Terminating an agreement, when can you do that?

In addition to dissolution, there is also the possibility of termination, which does not require a breach of contract by the other party. When can a contract be terminated?

Introduction

Suppose: supplier X has concluded an agreement with contractor Y, under which X is obliged to supply products to Y for a certain price and under certain conditions. In this agreement, the parties have stipulated that these arrangements apply for the duration of four housing projects to be realized by Y.

After a year and a half, X is scratching his head and believes that the agreements are not as favorable after all as he initially thought. Two of the four housing projects have now been completed. Can X cancel the agreement? The answer is - perhaps surprisingly - "yes. This is explained (and, of course, somewhat qualified).

Lease agreement

The example outlined above involves a continuing performance contract. A continuing performance contract is one in which the parties have mutually committed themselves to continuous, recurring or successive performance. Examples include a rental agreement, employment agreement, operating agreement or distribution agreement.

In certain cases (such as a lease or employment contract), there are legal regulations on notice/termination. In many cases, however, there are not. In order to determine whether termination is possible in such cases, it is important to know whether the contract is for a definite or indefinite period.

Fixed-term agreement

In principle, a fixed-term contract cannot be terminated (prematurely). There are always exceptions (for example, based on unforeseen circumstances), but the basic principle is 'a deal is a deal'.

Note that if an agreement is entered into for (for example) one year, then in principle this agreement ends without notice being required after that year. However, often a provision is included providing for an extension after the expiration of the first year, subject to notice. In that case, it is important that the agreement is terminated (in a timely manner).

Open-ended agreement

It becomes interesting if a contract is concluded for an indefinite period of time that does not provide for a termination option. This is because a sound contract is in principle terminable.

Back to the case study. Why can supplier Y terminate its agreement with contractor X? Is there not a fixed-term contract since it is for the duration of the four housing projects? No, in this case, although the end of the contract is (globally) determined (after completion of the fourth housing project), it is not fixed or objectively determinable when in time (at what moment) the contract actually ends. In this case, therefore, it is a contract for an indefinite period of time that can (in principle) be terminated.

However, the requirements of reasonableness and fairness may entail that i) a weighty ground is required for termination, ii) a certain notice period must be given, or iii) the termination must be accompanied by (an offer to pay) damages. What counts as "reasonable" depends on the concrete circumstances of the case.

In conclusion

Whether a contract is terminable depends first and foremost on what the parties have agreed in this regard. If nothing has been agreed on terminability and the contract has been concluded for an indefinite period of time, then it is (in principle) terminable.

When in doubt, one would do well to test (or have tested) whether a contract has been (or will be) concluded for a definite or indefinite period. After all, the distinction is not always clear. Is the contract concluded for an "indefinite period of time" and do you want to prevent or limit the possibility of termination? This is possible, but write this down properly.