Terminating a contract can be tricky. Yet there are times when you should end a business contract early. Here is how to go about it.
Originally published by activerain. Re-posted with permission.
Business contracts are binding agreements between yourself and another entity. They require legal documentation to protect each party’s rights and stipulate their responsibilities and obligations.
Terminating a contract before its expiry can be tricky. By signing a contract, you agree to terms and conditions, some of which govern cancelation. If you know and understand them, you could discover that terminating a contract is easier said than done. Here are times when you should end a business contract and how to go about it.
A contract breach occurs when one party intentionally does not honor its obligations. This failure could be partial or complete. A material breach of contract affects your business and its future, such as a supplier who delivers two weeks late. You need to prove any detrimental effects of the supplier’s action.
Another possible breach of contract could occur if a company or its representative behaves egregiously, such as ignoring your visitor management system, entering your building without authorization, and stealing valuable company secrets. A system from Greetly makes such actions impossible.
Minor contract violations, such as delivering a day late, are considered immaterial breaches and do not justify a summary contract termination. The onus is on you to determine that the breach is material, has a substantial impact on your business, and cannot be remedied.
A business contract should stipulate terms under which either party may cancel the agreement. Such contractual stipulations are called break clauses and explain what qualifies as a reason for contract termination. Break clauses should be specific and not subject to interpretation.
Since these reasons for termination are in a contract when both parties sign it, they are categorized as previous agreements. You cannot terminate a contract on a prior agreement basis when your reason for ending it is not stipulated in the agreement.
Anyone who enters a contract can terminate it on the grounds of a recission if they can prove that the other party misrepresented themselves, committed fraud, or acted in any other illegal manner. For example, if a supplier lied about having the capacity to manufacture your components in sufficient quantities, you could rescind the contract.
When a contracting party deliberately hides something from their counterpart, it qualifies as recission. For instance, if you buy a car and the owner did not disclose a serious problem with the vehicle, you could insist on recission. This termination type also applies when anyone lacking legal capacity to sign a contract does so, such as a minor or mentally impaired person.
If either party cannot fulfill their responsibilities and obligations listed in a contract, the other signatory can cancel it based on an impossibility of performance. This agreement termination type should not be confused with a breach of contract as they have different legal definitions.
For example, if you hire a DJ to play music at an event and do a terrible job, that is a breach of contract. If the DJ is in a serious accident on their way to the wedding and cannot send a replacement, that counts as an impossibility of performance. The DJ would have to prove this.
Once a contract has run its course, you have the option of renewing or terminating it according to its stipulations. Therefore, if you have completed everything that the contract requires, its obligations are complete. You need a new agreement to continue the business relationship.
Some agreements could continue after the termination date on a month-to-month basis, such as a cellphone contract. Either party is free to cancel at any time, provided they adhere to the required notice period stipulated in their contract.
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