Quick Contract Tips #3: How to go about ending a contract with your customer or client

Quick Contract Tips #3: Tips on how to go about ending a contract with your customer or client

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It's almost inevitable that you will excitedly sign a contract with a new client or customer for a new project and then later want to get out of it for some reason, usually because your values and vision don’t align as you first thought. In this sense, entering contracts can be a bit like dating someone; alluring at first then some of the shine wears off as you discover some of their strange habits and different beliefs. But we don’t want to think about the end at the start; we hate breaking up and ignore the reality that something may not go well. 

When I design and review contracts for business owners, I encourage clients to first look at the business relationship like you would any other relationship, and to think about the terms you might include in your contracts to make sure you have a graceful separation whilst not breaching your responsibilities and obligations to your client and to then secondly, create a solid “termination/cancellation clause” to formally addresses how to bring things to an end. 

Like a dating relationship might end because it naturally fizzles out, in a business relationship it may end because you have finished providing the work or performed the services, the client has paid you, and the project is completed. A contract will usually contain two circumstances in which a contract may be ended, being namely, termination “for convenience” or “for cause”.

Termination for convenience - This is termination for any reason by giving notice. The notice period will be found in the contract (e.g. a “one month” notice period). This can be for reasons such as termination because the client/customer has become insolvent or is unable to pay their debts; the contract is for a fixed period of time which has now expired or ended or perhaps the obligations under the contract have become impossible because of events outside the control of the parties, e.g. tsunami, flooding, earthquake - called 'force majeure' events. Remember, if you are not specifically allowed in the contract to terminate for convenience you cannot just end a contract just because it no longer meets your business needs. 

Termination for cause - Before bringing the contract to an end for this reason, check if there is a sufficiently serious problem with an important part of the contract; that the problem, default or failure to perform an important element is caused by the client/customer; that you haven’t done anything which might be interpreted as causing, encouraging or accepting their behaviour instead of complaining about it; and that you have given your client/customer sufficient warning to remedy the problem within a fixed time. With my business clients, we talk about these kinds of pre-conditions to termination that might come up, as their contract is designed or reviewed. 

What I would suggest you do is take a close look at each of your contract relationships and play out various kinds of scenarios. Think about what kind of cancellation or termination clause would cover the situations where you and your client may want to part ways? Are there conditions you believe you need satisfied by your client, before your client is able to terminate the contract? Do you care to know their reasons for termination?  

Give thought to what happens after termination as well. Most likely you will want your client to pay you for any outstanding services and you may need to return certain materials to them (cross-referencing with the “confidentiality” clause which often requires this as well). When you request to terminate the contract will you return as yet unearned fees? Are you obliged to help them find a replacement service provider? 

Sending a notice to your client/customer - the technical bit

Finally, when it comes down to actually cancelling the contract, written notice must always be used for any type of contractual termination and the method of how to provide the notice (e.g. by post or by email) and the time period required, are normally stated. You must comply with these provisions. The notice should be headed “Notice to terminate contract” and include the reference to a relevant contract and paragraph in the contract upon which the reason for the notice is based. 

Disclaimer: The contents above are for educational and informational purposes only and do not create an attorney-client relationship. If you have specific questions make sure you contact a lawyer for advice.

To design or review the termination and notice clauses in your agreements contact me at catherine@catherineoconnelllaw.com.

Catherine O'Connell