CONTRACTS - 31.10.2023

How to terminate a contract for non-payment

Review the contract

If someone stops paying on a contract - or if they never paid in the first place - the directors might be tempted to terminate the contract immediately. The courts, however, don’t tend to agree with this approach. As in the case of Dominion Corporate Trustees Ltd v Debenhams Properties Ltd 2010 , if the judge thinks that you have got things wrong, they can order you to pay damages to the other side for breach of contract, even if you’re owed the money!

Of course, terminating a contract for non-payment can be a legally valid option, but you need to ensure it is executed in accordance with the law and the terms outlined in the contract itself.

Tip. Carefully review the contract’s terms. Contracts typically specify payment terms, including due dates, amounts, and any applicable interest or penalty clauses. If the other party fails to meet these terms, you may have grounds for termination.

Tip. The law says that, in the absence of agreed terms between the supplier and their customer, the payment terms are assumed to be 30 days from the invoice date.

Notice of non-payment

Before terminating the contract, it’s usually necessary to provide notice to the non-paying party. If a payment isn’t forthcoming, write to the other party immediately. Put them on notice that payment is required by a particular time and date or you will regard the contract as terminated (see The next step ).

Tip. Make sure that the deadline aligns with any specific non-payment termination clause such as the right to terminate the contract after a specific grace period.

Tip. If there’s no specific termination clause for non-payment in the contract, your deadline should be reasonable, e.g. seven working days. Don’t demand payment the next day as it’s likely to invalidate your notice.

Legal remedies

If there’s still no payment after the deadline set out in the notice, write to the other party to confirm that the contract has been terminated. As you will still be out of pocket, you could then seek damages for breach of contract.

Tip. It’s always best to seek legal advice before terminating the contract and seeking damages to make sure that you don’t open yourself up to a counter claim for wrongful termination.

Tip. When working out the loss you have sustained, you could include loss of interest at 8% above the Bank of England base rate which is interest allowed under the Late Payment of Commercial Debts (Interest) Act 1998 .

Note. If there’s a different interest rate written into your contract you will have to include that.

Sample requirement to pay letter