How to Effectively Terminate a Contract
Terminating a contract is usually a straightforward exercise but if it’s not done correctly, it can lead to a dispute.
Check the dates
If you don’t have one already, your organisation should have a central document that records the various dates by which a contract needs to be terminated before it automatically renews and locks your business in for a further period of time.
The agreement should have this information set out under a sub-heading labelled “Termination” or “Notice” (or something similar) which is generally found towards the end of an agreement.
The agreement may stipulate an exact termination date, or, it could merely say within X months of the anniversary of the contract.
It is important to diarise these dates and assign an individual who will be responsible for ensuring the contract is terminated within the correct timeframe. This individual is typically a contracts manager, legal counsel or company secretary.
Check the method
Some contracts can be convoluted and complex when it comes to termination. Check how the other party wants the agreement to be terminated.
Does the contract ask for it to be in writing? If so, must this be done by recorded delivery and/or first class post? Have they provided the address for the notice? Has that address changed? Do they accept notice by email? If so, have they listed the appropriate email address?
If the contract is silent on the method of termination, we suggest you take advice.
What should your termination notice say?
Typically, a contract will explain what the termination notice needs to say. For example, the notice may need to state explicitly that this is a notice of termination and you will need to include a reference number in order for it to be valid.
The other party may ask for you to stipulate whether you wish to terminate and renew on different terms or whether you just want to terminate.
It is best practice for the termination notice to request an acknowledgement from the other party within a short period of time so you know they’ve received it.
Can we terminate early?
Whether or not you can terminate an agreement early will depend upon a wide range of factors including whether or not there have been any breaches of contract, what type of breach has been committed, what the terms of the contract are, and the conduct of the parties to date.
If the breach is serious enough, this could enable the parties to treat the contract as at an end.
Take the fictional example of where a contract is entered into between a restaurant and a bakery. The restaurant and bakery may enter into a year-long agreement for the daily supply of goods (the bread) and services (delivery of the bread). In the agreement, the restaurant promises to pay the bakery a specified amount each quarter. The restaurant cannot terminate the agreement until a year has passed.
If the bakery were to fail to comply with their obligations (i.e. they don’t produce or deliver any bread) the restaurant may be entitled to refuse to pay the bakery’s invoices and terminate the agreement before the year has expired because the bakery has committed a substantial breach of contract.
Terminating early, in the wrong way or for an insufficient reason, can lead to disputes. If you wish to terminate an agreement early, or if you wish to terminate a high-value agreement, we suggest you get advice before doing so.
We can help
If you want some advice, please do get in contact with our commercial dispute resolution solicitors. We provide practical legal advice and can help your business terminate an agreement correctly.
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