When it is so easy to enter contracts with electronic signatures and clickwrap agreements, it’s a common mistake to think that you can exit those contracts as easily as you enter them. Many small businesses fall into difficult situations because of their contracts but don’t have a way out. While there may be some limited options, it can be challenging to successfully get out of a signed contract. In this article, we look at why that is and what the options are for small businesses looking to exit a contract.
How do you terminate a contract?
You cannot always get out of a contract once signed, but there are three main exceptions:
- If you have grounds under expressly written termination rights written in the contract;
- If there are specific legal grounds to set the contract aside
- If there are Australian Consumer Law grounds to terminate.
Express termination rights
A termination clause sets out the circumstances in which you or another party may exit the contract. Most contracts have an exclusion clause that allows termination if a party materially breaches a contract term. Others may be more flexible and allow termination by notice.
Specific legal grounds for termination
There are sometimes legal grounds (such as contract frustration, undue influence, duress, misrepresentation) or Australian Consumer Law grounds to terminate, but these tend to be limited in scope or challenging and likely costly to obtain advice for and to argue. It is always better to rely on expressly written termination rights.
Australian Consumer Law grounds for termination
There may be grounds for termination if the supplier of goods/services did not abide by consumer guarantees under the Australian Consumer Law. There are standards that goods and services must meet, and these legally cannot be contracted out of. Read more about consumer guarantees in our article here.
If a supplier of goods fails to meet a guarantee and cannot remedy it, you may be able to terminate the contract for the supply of those goods. This also terminates any contract for the supply of services that is connected to the supply of goods.
For example, let’s say you have a contract with a supplier to buy fabric from them, as well as another contract that arranges delivery of that fabric to you. If the fabric fails to meet a consumer guarantee and cannot be remedied, then you may have grounds to terminate the contract for the fabric, as well as the delivery contract. This also works in reverse; if the delivery fails to meet a consumer guarantee, you may be able to terminate the contract, but you will also be taken to have rejected the fabric and may need to return it.
What to do?
Before assuming you can walk away, it’s important to carefully review the contract terms and get legal advice. Attempting to exit a contract without proper grounds could expose you to claims for breach and financial liability.
Therefore, to manage difficult situations in a contract, it is best to negotiate your termination rights before you sign:
- Be careful with the meaning of termination clauses. When reading a contract, ask yourself: In what circumstances can I exit this contract? For example, if you can only terminate for material breach, what is considered a ‘material’ breach? Does it need more clarification?
- Think about what the consequences will be for you if you can’t terminate the contract when you want to. What are the financial and non-financial impacts of not being able to terminate? Would you have to keep paying for or maintaining something that will not be able to benefit you?
- Never sign a contract without first considering when you want it to end and what you can do if something doesn’t go according to plan in the contract, and negotiating termination clauses in or considering whether you want to enter the contract in the first place.
- Consider barriers to termination, such as having to pay out the full term of a fixed term contract or any other potential costs of ending a contract early. For example, if you are subscribing to something, can you terminate at any time without penalty or do you have to pay out the whole term?
Termination clauses are essential to protect your small business if things go wrong. Therefore, it’s crucial to review the contract terms and get legal advice to avoid unforeseen costs or burdens if you can’t exit a contract. For help with your small business contracts, contact us for a free, no-obligation chat.
