Thursday, October 13, 2011

Terminating a contract that has no termination clause.

Under contract law performance is excused when all work contemplated by the agreement has been completed. It may be excused earlier by certain conditions existing. Two that are important in this discussion are:
1) Rescission (where the parties have agreed to stop it).
2) Lapse (where the contract term has lapsed).

If you do not have termination rights included in your agreement, the first thing to check is whether or not the agreement term has lapsed. If it has, the agreement does not need to be terminated, it has ended.

If it has not lapsed, you need to review the agreement looking for any firm commitments to purchase quantities and when liabilities accrue. Many agreements establish terms in the event there is an order or statement of work to be placed, but does not make firm commitments to purchase. Many agreements also have liabilities accrue only when orders are placed or when the supplier needs to make an investment or commitment. If commitments up to that date have been met, you may have no liability. If you do have liability you will need to negotiate a termination.

If you don't have firm commitments or liabilities, you can effectively terminate those types of agreements by simply stopping buying. With any old agreements you probably already have stopped buying anyway. If you want to clean out these old agreements that don’t have termination provisions and that you aren't using, the parties can mutually agree to rescind the agreement at any time. Most suppliers won't have a problem rescinding old agreements that aren't being used.

To rescind an agreement I would work with you lawyer to draft a rescission letter agreement.

These can be very simple. In the preamble paragraph you would describe both the agreement that you want to rescind and the reason why, such as the fact that there has been no business in a specific time. Second you would request that they agree to rescind the agreement as of a specific date. Third, you would establish that the rescission shall be without liability for either party for such rescission. Last you would have the rescission letter signed by individuals on both sides that have the authority to amend the agreement. As a later writing in time between the parties, the agreed letter to rescind the agreement without any liability for either party for such rescission ends the agreement.

The reason why you need to have a lawyer involved is so the letter is drafted in a way where you excuse the supplier of any liability for the rescission, but you don’t excuse them from liability that they would have on terms that survive the expiration or termination of the agreement for all the purchase that were made prior to the rescission.

The process is referred to by lawyers as "discharge by mutual assent"

In some jurisdiction such as England, you may also terminate a contract that has no term or termination clause by providing the other party with reasonable notice. In that situation you would need to have no firm commitments to the other party for purchase or delivery and the notice period could be also long as it would take the other party to reasonably find replacement business.

Want to learn more? The companion book "Negotiating Procurement Contracts - The Knowledge to Negotiate" is now available on A hotlink to
Is at the top of the post.

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