So you have entered a commercial contract and things just are not working out. Maybe your business practice has changed, and you no longer need the service you signed up for. Maybe the other party just is not meeting your expectations. Whatever the reason, before you take any action to terminate a commercial contract, you should consider the legalities and, if necessary, consult a contract lawyer to find out exactly where you stand.
Follow our quick steps to see if you may have grounds to terminate:
Step 1 – Establish what exactly your contract is
With some exceptions, contracts don’t need to be in writing to be binding, and can incorporate terms and conditions, verbal communications and even implied terms. A contract can be partly written, and partly verbal. To be a binding contract at law, you simply need 4 elements; offer, acceptance, consideration and intention to create legal relations. Consider how these elements apply to your facts to determine precisely what the contract is.
Step 2 – Look at the contractual terms
Often, the contract itself will dictate precisely when a party is entitled to terminate a commercial contract, and if the contract is fixed term. Read the details.
Step 3 – Consider the breach
Many cases have been fought through the Australian Court system arising from an alleged breach and, more specifically, the legal characterization of that breach. Not every breach of contract will entitle you to terminate, it all depends on the seriousness of the breach and, again, the precise contractual terms. A contract lawyer should be engaged to assist you make an assessment where it is unclear.
Step 4 – Consider other areas of law
Other areas of law may entitle you to terminate, such as where a party has made a misrepresentation (i.e. made a statement of fact which was false, but which induced the other party to enter into the contract), or where a party has repudiated the contract (i.e. demonstrated an intention not to be bound). A contract lawyer will be able to assist you to determine if any such factors apply.
Step 5 – Assess your risks
Damages for breach of contract are designed to put the damaged party in the position they would have been in had the contract been performed. Accordingly, if you purport to terminate a contract of service for 5 years at $100,000 p.a. (without proper reason) at the end of year one, you could potentially face a damages claim of $400,000 (subject to certain rules). Our courts are filled with disputes over contracts, which disputes undoubtedly cost all parties involved a lot of money. You need to be aware of the potential litigation that could follow from a termination before taking steps to terminate.
If you have any ‘iffy’ areas, you should always consult a contract lawyer who will be able to advise you on your ability to terminate a commercial contract at law, and the potential pitfalls of doing so. The last thing you want is to be faced with a claim for contractual damages, so make sure it is done right from the start, whatever your reason for terminating.