Disputes 101 – How to get out of a contract or obligation

Back to basics – Do you even have a contract?

Generally, a contract will be formed when parties come to an agreement through offer/acceptance. This doesn’t typically create problems where there is a written agreement between commercial parties. To avoid doubt, lawyers and business teams should be clear when negotiating that a commercial agreement is always subject to contract and not binding until a written agreement is executed.

Parties sometimes try to argue that there was no intention to enter into contractual relations to avoid a contract. This is difficult where there are written terms, but if you really do not intend to be bound (e.g. non-binding heads of terms), expressly say so!

Carefully consider what is agreed - or not. If important issues are unresolved, the agreement may be incomplete. A mere ‘agreement to agree’ is not enforceable so it is best to agree everything upfront, if possible. Where you cannot, negotiation obligations should be drafted as narrowly and clearly as possible because vague and broad obligations to negotiate may be difficult to enforce. 

Always check that your counterparts (and your signatory) have authority to contract.

Get me out of here! Avenues out of a contract

If you have a binding contract, your contract or legal principles might help you get out of it.  Including express contractual rights are the best way to protect yourself for a particular scenario, provided it can be anticipated and you have the bargaining power to negotiate it.  But whether you can rely on a clause in a given situation will turn on the wording used, its context within the contract and the precise facts you’re presented with.

1. Termination rights: Read your contract carefully. These may be in a number of clauses. If exercising a termination right, strictly follow procedural requirements.  If a termination right is available but not being exercised (yet), reserve your rights and act consistently with this reservation, but note your right to do so only lasts for so long.
2. Other contractual clauses (typically events based):
   • Material adverse change or effect clauses – normal principles of interpretation apply so you will have to consider carefully if it responds to what has happened.
   • Force majeure clauses – again it will depend on what has been negotiated but these are narrowly interpreted so their scope should be clearly specified. If they apply they may help you out of a contract or particular obligation.
   • Illegality clauses – these can apply in wider circumstances than the common law concept (see below).
3. Other legal principles (again, typically events based):
   • Frustration – broadly speaking, a contract will come to an end if performance has become impossible, illegal (under English law or, in some cases, under a foreign law) or radically different to what was agreed.  This will not help where risk for the event is allocated contractually (e.g. in a force majeure clause), so it offers limited help in practice.
   • Routes to rescission – fraudulent misrepresentation is frequently alleged to unwind a contract entirely but is hard to prove and only applies to representations made before the contract was formed.  Depending on your facts, you should also consider if other claims may be available such as whether the contract is tainted by economic duress, undue influence, bribery, mistake or an unconscionable bargain. 

A narrower question – can I get out of a specific obligation?

Before trying to get out of an obligation, the first step is usually trying to interpret it in your favour – see our blog on interpretation here.  You may also consider arguing that the obligation has been varied, your counterpart has waived their rights, or the obligation is unenforceable (e.g. as a penalty clause). If none of those work, there are other avenues to explore. 

Rectification is where the court fixes a mistake and makes the contract reflect what the parties always intended, but it is difficult to prove. It will only help if the parties have demonstrated a common intention, both before and when they entered into the contract, but it is not recorded due to a mistake. 

Obligations that amount to an unreasonable restraint of trade in a commercial context are not enforceable.

If one party is in breach, must the other party continue to perform?  This depends on the nature of your respective obligations:

1. If the other party’s obligation is a “condition precedent” to yours, you do not need to perform until they have performed first.
2. “Concurrent conditions” depend on the readiness and willingness of both parties to perform at the same time (think: buying/selling a house).
3. If the parties’ obligations are “independent promises”, each party is required to perform, regardless of the other’s breach.

And of course, if you are being accused of breaching an obligation, there may be procedural ways to avoid liability. Think:

• Limitation periods. Any claim for breach needs to be brought within the stipulated statutory or contractual time frame for bringing the claim.
• Notice requirements. Contracts will generally say how notice of claim must be given and the courts interpret notice requirements strictly. If notice is not provided properly, liability may be avoided.