Terminating contracts for convenience

On Behalf of | Jan 27, 2021 | Business & Commercial |

Business contracts are often viewed as a barometer of a company’s general health. Provided a business in Alabama has contracts in place, it enjoys a certain sense of security due to having services to perform (and revenue coming in). The security comes from the assumption that as long as the business fulfills its contractual terms, its partner cannot end their agreement.

Yet is that truly the case? A legal principle exists known as “termination for convenience” that allows companies to end contracts prematurely simply when it believes it to be in its best interest to do so. Knowing when a partner can lawfully exercise this right may help companies optimize what they might recover should such a situation arise.

When can companies terminate contracts for their convenience?

According to the Congressional Research Service, government agencies automatically have the right to end contracts for their convenience. This is not a benefit that a partner must first concede in order for such an agency to invoke this privilege. The same does not hold true for private companies. Such a right is only available to them if their partner agrees to offer it during contract negotiations.

What can a company recover in such a case?

The American Bar Association states that a company whose partner ends their agreement for the partner’s convenience must submit a termination proposal to the former partner within one year of that company terminating the contract. Such a proposal should outline what they expect in terms of compensation. The law requires the company that ends the agreement to pay for any services already rendered as well as any costs associated with ending the agreement early. Damages for breach of contract are only an option if the aggrieved former partner proves that the other company initially negotiated the contract in bad faith.