How do I terminate a contract?

If you have a written contract in place, the termination provisions will be your guide. If there is no written contract, you can still terminate the contract either by mutual written agreement or by using your rights under the common law. 

Whichever route you take, the first thing to establish is why you want to terminate a certain contract as this will determine the “how”. More often than not the process for you to terminate for convenience (i.e. due to no fault of either party) will be different from termination for cause (e.g. if the other party commits a material breach or becomes insolvent). Some contracts may not even allow you to terminate for convenience, which means you may only terminate if one of the permitted termination events has occurred.

Once you have established the reason for termination, you should follow the formality to terminate. Usually this starts with you serving valid termination notice on the other party. You should ensure that such notice is in the required format (by hand, letter or email – some contracts do not allow emails) and given within the notice period (e.g. is there a fixed initial term during which you can’t terminate; or must the notice be given within a number of days before a specific point of time such as the expiry date).

The notice must make it absolutely clear when the contract ends and what to expect from the parties to end it. Among other things, you should consider:

  • Are there any pre-termination accumulated rights and obligations to fulfil (e.g. due or payable sums for the goods or services provided; or IP assignment).
  • Is there any exit period during which your existing obligations will be phased and transitioned to either the client or a third party. The parties must be absolutely clear about the scope, nature and chargeability of any such exit period, e.g. what support will you provide free of charge (such as providing management information within the agreed scope) and what will be charged (such as the phased reduction of the service provision or additional exit assistance).

At the end of the exit period (if any), you should be freed from any future obligations to the client. Be cautious of any post-termination obligations though. For example, you may have to delete or return all client data or the client may have the right to audit or access your records for a fixed number of years post-termination. Also look out for any survival clauses which specify the contract provisions applicable after the contract has ended, such as confidentiality, IP, liability and indemnities or records retention.