How to terminate a contract

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If your business is facing distress due to the current economic climate, reviewing contractual commitments, and identifying opportunities to terminate those that are unproductive, can help significantly in reducing overheads. Here, we explain how to start the termination process, and why legal advice is crucial at every stage.

It’s a fact of life, and business, that circumstances change. Commercial relationships that once seemed productive and profitable can go sour, becoming a huge drain on that business’s resources. Given the many challenges businesses are currently facing, an arduous contract is the last thing you will want to deal with, not least because it can be a huge distraction from what really matters: running the business.

In such circumstances, businesses can explore many options, but if these are exhausted, then terminating the contract and ending the business relationship can be one of the best ways to streamline contractual commitments and focus only on those that are adding value.

Terminating contracts, however, is a serious step, with major implications for your business should you get it wrong. In the worst cases, early termination of a contract could result in a legal claim and sizeable financial damages. This does not mean that you are stuck, but it does mean that treading carefully and seeking legal advice at every stage is crucial to avoid defending any future legal claims.

What causes a contract dispute?

Most important business relationships are governed by a written contract. These can either be bespoke or based on standard terms of business. Disputes usually arise when one party breaks (or appears to break) one or more of the contract’s provisions.

In the case of termination, this may be triggered by a potential break from a termination clause or its relevant provisions. For this reason, engaging a legal adviser early – before even notifying the other party of your intentions to terminate the relationship – is crucial. As a first step, they can review the contract and advise you of what it permits in terms of ending the contract. They should also consider the relevant provisions – many of which are not always immediately obvious – and ensure these are accounted for in any advice.

How can you terminate the contract?

Once you and your legal adviser have thoroughly reviewed the contract, you can assess your options and agree next steps. These will depend upon the strength of your legal position under the contract. If your legal position is weaker than expected, you may need to work with your legal adviser to ensure that your business is in the best possible position for when you do decide to proceed with termination. As with every stage of this process, legal advice should be sought and followed.

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