Prepare for it right from the very beginning
Most legal systems respect the right to engage in and withdraw from contractual relationships of contracting parties. Therefore, regarding contract termination, the express terms agreed by the parties take precedence over implied terms. The implied terms created by statutes and case laws only apply in the absence of express terms. It would be a good choice if you had a termination clause in place.
The termination clause should have the following contents:
- When is a party entitled to terminate the contract? This content is very important, since termination without any justification is deemed as a breach of contract which may causes the terminating party to pay damages to the other. If there is no presence of termination clause, the contracting parties are only entitled to legally terminate the contract in case of fundamental breaches or anticipatory breaches, which vary case by case. When drafting the contract, you should list the breaches that can lead to termination or make reference to relevant appendices.
- Will the breaching party be given the second chance? Switching an important supplier/partner/buyer can disrupt your supply chain seriously. Termination upon single breach is not a good idea. Instead, both parties can help each other by finding the root causes and try to rectify the situation. This option will give you some time to qualify new supplier, which can be employed if the current one continues to disappoint you.
- How will the termination procedure proceed? Would you (or they) accept an informal termination notice via phone or email? Or will you only accept the notice in the right form, with signature of the right representative? If your clause is silent on this matter, the termination procedure can frustrate both parties.
- What are the consequences of termination? In contractual law, contract termination is prospective, which means the future obligations no longer bind the contracting parties, except the clauses on jurisdiction and dispute settlement. However, contract termination gives the rise to restitution, or the obligation to return anything that have been received unjustly. For example, A firm of accountants agrees to lease a computerised accounts system, which requires a particular kind of computer. The lessor supplies the hardware but completely fails to supply the software. The accountants have not yet paid anything under the contract. They terminate for fundamental non-performance. They should not, however, be allowed to keep the hardware. But there are things that are impossible to be returned (such as consumables, works or services). So the contract should specify what will be restituted, what will not be and how to pay the restitution.
When a well-drafted contract is in place, you still have to manage the performance of contract. Any non-performance or breach must be documented so that you have the firm evidence. However, the performance management should not be too onerous that the supplier feels stressful or overwhelmed. Even the supplier is performing poorly, the procurement should still conform with due diligence as written in the contract.