Think before you terminate...read this first
You may wish to terminate a key contract that your business has entered into, such as a lease, supply agreement or franchise agreement.
To do so will require consideration and review of the relevant termination clause and any other post-termination obligations to ensure that you are aware of the following:
- Permitted grounds of termination
- Notice period
- Post-termination obligations
- Method of giving notice
Termination for convenience
Many contracts specify a right of termination for one or both of the parties, usually after a period of notice has expired.
This often also applies to contracts which began with a fixed term which has now expired, but which provides that it will continue until terminated by a party (for example a holding over clause in a lease).
Unless there are very good reasons for doing otherwise, you should ensure that you comply with the requirement to give notice and continue to comply with the terms of the contract until it has expired.
Terminating a fixed term contract
Some contracts provide for a fixed term of engagement. Where this is the case, you will need to review the contract further to determine whether any other grounds are provided. if you do not, you may be liable for all losses of the other party up to the end of date of the fixed term period of the contract.
If the contract is being terminated as a result of some fundamental or essential failure to perform by the other party, then this should be grounds for you to terminate during the fixed term (but we would always recommend you obtain specific legal advice before you do so to ensure that you ensure that the termination is valid and you are not giving away any specific rights to compensation or damages by terminating rather than affirming the contract).
Otherwise, can you terminate the contract for a serious breach of a non-essential term? Does the agreement require you to give the other party notice and an opportunity to rectify any breach? These are matters of legal complexity and you should always seek your solicitor's advice before taking such steps as it could save you significant cost.
If you are seeking to terminate a fixed term contract, there may be costs, compensation or other consequences of terminating the contract and you should be prepared for these. Often the terms of exit can be negotiated if approached correctly.
Are there post-termination obligations?
A contract may specify a number of obligations on a party on termination of the contract. For example, a franchisee may be required to cease using the franchise brand or other intellectual property, return property of the franchisor such as marketing material and the operating manual, vacate the premises and notify third parties.
You may also have competition or client contact restraints that apply to you following settlement. These should be carefully considered before you make the decision to terminate.
Method of giving notice
Does the agreement specify a particular method by which notices may be given? For example, the contract may specify that notices may only be served at a particular address or by a particular method (eg, registered post).
If so, it is important that such process be followed in giving your notice of termination or the termination may not be valid.
The key takeaway from all of the above is to know your contract before taking any steps as once taken they can usually not be undone. Please contact us if you require any advice prior to taking any such steps.
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