Lately, we have noticed misinformation being shared in relation to how you can terminate a contract in a business scenario. Wrongly, some people have been quoting that a business has the same rights to terminate as a consumer. This simply is not the case. If you have entered into a contract as a business with another business neither party is able to rely on consumer rights.
There are many reasons you may want to terminate a contract, such as financial disputes or dissatisfaction with the services or products provided. However, terminating a contract has to be done in a way to avoid wrongful termination that will result in financial damages and legal exposure.
Here you will find everything you need to know about terminating a contract, including reasons to terminate a contract and how to terminate one.
What it means to terminate a contract?
When you sign a contract you agree to be bound terms of that contract. This means that you and the other party are legally obliged to fulfil the obligation under the contract. When one party fails in some way, this can lead to a breach of contract.
Simply put, “terminating a signed contract is legally ending the contract before both parties have fulfilled their obligations under the terms of the contract.”
Reasons to terminate a contract
There are several circumstances where parties to a contract can initiate a contract termination in the abesence of a no fault termination clause:
- Impossibility of Performance. If one of the parties is unable to perform due to unforeseen circumstances. Circumstances such as the Covid-19 pandemic, natural disasters, terminal illness, and others.
- Fraud, Misinterpretation, or Mistake. In the case one party (a vendor, or client) commits fraud. Or one party has signed a contract under a mistaken belief or the other party has maken a falst statement.
- Breach of contract. When one of the parties fails to perform the obligations under the terms of the contract or violates them. This means they have breached the contract and it is considered a reasonable ground for termination of the contract. The non-breaching party can void the contract and take legal action based on the other party’s breach.
- Illegality. In the case your contract has become illegal due to new law enforcement after the contract was signed. This means the contract can no longer be legally performed and therefore can be terminated.
- Mutual agreement. This is one of the best ways to terminate a contract. But sometimes it is only possible when both parties agree.
How Do You Terminate a Contract?
The first step, before you decide to terminate a contract, is to check the contract for a termination clause. This is to avoid accountability for wrongful termination. There may also be instructions on how to inform the other party about your decision to terminate the contract. When that is determined, you need to give the other party notice in writing. It is important to have the notice in writing rather than just a conversation about terminating the contract.
The main grounds of a contract termination may arise as a result of:
- Statute. When contracts are terminated as a result of the death of either party. Or when the contract is merged with another.
- Terminating under common law. At common law, either party has the right to terminate on grounds of a serious breach of contract. Since “serious breach” has not been defined. It is rather complicated for one to determine what that “serious breach” is, without legal advice.
- Terminating in accordance with a contractual term. In this case, a party can be given the “right to terminate for convenience. Or conditions may need to be met before termination can take place.”
The Contract
One of the most important parts when venturing into a business is having the right legal documents. You have to be aware of everything that is stated in the contract and that is why it is best to have the legal documents reviewed by qualified legal professionals like us.
It’s far easier to sort out the problems before signing a contract than when it’s signed. This is because you might be locked into the contract and it will be more costly to deal with.
If you feel like you have to terminate a contract and are not sure how and what to do about it, please don’t hesitate to contact us. We offer contract reviews but can also consider whether someone has a right to terminate based on the facts. We can guide you through the process and give you advice on any potential liability.
Summary
The reasons to terminate a contract are many. The first step is to look at the contract to identify whether you have the right to terminate it. Then you can look into ways to act on it. Some contracts include a no fault termination clause. This should be written in a way that makes it easy for either party to termination by simply providing the required notice period. Whilst other contracts make it more difficult to exit early. However, with the proper knowledge and legal advice, you can avoid terminating a contract wrongfully and suffer both financially and in terms of reputation.
We often find clients come to us when it’s too late. That’s why it’s crucial that you get a professional eye on a contract before you sign. We can not only check the terminiation clause for you. But also check other clauses which may be detrimental to you.
We offer a fixed fee contract review service which many of our clients have benefitted from. By this we mean don’t be pushed around by businesses more established or larger than you. If you are a startup or small business don’t feel that you have no bargaining power. This is a common mistake among startups and small businesses. If you’re not happy with something, push back on it. If the other party wants the relationship to survive they should be shouldering some of the risk.
Contact us to find out all about our small business legal document services.
