Terminating a contract: what are your rights?

For continuing performance contracts, termination plays a major role. Unlike dissolution, with termination the contract is ended for the future. Reasonableness and fairness are often decisive in determining whether and when termination is possible.

What is termination?

Termination is the unilateral ending of a contract for the future. This in contrast to dissolution, where the contract ends retroactively.

Characteristics of termination:

• ✓ contract ends for the future;
• ✓ no retroactive effect;
• ✓ often for continuing performance contracts;
• ✓ notice period is often applicable;
• ✓ must be done in writing.

When can you terminate?

Whether you can terminate a contract depends on the type of agreement and the contractual arrangements. Some contracts are for a fixed term, others for an indefinite term.

Termination options:

• ✓ usually possible for indefinite term agreements;
• ✓ often not simply possible for fixed term;
• ✓ contractual termination clause gives right to terminate;
• ✓ termination due to unforeseen circumstances;
• ✓ termination based on urgent reasons.

Notice period and conditions

If termination is possible, you usually must observe a notice period. This can be contractually established or arise from the law.

Points of attention for notice period:

• ✓ contractually established period takes precedence;
• ✓ statutory period applies in absence of agreement;
• ✓ reasonable period required based on reasonableness and fairness;
• ✓ termination against correct date (often end of month/quarter/year);
• ✓ written termination is mandatory.

Termination of fixed-term agreements

Fixed-term agreements cannot in principle be terminated early, unless this is expressly agreed.

Exceptions to main rule:

• ✓ contractual termination clause for fixed term;
• ✓ termination due to unforeseen circumstances;
• ✓ termination based on urgent reason;
• ✓ mutual consent to termination;
• ✓ judicial dissolution in exceptional cases.

Reasonableness and fairness

Even if no explicit termination option has been agreed, termination may sometimes still be possible based on reasonableness and fairness. This strongly depends on the circumstances of the case.

Factors that are considered:

• ✓ duration of the agreement;
• ✓ interests of both parties;
• ✓ foreseeable damage upon termination;
• ✓ behavior of parties during execution;
• ✓ any changed circumstances.

Consequences of incorrect termination

Termination in an incorrect manner or without valid reason can lead to liability for damages. You may be required to still fulfill the contract or pay compensation.

Risks of incorrect termination:

• ✓ contract continues to run;
• ✓ compensation to other party;
• ✓ payment of contractual penalty;
• ✓ reputational damage;
• ✓ legal costs in judicial procedure.