Generally speaking, prematurely terminating a contract is not a small business owner’s main focus when initially entering into the agreement. However, having a viable contingency plan in place to do so can save you considerable time, hassle, and money in the long run.
Contracts can be terminated for a variety of different reasons under specific circumstances depending on the content of the agreement.
While every situation is unique, the most common reasons for contract termination are:
- Mutual Termination: If you and the other party to the agreement find that the contract is no longer mutually beneficial, you have the option of ending the contract via mutual agreement, which is the ideal scenario for ending an agreement.
- Breach of Contract: A well drafted contract will explicitly outline a comprehensive set of duties that each party is expected to perform, which, if they fail to do so, may lead to the termination of the agreement. If the other party has failed to perform their specified duties, double-check the contractual language to ensure they include termination as a result of non-performance (also known as termination for cause). Examples include: failure to perform services, non-delivery of goods, improper performance of services, failure to make timely payments, and the like.
- Force Majeure: Contract often include a force majeure or “acts of God” clause, which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the reasonable control of the parties (e.g., war, riot, crime, epidemic, natural disaster, etc.) prevents one or both parties from meeting their contractual obligations. These clauses were invoked frequently during the shut down periods of the pandemic as people were prevented by governmental orders to gather in groups, travel to certain places and the like.
- Recission: Whether it is done intentionally or in error, a party may have misrepresented their capabilities, assets or scope of services that were outlined in the original contract. If this occurs, the non-misrepresenting party has the option of rescinding the contract without fear of penalty.
- Impossibility of Performance: A party to a contract can invoke the affirmative defense of impossibility of performance to terminate an agreement and avoid being held liable for breaching their contractual obligations. For instance, a painter could claim impossibility to terminate a contract if the building he was working on burned down.
- Completion: If both parties have fully completed all of their required obligations or the date of expiration has come and gone, the contract will automatically terminate without any action taken by either party.
The act of terminating a contract generally falls into one of two categories: (1) termination for cause; and (2) termination for convenience. Terminating a contract for cause includes instances of breach; whereas terminating for convenience may occur when both parties find that ending the contract is in both of their best interests.
After you have made the decision to terminate the contract, the next step is providing notice to the other party. The notice should include a thorough explanation of your reasoning for terminating the contract—whether that is breach, recission, impossibility, etc. However, an important thing to keep in mind is not to burn any bridges. Certain industries are tight-knit and insular; chances are you will interact with the other party again or an acquaintance of theirs. Professionally handling the contract termination process enables you to preserve relationships even when it becomes apparent that the present agreement must be ended.
Prior to terminating any contract, ensure that you have legal justification for doing so and the specific criteria established in the contractual language would be enforceable in court. Failure to do so may result in negative consequences down the road that could adversely impact your small business. That is why it is essential to be extremely detail-oriented and thorough when drafting any sort of contract. Writing strong agreements for both parties to enter into is a vital capability for the longevity of your business. As the saying goes, the best defense is a good offense.
For relatively new business owners, you may have already made the misstep of not incorporating a termination clause into your contract. Does that mean your hands are tied? The short answer is no, however terminating the agreement will be a bit more complex than if you had properly drafted the contract. Further, it is possible to revise the contract mutually with the other party.
The preferred course of action for business owners is to seek out a business attorney with a proven track record of successfully drafting effective contracts. Your lawyer can assist you with drafting the required notices, writing new agreements that incorporate updated clauses necessary to protect your interests, and determine what the next steps should be when it comes to enforcing a termination clause. With this level of professional support, you can approach contract negotiations with an enviable degree of confidence—allowing you to concentrate fully on growing and scaling your business. That is exactly the type of experience you can expect when you choose to engage with the LOVE LAW FIRM.
Committing to the decision to end an agreement is a process that entails multiple phases, starting with a properly drafted contract, making sure that you have all of the needed information prior to terminating a contract, and having the services of a vetted business attorney to guide you through the process, makes this complex undertaking much more manageable.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.