify regulators, obtain prior approvals, or comply with specific procedures before bringing a contract to an end. For instance, in sectors like oil and gas, telecommunications, or finance, termination of contracts may result in reporting obligations or impact existing licences and permits. Where employment is concerned, termination must comply not only with contractual terms but with the constitutional principle of fair hearing, primarily where misconduct or disciplinary grounds are alleged. Parties must therefore assess the commercial terms and the regulatory context when exploring the option of termination
Grounds for the Termination of Contracts
A party that performs all its obligations under a contract is discharged or free from any liability under that contract.2 If both parties perform their obligations under the contract, they are discharged from the agreement's obligations, which, therefore, ends.3 For contracts with fixed terms, the expiration of the term leads to the termination of such a contract. However, there are instances where a party may unilaterally seek to end a contractual relationship before full performance, either due to a breakdown in commercial expectations, breach, or by relying on specific provisions within the contract.
The general grounds for termination include:
- Mutual Agreement – For a contract to be
valid, "there must be mutuality of purpose and
intention."4 As contracts exist through mutuality,
it may also be terminated through a mutual agreement by the same
parties. This ground is backed by the Latin maxim eodem modo
quo, oriter eodem modo dissolvitur (in the same manner as it
arises, so it is dissolved). Contracts may end when both parties
agree to terminate the agreement and be released from further
obligations. This often takes the form of a formal termination
letter or release contract and is typically uncontentious if
clearly documented.
- Termination Pursuant to Express Contractual
Provisions
Many contracts have express clauses that specify the conditions under which either party may lawfully terminate the agreement. These provisions are a primary ground for termination and help provide clarity and predictability in commercial relationships. The most common types include:
- Termination for Cause: This allows a party to exit the contract if the other party is in fundamental breach, becomes insolvent, fails to meet key obligations, or engages in conduct that undermines the contract.
- Termination for Convenience: This permits a party to terminate the agreement without needing to establish fault or breach. Such clauses usually require advance notice and, in some cases, may provide for compensation or refund of payments already made to the non-terminating party.
- Force Majeure: Some contracts include
provisions allowing for termination or suspension of performance
due to extraordinary events beyond the parties' control, such
as natural disasters, armed conflict, or pandemics, that render the
contract impracticable or impossible to perform.
- Breach of Contract – A fundamental
breach, particularly one that goes to the root of the contract, may
give the innocent party the right to terminate. However, the breach
must be substantial and central to the operation of the
contract.
- Frustration – A contract may also be
terminated if unforeseen circumstances render performance
impossible or fundamentally different from what was initially
contemplated. Frustration occurs whenever the law recognises that,
without default of either party, a contractual obligation has
become incapable of being performed because the circumstances in
which performance is called for would render it a thing radically
different from what was undertaken by the contract.5 The
critical difference between force majeure and frustration is that a
contract becomes frustrated when it is practically impossible for
the parties to fulfil their obligation. In contrast, a force
majeure event may merely prolong or postpone fulfilment of the
contractual obligation.
- By Operation of Law: A contract may be terminated by operation of law when certain legal events occur that automatically bring the agreement to an end, regardless of the parties' intentions. These include situations such as the death of a party in contracts requiring personal performance, bankruptcy or insolvency proceedings that affect a party's capacity to perform, or a change in law that renders the subject matter of the contract illegal. Unlike termination by mutual agreement or breach, these events trigger termination as a matter of legal necessity, and parties often have little control once such conditions arise.
The Termination Process: How to Do It Right
Lawful termination requires more than just the desire to exit a contract; it must be carried out in accordance with the agreement and applicable legal principles.
Step one is to thoroughly review the contract, which involves paying close attention to the termination clause, notice requirements, and any preconditions or pending obligations. The next step, where notice is required, is to ensure that it is delivered in the correct form, to the right party, and within the stipulated period. It is important to note when the official termination date will be after notice, to ensure that there is no breach within the stipulated timeframe, as the contract still exists until that date. The effective date of termination is the date on which the notice expires, where the contract is terminated by notice.6
Where the termination stems from a breach, it is vital to clearly document the breach or the event that triggered the termination. Maintaining records that justify the decision to terminate the contract is also vital. It is pertinent that parties are aware that wrongful termination may expose them to liability for damages, reputational harm, or even litigation.
Parties need to be especially aware of the effect of termination on the parties' obligations under the contract. Termination does not automatically eliminate any liabilities or obligations that may have accrued before the termination, nor does it extinguish obligations intended to survive termination. Where the contract states that specific clauses will survive termination, the responsible party must comply with the obligations outlined in the relevant provisions. Usual clauses indicated to survive termination include confidentiality obligations, payment obligations, indemnities, and potential claims arising before termination. Parties must, therefore, thoroughly review and adhere to the provisions of the contract when terminating an agreement to ensure compliance and minimise potential issues that may precede or succeed the termination of the relevant contract.
What to Look Out for When Drafting Termination Clauses
To ensure these clauses are effective and enforceable, drafters of termination clauses should:
- clearly define the grounds for termination to avoid ambiguity.
- specify notice periods and the required form and method of communication.
- address the legal and commercial consequences of terminating the contract, including obligations that survive the termination (e.g., confidentiality, non-compete, indemnities etcetera).
- provide for compensation or penalties, particularly in termination for convenience.
- include dispute resolution procedures geared towards termination-related issues.
A well-drafted termination clause protects the interests of both parties, reduces the risk of disputes, and provides a practical mechanism for concluding a contract in a tidy manner.
Legal and Commercial Risks of Improper Termination
Improper or premature contract termination can expose a party to significant legal and commercial consequences. From a legal standpoint, terminating without valid grounds or failing to follow the agreed procedure (such as providing notice or relying on a non-existent breach) may constitute a breach of the contract, thereby giving rise to liability for damages. Commercially, it can damage business relationships, lead to reputational harm, disrupt operations, or trigger cross-defaults in related agreements. It may even invite scrutiny from authorities or contravene compliance obligations in regulated sectors. Parties must approach termination carefully, ensuring the decision is legally defensible and strategically sound.
Conclusion
Contract termination is not simply the end of a legal relationship but an important decision with significant consequences. As this article has shown, navigating the pathway from deal to departure requires a clear understanding of the legal foundations of contract termination, the applicable grounds, and the practical steps involved in doing it right. Whether arising from mutual agreement or express contractual provisions, termination must be approached with care, considering the terms of the contract and the realities of the legal and regulatory environment.
For legal advisers and corporate leaders alike, the ability to exit a contract unblemished and lawfully is just as important as negotiating its terms. Termination should never be treated as an afterthought. By infusing sound termination clauses into contracts, complying with procedural and regulatory requirements, and weighing legal and commercial risks, parties can limit their exposure and safeguard their interests at both the deal stage and the point of departure. Whether it is an ugu seller in an open market or a multi-billion-dollar deal between multinationals, parties must adhere strictly to the rules in bringing a contractual relationship to an end, as a properly managed termination prevents unnecessary dispute and lays the foundation for future cooperation, or at the very least, a dignified and defensible exit.
Footnotes
1. Contract Termination: Definition & Types (Sarvarth Misra, August 23, 2022) https://contractpodai.com/news/what-is-contract-termination/#:~:text=Understanding%20Contract%20Termination,a%20relationship%20between%20the%20parties. Accessed 21st May 2025
2. Sagay, Nigerian Law of Contract (2nd Edition, 1999) Pg. 518
3. Ibid
4. Orient Bank (Nig) Plc v. Bilante International Ltd. [1997] 8 NWLR (Pt. 515) 37 at 76
5. Davis Contractors Ltd v. Fareham U.D.C. [1956] A C. 696
6. Effective Date of Termination definition (LexisNexis) https://www.lexisnexis.co.uk/legal/glossary/effective-date-of-termination accessed 21st May 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
