When you enter into a contract with a client, you’re entering into a legally binding agreement. In an ideal world, the contract will run its natural course and come to an end when, for example, the project is complete and you’ve been paid.
However, sometimes circumstances change and you may want to terminate the contract early. So, if you want to avoid being sued for breach of contract, you must do this legally.
Reasons for terminating a contract early
There are many reasons why you may want to terminate a contract early, but three of the most common are:
- Your client hasn’t paid your fees or an instalment of them;
- Your client may have become insolvent; or
- Your client may not be complying with their obligations under the terms of the contract.
Sometimes, your client may not have done anything wrong. Instead, you want to terminate the contract early because, for example, it’s no longer profitable for you to provide the service.
Whatever the reason, you’re unlikely to be able just to stop providing your services because if you do, you could be sued for breach of contract and your client could claim compensation from you – even if they’re the one in the wrong!
How to terminate a contract
The first step is check the terms of the contract. If you have a written contract, it should have a “termination clause”. This will tell you how to terminate your contract legally. For example, it will tell you the circumstances in which you are entitled to terminate your contract and the notice you must give. This could be 30 days or even immediately if the breach of contract is serious (often called a “material breach of contract”).
The termination clause should also tell you how to terminate the contract. For example, you may have to send a written notice to your client’s registered office. If you don’t do this and instead send an email, even if it’s to the managing director, it’s unlikely to be valid. Therefore, the contract will still be binding on you and you will still be obliged to continue fulfilling your obligations under the contract and if you don’t, you’ll be in breach.
If you don’t have a written contact you have to be very careful when trying to terminate it. First, you have to be very sure of the terms of the contact, which isn’t easy when there isn’t a written record of them. Then you have to be clear that your client has breached these terms and this breach entitles you to terminate.
Once you have established this, you must give “reasonable” notice of termination. The trouble is, what’s reasonable to you may not be reasonable to your client and this is when disputes arise. (If you’re in this situation, please feel free to give me a call and I can advise what is or isn’t reasonable.)
What happens after you terminate a contract?
You may think that after termination of the contract, neither party will owe any further obligation to the other. However, this isn’t always the case.
Again, written contracts may have a clause explaining the effects of termination. For example, the contract may say that confidentiality provisions shall continue indefinitely. Other provisions may include an orderly hand-over to a new supplier.
It’s important to consider these post-termination points when preparing contracts. I’m sure the last thing you want to do is spend more time assisting a new supplier get up to speed when you haven’t been paid for the work you’ve already done!
Alternatives to terminating a contract
Terminating a contract is a drastic step and it’s not always necessary to achieve the outcome you’re looking for.
For example, if you client is slow in paying but you think they will pay if some pressure is put on them, you could suspend the provision of your services. However, you need to be careful to ensure you have the right to do this or once again, you could be the one in breach of contract!
Other times you may wish to change the terms of the contract (a process known as variation). Often, within your terms and conditions of business you will reserve the right to amend the contract from time to time. If you don’t have this right you can only vary it with the consent of your client – and they may not agree if the changes are not in their favour. Please check your terms and conditions to see if you have this right and if you don’t it’s something you should seriously consider for the future.
Related content – Blog – Why use standard terms and conditions of business?
Remedies for wrongful termination of contract
If you terminate a contract when you don’t have the right to, or if you don’t follow the correct procedure for terminating the contract, your client could sue you. They could claim compensation from you for any losses they suffer as a result.
So, if you want to terminate a contract early and you’re not sure about what to do, please feel free to give me a call on a no obligation basis and I’ll explain what to do.
I’ve written this blog post using the example of a client / supplier relationship but the principles hold true for any contract. For example, if you have a shareholders agreement with a business partner and you want to go your separate ways, you need to terminate it in accordance with the terms of the contract.