Time to Part Ways? Tips on Getting Out of a Contract

 

22 May 2017
Posted by Tony Grujovski

Most of the time, the parties to a contract sign their paperwork with the best of intentions, at a time when they are on great terms and the relationship is commercially strong. But what seemed like a little formality in the midst of an exciting deal can be the basis for a bitter and expensive legal battle if things go south and someone wants to end the agreement.

Getting out of a contract can be cheap and painless provided that both sides have properly negotiated and clearly understood its terms, and bring a constructive attitude to termination.

There’s nothing like being prepared for the worst before it happens, which means you should definitely read our blog on contract signing tips and contract negotiation tips before signing anything!

In this blog, part three of our contract law series, we look at some steps you can take to help you part ways with as much ease and dignity as possible.

Take a deep breath

By now, you’ve heard us say this a few times about contracts. But the importance of taking a step back and giving yourself some thinking time can’t be emphasised enough!  Do you really want to go in and end the relationship? Is there really no value in keeping this contract on foot? Consider the value that the contract adds to your business and weigh up the commercial risks.

We would definitely recommend that before you take any action to terminate the contract, you contact the other party and let them know that you are not happy and ask to meet to discuss your issues in person or by phone.  The other party might not be aware that you are dissatisfied and by simply notifying them, you might be able to repair the relationship.

We recommend you leave any threat of contract termination out of this conversation – human nature is that people do not respond well to threats. Your initial approach should be as conciliatory as possible in order to avoid the need for legal action.

What are your grounds for terminating?  

If you’ve tried to save the relationship without success and you’re still intent on terminating, the next step is for you to find a legal basis for ending the contract.

Usually, the other side isn’t going to let you out just because you ask nicely! But that said, it can and does happen. Sometimes, the other side might be prepared to do this if you pay them some sort of settlement fee. Remember that if the other party is the one at fault, you shouldn’t be paying up unless you’ve made a commercial decision that this would be in your best interests overall.

If simply seeking the other side’s consent isn’t an option, the next step is to check whether the other party has breached one of their obligations under the contract.  Remember that not all breaches will necessarily give you the right to terminate the contract. The contract might specify that breaches of certain clauses give rise to a termination right. Otherwise, if the contract is silent about how different breaches will be treated, the general rule of thumb is that you will only be allowed to terminate if the breach is sufficiently serious, or if it is a breach of a clause that goes to the heart of what was agreed between the parties. Working this out can be tricky (again, consider engaging a lawyer to make sure you genuinely have a legal basis for termination).

What’s the termination process?

Once you have established that you have a legal basis for terminating, the next step is to check whether is a process for termination set out in the contract, which you can then follow. Do you need to give written notice? Does the other party have a set period to try to remedy their breach before you are allowed to end the contract? When it comes to terminating contracts, the details matter.

How do you give ‘notice’?

Watch out for the ‘notice’ requirements in the contract. You need to make sure your notice of your intention to terminate actually counts as ‘notice’ in the contract. We suggest you ‘control-F’ search for ‘notice’ in the document to see how you need to do this. Would email count? If you have to post your notice, does this have to be registered post? What address do you need to send the notice to? Again, detail is everything.

Keep it civil

Overall, remember: you can usually catch more flies with honey than vinegar. When you drop the bombshell, and particularly in all your correspondence with the other side, keep your language polite and courteous, and try to avoid personal jabs. Don’t forget it’s probably stressful for them too: nobody likes conflict!

Finally… consider lawyering up

The best way to make sure you have a good legal basis for termination and follow the proper process is to engage a lawyer to prepare a breach or termination notice according to the requirements of the contract. A lawyer will make sure that you follow all required steps to terminate according to the contract’s terms and the law. If you improperly try to terminate the contract and then stop performing your obligations under the contract (believing it has been terminated), the other party could be in the position to terminate and claim losses suffered by your failure to perform. This is the last thing you want! If the other side is prepared to enter into some form of compromise with you, a lawyer will also be able to help you negotiate a settlement that protects your interests.

Studio Legal are experienced contract lawyers, advising on all aspects of contractual disputes and termination. If you need any assistance in these areas, please email hello@studiolegal.com.au or call (03) 9521 2128.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.