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Beware of Terminating Contracts With Certain Providers

Good practicesEntrepreneur

terminating contracts

When you look at all the expenses of your professional activity, it is very typical that you want to terminate certain contracts with some service providers. You probably don’t need them due to the drop in demand or because you consider it an extra expense that you can do without.

But before doing anything, you should take a good look at the date the contract ends. Otherwise, you could incur more expenses than you anticipate.

Risks of terminating contracts with certain providers

When a contract is terminated before it ends, your supplier can sue you to receive compensation for damages arising from the termination of the said contract if that’s not by mutual agreement. These damages could be:

  • for buying the material with which they were going to provide the service,
  • the expenses of the personnel they had hired to do it, and that if they are fired, they will in turn demand compensation, causing more expense;
  • or even those derived from benefits to other clients that they could not accept because it didn’t affect their contract with you.

Thus, the first thing you should try is to terminate the contract by mutual agreement, agreeing with the supplier on the indemnities or compensations that seem reasonable to both of you.

If there is no mutual agreement

The most typical thing is that the matter goes to court if you disagree. Usually, compensation is set at approximately 15% of the amounts that have remained unpaid or that will not be paid until the practical completion of the contract.

For example, suppose you had a contract until December 2022, and you terminate it now in May 2022. In that case, you will have to pay 15% of the amounts agreed upon it until December 2022.

However, the less time is left for the practical completion of the contract, the judges can rule a higher percentage, such as 30% or more.

You can do something else…

There is a solution to save yourself all these unforeseen expenses or minimize them as much as possible. 

When you sign a contract with a provider or service provider for a predetermined period of time, you can include a clause whereby you can dispense with their services by notifying them within a specific time.

But keep in mind that you have to meet this deadline because otherwise, you will have to pay compensation anyway. 

The advantage is that you would only have to pay it for the amounts agreed to pay during the missed notice period.

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