Ending a Contract: Termination Clauses, Material Breach and Notice

Start with the contract's own exit terms

Most contracts say how they can end. The usual routes are expiry of a fixed term, non-renewal by notice, termination for convenience, and termination for breach after a cure period. A party that wants to end the contract should follow the clause step by step, because a termination that skips a required step may not be effective.

The notice clause is the part most often missed. It states the method (email, courier or registered mail), the address and the timing, and it may say when a notice counts as received. The short review below applies to every route in this page.

Material breach: when one side's failure releases the other

In Mustang Pipeline Co. v. Driver Pipeline Co., decided on 23 April 2004, the Texas Supreme Court restated the rule that when one party commits a material breach, the other party is discharged or excused from further performance. The court listed the Restatement (Second) of Contracts, section 241, considerations for deciding whether a breach is material:

• how much of the benefit that the injured party reasonably expected is lost;
• whether the injured party can be adequately compensated for the lost benefit;
• the forfeiture the breaching party would suffer;
• how likely it is that the breaching party will cure its failure; and
• whether the breaching party acted in good faith and dealt fairly.

What Mustang Pipeline held about time of the essence

The court of appeals had reasoned that whether a breach is material is a fact question and required an express jury finding. The Supreme Court disagreed and held that such a finding is not required where time is of the essence. A contract with a firm deadline therefore gives the party that relies on it a stronger position than a contract with loose timing.

The practical lesson is to record the facts that make a failure material: the deadline in the contract, the progress made, any promise to catch up, and when the other side was told. A party that ends a contract without a right to do so, because the other side's breach was not material, risks being treated as the party in breach, so the materiality factors deserve a careful look before the letter is sent.

Contracts for goods with no fixed end date

Texas Business and Commerce Code 2.309 covers sales of goods. A contract for successive performances with no definite duration stays valid for a reasonable time, and unless the parties agreed otherwise, either party may end it at any time. The party that ends it must give the other reasonable notification. An agreement that waives notification is invalid if enforcing it would be unconscionable. Notice is not required when termination happens on an agreed event.

This rule applies to the sale of goods. Service, licence and construction contracts are not covered by it, and their termination rights come from the contract and from general contract law.

Ending by agreement

Two parties can end a contract whenever both agree. The safest form is a written termination agreement that both sign through authorized signatories, in the way the contract's amendment clause requires. It should say:

• the date the contract ends;
• what each side must still pay, deliver or return;
• which clauses survive, such as confidentiality, intellectual property and any restriction on competition;
• whether each side releases claims against the other, and which claims are excluded;
• how disputes about the termination will be handled.

Unforeseen events and events beyond the parties' control

Wars, natural disasters, new laws and the destruction of something the contract depends on can make performance impossible or pointless. Whether such an event ends the contract or only suspends it usually turns on the contract's force majeure clause: which events it lists, what notice it requires, and what happens if the event lasts a long time. Courts read such clauses against the facts of each case.

The earlier blog post also named the death or incapacity of a party, bankruptcy, and illegality as events that end contracts automatically. Those depend on the kind of contract and on the rules that apply, and bankruptcy brings its own statutory rules, so none of them should be treated as ending a contract without a check.

A checklist before sending a termination letter

Work through these steps in order.

1. Read the termination, notice, cure and dispute-resolution clauses together.
2. Identify the exact ground: expiry, convenience, breach or agreement. Use the contract's own words for it.
3. If a cure period applies, send the breach notice first and wait for the period to end.
4. Gather the evidence of the breach and of its effect: dates, deliverables, messages and payments.
5. Send the notice by the method, to the address and within the time the contract requires, and keep proof of delivery.
6. List what survives termination and what each side still owes, including payments for work already done.
7. Check clauses that restrain a party after the contract, such as confidentiality and non-competition terms, before announcing the end.