Can companies terminate contracts simply at their convenience?

| Feb 4, 2021 | Business Litigation |

As you enter into a contract with a new business partner in California, your thoughts inevitably turn to its completion. You may begin to make plans on how your company will use the resources the contract brings into your business, assuming that those resources all but guaranteed. This assumption comes from your confidence that as long as your company fulfills its contractual terms, your partner cannot back away from your agreement.

Yet a legal principle exists known as “termination for convenience” which allows companies to end contractual agreements when they believe it to be in their best interest to do so (eliminating the need to have cause). It is important that you (as a business owner or executive) understand when a partner can exercise this benefit (and what you can do in response).

Who can cite termination for convenience?

According to the Congressional Research Service, federal, state and local government agencies are statutorily endowed with the right to terminate business contracts for their convenience. Contracts with such partners are often coveted (due to their stability compared to private entities); the risk of them walking away from a contract with you at any time is a risk many simply cite as the cost of doing business with them.

Private companies, on the other hand, can only earn the right to terminate a contract for their convenience through concession. You typically have to afford them that right privilege in the contract itself (a concession you may make if it results in securing the business of a renowned partner).

Your recourse following a premature contract termination

What should you do if a partner exercises their right to termination for convenience? You must provide them with a termination proposal detailing services rendered and any expenses still owed (along with invoices or a suggested repayment schedule).

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