How to Effectively Terminate a Contract

September 10, 2018
CLARK.LAW

By: Chris Clark and Christy Clark

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In one of my favorite episodes of the US sitcom The Office, office manager Michael Scott confronts his growing debt by seeking a fresh start. Michael walks out into the middle of the office, and the following exchange occurs:

Michael (loudly): “I DECLARE BANKRUPTCY!”
Oscar: “Hey. I just wanted you to know that you can’t just say the word “bankruptcy” and expect anything to happen.”
Michael: “I didn’t say it. I declared it.”

Sometimes over the years we have represented clients that thought like Michael Scott. They were under the mistaken impression that getting out of a legal contract was as easy as letting everyone know they wanted out.

Unfortunately, terminating a contract is rarely that simple.

Anyone who wants to terminate a written contract should look for at least two sections in the document: (1) not surprisingly, the Termination section, and (2) the Notice section.

Termination

Typically the Termination section of a contract will provide a list of criteria that must be met in order to terminate. The list of grounds for termination could be lengthy and should be based on the unique variables of the parties’ relationship. Here are some of the most common bases for allowing a party to terminate a contract:

  1. Giving Notice.  Some contracts can be terminated simply by giving the other party(ies) to the contract a certain amount of notice (i.e. 30 days, 60 days, etc.) Sometimes this notice must be given at a certain time, such as within a number of days or weeks prior to the contract’s renewal date. (For a discussion of what constitutes proper “notice”, see below.
  2. The Other Party’s Breach.  If the other party to the contract isn’t living up to their end of the bargain, it’s likely that is a valid basis for termination. Often you must provide the other party with notice of the breach and give them an opportunity to “cure” the breach. For example, one of the most common forms of breach is non-payment. If the other party is obligated to pay you and they fail to do so, a typical scenario would be that you provide them with notice of non-payment, and if they don’t pay up within 30 days then you are free to terminate the contract.
  3. The Occurrence of Certain Events.  Many contracts provide that if the other party becomes insolvent, reorganizes (if it is an entity), dies (if they are a person), or ceases to conduct business, that gives rise to an automatic right of termination.
  4. The Mutual Agreement of the Parties.  This one seems obvious, but our firm routinely includes a provision expressly allowing the parties to terminate the agreement at any time for any reason or no reason if they both desire for the contract to terminate. This may seem unnecessary, but we feel it guards against the possibility that a third party could assert that a contract’s termination was legally ineffective due to there not being an express provision allowing it.

Notice

Now that we know some reasons you might be able to terminate a contract, how do you communicate your intent to the other party(ies)? Here are some common notice provisions found in commercial contracts:

  1. In Writing.  Almost always, notices to be given under a contract (which would include notification of termination) must be in writing. A well-drafted notice provision will state whether a written notice must also be signed, and if so, whether electronic or another non-traditional form of signature is acceptable, or is an ink-on-paper signature required. It is rare, but sometimes a written notice must also be notarized.
  2. Method of Delivery.  This is an important thing to note, because a lot of contracts that were signed years ago (and even some new ones that still use old language) allow or require specific methods of delivery. Some examples are (a) personal hand delivery, (b) registered or certified mail, return receipt requested, (c) nationally recognized overnight courier, and (d) facsimile. The good thing about each of these means of delivery is that they automatically include some form of proof of delivery. Our firm also typically allows written notices to be delivered by email; the important thing to note about allowing email notice to be effective for legal purposes is that you must agree on an acceptable standard for proof of delivery. We’ve all had that awkward exchange where someone claims not to have received an email, and we have no good method of proving whether they did or not.
  3. Date Effective.  Knowing for sure what date your notice is effective will usually have an important bearing on the contract’s actual termination date. For example, written notifications delivered by hand are typically effective on the date of delivery, however if regular US mail is an acceptable method of notice, the effective date of delivery is usually 3 or more days after you deposit the written notice in the mail (regardless of when it was actually received). If your termination is effective 30 days after the other party receives notice, it is essential to understand when that 30-day clock starts and ends.

As a final point, don’t get cute with your termination notifications. If your written contract states that you can terminate the agreement by a writing mailed to a certain address, but you know the address in the contract is old and not where the other party receives mail anymore, don’t use the old address anyway. To use an abundance of caution, mail the notice to the old and the new address. Similarly, if you know the other party (like most of us) no longer uses a fax machine, don’t rely on delivering your termination notice by fax. Instead, try sending the written notice attached to an email message to the other party and request they email back acknowledging its receipt.

Like Oscar’s advice to Michael, you can’t just “declare” that you want to terminate a contract and expect anything to happen. Following the requirements in your written agreement should yield a much more effective result.

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