Although parties often benefit by having an annual or multi-year contract that either renews automatically or gives one party the option to renew, there are many cases where an ongoing relationship is not financially beneficial.
Whether it’s poor performance, market changes, or some other adverse event, you may want to terminate a contract early.
Contract Terms and Conditions
According to Texas Business Lawyer Mike Young, the first thing to do is review the terms and conditions of your agreement, including any amendments, to determine if there is a clear path to premature termination. “Many contracts provide for early termination by giving advance written notice, particularly when one party is in material breach and fails to timely fix the problem after being notified of the violation,” he said.
Some agreements provide for termination without cause and with little or no notice if the party who ends the contract pays an early termination fee to the other party.
If there is a notice provision in the contract, it should be followed. For example, don’t just wing it by sending an email to the other party if the contract requires notice to be sent by certified mail with a signature required.
If one party to an agreement is unhappy, the other party frequently is dissatisfied too. If it appears the differences are too great, and the contract is silent on early termination, you may wish to reach out and make an offer to end the deal early anyway. Frequently both sides will agree to this and go their separate ways without a termination fee being paid by either.
Just as it was important to get your contract down on paper in the first place, it’s equally important to ensure that your agreement to terminate early is in writing signed by the parties.
Why? Because memories fade faster than ink.
If there’s a subsequent disagreement about how the relationship ended, you want to be able to rely upon written terms to show exactly what was agreed to and what was not.
Decide Not to Renew
If a contract contains renewal provisions, such clauses frequently permit either party to provide notice of intent not to renew at the end of the current term. Although this is not technically early termination, it does prevent the contractual relationship from continuing longer than the minimum time required.
Be sure to follow instructions to the letter as to the method and deadlines for giving proper notice.
Terminate a Contract Early by Efficient Economic Breach
If it is essential to terminate your agreement early, you’re able to compensate the other party for such termination, and you’ll financially benefit after paying such compensation, it may make sense to walk away from the contract even if the other party wants to continue the relationship.
Be sure to discuss this option with an experienced business lawyer before taking any action because there are a variety of legal factors that must be taken into account when evaluating the true cost of a willful breach of contract.
Regardless of the method you choose to terminate a contract early, it’s important not to publicly disparage each other as the relationship ends.
In addition to creating ill will and tarnishing your company’s reputation, disparaging the other party can lead to additional claims for damages in a civil lawsuit and increase the likelihood you’ll end up in court rather than walking away from the original deal amicably.