Core principles of contract law - Termination

Learning Outcomes

This article explains the core principles governing termination of contracts, including:

• The main legal grounds on which contracts may be brought to an end, such as termination for breach (actual and anticipatory), frustration, termination by agreement, and discharge by performance.
• The classification of contractual terms into conditions, warranties, and innominate terms, and how this classification determines whether a breach is repudiatory.
• The concept of election following a repudiatory breach, distinguishing clearly between accepting the breach (terminating) and affirming the contract, and the consequences of each choice.
• The operation of the Law Reform (Frustrated Contracts) Act 1943 in reallocating losses after frustration, and the distinction between frustration and contractual force majeure provisions.
• Exceptions to the strict rule of complete performance, including substantial performance, divisible obligations, and acceptance of partial performance, and the impact of these on payment and quantum meruit claims.
• The legal consequences of termination for accrued rights, future obligations, and damages, and the important distinction between termination and rescission as separate remedies with different effects.

SQE2 Syllabus

For SQE2, you are required to understand when and how a contract may be lawfully terminated and to apply this knowledge to client or scenario-based questions, with a focus on the following syllabus points:

• termination for repudiatory breach (actual and anticipatory)
• classification of terms: conditions, warranties, and innominate terms
• election: accepting repudiation vs affirming the contract, and loss of the right to terminate
• termination by agreement (with and without consideration or by deed)
• discharge by performance and exceptions (substantial performance, divisible obligations, acceptance of partial performance)
• frustration and its practical and legal consequences, including interaction with force majeure clauses
• the difference between termination and rescission
• the effects of termination on rights and liabilities, including accrued and future obligations, and statutory adjustments under the Law Reform (Frustrated Contracts) Act 1943

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What distinguishes a repudiatory breach from a minor contractual breach?
2. What is required for a party to accept a repudiatory breach and terminate the contract?
3. In what circumstances can a contract be terminated by frustration?
4. What happens to accrued rights and future obligations when a contract is terminated for breach?
5. Can the parties terminate a contract by agreement without fresh consideration? If so, how?

Introduction

Contract law regulates how and when parties are discharged from their contractual obligations. Termination may arise due to breach, agreement, frustration, or by operation of law. Knowing the principles and consequences of termination is essential for advising clients on their contractual rights and remedies. A sound approach begins with identifying the contractual term breached and its classification, understanding whether the breach is repudiatory, and then advising the innocent party on election: either accept the breach and end future performance or affirm and keep the contract alive. Where external events intervene, consider frustration and any force majeure clause. Finally, analyse how termination affects accrued rights and what remedies remain.

Key Term: repudiatory breach
A serious breach that deprives the innocent party of substantially the whole benefit of the contract and entitles that party to terminate.

Key Term: condition
A major term of the contract; breach of a condition gives the innocent party a right to terminate and claim damages.

Key Term: warranty
A minor term; breach gives a right to damages only, not termination.

Key Term: innominate term
A term whose legal effect depends on the seriousness of the consequences of breach; a very serious breach may be repudiatory.

Termination for Breach

A contract may be terminated following a serious breach by one party. The law distinguishes between repudiatory breaches and breaches of lesser terms. Where the term breached is a condition, termination is available as of right. Where the term is innominate, the court assesses the gravity of the consequences: only a breach that substantially deprives the innocent party of the whole benefit (or goes to the root of the contract) is repudiatory. Breach of a warranty does not entitle termination.

A repudiatory breach allows the innocent party to choose between affirming the contract or accepting the breach and bringing the contract to an end for future obligations. Accrued rights up to the date of termination remain enforceable. Usually, a breach of condition or very serious breach of an innominate term will be repudiatory.

Actual vs. Anticipatory Breach

A repudiatory breach may be "actual" (occurs at the time performance is due) or "anticipatory" (when one party makes clear, before performance is due, that they will not perform).

Key Term: anticipatory breach
When one party, before their contractual obligations are due, shows an intention not to perform or fulfill their obligations.

On anticipatory breach, the innocent party may immediately accept the breach and terminate or choose to wait until performance is due, subject to certain risks. If the innocent party elects to wait, an intervening event (for example, frustration) may extinguish the right to terminate for the earlier repudiation, and damages may be reduced or lost because performance would not have occurred in any event.

Accepting and Affirming Breach

To terminate, the innocent party must communicate acceptance of the repudiatory breach to the other party, clearly and unequivocally. Communication can be by words or conduct (for example, stopping performance, repossessing goods, or notifying cancellation in accordance with a termination clause). If instead the innocent party affirms the contract (either expressly or by conduct), they lose the right to terminate for that breach; thereafter, the contract continues and the innocent party is confined to damages for the breach.

Key Term: affirmation
Where the innocent party, after a repudiatory breach, elects to continue with the contract, losing the right to terminate for that breach.

Key Term: election
The binding choice the innocent party makes after a repudiatory breach: to accept the breach and terminate, or to affirm and continue. Once made with knowledge of the breach, the election cannot be reversed.

Affirmation may be limited where continued performance requires the defaulting party’s cooperation or a legitimate interest test is engaged in claims for an agreed sum. As a practical matter, an innocent party who intends to terminate should act promptly and avoid conduct that could be construed as affirmation (for example, accepting further performance without reservation). Where termination is accepted, damages are available for losses caused by the breach; where the contract is affirmed, the innocent party may continue to seek an agreed sum for performance if the contract allows and the performance does not require the defaulting party’s cooperation.

Exam Tip Identify the term breached, classify it, then advise on election with clear, timely communication. If the client intends to terminate, ensure notice complies with any contractual notice provisions.

Worked Example 1.1

Lola contracts to supply Ravi with 10,000 units by 1 July. On 15 June, Lola informs Ravi she will not deliver any units. What are Ravi's options?

Answer:
Lola's statement is an anticipatory repudiatory breach. Ravi may either accept the breach and terminate now, claiming damages, or affirm the contract and require Lola to perform when due, risking loss of remedy if circumstances change before 1 July (for example, if the contract becomes frustrated or Ravi’s losses reduce).

Termination by Agreement

Parties can terminate a contract by mutual agreement, but the terms and requirements differ depending on whether consideration is present.

If both parties have continuing obligations, mutual release is generally sufficient consideration to support termination. If only one party has performed in full, fresh consideration from the other party is required, unless the release is executed as a deed. Parties may also agree a novation (replacing one contract with another) or a variation that includes termination terms. Settlement agreements often include mutual releases, waiver of claims, and survival clauses specifying which obligations continue (for example, confidentiality, IP, or limitation clauses).

Key Term: termination by agreement
Ending contractual obligations by mutual consent, which must be either supported by consideration or executed as a deed if consideration is lacking.

Key Term: deed
A document executed with specific legal formalities stating it is a deed, signed, witnessed, and delivered, allowing release without consideration.

When considering termination by agreement:

• ensure clear mutual consent and the scope of release (future obligations only or also accrued claims)
• check if any third-party rights are engaged (which may require consent)
• comply with formalities if using a deed (clear identification of the parties and obligations, signature, witnessing, delivery)
• address the return of deposits, settlement sums, and survival of key clauses

Worked Example 1.2

A cleaning contractor agrees to provide two years of daily services at a fixed monthly price. After six months, both parties agree to end the contract. Is further consideration required to make this effective?

Answer:
No further consideration is required because both parties had future obligations. Each is giving up those rights/duties, making the agreement binding.

Worked Example 1.3

Only one party has continuing obligations. A consultant completes a one-off deliverable and, under the contract, the client must pay within 30 days. Before payment, the parties agree to “cancel” the contract and the client pays nothing further. Is the cancellation binding?

Answer:
Not without fresh consideration from the consultant or execution as a deed. The consultant has fully performed and is owed payment; the client’s release from payment requires consideration (such as a concession) or must be effected by deed. Otherwise, the consultant retains the accrued right to be paid.

Discharge by Performance

Full and exact performance usually discharges the contract. If a contract is 'entire', incomplete performance may result in no payment unless the contract is divisible or an exception applies.

Key Term: entire contract
A contract in which full and precise performance is required; partial performance generally earns no reward.

Key Term: divisible contract
A contract comprised of separable parts or stages, often with stage or instalment payments; recovery is available for completed parts even if later parts are incomplete.

Key Term: substantial performance
Performance that, despite minor defects, achieves the essential purpose of the contract; price is payable subject to a deduction reflecting the defects.

Exceptions include:

• substantial performance (where minor defects exist but essential obligations are met—allowing price adjustment)
• divisible contracts (structured in stages or instalments, permitting recovery for completed parts)
• acceptance of partial performance (with express or implied consent), which may create a new agreement or entitle reasonable remuneration (quantum meruit)

Substantial performance is fact-sensitive. Where defects are minor and remediable at modest cost relative to the contract price, courts may find substantial performance and award the price less the cost of rectification. Where defects go to the root or are serious (for example, heating system failing entirely in a domestic installation), substantial performance may not be made out, and the innocent party may refuse payment for defective performance.

Worked Example 1.4

A contractor renovates a flat for £20,000. The work is largely satisfactory but some cupboard doors stick and a minor paint finish is patchy. The cost to remedy is £600. The client refuses to pay anything, claiming the contract required exact performance. Is payment due?

Answer:
Likely yes. This is substantial performance: the essential purpose is achieved and the defects are minor. The contractor can recover the price subject to a deduction of the reasonable cost to remedy (about £600), unless the contract expressly makes perfect compliance a condition precedent to payment.

Termination may also occur when an "entire" obligation becomes impossible, as discussed below under frustration. In that case, future obligations are automatically discharged by law, and losses are adjusted by statute.

Discharge by Frustration

A contract is frustrated when an unforeseen event, not caused by either party, makes performance impossible, illegal, or radically different from what was agreed.

Key Term: frustration
Automatic discharge of a contract due to unforeseen events making performance impossible, illegal, or fundamentally different.

Key Term: force majeure clause
A contractual provision allocating risk and consequences of specified supervening events; where applicable, it displaces frustration by providing the agreed outcome.

Examples include destruction of subject matter, change of law making the contract illegal, or cancellation of a central event. Mere increased expense or difficulty does not suffice, nor does self-induced frustration. If the contract contains a force majeure clause covering the event, the clause governs the consequences and frustration is less likely to apply. Illegality arising after formation cannot be excused by contract; it will frustrate the agreement.

When a contract is frustrated, both parties are freed from future obligations. Accrued rights up to the frustrating event remain, and statutory rules adjust losses in many cases under the Law Reform (Frustrated Contracts) Act 1943. Key points under s 1(2):

• money paid before the event can be recovered
• money payable before the event need not be paid
• the court has a discretion to allow the payee to retain or recover expenses from the pre-event payments/payables, up to the lower of the amount of expenses and the total of sums paid/payable before the event

Under s 1(3), where a party has conferred a valuable benefit before the frustrating event, the court may award a “just sum” to reflect that benefit, taking account of the effect of the event and any sums forfeited or retained under s 1(2).

Self-induced frustration will not discharge the contract. If the alleged frustration arises from the party’s own act or allocation of resources that makes performance impossible, frustration is not available; the party remains liable for breach.

Worked Example 1.5

Moira hires a boat from Jane for six weeks from 1 August. She pays a £200 deposit and agrees to pay £400 on 15 July and £2,400 on 1 August. Jane installs extra bunks at a cost of £800. On 16 July, a fire destroys the boat (not caused by either party). What are the consequences?

Answer:
The contract is frustrated from 16 July. Future obligations end automatically; Moira need not pay the £2,400 due on 1 August. Under s 1(2), Moira can recover the £200 deposit and need not pay the £400 due on 15 July, subject to the court’s discretion to award Jane expenses from the pre-event sums (maximum of £600, the total of paid/payable before the event, even though Jane’s expenses were £800). Under s 1(3), there is likely no valuable benefit surviving the destruction; a just sum may be nil.

Worked Example 1.6

A supplier’s contract includes a force majeure clause excusing performance for “government-imposed lockdowns and closures.” A later lockdown prevents delivery for three months. The buyer argues frustration.

Answer:
The force majeure clause governs. Because the parties provided contractually for this supervening event, the clause displaces frustration. The contract’s consequences (for example, suspension of obligations without liability for delay) apply if the clause is effective; it may need to satisfy reasonableness controls where the clause excludes or limits liability.

Worked Example 1.7

Olive rents a venue from Faith for a concert on 9 September. On 1 September, the venue is destroyed by fire (not caused by either party). What is the legal effect?

Answer:
The contract is frustrated. Both parties are automatically released from obligations from 1 September. Olive may claim repayment of fees paid in advance, subject to the court's discretion and statute.

Consequences of Termination

Upon termination for breach or frustration, the future, unperformed obligations are discharged. Accrued rights—such as claims for payment for services already rendered, or for damages for breaches before termination—remain enforceable unless otherwise agreed.

Key Term: accrued rights
Rights or obligations that have become due or enforceable prior to termination or frustration; these survive termination.

Upon termination for actual or anticipatory repudiatory breach, the innocent party may claim damages for losses arising from the breach. Damages aim to put the innocent party in the position they would have been in had the contract been properly performed, subject to causation, remoteness, and mitigation. Where termination by agreement is concluded, rights are governed by the new agreement (for example, mutual releases or settlement sums), and parties may specify survival of key clauses (confidentiality, IP, limitation/exclusion, dispute resolution).

In sale of goods, termination for breach does not unwind deliveries already made; the buyer may reject non-conforming goods (subject to statutory rules) or claim damages while accrued rights (including payment for conforming deliveries) subsist. Where goods have been accepted, the remedy may be damages rather than rejection, depending on the statutory regime and contract terms.

Terminating a contract does not automatically rescind it. Rescission is an equitable remedy (usually for misrepresentation or vitiating factors), which unwinds the contract retrospectively.

Key Term: rescission
An equitable remedy which renders a contract void from the beginning, restoring parties to their pre-contract position; differs from termination, which operates prospectively.

Bars to rescission include affirmation (with knowledge), lapse of time, and where third-party rights have intervened. By contrast, termination for breach is a matter of election and communication by the innocent party; frustration operates automatically by law.

Exam Warning

When termination occurs, ensure you distinguish between the effect of discharge (future obligations only) and rescission (entire contract treated as void ab initio). Misapplying the remedy may mislead on whether restitution or damages is available. Also ensure any acceptance of breach is clearly communicated; inadvertent affirmation by continuing performance may forfeit the right to terminate.

Key Point Checklist

This article has covered the following key knowledge points:

• Termination can occur for repudiatory breach (actual or anticipatory), frustration, agreement, or by performance.
• Classify the term breached: breach of a condition or a very serious breach of an innominate term is usually repudiatory; breach of a warranty yields damages only.
• A repudiatory breach entitles the innocent party to terminate for future obligations but leaves accrued rights intact.
• Election matters: the innocent party must choose to accept the breach (terminate) or affirm; affirmation (by words or conduct) bars later termination for that breach.
• To terminate for anticipatory breach, the innocent party must elect to either accept the breach or affirm the contract; waiting carries risks if intervening events occur.
• Termination by agreement requires mutual release, fresh consideration, or execution as a deed where only one party has unperformed obligations; settlement terms should address survival of key clauses.
• Complete performance discharges obligations; exceptions include substantial performance, divisible contracts, and accepted partial performance.
• Frustration automatically ends the contract upon occurrence of a qualifying event outside the parties' control; self-induced frustration does not apply.
• The Law Reform (Frustrated Contracts) Act 1943 governs adjustments of pre-event payments, expenses, and valuable benefits.
• Accrued rights and prior breaches generally survive termination; future obligations do not.
• Force majeure clauses, where effective, govern specified supervening events and may displace frustration.
• Termination and rescission are distinct: termination ends the contract for the future; rescission unwinds the contract from the start.

Key Terms and Concepts

• repudiatory breach
• condition
• warranty
• innominate term
• anticipatory breach
• affirmation
• election
• termination by agreement
• deed
• entire contract
• divisible contract
• substantial performance
• frustration
• force majeure clause
• accrued rights
• rescission