Terminating Contractual Relationships: Look to the Contract

There may be times when you’ll want to terminate a contract – whether it is with a tenant, manager, service provider, vendor or other party.  Perhaps the relationship has gone sour, the performance is not up to par or you simply need to change course.  Dust off the contract before you take any action – the contract language will help determine how you can and should move forward to end this relationship.  Here are some questions to consider:

1. What Are Your Termination Rights?  If your contract gives you the right to terminate the contract for any reason at any time, or will expire shortly, then you have maximum flexibility. If the contract requires you to pay a termination fee, you will need to weigh that against the cost of pursuing other alternatives. You may have certain termination rights as a matter of law (e.g., hotel management agreements), but you may be responsible for costly damages.  If your contract party has not performed material obligations under the contract, you may have the right to terminate based on breach of the contract.  You will need to carefully consider whether you have the factual basis to support a claim of breach.  More on that below.
2. Can You Terminate Based on Breach?  Check the default section of your contract. It is generally required that a breach be material, or substantial, to justify termination. A termination for breach may not be effective until you give the other party notice of its breach, and an opportunity to “cure”, or correct, its failures.  If it is able to do so within the time period provided in the contract, you no longer have the ability to terminate.  Further, the delays and costs related to a dispute as to whether you properly terminated the contract should be considered.  Confirm whether your contract (or governing law) provides that in the event of a dispute, the winner’s legal fees are paid by the loser. This is a powerful incentive against non-meritorious claims.
3. Did You Read the Fine Print?  No matter which rights under your contract you wish to exercise, follow the provisions of the contract to the letter. For example, find the provision addressing when, how, where and to whom notices must be sent and comply exactly.  Failure to do so could jeopardize your ability to terminate. In certain cases (e.g., leases), notices may need to be sent by a process server per local law.
4. Do You Have the Entire Contract?  Search your files for all correspondence, cancelled checks, and other documents relating to this relationship. Do they support your preferred strategy? Have you amended your contract, perhaps inadvertently (e.g., by emails)? All further communications must be carefully monitored.
   What’s Your Plan B?  If you need to line up an alternative provider so that there is no gap in service, keep in mind that you may not be able to commit to a new contract until your current contract party no longer has the right to cure its breach and avoid termination. Will your new provider accept the conditions as left by the departing party? If possible, move forward on parallel tracks with both parties while keeping all options open.
5. Can You Preserve Your Evidence? Be cognizant of preserving and documenting the facts with contemporaneous reports and minutes, photographs of existing conditions, preserving samples, etc., so that you maintain proof that a termination for breach was justified. React promptly to changing circumstances to protect yourself from claims that you waived your contract rights.
6. Do You Have Third Party Support?  If your termination is based on failure to perform certain technical functions, or if particular expertise is required to ascertain who is at fault, you may need an analysis from an independent third party. For example, an engineer’s assessment would help verify whether the collapse of a building was the fault of your contractor, or was caused instead by a defect in the design that was not the contractor’s responsibility.
7. Do You Have Clean Hands?  It can be tempting to take actions such as withholding payments to the other party, removing its access to your property or the like. But first make sure that doing so is legally permissible so that you don’t go from a wronged party to a bad actor and thereby jeopardize your claims.
   Are There Limitations on Liability?  If you prevail in terminating your contract based on breach, you will want to seek reimbursement for the damages (costs, expenses, losses) you’ve suffered. However, your contract may limit those damages. Check the small print for exclusions or limits on your ability to seek damages. One example is a waiver or cap on consequential damages, which may prohibit you from collecting economic damages like lost profits.
8. Can You Actually Collect?  Even if you are entitled to damages, will the other party pay? Does the contracting party have assets of any substance, and where are they located?  Does the contract limit the assets that you would have access to?  Is there a guarantor, a security deposit? Will insurance cover your claims? Investigate before incurring substantial costs to pursue legal remedies against a “judgment proof” party.

For more information about what we might be able to do for you, please contact our offices directly.