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The Do’s And Don’ts Of Terminating A Contract

On Behalf of | Oct 30, 2018 | Business Law |

Understanding the requirements or conditions for cancelling a contract according to the terms of the contract, the type of contract and the factual scenario is very important in ensuring that you or your business do run foul of, and consequently breach its terms. There are usually no formalities before a contract can be cancelled, so the parties must stipulate in the termination clause what situations or conditions will permit a contract to be cancelled, unless it is otherwise voided by law.

The Do’s

Do be very mindful about your company’s public image and public relations. If you are considering terminating a contract for whatever reason, you need to be sure to think about what impact it might potentially have on your company’s image with the general public if appropriate. While this more often than not applies to larger companies with a large customer base, smaller companies are not always protected from PR nightmares as a result of a contract gone awry.

Therefore, consider the costs and consequences of termination and make sure the costs do not outweigh the benefits.

If a contract is cancelled as a result of a breach by the other party or parties, the non-breaching party can demand contract performance by giving the party in breach reasonable notice to live up to the contract terms, failing which legal proceedings can be instituted against them. These legal proceedings will almost always entail a lawsuit, for which a business litigation lawyer will be needed.

Don’t leave the other party in any doubt that the contract has come to an end. Have alternative contractors lined up because following an outcome of termination, you must be well prepared. Think very carefully about when to terminate the contract.

Determine if the contract has a cancellation or date of performance clause. If the contract has a cancellation clause, the innocent party will be able to cancel the contract in the event of a breach of a term. The innocent party must not cancel the contract incorrectly, otherwise the party in breach may interpret the cancellation as a repudiation of the contract. In this case, the party in breach will have the right to cancel the contract.

Check if the contract does not contain a cancellation clause. In the presence of a clause the innocent party will only be able to cancel the contract if the breach constitutes a material breach of contract.

Date for performance. If no date performance is specified, the innocent party must give the party in breach notice of breach. If there is a date of performance and the party does not perform in time that party will be in mora, breach of the time-factor of the contract. Mora is a lesser form of breach of contract. It does not automatically give rise to the right to cancel the contract. A contract containing a suspensive condition will terminate automatically unless the suspensive condition is fulfilled or waived.

The Don’ts

Do not delay. If you delay following any termination, you risk affirming the contract by conduct which might remove your right to terminate, in which case the contract will continue in full effect.

Do not let the contract continue by allowing the other party to carry on working. If you do, you risk affirming the contract. The innocent must however take care not to cancel the contract incorrectly. If this happens the party in breach can interpret the cancellation as a repudiation of the contract, in which case the party in breach will also have the right to cancel the contract.

Don’t read the contract over hurriedly. It takes time to understand all of the possible nuances of the language used. Include the other party’s oral explanation in writing. Only start acting according to the terms of the contract until both parties have executed it. Memorializing it in writing any breaches of the contract.

Don’t assume that use of a standard or form contract eliminates the need for a contract lawyer to review it. An advocate must be used to understand the clauses of contract termination.

Conclusion

Before deciding to terminate, exhaust all other avenues by meeting with the other party to discuss the issues that are causing problems.
It is safer route to terminate under the  terms of a contract. Both parties have the option to jointly decide to cancel the contract. This is the preferred route as both parties can then enter into a termination agreement whereby they record that they will return what was performed in terms of the original contract and that they will not institute any claims arising from the original contract.