Cutting the cord: terminating indefinite contracts.

An indefinite contract establishes an ongoing contractual relationship. Typical examples include contracts that:

• automatically renew;
• do not specify an expiry date; or
• do not specify express termination rights.

This bulletin explores 2 potential common law avenues for ending an indefinite contract and ‘cutting the cord’.

Termination for breach or repudiation.

If a contract does not specify express termination rights, a party (terminating party) may still rely on its common law rights to terminate the contract if the other party:

• repudiates the contract by showing an intention to no longer be bound by the terms of the contract;
• breaches an essential term (also known as a condition) of the contract that is so important to the terminating party that it would not have entered into the contract without having been assured of strict performance of that term; or
• commits a serious breach of an intermediate term (being a term that is neither a condition nor a warranty) in a way that would deprive the terminating party of substantially the whole benefit it intended to obtain under the contract.

Termination under an implied right.

Where no breach or repudiation has occurred, a terminating party may be able to rely on an implied right to terminate with reasonable notice.

When may a right to terminate be implied?

Whether a right to terminate may be implied into a contract depends on several factors, including:

• the subject matter and circumstances of the contract; and
• the terms to which the parties have, or have not, agreed.

What is reasonable notice?

If a contract is found to contain an implied right to terminate, ‘reasonable notice’ of termination must be provided. The amount of time that constitutes ‘reasonable notice’ varies on a case by case basis. For example, with standard contracts, it may be that 30 days’ notice is implied. Generally, the longer the relationship and the higher the level of investment by the parties, the longer the notice period will need to be in order to be ‘reasonable’.

Caution required.

Not all breaches will give rise to a right to terminate. A party that attempts to terminate invalidly risks repudiating the contract. Therefore, it is important to exercise caution prior to terminating an indefinite contract and to seek legal advice where your rights are unclear.

Do you need contractual advice or are you considering if it is possible to ‘cut the cord’ even without an express right to terminate? Get in touch with our Commercial and Corporate team.