Reread Your Contract Before You Terminate It

Paul Durham | November 10, 2020

Businesses must position themselves to be flexible in unpredictable times. For many decision makers, that means cutting costs by carefully reevaluating the terms of existing business arrangements and, if necessary, terminating them altogether. But before terminating any contract—whether it is a service agreement, a long-term supply agreement, or a lease—you should take the time to understand your rights and obligations.

Is there a written agreement? If so, read it. Not every business relationship is documented by way of a written agreement, but most are. Binding agreements can even be created by simple email exchanges—sometimes unexpectedly (that is a topic for another legal tip). Assuming a written agreement does exist, be sure to reread it thoroughly. You may be surprised by what you find.

Termination for cause or convenience. Typically, contracts give each party the ability to terminate the agreement for cause if the other party has failed to fulfill its obligations. However, these for-cause terminations generally cannot be relied upon absent breach or non-performance by the other side. Less often, one party or both parties may have the option to terminate for convenience—that is, with or without reason. This kind of contractual flexibility may be ideal for the party looking to get out of an undesirable contract, but it is not necessarily the norm.

Fixed term or autorenewal. If the contract does not permit early termination, it is critical to understand the duration or “term” of the agreement. On the surface, this seems straight forward enough. Many contracts will have a fixed term-often one year or more. If you are approaching the end of the term of a contract you would like to terminate, you might be satisfied to do nothing and simply wait for it to expire. However, be sure that the agreement does not also include a so-called “evergreen” provision. An evergreen provision automatically renews the agreement for one or more additional terms unless one party provides timely notice of its intention to not renew. This notice period could be 30 days, 60 days, or significantly longer depending on the nature of the agreement. Simply waiting for the term to expire, or waiting too long to provide a nonrenewal notice, can result in unintended consequences. That is why it is so important to review these basic terms sooner rather than later.

If you find yourself stuck in the middle of a long-term agreement that no longer makes economic sense and the language of the contract gives you no clear exit, you might still resort to negotiating a buyout of the agreement. Although this is not ideal, a negotiated resolution might ultimately save you money and resources in the long run. But you won’t know your options until you take the time to reread that contract.

This article was originally published by the Portsmouth Chamber of Commerce.