What is the difference between cancelling and terminating a contract? In May, the Home Office said it had ‘cancelled’ a Border Force contract with P&O after the ferry operator sacked nearly 800 employees – but the language used is equally important when two parties consider ending a contract agreed between them, says Taylor Walton's Katarina Morgan …
In general terms, once a contract has been agreed it becomes binding, and the parties will be legally bound to perform according to the contractual terms and conditions. However (as in the P&O example), circumstances can quickly change and impact any contract, and things can go wrong if care is not afforded.
If one party feels the contract is not being upheld, depending on the type of breach, they could either affirm the contract and claim damages, they could try to terminate the contract, or they might wish to cancel the contract (known legally as rescission).
Ultimately, every furniture business needs to understand the difference between the impact of a contractual termination and rescinding (cancelling) an agreement that is in place.
Terminating a contract
Either or both parties must meet the obligations within a contact to terminate it. The contract must be ended as if all actions had been performed – an amicable arrangement.
Termination happens by following an express termination clause in the contract itself by giving notice to the other party to terminate the contract. It can also happen if there is an implied clause permitting a party(ies) to terminate under common or statute law or automatically (for instance, if the contract has been frustrated).
Termination clauses can sometimes be unilateral and, depending on the wording of the express clause and the circumstances, this could give rise to an unfair contract term argument.
Rescinding a contract
Rescinding a contract, however, means both parties are restored to the position they were in before the contract was entered into. When a contract is rescinded, it is set aside entirely – it is as if the contract never existed and it therefore removes the parties’ obligations under the contract.
Rescission is an equitable remedy against a party who has committed a breach of contract, usually for misrepresentation or mistake – but rescinding is only applicable if the contract has not been affirmed.
Affirming a contract
Affirming a contract refers to the continued application of contractual terms after a repudiatory breach has occurred, with the sole intention of claiming damages in light of that breach.
A repudiatory breach of contract takes place where one party fails or refuses to perform a fundamental term or condition of the contract. The other party can either choose to accept that repudatory breach of contract and rescind the contract, or they can choose to continue with it (affirm it) and claim damages instead – the circumstances will usually dictate which is the better option for the party not in breach.
This is just one reason why action to rescind a contract has to be taken promptly once a sufficient breach has been noted. Any delay could be used by the other party to argue that the contract was affirmed, and thus the chance to rescind has been missed.
To rescind or affirm?
Because rescinding renders a contract retrospectively non-existent, the innocent party needs to consider what will give them the best outcome. That could include the return of valuable property to them.
Rescinding a contract is not initiated by a court, but by either of the contractual parties. The innocent party will inform the offending party of their intentions, and if the matter is subject to litigation, the court will decide whether rescinding the contract was legally valid. If it was, the court will make orders designed to give effect to the rescission of the contract.
Rescission will not be found valid by the court if it believes the contract was affirmed, if a third party has acquired rights to any property subject to the rescission, or if it is impossible for the parties to be restored to their positions prior to entering into the contract.