How to Terminate a Vendor Contract?

For business owners, time is often a precious commodity. Carefully reading vendor contracts do not often rank high on a business owner’s priority list.  Vendor contracts can be long and cumbersome and not something to glance at quickly. Alternatively, when vendor contracts are signed online, important terms may be overlooked if the business owner selects “I Agree to Terms and Conditions” rather than reading through important provisions. 

We have seen more business owners facing similar situations of being locked into long-term vendor contracts without the flexibility to terminate on reasonable terms. For example, business owners will often enter into a vendor contract with hopes and expectations that the relationship with the vendor will be productive and prosperous. When the vendor does not live up to the business owner’s expectation or a business owner finds a vendor that is a better fit, the business owner cannot end the relationship with the vendor without facing steep penalties or the vendor forces the business owner to uphold the contract.

For business owners facing this situation, we have identified a few tips to assist in reasonably terminating a contract.  Additionally, in looking forward to working with future vendors, we have identified provisions to review to prevent this situation.

1. Review the Vendor Contract’s Termination Provisions. Review the termination provisions in the vendor contract. If a business owner is locked into a long term contract without the ability to easily terminate upon 30 or 60 days notice, or the business owner is not satisfied with the vendor, the business owner may need to take the steps outlined below prior to terminating the contract.  Often, the exact course of termination may be specific to the termination provision in the contract, so it is important to understand your contract.

2. Document the Vendor’s Shortcomings. If a relationship with a vendor is not going well, the business owner should document the vendor’s shortcomings and notify the vendor, in writing, of these issues. Be clear in what the expectations are, what the vendor did and how the situation should be remedied. The vendor has the ability to remedy the situation and improve the relationship with the business owner. 

3. Give the Vendor Time to Remedy the Situation (if required). If the contract requires the vendor an opportunity to cure the situation before termination, the business owner should allow the vendor a reasonable time period for the vendor to remedy the issue based on the situation unless the vendor’s mistakes are materially harming the business.  If the issues materially harm the business, a business owner may resort to showing the vendor breached the contract and terminating immediately (See Step 4).  If the vendor has not remedied any issues after given a reasonable time period to fix the situation, the business owner should provide the vendor with written notice to terminate the contract immediately or within the time frame needed to transition to a new vendor.

4. Prove a Breach by Vendor. In some situations, a vendor’s actions or inactions materially harm a business and such actions or omissions cannot be remedied or cured by the vendor. If this is applicable, a business owner should notify the vendor in writing and possibly by phone or in person, depending on the relationship.  The business owner should clearly describe in writing to the vendor: (i) the vendor’s actions, (ii) the harm to the business and (iii) why the vendor cannot remedy the situation. Most reputable business (whether a vendor or not) will not want to continue such a relationship if both parties can tell this is not a good working relationship.

5. Negotiate. If a vendor insists on locking a business owner into a contract despite issues in the relationship, the business owner should negotiate with the vendor on how to exit or terminate the contract in a manner reasonable to both parties.  The business owner should have clear business reasons for terminating the contract that are clearly articulated. Alternatively, if termination is not an option, the business owner should consider other ways to ending or shortening the relationship such as (i) the vendor should significantly reduce the vendor’s fees for the remainder of the contract or (ii) the length of the contract is shortened or (iii) the vendor must provide addition products or services to the business at no cost. 

6. Send a Demand Letter. If no resolution is reached after documenting any issues with the vendor and trying to work out any issues through negotiation, a business owner may consider hiring an attorney draft a demand letter to demand that the contract be terminated.  While demand letters tend to escalate a situation, this may be the next viable option, short of litigation, for a business owner.

Planning Point of View.

In order to avoid a contentious termination with a vendor, business owners should review the termination provisions of a contract prior to signing such contract.  Often, a contract may seem great at the outset, but this feeling may not continue in a year.  In reviewing the contract, focus on when a business owner can terminate the contract and what it takes to do terminate. Next, negotiate with the vendor as much flexibility as possible.  For example, do not require a vendor an opportunity to cure or a reasonable time to remedy the situation. Instead, allow either party to terminate the contract upon a certain time period, 30, 60 or 90 days.