At some point in a business relationship, you and your counterparty may decide that it’s time to end your contract and to go your separate ways.
There could be various reasons for termination of contract: for example, it might be that both of you are unhappy in the arrangement, or it could simply be that the work contracted has been completed ahead of schedule.
There are two ways a mutually agreed contract termination can work:
by agreeing to a termination outside of the strict terms of the contract
by relying on termination rights already available within the contract
As part of your Farillio membership, you can use this template contract termination letter if the decision to end the business relationship is mutual.
What if the intention to terminate the contract isn’t mutual?
Sometimes, it may just be one party that wants to cancel. Maybe you’re not happy with the service provided by a supplier, or your business is changing direction and you no longer need these products or services, or perhaps you’ve found that you can get exactly the same goods or service elsewhere at a better price.
So how does this work when there’s a legally binding contract in place? After all, there would be little point in signing a contract that could be terminated at the drop of a hat.
While contracts will continue to be relevant in relation to any rights and obligations that have built up and are owed (accrued), it is indeed possible to put a stop to the generation of future rights and obligations between you and your counterparty, by ‘discharging’ the contract.
Alternatives to consider before terminating the contract…
You may want to first get in touch with the other party to see if you can find an alternative way of doing business that’ll work better.
That way, you can have the arrangement you want without disrupting your business relationship.
Take a look at our guide to making variations to a contract for more information on this.
Or, if you want to terminate the contract due to a dispute, it may be better to try resolving the situation first.
Still want to cancel? First, check the contract
If you do decide to discharge the contract, make sure you’ve checked if there’s a contract termination clause that fits in with your reasoning.
For example, your contract may have a contract termination clause that explains how to terminate in the event of the supplier going out of business during the duration of the contract.
There may be a term that states how much notice of your intention to terminate should be given when cancelling the contract, as well as how that notice must be given.
If there’s not a specific time frame advised, it may say that ‘reasonable notice’ should be given. Reasonable notice is subjective to each contract. You may be able to look at industry standards or typical practice in your sector for an indication of what would be considered a reasonable notice period. Generally, longer-term contracts that involve relatively intensive and regular co-operation between the parties will give rise to expectations of longer notice periods.
Breaches of contract and common law
Contracts between a business and a consumer (B2C)
For contracts between a business and a consumer (B2C), regardless of what is or isn’t in the contract, there are certain situations where the law allows for contracts immediately to be terminated by one of the parties.
These situations are:
if the contract is made impossible to perform due to an act of a party (for example, if someone hires a gardener who then relocates abroad)
if a party refuses to carry out a main part of their side of the contract (for example, if someone buys a washing machine that comes with an installation service included, and the supplier then refuses to install it)
if there’s a breach of any of the contract’s conditions (usually the most important terms), or
if there’s a serious breach of any of a contract’s ‘innominate’ terms (terms that aren’t as vital as the conditions). If there’s an argument between the parties about what constitutes a ‘serious breach’, then what is ‘serious’ will be determined by court, taking into consideration: the level of financial loss suffered, whether compensation would be an adequate remedy for this loss, the behaviour of the other party prior to the breach occurring, and whether the breach is likely to happen again
Contracts between a business and another business (B2B)
Conversely, for contracts between businesses (B2B contracts), reasons for terminating a contract must be specifically written into the contract.
Without these express terms, your options for termination will be extremely limited.
Take care that your contracts contain no-waiver clauses – like our templates do.
A no-waiver clause seems relatively innocuous, but it carries significant power that can, for example, work against you and to the benefit of a business that you believe is in breach of contractual duties that it owes to you.
A no-waiver clause essentially states that, even if you fail to react rapidly (or at all) to a specific breach of contract by your counterparty, this does not mean that you have permanently waived your right to object to this breach or to any future ones that might follow.
Make sure you haven’t given the other party any credible reason to argue that, in spite of the contract wording, you’d led them to believe that their actions were acceptable to you.
Where a breach has occurred, you may also be under a duty to give them the opportunity to fix the problem that the their breach has caused.
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