Burnt or Bruised? Think Twice Before You Terminate that Contract

March 2, 2026

Could terminating a contract incorrectly for breach by the other party be worse than the original breach?

When parties enter into a contract, they do so with the expectation that each side will perform its obligations. However, when a party is aggrieved due to delay, non-payment, poor performance or complete inaction, the instinctive reaction is often to end the contract. Termination feels like a way to regain control of a deteriorating situation, yet it is one of the most misunderstood, risky, and litigated areas in contracting.

What to consider before terminating a contract

Even when a party has a right to terminate, exercising that right incorrectly can create more problems than the original breach. As such, termination should never be the first impulse and parties must think carefully about:

  1. what rights they actually have
  2. whether those rights have arisen
  3. what the risks are if the termination is challenged.
Is contract termination really the right remedy?

Before delving further into the issues that arise during termination, it is important to mention that contract termination is not the only remedy when a contract relationship becomes strained. A party could consider, amongst others:

  • exercising the right to suspend performance where provided for under the contract. A common example is if you are a supplier who has not been paid, or a contractor who cannot proceed because instructions or access have not been provided; or
  • issuing warnings; or
  • amicably seeking resolution through party meetings to resolve issues; or
  • allowing for the cure period before terminating.
How to terminate a contract

There are broadly three (3) routes by which a contract can be terminated. A party seeking to exercise these rights must carefully set out what right(s) such party is seeking to terminate in the termination notice. To read more about notices refer to our article here.

These rights to terminate are:

  1. The common law right to terminate for repudiatory breach.
  2. The contractual rights as set out in the contract.
  3. By agreement of the parties.

One common mistake is a party seeking to terminate under a contractual right but later attempting to claim damages available only where you terminate for repudiatory breach, such as loss of bargain or contract. This was an issue that was considered in Phones 4U Ltd (In Administration) v EE Ltd [2018] EWHC 49 (Comm), a strong reminder of the importance of setting out all the bases on which a party is seeking to end a contract in its termination notice.

Case study 1: Phones 4U Ltd vs EE Ltd

In that case, EE exercised its contractual right to terminate its agreement with Phones 4U following the latter’s insolvency.   Under its trading agreement, Phones 4U earned commission on EE connections sold, and the agreement stated that EE’s liability for commission already earned during the existence of the trading agreement would survive termination. These commissions, due to run until 2021, were in the aggregate amount of £120m.

After EE terminated the agreement, Phones 4U brought proceedings to recover the commission. EE responded with a counterclaim seeking more than £200 million in damages for loss of bargain under common law, arguing that Phones 4U had repudiated the contract by ceasing to trade.

The problem here was that EE in its termination letter had relied solely on an express clause of the contract to terminate for insolvency rather than a right to terminate for repudiatory breach.

Although, EE attempted to rely on general “rights reserved” wording in the letter, the court rejected this. The judge found that EE had “unequivocally communicated” that it was terminating the agreement in exercise of, and only of, its contractual right to terminate upon insolvency; there was no mention of any breach (including repudiatory breach) in the termination letter. Thus, because it had not exercised the common law right to terminate, it could not rely on it to claim damages.

In summary, this case illustrates the importance of parties being deliberate and precise when drafting termination notices. A notice determines the legal foundation of the termination and can close off avenues that might have otherwise been available.

Case study 2: Providence Building Services Ltd v. Hexagon Housing Association [2026] UKSC 1.

Another recent case that further highlights the dangers of misinterpreting termination rights is Providence Building Services Ltd v. Hexagon Housing Association [2026] UKSC 1.

This case centred on the JCT Design and Build Contract 2016 and concerned whether a contractor could terminate under clause 8.9.4 without first having the right to terminate under clause 8.9.3 for “specified defaults”. These specified defaults were set out in clause 8.9.1 for which the contractor could terminate by giving notice specifying the default or defaults including if the employer “does not pay by the final date for payment the amount due to the contractor in accordance with clause 4.9. and/or any VAT properly chargeable on that amount…”

Clause 8.9.3 allows the contractor to terminate by a further notice if the employer’s default continues for 28 days after a notice has been given. clause 8.9.4 allows the contractor to terminate for a repeated default, but the key issue was whether that repeated default had to be linked to an earlier default that wasn’t cured within 28 days.

The contract was to build several buildings in Purley, London. The contractor served a notice of specified default in December 2022 when the employer failed to pay a due sum. However, the employer cured the default within the 28 days’ period, meaning the contractor never acquired the right to terminate under clause 8.9.3. Months later, in May 2023, the employer again failed to pay a sum on time. This time, the contractor immediately served a termination notice under clause 8.9.4, calling the late payment a “repetition” of the December default.

The employer paid the outstanding sum shortly thereafter and challenged the legality of the notice. The matter went before an adjudicator, who decided in favour of the employer, and then to litigation all the way to the Supreme Court.

The Supreme Court held that the contractor’s termination was invalid. clause 8.9.4, the court explained, is “parasitic” on clause 8.9.3. The contractor cannot rely on clause 8.9.4 unless the original default was one that actually gave rise to a right to terminate under clause 8.9.3. Thus, because the December default had been cured within 28 days, the right to terminate had never accrued. As a result, there was no valid “repeated” default for the purposes of clause 8.9.4.

By serving an invalid termination notice, the contractor’s conduct was treated as a repudiatory breach, giving the employer the right to terminate the contract under its common law rights. While the Supreme Court’s decision centred on the proper interpretation of the contract, its finding that the contractor wrongfully terminated the contract effectively opens the door for the employer to claim damages arising from that wrongful termination.

This case underscores how carefully a party must follow contractual mechanisms for termination, especially where cure periods, timelines or sequential steps are involved. Getting these steps wrong could result in the action of the party seeking to terminate being characterised as a repudiatory breach.

Common mistakes businesses make when terminating contracts

Beyond these landmark cases, there are several ways parties commonly get contract termination wrong. Amongst many others are:

  • Terminating a contract without having the right to do so, because not every breach gives rise to a termination right.
  • Misinterpreting or overlooking pre-conditions to termination. A lot of contracts typically require very specific procedures, such as notices being served in a particular form, on a particular person, or a specified address, using a specified method and within certain timeframes. Cure periods also need to be taken into account.
  • Flowing from the above, errors in the content of notices can also be fatal. A termination notice that cites the wrong clause, gives unclear reasons, or is served incorrectly may render the termination invalid.
  • Acting too quickly as a result of financial or commercial pressure. This is very common when there are issues with cashflow, contractors or suppliers may rush to terminate without properly analysing their contractual position, only to find they have acted prematurely.

A party who wrongfully terminates may be treated as having committed a repudiatory breach, this will expose them to liability for damages, including loss of contract and loss of bargain, and giving the innocent party the right to bring the contract to an end.

Key Factors to Consider before Terminating a Contract
  1. Given the risk involved, before terminating, consider alternatives such as a temporary suspension of performance, meeting to resolve issues amicably and careful documentation of ongoing breaches.
  2. Maintain a clear and detailed timeline of breaches, notices, and communications
  3. Should termination become necessary, strict compliance with every contractual requirement is essential. As such, seeking legal advice early can avoid costly mistakes.
  4. Review the intended termination notice, taking into account whether you intend to claim loss of bargain or other common law damages, and if so, whether the termination notice must rely on common law repudiation in addition to or instead of contractual rights. Closely tied to this is to consider whether the contract preserves or excludes the common law right to terminate.
How can we help

In conclusion, terminating a contract is never as simple as stating that the other party has failed to perform its obligations under the contract. However, by approaching termination thoughtfully, complying with the contractual requirements, and seeking guidance where needed, parties can protect themselves and avoid many of the pitfalls commonly seen in case law and practice.

If you found any of these insights helpful, our team can assist with general contract reviews and guide you through navigating termination of a contract. Please contact us.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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