When do you need a deed of termination? A quick guide.

Following on from our previous article on contract termination: getting it wrong, some businesses might not have an express or implied right to terminate the contract or a right to terminate the contract under common law, leaving limited scope for a party to terminate a contract unilaterally.

As a result, the parties to the contract might agree to end the contract by mutual consent. To facilitate this, it is recommended that the parties enter into what is known as a deed of termination.

We regularly recommend to our clients that they enter into a deed of termination when terminating a contract by mutual consent. A deed of termination documents the termination and provides evidence of the termination therefore minimising the chances of a party challenging that termination has taken place. It also provide an opportunity for the parties to decide the terms which will govern the termination.

The length of the document will be governed by the complexity of the termination. A simple deed of termination can be relatively short (usually only a few pages).

A deed of termination allows the parties’ to deal with their accrued rights and liabilities under the contract. Termination of the contract brings the parties’ primary duties to an end, releasing them from future performance. Accrued right survive, unless waived. Accrued rights might include payment of sums already due, interest on late payments, delivery of goods ordered and claims for breaches already committed. Therefore if the parties are agreeing to waive any rights which would have survived the termination or preserve any rights which would have otherwise come to an end, this will need to be documented in the deed of termination.

The parties will need to consider whether to release each other not only from future performance but also from accrued claims. If the parties agree to “release and waive” one another from accrued claims then the parties’ cannot rely on such rights and cannot demand performance of outstanding obligations or claim damages for their breach.

Alternatively, the parties may agree that any accrued claims survive termination. Therefore if it comes to the knowledge of one party that the other has breached the contract prior to its termination then the innocent party will still be able to bring a breach of contract claim under the contract and claim damages. Subsequently, if you are agreeing to this under a deed of termination you need to ensure that you have complied with the terms of the contract, or you may still be liable under the contract after termination for any prior breaches.

Of course, at the point of termination there may be certain breaches that the parties are aware of, but there may also be unknown breaches. It may be that the parties wish to deal with each type of breach differently and again this will need to be set out carefully in the deed of termination.

The parties will also need to consider the practical implications of terminating the contract – they need to decide what terms they require to survive termination and what terms they want terminated. The parties may need certain licences to survive termination in order for them to continue using a benefit they have received under the contract. In addition, parties may want to invoke or implement some form of handover process or exit assistance. Again this will need to be carefully considered and properly documented. Alternatively, parties might want to expressly terminate certain rights under the contract. For example, if the contract provides that the terminating party have to pay a termination payment but the parties have agreed to waive the relevant termination payment we would recommend expressly terminating this in the deed of termination.

Furthermore, one party may have agreed to pay some form of compensation to the other for agreeing to the termination. If so, the amount and terms of the payment (including any conditions attached to it) will need to be described and defined in the deed of termination. Also, if you are the paying party, thought will need to be given on the impact this payment may have on your liability; another thing which needs to be addressed.

The recommended position is often that termination agreements are executed as deeds, particularly where no payments (of money or in kind) are being made and therefore the legal formalities required of a deed will need to be followed in order to ensure that the document takes proper legal effect.

There are many aspects of a deed of termination which should be considered before entering into one, some of which could impact your future liability and ability to claim for breaches.  We would therefore always recommend that clients seek legal advice when considering a deed of termination.

How can we help?

For strategic advice on termination and entering into a deed of termination, please contact our commercial team.

For more insights on COVID-19 and how we can assist you or your business, visit our COVID-19 hub here.

Mark Chapman
Partner, Commercial
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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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