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The Implications and Considerations of Terminating a Commercial Contract Early

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This article has been submitted by Greenaway Scott.

When most contracts are drafted, they are set for an agreed period of time and generally expire at the end of this without issue.

However, in some circumstances you may want to bring a contract to an end early. This may be because of unforeseeable events when the contract was entered into, or because one or both parties consider it is no longer working.

Whatever the reason, it is important to consider all the options, and implications, before terminating the contract. Take a step back and consider these from an early stage so the decision is not taken lightly. This could greatly improve the eventual outcome.

The first step is to look at the contract itself. The most straightforward way to end the contract will be to use the termination clause, provided it is clearly drafted, and you fit within the conditions. A full review of the contract will be required as there will also usually be consequences for termination, so you need to be clear on the effects and liabilities.

A number of clauses will usually survive termination. Therefore, it is important to remember that ending it will not remove your liability for any breach of contract.

There may be remedies available to the other party after a breach, which could be financially burdensome. For example; they may have the right to instruct a third party to perform your obligations under the contract at a cost to you. If these remedies survive, then they cannot be amended or varied once the contract is ended.

If you are concerned about termination because, for example, you want to maintain an ongoing working relationship, then you could consider varying the contract instead. Many contracts allow for this, and it is usually stated as being acceptable in writing by authorised representatives of both parties.

This may give all sides the opportunity to renegotiate the contract to reflect the change in position. Whatever the reason, the best starting point is often a ‘without prejudice’ negotiation to discuss your concerns and reach an amicable agreement.

Finally, it is vital to consider any implications of termination that will not be specified within the contract, but could be afforded to contracts under UK/EU regulation or legislation. For example, under the Commercial Agents Regulations 1993 commercial agents are entitled to a pay-out upon termination of a commercial agency agreement.

Careful consideration at the outset of all the obligations facing you, will put you in a better negotiating position and help you make the best commercial decisions.

Disclaimer: This article is for information only and does not constitute legal advice.