Breaches of contracts can cost companies large sums and serious delays, doing long-term damage to your company’s performance. That’s why good contracts always define what a breach of contract is and how it can be remedied—including when contract termination is available as a solution. They frequently also detail a forum for dispute resolution and the choice of law.
For these kinds of clauses to be enforceable, though, they need to be well-written, which is why you want to ensure that your company’s interests are represented by an experienced contracts lawyer. Priori can connect you with a top contracts lawyer to help you draft favorable contract termination provisions and a top litigator in case of breach.
When Can I Terminate a Contract for a Breach?
When—and how—you can terminate a contract for a breach depends on the way that each contract is drafted. Even when not specified, though, the U.S. Uniform Commercial Code provides you the opportunity to terminate a contract due to a fundamental breach—a failure to fulfill the terms of the contract so significant that it undermines the entire contract. A contract is based on the idea that parties must fulfill their agreed-upon duties in good faith, whether delivering goods, sending payment, or doing whatever is written in the contract. If that does not happen, the contract is no use and can be terminated. It’s important to note, however, that breach conditions accepted will vary from state to state unless specified within the contract.
Contract Termination Provisions
While a fundamental breach is obviously cause to terminate the contract and seek damages, most companies don’t want to be stuck depending on the court to establish what a fundamental breach may be. That’s why contracts have termination clauses and provisions that establish what kind of breach (or other situation) is severe enough to terminate the contract, as well as the steps and procedures that must be followed in order to do so. These provisions are vital to include and must be well-negotiated in order to protect you from unnecessary termination by the other party, while still establishing your right to terminate in certain situations.
Material Breach of Contract
Most contracts only allow termination in the case of a material breach. A material breach is defined as a significant failure to carry out the terms of the contract. There are several elements you can use to determine whether or not a breach is material:
- the extent to which the breach deprives you of a reasonably expected benefit of the contract (such as profit or ability to make a manufacturing deadline, etc.);
- the extent to which you can be adequately compensated for the deprived benefit;
- the extent to which the non-performing party will suffer forfeiture;
- the likelihood that the non-performing party will remedy the breach; and
- the extent to which the non-performing party followed standards of good faith and fair dealing.
When a material breach occurs, you have the option of compelling performance, collecting damages, or even terminating the contract if it is so written.
Almost all contracts require you to notify the other party within a certain timeframe that you are terminating the contract due to a breach. You do this by sending a termination letter. This termination letter must include the date of effect, the reason for termination (such as an explanation of the material breach), a description of the remedies attempted to be made to resolve the situation, and any other information required in the termination clause.
Depending on your specific situation, the cost of handling a breach of contract or termination can vary dramatically. Typically, the hourly rate for lawyers begins around $175 per hour and can range upward to more than $450 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and free price quote from one of our lawyers.
If I know that the other party is planning on breaching our contract can I terminate the contract before the breach has occurred?
Sometimes. If you have received written notice that the other party is intending on doing some action that could be considered a breach of contract, this is considered an anticipatory breach, and you have the right to take action as though the breach had already occurred. Simply suspecting that a breach will occur, however, is not enough.
Can I sue for damages in addition to terminating the contract after a breach?
Depending on the situation, you can often recover restitution for costs incurred due to the other party’s breach, and you may be able to sue for additional damages in the event of a fundamental breach. If you believe you are due damages to remedy a breach of contract, you should discuss the unique situation in question with a contract lawyer to determine if you have a case and how you can proceed with your suit.