How To Terminate A Contract

Breaking up is hard, especially in supply chain

Terminate
Terminate that!. Getty Images

Disclaimer:  I’m not an attorney.  You should a consult with the appropriate counsel prior to attempting to terminate a written or verbal business or commercial contract.  That said, I can offer you this guide.  First of all, remember…

…everything (in supply chain, life and romance) is negotiable.   

Even if you have a written, fully executed and notarized contract between two parties, both parties might agree that they want out.

  And both parties have attorneys who agree that the full and complete terms of the entire contract should no longer be valid.  And everyone agrees in writing that the contract is no longer valid and there are no outstanding or ongoing issues that require remedying – you can spit in your hand and shake on it (actually, that sentence should read: your attorneys can draw up an early termination agreement to the contract). 

So, the first way to terminate a contract is that everyone involved agrees to an early termination. 

This almost never happens.

To fully understand how you might otherwise terminate a contract, you must fully understand said contract.  Read it carefully. 

What is the contract’s term – i.e. when will it expire?  Most contracts terminate after a given date.  Usually near the top of the contract there will be language that describes the term (“3 years from the signature dates” or “on December 31, 2018” or something like that).

 

Some contracts renew automatically, unless one or both parties agree that it shouldn’t renew.  Some contracts terminate automatically, unless one or both parties agree that it should continue.  Understand what kind of situation you’re in.  You might get lucky and find out that your contact is going to expire soon and you don’t have to do anything.

  Or you need to do something to stop it. 

There’s a section in your contract that describes Term & Termination.  Find this section and study it.  These are the reasons that early termination is allowable: 

1) Termination for cause.  This allows one or both parties to terminate the contract if the other party violates a term in the contract or otherwise does something illegal or enters severe financial distress (i.e. bankruptcy).  If one party fails to deliver on a product or meet product quality, termination for cause allows the other party to terminate the contract. 

2) Termination without cause.  In some cases, your contract may be terminated early without cause using written notice (typically 30-60 days).  Termination without cause allows either party the early out that you might be looking for.  In some cases, one party might be allowed termination without cause while the other may not have the same right.  Know what side you’re on. 

Why do you want to terminate?  In many cases, you may not need to terminate your contract.  If what you want is different pricing or an amendment to services or some other revision to a deliverable (whether you’re the customer or the supplier), oftentimes you can negotiate with the other party to amend the contract to meet your current needs.

 

Who has the leverage?  With most contracts, one party has more leverage than the other party (because of company size or intellectual proprietary rights or amount of spend).  If you’re the party with the leverage, you may be able to terminate the contract because the other party has nothing to negotiate with or to counter offer.  If you’re the party who doesn’t have the leverage, you’d better hope that the other party hasn’t read this article.