In light of the Covid-19 emergency, many businesses are checking their existing contracts to see how much it will cost them to terminate. Some are in for a shock, as they realise how little attention has been paid to this strategically pivotal issue in a contract.
Like many professionals, we would always recommend prevention before cure, so consider these points when writing your contract:
- Consider the strategic goal of the contract.
- Check any standard terms on duration, notice, charges and termination are realistic for your business.
- Balance the risks of termination against the benefit of contracting.
- Try to negotiate a specific termination term.
- Diarise key dates for providing notice to terminate.
Otherwise, you can start by checking if the contract mentions termination. To terminate effectively without repercussions, it is important to comply with the exact wording of the contract. If the contract does not mention termination, the court may have to assess what would be considered “reasonable notice” in each particular case, so it is worth giving as much notice as you can.
There is also the common law right to terminate if the other party has breached the contract in certain significant ways that undermine the contract. To allow you the right to terminate, this breach must be very serious, and your contract is not terminated automatically because of it. You must tell the other side clearly and quickly that you decide to terminate because of such a breach.
If you could terminate using either a contractual provision or common law, it is worth considering how damages can be measured. However, you should also check if there might be surviving contract provisions that could hinder your business further down the line. If one option is considerably better than the other, you should specify in your notice, but otherwise the notice can state that the termination is under the contract and common law.
There is also the further option of discharging the contract by a release or an agreement if the parties are in consensus.
Termination will always depend on the circumstances of each contract, so it is best to consider your contract in detail and act as soon as possible to achieve the best outcome.