February 21, 2012

Business Contract Termination Process & Terminology

Two major reasons for a business contract termination are as follows:
Business Contract Termination Process & Terminology
  1. Work you contracted for is over, OR
  2. Contracting parties decide not to work with each other
There could be multiple reasons why you decide not to work with the other party. The most common reason is a “breach” of the business contract. The breach of the business contract may be an express breach or an implied breach.
  • Express contract breach: An express contract breach occurs when one party deliberately OR callously fails to perform its side of the bargain. For instance, if you hire a company to build a website for you, and the other side fails to provide you with a functioning website as per your specifications, and further refuse to correct the defect in the service, that would be an express breach of contract.
  • Implied contract breach: An implied contract breach on the other hand is where there is no deliberate refusal to perform the contract, but the behavior of the party makes it clear that they will not be performing their share of the bargain. For instance, you hire a Company to help you with Search Engine Optimization. They promise at the time of signing the contract that they will help you rank on the first page of the organic search for six keywords.Six months later, when the contract period is about to expire, they have not been able to rank you for even one keyword on the organic search. There is no refusal on their part, just a failure to deliver as promised.
Other Important Notes regarding contract termination and framing:
  • There are many cases where it is amply clear from early on that the other party will not be in any position to perform the contractual obligations. For instance a contract to supply you with machinery for your business. The machinery, let us assume, is going to be imported from Germany. Any import from Germany, in order to be brought in and clear customs, needs a clear 30 working days. Twenty days before the delivery date, you speak to the company in Germany casually, and they tell you that the machinery is still in the process of being made, since the order for it was placed late. Now it is clear that the importer and distributor will not be able to deliver the machinery on time, and you can declare breach.
  • The best way to declare breach is to send a notice to the other party declaring breach. Your business contract should specify a mandatory period for giving this notice. If you are drafting a business contract today, make sure the notice period is no more than 7 working days.
  • Make sure that the business contract mentions the compensation for the breach. Typically, people hesitate to mention compensation in a business contract because it is unpleasant, but convince the other side that you are doing it in the interest of harmony and certainty, in case things go wrong. It is much easier and less unpleasant to enforce a contract rather than haggle over compensation later.

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