Your Company Terminated the Contract and Is Being Sued: Was the Termination Wrongful?

Your company terminated a contract because the other side missed milestones, failed to pay, delivered defective work or otherwise failed to perform. Now the counterparty says the termination itself was wrongful and that your company is the one in breach.

That dispute is rarely decided by asking who was more frustrated with the relationship. The real questions are narrower: what right to terminate existed, when did that right arise, what did the contract require before it could be exercised, and what do the documents show your company actually did?

If those questions are not tested carefully, a business can turn a genuine complaint about the other party's performance into a claim against itself.

The first question is whether your company actually had a right to terminate

Not every contractual problem gives a party an immediate right to end the agreement. A contract may distinguish between minor breaches, material breaches, repeated breaches and breaches that become termination events only after notice or a cure period.

There may also be rights that arise outside the express termination clause. Section 40 of Malaysia's Contracts Act 1950 addresses a situation where a party refuses to perform, or disables itself from performing, its promise in its entirety. In broad terms, the other party may be entitled to put an end to the contract unless it has, by words or conduct, accepted its continuation.

That does not mean every failure is automatically serious enough to justify termination. The particular contract, the nature of the obligation, the seriousness of the failure and the parties' conduct all matter.

For a defendant, the practical starting point is therefore not simply: "The claimant breached first." It is: "What contractual or legal termination right did we exercise, and what facts made that right available at the time?"

Start with the clause your company relied on

Pull the signed agreement and identify the precise termination route that was used. Depending on the contract, the trigger may be non-payment, failure to meet a milestone, repeated default, material breach, insolvency-related events or some other specified circumstance.

Then look beyond the headline termination clause. Relevant requirements may sit elsewhere in the agreement: the notices clause, payment provisions, milestone schedule, cure mechanism, dispute procedure or an amendment agreed later.

This is why termination disputes often become document disputes. The commercial team may remember a clear pattern of underperformance, while the written contract may require a particular notice sequence before that underperformance permits termination.

Did your company follow the notice and cure machinery?

A strong substantive complaint can still become harder to defend if the agreed termination process was not followed.

Check what the contract required. Did the notice have to identify the breach? Was it required to give a fixed period to remedy the problem? Did it have to be served at a particular address or by a particular method? Was a warning notice required before a termination notice? Did the contract require the breach to remain unremedied at the end of the cure period?

Do not assume a termination notice is valid merely because everyone understood that the relationship was ending. Equally, do not assume that every technical imperfection automatically decides the whole lawsuit. The legal effect of a notice problem depends on the wording of the contract, the issue in dispute and the governing authorities.

For the defence team, the useful exercise is to put the clause and the actual notice side by side, then build a chronology around them.

Had the termination right actually arisen when the notice was sent?

Timing can be decisive.

Suppose a contract gives the counterparty 14 days to cure a specified breach, but the termination notice was sent on day 10. Or the alleged milestone had been extended by email. Or payment was not yet contractually due. Or the parties were still operating under a revised timetable that never made it into a formal amendment.

The company may still have had legitimate commercial concerns, but the legal question is whether the termination right had crystallised when it was exercised.

This makes the chronology one of the first documents a defendant should prepare. Dates of performance, notices, extensions, invoices, approvals, cure periods, meetings and termination should be assembled from contemporaneous records rather than memory alone.

Did your own conduct affect the right to terminate?

A termination right can also become more complicated when the parties have continued dealing with each other after the alleged default.

Perhaps your team accepted late performance several times. Perhaps a deadline was extended. Perhaps work continued while the parties negotiated a recovery plan. Perhaps senior management told the counterparty to proceed, only for a termination notice to follow shortly afterwards.

Those facts can raise questions about waiver, election, acquiescence, variation or estoppel. They are highly fact-sensitive. A business should not assume that "nothing was signed" ends the issue, or that continued dealings necessarily destroy every termination right.

The important question is what the company communicated and did after learning of the alleged breach.

What if the claimant was itself in breach?

The claimant's own performance can be central to the defence.

For example, a supplier may say it missed a delivery milestone because your company failed to provide specifications. A contractor may say progress stopped because access was not provided. Your company may say it withheld payment because contractual conditions for payment were not met.

These are not side issues. Depending on the contract and the facts, reciprocal obligations and the claimant's conduct may affect whether the alleged default occurred at all, whether your company was entitled to act on it, and whether the claimant can prove the loss it now claims.

The defence should therefore test both sides' performance against the same chronology.

Termination for convenience is a different question

Some commercial agreements give one party a right to terminate without proving breach, usually by giving a specified period of notice.

If your company relied on such a clause, the argument is different. The questions may concern whether the clause was properly invoked, whether the notice period was observed, what accrued payments remained due, whether transition obligations applied and whether the agreement provided compensation or other consequences of convenience termination.

A convenience clause can be commercially powerful, but it should not be treated as a blank cheque to disregard the rest of the agreement.

If the termination was wrongful, what is the claimant actually entitled to recover?

Even where the claimant establishes a breach, that is not the end of the analysis. Liability and financial exposure are separate questions.

Section 74 of the Contracts Act 1950 deals with compensation for loss or damage caused by breach of contract and excludes remote or indirect loss. Where the contract names a sum payable for breach or contains a penalty-type stipulation, section 75 provides for reasonable compensation subject to the statutory limit.

For a defendant, that means the claimed figure still needs to be tested. What loss was actually caused by the termination? Was some of it caused by other events? Did the claimant take reasonable steps to reduce its loss? Is the same loss being claimed twice under different headings? Does the contract contain a liability cap, exclusion clause, agreed damages provision or other allocation of risk?

A company can therefore have meaningful arguments on quantum even where some part of the claimant's liability case is arguable.

What evidence should your company preserve now?

Termination cases are usually won or lost on the quality of the documentary story. Preserve the executed contract, schedules and amendments; all breach, cure and termination notices; proof of service; project and milestone records; invoices and payment records; meeting minutes; emails and messaging records; internal approvals; extension requests; evidence of the claimant's own defaults; and documents relevant to the loss being claimed.

Do not clean up the file by deleting informal communications that now look inconvenient. Preserve the record first. Lawyers can then assess what helps, what hurts and what needs explanation.

A short, date-based chronology with links to the underlying documents is often more useful at the beginning than a long internal narrative written from memory.

Can you still defend the lawsuit if the termination notice was imperfect?

Potentially, yes. An issue with the termination route does not necessarily answer every issue in the proceedings.

The wider defence may still involve whether the claimant performed its own obligations, how the contract should be interpreted, whether the loss claimed was caused by the termination, whether the claimant mitigated that loss, whether contractual limits apply, whether a counterclaim exists, or whether there are procedural issues affecting the claim.

But an imperfect termination should not be minimised either. If the claimant's case is that your company itself repudiated the agreement by terminating without a valid right, the validity of the termination can sit at the centre of the dispute.

That is why this issue should be assessed together with the broader defences to a breach of contract claim, rather than in isolation.

Defend, settle or narrow the dispute?

Once the legal position is clearer, management still has a commercial decision to make.

A technically arguable defence may be unattractive if the documents are weak, the litigation cost is disproportionate or the dispute is damaging an important commercial relationship. Conversely, a large claim may justify a firm defence where the claimant's case depends on an inaccurate chronology, ignores its own non-performance or materially overstates the loss.

Useful questions include: What is the realistic exposure? Which issues are document-heavy and which depend on witness evidence? Is there insurance or an indemnity? Is a counterclaim commercially meaningful? Can the parties narrow the dispute without conceding liability? What would an acceptable settlement range look like compared with the cost and distraction of litigation?

When should litigation counsel become involved?

If a termination has already led to a substantial claim or court proceedings, the contract should not be reviewed in isolation. The termination notice, chronology, claimant's allegations, supporting evidence, quantum and procedural position need to be assessed together.

Our Civil Litigation Defence for Breach of Contract service is for businesses defending breach-of-contract claims. If your company has been accused of wrongful termination, you can use the contact form on this article page to send us the basic background and the key documents so the position can be assessed.

Can a company terminate immediately for a serious breach?

Sometimes, but not simply because management regards the breach as serious. The answer depends on the contract, the nature of the breach, any applicable termination mechanism and the governing law. Check the actual termination clause and the facts before assuming an immediate right existed.

What happens if the termination notice relied on the wrong clause?

That can create risk, but its effect depends on the contract, the notice and the legal basis said to justify termination. It should be assessed rather than assumed to be either fatal or irrelevant.

Can accepting late performance affect a later termination?

It can. Continued performance, extensions and other conduct may raise questions about whether a party accepted continuation of the contract or affected a particular right. The result is fact-sensitive and should be tested against the documents.

Does failing to give a cure period make the termination wrongful?

If the contract made a cure period a condition of the termination right, failing to follow it may be important. The precise consequence depends on the wording and the applicable law, so the notice mechanism should be reviewed carefully.

What if the other party breached first?

That may be central to the defence, but an earlier breach does not automatically validate every later termination. The court may still need to determine what obligation was breached, whether the breach gave rise to the right exercised, and whether the termination process was followed.

This article is for general information only and does not constitute legal advice. Every contract and factual situation is different. Obtain specific advice from a qualified adviser before acting on any part of it.