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Contracts are important tools that outline your agreement with a party, including what happens if things do not go as planned. There are several reasons for terminating a contract. These include:

However, termination is not something that you should take lightly. This article will take you through five questions you should ask yourself before terminating a contract.

1. Why Am I Terminating This Contract?

Although a seemingly obvious question, you should first ask yourself why you want to terminate the contract. If frustrations have been building for a while, termination might seem like the obvious and easiest choice. However, you should not make such a decision based purely on emotion. Instead, you should consider whether termination is in the best interests of your business. Further, you should explore alternative options first to avoid damaging your relationship with the other parties or causing unnecessary legal disputes.

2. Are There Implications?

Terminating a contract will have a range of implications. This includes financial implications and implications to the project and your relationship with the other parties. Before terminating a contract, you should consider your financial losses and if it is in your best commercial interests to terminate the contract. Further, your relationship with the other contracting parties is equally (if not more) important than your financial losses. Losing an important business relationship could have a long term impact on your business operations and reputation and should therefore be treated with care.

3. Will I Impact Others? 

In addition to considering your relationship with the other contracting parties, you should consider the larger picture. For example, consider you are a carpenter, and you have been contracted to build the frame of a building. If you terminate the contract, it will postpone every other phase of the building process. This might cause scheduling conflicts for everyone involved in the project or disputes with counterparties which, may have, for example, ordered 1 tonne of bricks that now need to be dealt with. 

Essentially, one party terminating a contract could have implications on other parties to the project, as well as other related contracts. This could impact your reputation in the industry or even compromise your legal obligations to third parties.

4. Does the Contract Allow Me to Terminate?

Before terminating a contract, you should carefully evaluate whether you are permitted to do so. Many commercial contracts will contain express provisions for termination rights. Therefore, you should consider your current circumstances to determine if they fall in line with the termination provisions. 

If your contract does not expressly provide for termination, you might have to consider the common law options. This means that if there has been a substantial breach of the contract, you will be able to terminate the contract regardless of whether the contract provides for it. A substantial breach will refer to circumstances such as the other party completely abandoning their contractual requirements. If it is not clear that you have a right to terminate, whether under contract or at law, you will likely need to seek legal advice to determine if this is a viable option for you.

5. Do I Need to Provide Notice?

Finally, before terminating a contract, you should ask yourself what processes you will need to follow. Your contract will likely outline termination procedures, which you must follow for the termination to be valid. For example, your contract might explicitly outline that you need to undergo alternative dispute resolution such as mediation before you can terminate the contract. If you do not comply with the outlined requirements, you might be accused of breaching the contract by incorrectly terminating it. 

Further, in some cases, the contract will outline notice periods for terminating the contract. To ensure you comply with these requirements, you should carefully consider these notices and ensure you serve them: 

  • on time;
  • in the correct format with the right information; and
  • to the right people.

Key Takeaways

Terminating a contract is a big step to take that will have a range of consequences. Before terminating a contract, you should ask yourself:

  • why you are terminating the contract;
  • what the contractual and commercial implications of termination are;
  • what the impact on other parties will be;
  • if the contract allows for termination; and
  • what the relevant termination procedures are.

If you need assistance deciding if you should terminate a contract, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What are the reasons to terminate a contract?

There are a range of reasons that you might need to terminate a contract. The terms of the contract might have had a material breach, it might be frustrated or the contract might be misrepresented. Alternatively, a contract might be terminated based on the mutual agreement of all parties.

What should I consider before terminating a contract?

Before terminating a contract, there are a few questions you should ask yourself. First, you should consider why you are terminating the contract and what the implications will be, both to yourself and to third parties. Further, you should consider whether the contract has a termination clause, outlining terms for terminating the contract and if any notice periods are required.
 

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