Beyond the clause: Five considerations for terminating a contract

What do you do when a supplier consistently underperforms or breaches a contract or when commercial priorities shift? The decision to terminate a contract is rarely straightforward and can have far-reaching legal, commercial and operational consequences.

In this Insight, we outline the five steps you should consider before terminating a contract:

1. Establish your legal right to terminate

Before any action is taken, you need confirm if you have a legal right to terminate and on what basis.

• Contractual rights: Check if the contract includes an express right to terminate. These clauses usually specify the procedure, notice requirements, and any remedy periods that must be adhered to.
• Common law rights: In certain cases, a very serious breach of contract (referred to as repudiation) triggers a right to terminate outside the bounds of the contract. It can be difficult to identify when a breach amounts to repudiation and you should seek legal advice promptly  as the right to terminate can be lost potentially within a matter of days.
• Public sector contracts: The new Procurement Act 2023 implies termination rights for contracting authorities into relevant public contracts.  Relevant contracts can be terminated by the contracting authority in three specific circumstances including where the supplier or a subcontractor becomes an excluded or excludable supplier. These expand on the termination rights implied by the previous legislation and strengthen contracting authorities’ rights.

2. Evaluate the commercial and financial implications

Termination can have significant cost and operational impact. Before you terminate:

• Check if your contract includes any early termination fees such as breakage costs or compensation, or long notice periods during which you must continue to pay for services.
• Check if you still owe payments for goods or services delivered pre-termination.
• Do you need to onboard a new supplier to ensure operational continuity. If so, do you need to undertake discreet market engagement to allow you to understand the options and timelines for re-procurement.
• Consider the impact of termination on existing commercial relationships, which may be strained or permanently damaged.
• Consider what losses your company or organisation will incur and whether those losses will be potentially recoverable.  

3. Consider alternative remedies first

Alternative strategies may be more effective than termination in certain circumstances, and it may be worth:

• Considering a negotiated exit or a variation. This can often preserve relationships and reduce risk compared to a contested termination.
• Seeking to renegotiate scope of services, service levels, pricing or delivery timelines.
• Are there contractual mechanisms available to drive improved performance – for example delay payments, rectification processes.
• Using contract escalation or dispute resolution mechanisms proactively— sometimes a formal warning or a negotiation can prompt an improvement in performance or a resolution.

4. Follow the process to the letter

Termination, however well justified, can be undermined by poor execution. Ensure you:

• Follow any notice provisions set out in the contract (method, content, recipient, and timing).
• Use a termination checklist and review your draft notice for compliance with all contractual requirements.
• Honour any cure periods or remedial opportunities.
• Provide a clear, well-evidenced rationale for termination.
• Keep detailed records of all performance issues, correspondence, and decisions —these can be invaluable if the termination is challenged.

To avoid challenge where termination is based on the Procurement Act 2023, ensure strict compliance with the steps in the Act which require notification, explanation, and an opportunity for the supplier to respond.

5. Plan for risk, recovery and what comes next

Termination ends the contract, but it does not end your responsibilities.

You must:

• Manage surviving obligations such as confidentiality, return of property, and IP protections.
• Manage any exit plan / transition period in accordance with the contract.
• Enforce accrued rights like unpaid invoices or indemnities.
• Prepare for potential claims, allegations of wrongful termination or breach can be common.
• Mitigate losses, any party seeking damages must show they took reasonable steps to minimise impact.
• Assess damage exposure, claims may be limited by liability caps or exclusion clauses

Summary

A poorly handled termination can lead to litigation, reputational harm, and unnecessary cost.
TLT offers end-to-end support, from contract review and exit planning through to contract management, dispute resolution or recovery of damages, ensuring you remain commercially focused.

If you are considering terminating a contract, our team can help you assess your options, manage risk, and ensure a smooth transition. Contact us for tailored advice and support.

Whether you’re supplying or procuring within the public and private sector, proactive contract management is crucial. Visit our Navigating supplier performance hub to learn more about effective supplier performance management, with guidance to help you maintain control throughout the contract lifecycle.

Contributors: Vicky Mabbett, Claire Blackmore & Shelley Bishop

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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