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As a business owner, there may be times when you need to terminate your commercial contracts. If so, you must ensure that your contract termination is carried out correctly in line with your contract terms and must exercise due care. Wrongful termination can risk your business as the terminating party incurs liability for a significant financial sum to the other contracting party. This article will present three key questions you should ask yourself if you consider contract termination for one of your commercial contracts.
1. Do I Have the Right to Terminate the Contract?
Almost all business contracts contain a termination clause, which states how and when to terminate an agreement. Alternatively, some companies will reach a mutual agreement to end the original contract to start a new contract with updated terms.
A termination clause will explain the circumstances when your business can terminate the contract. For example, it will state:
- whether your company can serve notice immediately;
- if your business needs to provide a reasonable notice period; and
- the length of any notice period.
However, some termination clauses can be vague or confusing when they try to cover all possible eventualities within the contract. If it is unclear whether your business has the legal power to terminate the agreement, you should obtain expert legal advice.
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2. Does Termination Make Commercial Sense?
Even if you are reasonably confident that you have the power to end your contract, you need to ensure that it makes good commercial sense for your business.
Suppose the other party has technically breached their obligations but has immediately apologised and promised to take action to avoid your business suffering financial loss. In that case, you may sensibly choose to give the other company a chance to rectify the situation rather than take immediate drastic action and end the contract, particularly if the other party is a long-time business partner.
However, if the other party has knowingly breached the contract, and shows no remorse and intention to rectify it, it may make commercial sense to end the contract. In these circumstances, it is reasonable for you to suspect that they may breach the terms of the agreement again in the future, which could subject your business to repeated financial loss.
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3. Is There Any Significant Risk to Terminating?
Terminating a contract can be risky, and some situations will give rise to an easier decision than others. For example, you may receive legal advice that the other party is ‘60% likely’ to commit a material breach, giving you the right to end the contract legally. In this case, you should weigh the commercial and financial benefits and risks of termination against the 40% chance of legal action by the other party against your business. This is important because if you lose a case and cannot show you had the legal power to end the written agreement, a judge will likely award legal costs and damages to the other party.
There may be occasions where your business most likely has the power to end a contract, but after weighing up the pros and cons of terminating the agreement, you conclude that it is less risky to continue.
Key Takeaways
Terminating your business contracts can be risky, so you need to consider carefully before doing so. For example, you could lose all potential business with another party in the future, or the company might sue your business for wrongfully terminating the agreement. Whenever your business considers terminating a contract, it is helpful to weigh up the pros and cons before doing so, which may require your business to obtain specialist legal advice.
If you need advice on terminating a business contract, our experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Common reasons for terminating a contract can be, for example, where the other party has breached an essential clause of the written agreement or, alternatively, where the arrangement is no longer profitable or beneficial to one of the parties.
An agreement can be terminated in a way that maintains your commercial relationship. For example, some companies will reach a mutual agreement to terminate the original contract to start a new contract with updated terms.
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