Suppose that your company has a falling out with a service provider. Angry words are exchanged, including words to the effect that your company will no longer pay for their *ahem* suboptimal service. You hang up the phone, and that’s that. You find a new service provider, and go on your merry way.
All is well. Right?
Sure… until six months later, when the former service provider sues you for breach of contract. The lawsuit claims that you failed to terminate the contract in the manner required by the contract, and then you failed to pay the monthly fee. Therefore you are in breach, and you owe the entire outstanding amount of the contract. Oh, and the service provider’s attorney’s fees too.
How can that be? You clearly terminated the contract. Right?
Wrong. In many cases, at least.
It is common for commercial contracts to contain very specific procedures for termination. For example, the contract may require that you give written notice, sent by certified mail, to the corporate headquarters, the local branch, and the company’s attorneys, plus a faxed copy to each of the above, a carrier pigeon to the CEO’s summer villa, and a public notice in the local newspaper. OK, I may be exaggerating… but not by much. I have seen contracts that impose truly burdensome termination procedures that are obviously intended to make termination as difficult as possible, and to create a trap for the unwary.
And those are just “no-cause” termination clauses – assuming the contract allows for termination before the end of the term of the contract at all. Most commercial contracts also include additional, very specific procedures to notify the other party if you believe it has breached the contract. The contract will likely require written notice specifically stating the alleged breach, and also obligate you to give the other party a certain amount of time (such as 10 or 30 days) to cure the breach. Termination is only allowed if the other party fails to make it right within the allowed time.
Failure to correctly comply with the contract’s termination provisions, whether for early “no cause” termination or for breach, may mean that you or your company is still bound by the contract. Commercial contracts also usually contain a clause that states that, if a party sues over the contract, the prevailing party gets its attorneys’ fees. That can provide an incentive to litigate a dispute, especially if it is indisputable that you did not “correctly” terminate the agreement because you did not follow the procedures in the contract. The result could be a nasty and expensive surprise lawsuit for breach of contract, when you thought that everyone had agreed to go their separate ways.
This does not just happen to small mom-and-pop businesses. I have seen this happen to businesses with monthly revenue in the millions. What often seems to happen is the people directly involved feel that they have come to an oral agreement or understanding with their counterpart at the other company, and that everything is wrapped up. Or, they simply stop communicating with the other party, because of the bad blood. Either can be a costly mistake.
Whenever you are having a problem with another company, vendor, or service provider with which you have a contract, make sure you carefully read the contract’s provisions for termination and notice of breach. You should consult your attorney before you terminate the contract.
This type of situation is a classic example where an ounce of prevention is worth a pound of cure. A small amount of work up-front can save tens or even hundreds of thousands of dollars in litigation costs or attorneys’ fees later.