Pitfalls in terminating contracts…

Mary was a landlord for a number of properties (both residential and commercial) and had her fair share of difficult tenants. One tenant, a small fish and chip operator called Dave, proved to be especially difficult in a variety of areas, including timely rent payments.

On one occasion, Dave was nearly 2 weeks behind in the rent. Frustrated, Mary went to the shop after hours, changed the locks, and posted a notice on the door saying the lease was terminated.

The terms of the lease permitted Mary to do this – but only if payment was 14 days in arrears.  Unfortunately the rent was in arrears by only 13 days when Mary terminated the lease.

Mary had inadvertently done something called “repudiating” the lease, by unlawfully excluding Dave from the premises.

If Mary had cancelled the lease in accordance with its terms, she could have successfully got rid of a bad tenant. Instead, by repudiating the lease, Mary opened the door for Dave to make a claim against her. If he is successful, Mary could be ordered to pay Dave an award of damages.

As a rule, a contract will need to be terminated in accordance with its terms. Drafting the contract properly at the outset is just as important as how the actual termination is conducted.

Here are a few drafting tips that can be used to prevent costly headaches.

1. Notice Provision – When drafting a contract, ensure that the wording is as clear and precise as possible.  Set out a specific notice period, so it is clear how much notice needs to be given.  If there is any ambiguity in the terms of the contract, the courts will construe that ambiguity against the party seeking to cancel the contract.
2. Correct Parties – It is surprisingly common for incorrect parties to be listed on a contract. For example, where the contract is with a family trust or company, the agreement should be signed by the trustees or directors, not someone in their personal capacity.  Having the wrong parties recorded on the agreement may make termination more difficult.
3. Full and Final – When entering the contract, ensure that the document which is signed is the full and final contract.  Make sure that any variations are recorded in writing and signed by each party.  Ensure that you are fully aware of any amendments or notations and their implications. A variation to the contract might have changed termination requirements.
4. Indemnity – When drafting a contract, ensure that both parties agree to indemnify each other. Put simply this means that the parties to the contract will not be left out of pocket if they suffer any losses as a result of the other party not fulfilling the contract.

The Actual Termination

How you go about terminating a contact will depend on the particular circumstances that make the termination necessary.  Always remember however, that (irrespective of the actions of the other party) you should always follow due process.

When cancelling a contract, remember to be aware of, and adhere to, the terms of the termination provisions.  Awareness means that you know what the notice requirements are (for instance, whether the period is working days or business days and whether the notice needs to be given in writing or orally).  Adherence to the terms means that you actually conduct yourself in a way that is consistent with the terms of the contract.

The process of cancelling a contract is as important as the process to enter into one!  Unfortunately people forget this, and make what can be costly mistakes. These tips will help ensure that you when terminating a contract your actions don’t come back to bite you down the track.