How do we get rid of each other? The basics for termination

In the practice of contract law, disputes over the termination of agreements occur regularly. Be it a lease agreement, a cooperation agreement or a commercial contract between companies. It often turns out that the agreements on the manner of termination and the conditions under which it can occur have not been adequately recorded. Unfortunately, parties often do not realize this until it is too late. Let this be your reminder to properly record the termination of agreements. We explain the basics for termination in this article.

Termination vs. dissolution

A common misconception is that termination and dissolution of a contract mean the same thing. In a legal sense, however, there is a substantial difference.

Termination usually occurs under a contractual or statutory provision. For example, consider an agreement that ends by operation of law after a certain term, or a situation in which a party validly terminates an agreement according to the agreed terms. Thus, the agreement ends as of a certain point in time where, in principle, the effects of that agreement continue until that point in time.

Dissolution, on the other hand, is an entirely different story. Dissolution obliges the parties to undo the performance already received. So everything must be reversed to the moment of entering into the agreement. Because dissolution is so drastic, you can also only invoke it if something has really gone wrong. One of the parties must have failed to fulfill the obligation. This gives the other party the possibility to terminate the contract unilaterally through dissolution. This is regulated in article 6:265 Civil Code ("BW"). As stated above, dissolution cannot be done just like that; the party that proceeds to dissolve the contract must be able to prove that there has been an attributable shortcoming and there must be a default. In most cases, this default only takes effect once the other party has been given a reasonable period of time to perform. Because dissolution has far-reaching consequences, care is essential.

Importance of appointments

In practice, the legal rules on termination and dissolution of contracts leave much room for interpretation and modification. For example, parties can stipulate that dissolution is only possible if one of the parties "seriously fails" to fulfill its obligations. Thus, although the law provides a general framework, based on the freedom of contract, parties have a broad possibility to regulate the termination of the contract. This is precisely why it is very important that the parties themselves include clear and detailed provisions on the (conditions for) termination.

It is also advisable to keep a close eye on the circumstances under which rescission is allowed. In purchase agreements we often see that dissolution is allowed without notice of default. This creates the possibility of termination without offering you a reasonable time for performance. These are the provisions you easily read over, but which can have major (financial) consequences.

It is also essential to establish what is considered a valid ground for termination, whether a notice period should be used and - if so - how long that period should last. Also consider the consequences of termination. For example, does early termination have financial consequences? When such clauses are missing, this is often a source of uncertainty and conflict between the parties and often results in going to court.

Judicial review

Courts test whether the parties have complied with the agreements they made in the agreement regarding termination or dissolution. Judges look not only at the literal text of the agreement, but also at the circumstances of the case and to what extent the parties have fulfilled their obligations.

When a party decides to terminate or rescind a contract without cause, it is usually subject to critical scrutiny. This may result in the termination or dissolution not being deemed legally valid. Judicial review is always an always a risk and moreover, proceedings are time consuming and very costly. Therefore, you would do well to consider the termination provisions when entering into agreements to avoid later conflicts.

Practical advice

Anyone who concludes an agreement would therefore do well to pay attention not only to the arrangements that will apply as long as the cooperation runs smoothly, but also to consider what should happen when the cooperation comes to an end. Situations in which interests diverge and trust comes under pressure require clear and well thought-out provisions. By carefully describing in advance under what circumstances and in what manner an agreement may be terminated or dissolved, parties can avoid a lot of ambiguity, misunderstandings and going to court.

Conclusion

You now know the difference between regular termination and rescission of an agreement. You also know what to look for in termination provisions. Insufficient attention to this can lead to lack of clarity, disputes and litigation. By paying explicit attention to the conditions, terms and consequences of termination when entering into agreements, you can contract with peace of mind.

So how do we get rid of each other? With well-thought-out termination provisions!