Picture this scenario:
ABCosmo, a small business in New Jersey, has just entered into an ongoing agreement with a security service provider, JustSafe Solutions, but they immediately realize they will not be satisfied with the quality of services.
So, the owner of ABCosmo decides to cancel the contract and find another provider.
You’ve probably been in similar situations, whether trying to cancel dodgy contracts with door-to-door salespeople or ending your gym membership after realizing the facility is a death trap.
Knowing the ins and outs of canceling a contract will be a massive boost for you in any of these scenarios.
This article will explain everything you need to know about canceling an agreement legally without incurring fines and legal action.
- Canceling a contract results in ending an agreement with another entity.
- There are several ways of canceling a contract, including by mutual or prior agreement, by completion, or by rescission.
- Failure to cancel an agreement legally will cost you or your business money and possibly tarnish your reputation.
- In certain situations, you can cancel a contract by appealing to the overarching authority and providing clear evidence of breach by the other party.
What is contract cancellation?
Contract cancellation is a process where one party ends a legally binding agreement.
This involves notifying the other party to the agreement that you no longer wish to participate in the agreement.
For instance, if the owner of ABCosmo wants to cease cooperation with JustSafe Solutions in order to protect their business interests, they could hand in a cancellation notice.
Contract cancellation vs. termination
People use “termination” and “cancellation” interchangeably when talking about ending contracts. In truth, they have similar meanings and interpretations in legal parlance.
But there is one slight difference.
When you terminate an agreement, both parties mutually understand that the relationship is not working.
So one or both parties decide to end the agreement either prematurely or at the end of the running term.
Alternatively — as ABCosmos intends to do with JustSafe Solutions — one party wants to cancel the agreement in its entirety, voiding it as if the contract had never happened.
In both instances, this is often a result of a breach of contract or other reasons to be discussed later.
Other synonyms for cancellation you can find in legal documents include “rescission,” “cessation,” or “discharge of contract.”
What are the conditions for canceling a contract?
Businesses, startups, and individuals cancel contracts because of convenience or blatant breaches of the agreement. Let’s discuss other reasons people opt for contract rescission.
- One of the parties to the agreement is unable or unwilling to perform their contractual obligations intentionally or due to unforeseen circumstances.
- The running contract is no longer favorable to one of the parties involved. Maybe one party can no longer afford services due to price hikes or bankruptcy. So canceling the contract will help them save money.
- The other entity is physically unable to perform the task due to injuries or death. For instance, an athlete gets a career-ending injury.
- The services or products provided by one of the entrants to the agreements don’t meet the expected quality. The mugs you ordered as part of the company swag have the wrong logo on them.
- A merger occurs between two companies, in which the parent company’s agreement now supersedes all existing agreements.
- The law changes, rendering parts of the agreement non-enforceable or invalid. For instance, you used to import and supply Huawei phones from China, but the government has banned their products.
Ways to cancel a contract legally
As mentioned earlier, there are several reasons to cancel a contract — or maybe you just don’t like the person you are dealing with.
Whatever your reason, here are ways to end an agreement legally.
1. By mutual agreement
Sometimes, terminating a contract could be as easy as a few phone calls or email exchanges.
This process becomes easier when both parties realize the relationship is more detrimental than beneficial to all involved.
For example, sports teams can decide to end a contract with a player who just doesn’t want to be there due to personal reasons.
Sign on the dotted line, shake hands, and everybody goes their way.
2. By prior agreement
A properly-drafted contract always contains a clause outlining the conditions for cancellation.
This part of the contract gives you express cancellation rights.
So once an event or action triggers this clause, one of the parties can easily end the contract without any legal stress.
Cancelation clauses are usually present in rent and lease agreements.
3. By completion
Every fixed-term contract has an expiration date, after which the agreement automatically cancels itself.
If not, you’ll continue paying for services you don’t need when the contract rolls over to the next period.
4. By rescission
Not to be confused with “recession,” rescission gives you the right to rescind an agreement due to the following reasons:
- The other entity lied about the conditions of the product or service.
- Executing the agreement involves illegal activity or an unsupervised minor.
- The contract is subject to a vitiating factor, which involves someone signing a contract under duress or other unconscionable scenarios.
In such cases, you need to send the other party a rescission notice with a detailed explanation of why you are ending the cooperation.
You might also need to get a court order. Just prepare for legal pushback.
5. By the presiding authority
The governing body with jurisdiction can decide whether to annul the contract, as the Court of Arbitration for Sport did in Jean Phillippe Mendy v. Baniyas FSC.
In high-level disputes, the presiding court can take over cancellation proceedings to make sure both parties are held to the letter of the signed agreement under state or federal law.
6. By using the “cooling-off” period rule
According to the Federal Trade Commission (FTC), the cooling-off period refers to a 3-day time limit during which buyers can cancel sales agreements without legal repercussions.
This issue is a consumer protection initiative to save people from scams and malicious marketing.
So, if you sign a contract with a door-to-door salesperson on Friday and buyer’s remorse sets in the next day, you can cancel the contract as long as its value exceeds $25.
The sales agreement should have also been conducted away from the seller’s normal place of business or over the phone.
Some transactions covered by the cooling-off rule include:
- Mortgage loan refinancing
- Home equity loans
- Home improvement contracts
- Door-to-door sales
- Credit repair clinics
However, the cooling-off rule does not apply to online sales contracts, real estate, insurance, legal services, securities, or warranties.
How to cancel a contract
Now that we’ve covered several ways to cancel a contract, let’s go through a step-by-step action plan to help you cancel any contract.
- Go through the cancellation clause in the contract.
- If there is no cancellation clause, reach out to the other party to negotiate conditions for mutual cancellation. Send a contract cancellation form—usually a written notice delivered via certified mail— to tell them why you want to end the cooperation.
- If they don’t agree to mutually end the contract, check if you qualify for the cooling-off period and other time-period cancellations.
- If the period has elapsed, you can check if the contract breaks any laws.
- If everything is legal and enforceable, wait for the contract term to elapse to automatically end the agreement.
- If the time frame for expiration is too long, involve a law firm to get the contract canceled.
Time-period cancellations refer to the number of business days before you can cancel any contract. The law varies in different states, but some are federal laws.
Here are some common time-period cancellations:
- 3 days — for repairs, dating services, weight loss programs, timeshares, and door-to-door sales above $25.
- 5 days — contracts with health clubs under $1500.
- 7 days — for personal emergency units outside the central alarm system.
- 10 days — for some insurance policies.
- 30 days — for home appliances and used motor vehicles.
- 60 days — for new motor vehicles.
- Indefinite — for property insurance.
Consult your lawyer to see which of these cancellations you are eligible for.
What happens if you don’t cancel a contract legally?
If you decide to walk away from a legally-binding contract without sending a notice of cancellation, you are opening a legal can of worms that will consume your time, funds, and reputation.
For starters, you will be liable for a breach of contract which probably attracts lawsuits that will end in fines and damages.
The breach could be actual or anticipatory: an actual breach means that you refused to fulfill the terms of the contract, while an anticipatory breach means that you warned the party in advance.
Also, failing to legally cancel a running agreement with service providers means that you’ll have to pay them for services provided, whether you want it or not.
This means the charges will continue going to your credit card until contract termination.
Most importantly, “flaking” on an agreement (even if that’s not the case but it’s perceived as such) may give you and your business a reputation of being unreliable and/or unprofessional — which will come back to haunt you in future dealings.
Cancel your contracts seamlessly with PandaDoc
Canceling a contract legally absolves you of all legal obligations to the other party of the agreement.
It enables people and businesses to end professional relationships without resorting to court orders and expensive lawsuits.
With a tool like PandaDoc, you can review agreements to make sure they have provisions for cancellation.
You can also manage the entire contract lifecycle from drafting to cancellation.
Apart from cancellations, you can also use PandaDoc’s contract management solution to handle all your legal documents.
You can also get templates for different types of contracts.
And most importantly, you can use PandaDoc to sign and negotiate service contracts electronically using approval workflows and click-wrap tools.
Frequently asked questions:
Yes, you can cancel a contract before it starts, provided it falls within the buffer time limit called the cooling-off period. This usually lasts three days and applies to agreements involving door-to-door sales, timeshares, and home equity loans.
Yes, you can cancel a contract after signing if the terms are no longer favorable and you’re within your legal rights to do so. You can also cancel a contract if the other party is physically incapable of fulfilling their obligations due to injury or permanent incapacitation. If the other party is doing something illegal, seek legal help to explore your options under federal or state law.
In some cases, you can cancel a contract without needing a lawyer. In others, yes, you need legal advice when terminating a contract. These experts will help you determine if you have the legal right to end the agreement within the cancellation period.
To cancel a contract without penalty, you need to send a written cancellation notice to the other party within a certain notification period. If the other entity refuses to honor the cancellation notice, you can take them to court or the governing authority.