Q: I have a business and want to terminate a contract with a supplier. I can go ahead do that, right?
A: Terminating a contract with a supplier or other business partner (such as customer) carries significant risk. You will need to carefully evaluate the language of the contract and the circumstances of the business relationship.
What does your contract say about termination? Some contracts have clauses which prescribe when and how the contract may be terminated. For example, the contract may require that advance notice of termination, often specified by a number of days, weeks, or months, be provided to your counterparty and that such notice be made by specific means (e.g., certified mail or overnight courier). Such terms are not mere guidelines. Failure to strictly comply with these contractual requirements may mean your attempted termination is invalid, which in turn could subject your business to legal claims and generally cause you headaches.
Some contracts allow termination only upon the occurrence of specified events, such as failure to make payment or deliver the required product or service. In that case, it is critical before terminating a contract to verify and re-verify that the contractual trigger for termination has occurred and is well documented. Even then, some contracts provide that a party in breach of the contract must be provided an opportunity to cure its breach before the contract can be terminated.
Other contracts may allow termination for any reason at the discretion of either party. While such provisions provide flexibility, care still must be taken with respect to termination. This is because every contract in New Hampshire carries with it an implied covenant of good faith and fair dealing. A detailed discussion of the implied covenant is outside the scope of this article, but generally speaking it may, among other restrictions, limit discretion in the performance of a contract so as to prohibit behavior inconsistent with the agreed purpose of the contract and the parties’ justified expectations. Whether the implied covenant may be implicated in the context of a contract termination is a highly fact-intensive inquiry dependent on the context of each termination scenario.
Terminating a contract can be messy and fraught with risk. If you find yourself in the position of wanting to terminate a business contract, it is advisable to seek legal advice before pulling the trigger to explore how to best mitigate risk and protect your business.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.