Strategies for Terminating a Business Contract That has “Gone Bad”

It happens sometimes: You are doing your part, but your contracting partner is doing a bad job. Problems might include:

• Delivery is behind schedule
• Service is no longer top-notch
• Product quality is less-than-desired
• And more

These unfortunate situations present a tricky legal and business problem. On the one hand, there is a contract and it is important to the honor one’s contractual obligations. On the other hand, the contract has “gone bad” and it may be time to move on. Here are a few strategies for working toward a solution. Retaining a good San Diego corporate attorney will help.

Start Talking and Keep Talking

Sometimes the situation is not as bad as it seems. Having a phone or face-to-face conversation with your contracting partner might resolve the problem. If that has already been done and no resolution reached, it is important to keep talking. When one contracting party is not living up to its obligations, it is possible for the other party to put an end to the contract. This is known legally as “anticipatory breach.” What needs to be communicated — verbally and in writing — is that the contract will be terminated if the other party fails to deliver on their obligations. A written notice is probably a good idea at this point stating the deficiencies in performance, demanding that the other party cure the deficiencies, and providing a time table.

Read the Contract

As always, it is crucial to have your trusted and experienced corporate attorney read the contract and provide advice and guidance. Many contracts will have provisions with respect to how to terminate, the amount of time to be given for “cure”, and related clauses. To legally terminate a contract “for cause,” you have to make sure that you are in compliance with the contract.

Explore Options and Find Alternatives

Before jettisoning the existing contract, make sure you have options and alternatives. Make sure those alternatives are in place before making the decision to terminate. Importantly, understand any cost differentials and any timing issues. For example, if it will take three months to get product from the new supplier, factor that timetable into your decision on termination. As noted, it is important to keep talking. Tell your non-performing contracting partner that you have researched alternatives. Discuss the various cost differentials. These discussions might provide a “wake-up call” to your non-performing contracting partner.

The Termination Letter

Once your alternatives are lined up and a decision is made to terminate, it is time to give notice. This definitely should be in writing — although a quick phone call is probably a good idea, too. The written notice should be written with an eye toward litigation, which is always a possibility. The notice of termination likely builds on the earlier notice of deficiencies. The termination notice should comply with any requirements of the contract in terms of timing and method of delivery. The letter should fully set out the non-performance by your contracting partners, should list the efforts to obtain compliance, and should provide whatever window of time for “cure” that is called for in the contract.

Negotiating Payment of Costs

In general, as you go through the process, keep track of costs related to ending the contract and with respect to finding alternatives. Excess employee time, for example, can be a compensable part of any damage claim. As part of the termination letter, there should be a discussion of payment by the other non-performing contracting partner for any extra costs that your business has paid or will have to pay. Goals here can range from actually recovering costs to providing your business with “ammunition” to negotiate a settlement of the contract that avoids expensive litigation.

Contact San Diego Corporate Law

If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses including contract drafting and review. Mr. Leonard has been named “Best of the Bar” by the San Diego Business Journal for four years running and can be reached at (858) 483-9200 or via email.

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