Unilateral termination of a contract may seem like a quick way to stop a loss-making project, get rid of an unreliable partner, or renegotiate more favorable terms. However, in practice, this action is one of the most common reasons why business partners end up in court.
According to Karolina Briliūtė, a lawyer at the AVOCAD law firm, even when the possibility of termination is clearly stipulated in the contract, it becomes a complex legal issue in the event of a dispute. Often, one party is convinced that it had both factual and legal grounds to terminate the contract, while the other party believes that such grounds did not exist or were only formal. That is why, according to the lawyer, unilateral termination often turns into a financial and reputational risk.
Court practice follows a clear line – first and foremost, the contract must be preserved, rather than looking for ways to terminate it. Termination is considered an extreme measure, applied only when there is essentially no possibility of preserving the contractual relationship. As Karolina Briliūtė points out, unilateral termination of a contract is not a free exit from an inconvenient business decision. Even if the contract provides for the right of termination, the court will take a strict view – the most important thing is whether there were real and sufficient grounds for such a decision. This means that the terminating party will in all cases have to prove that its decision was based on facts and not merely on a desire to withdraw from its obligations.
The fewest disputes arise when the termination conditions are formulated clearly, specifically, and objectively in the contract. For example, a specific deadline is set, after which the right to terminate the contract arises, the unpaid amount is clearly specified, or the scope of work is defined, and if it is not performed, the possibility of termination arises. The more abstract the terms are, the more room there is for interpretation and for figuring out what the parties really meant. "Clarity in a contract acts as a preventive measure. The more specific the terms are, the lower the risk that, in the event of a dispute, the terms will be interpreted differently than the parties had intended," emphasizes K. Briliūtė.
It is important to understand that even the possibility of termination provided for in the contract is not absolute. The court will assess not only whether the conditions for termination have been formally met, but also whether such a decision is fair and proportionate to the interests of the other party. Termination should not cause disproportionate damage to the other party compared to the interests of the terminating party. If termination substantially distorts the balance of interests between the parties, it may be deemed unjustified.
When it comes to termination due to a material breach of contract, a mere formal breach of the provisions is usually not sufficient. The difference between what was promised and what was actually delivered is assessed, whether the breach caused real and significant negative consequences, whether the breach was intentional or due to gross negligence, and whether it can reasonably be expected that the contract will be properly performed in the future. "What matters to the court is not the formal error, but the actual consequences. If the damage is insignificant or non-existent, the likelihood that the breach will be considered material is significantly reduced," emphasizes K. Briliūtė.
Therefore, before initiating unilateral termination of a contract, it is necessary to assess whether each element of the decision can be justified in the event of a dispute. Unjustified termination may result in an obligation to compensate the other party for losses, cover litigation costs, and cause additional business risks.
“It is possible to terminate a contract, but the most important thing is to have not only the right to do so, but also a sufficient argument based on concrete facts,” emphasizes the AVOCAD lawyer.