Contract termination is a term that can come across as a negative thing.
But the reality is that being able to terminate a legal document is a valuable and necessary right. And many times, terminating a contract is amicable for both parties.
Common reasons for terminating a contract
There are many reasons why one or both agreeing parties may wish to terminate a legal contract.
Some common termination reasons that apply to contract law include the following:
1. Impossibility of performance
Sometimes, it’s impossible for either one or both parties to fulfill the required performance of a contract.
Supervening circumstances — those which are outside of the control of either party — can render the performance impossible if they occur after a contract has been signed.
For example, in real estate, an intent to buy is agreed upon and legally binding.
However, let’s say a fire burns the house down before the deal closes.
It would now be impossible for the seller to perform and meet the obligations of the contract.
2. Illegal to perform
Similar to “impossibility of performance” in that termination is due to unforeseen circumstances that occur after a contract has been made.
However, in this case, a law would have been passed that effectively makes the contract illegal.
For instance, if alcohol were to be banned once again, breweries and distributors would be able to terminate any contracts with buyers for future products.
3. Fraud, misrepresentation, or mistake
When a contract has been brought into “consideration.” it’s interpreted that an agreement has been made between all parties involved.
However, if any parties lack the correct information during negotiations, the contract is liable to be voided.
For example, if a business contract was signed with misrepresented financial information in part of the contract, it would legally be terminated under common law.
4. Agreed-upon clauses
When a contract is drawn up, either party may wish to insert termination clauses. These terms of the contract clearly define if and when the contract may be terminated.
Once the contract has been signed, these clauses are enforceable for the duration of the agreement.
Termination clauses are similar to contract disclaimers in that they can be written to protect a party from an undesired outcome.
A common termination clause involves at-will employment in the United States.
Effectively, this means that an employer can send a written termination letter to employees at any time and without cause.
5. Breach of contract
Both parties are expected to perform according to all contractual obligations.
Non-performance from either party is a violation of the terms and a breach of the contract.
This includes any circumstance in which the breaching party behaves in a way that prevents the other from fulfilling its obligations.
6. Mutual agreement of separation
Both parties are willing to end the relationship.
In these cases, the contract is terminated due to negotiated and agreed-upon terms. This type of contract cancellation is commonly used by employers.
In a mutual separation agreement work termination, an employer and employee agree to part ways amicably.
Conditions of the agreement may include clauses that prevent future legal recourse for the employer and any benefits packages awarded in return.
Cancellation vs. termination of contracts
While effectively initiating the same action, “cancellation” and “termination” have slightly different legal meanings. In legal vocabulary, cancellation is known as rescission.
This term applies to the cancellation of a contract due to fraud, misrepresentation, mistake, duress, or breach of contract.
With rescission, the contract is voided, but the canceling party still has the right to be remedied for the termination of the contract.
This cancellation type voids the contract retroactively from the beginning as if the agreement had never been made.
When a contract is “terminated,” the contract is ended by mutual agreement.
With contract termination, both parties retain the validity of the contract prior to its end date or expiration.
Tips on how to terminate a contract
It’s important to know how to terminate a contract, and there are several things to do or consider when you do it, including:
1. Open a negotiation
If you’re interested in termination, it’s often best to practice informing the other party.
In this way, you can attempt to negotiate an amicable solution for a cancellation. This includes options like paying a cancellation fee or returning goods.
Negotiation is one of the best solutions to avoid lengthy and costly legal procedures that accompany contract disputes. It also keeps the door open for future business with the negotiating party.
2. Check for termination clauses
Always inspect your contract scrupulously before signing.
With that being said, should you desire to exit a contract, it’s good advice to re-examine the language for any termination clauses.
Typically, any written agreement will include conditions to be met, such as stating the termination in writing and/or associated fees.
3. Find and prove a breach of contract
Any breach of contract by the other party is grounds for termination.
You’ll need to work with your legal counsel or law firm to ensure a breach has occurred as it relates to the obligations defined in the contract.
4. Assert contractual impracticability
If either the other party or a force majeure has made it impossible or impractical for you to perform, you likely have the right to terminate a contract.
These include events like earthquakes, fires, or political upheavals.
5. Immediately provide termination notices
When you’ve decided to end a contract, you must provide a termination notice as soon as possible.
While it’s legal to give notice orally, it’s best practice to give written notice of cancellation.
And many contracts will outline conditions of how to give notice of termination.
It’s crucial to get contract termination right
Contract termination is for the protection of all of us when doing business.
It gives you a way out when conditions are impossible and lets you legally recover damages when applicable.
But contract termination is also highly complex at times.
Whether due to a breach of contract or a mutual agreement, you need to get contract termination right on the first try.
Refer to contract lawyers for guidance, and use the best tools available to ensure an accurate and streamlined contract termination process.
Frequently asked questions
This depends on the attached conditions and the reason for termination.
When applicable, if you can prove the termination isn’t your fault, you may suffer little to no consequences.
After a contract is terminated, you may be due or liable for monetary damages, including court-ruled punitive damages.
Or the offending party may be required to fulfill restitution to the damaged party.
This depends on the circumstances, which may include:
- Mutual agreement by both parties
- Triggering of a termination clause
- A breach of contract or fraud
- It’s impossible or impractical for either party to perform
- The length of the contract or expiration date has passed
In these cases, the contract is either terminated retroactively or from a future point beyond a defined date.
A notice of termination letter is a formal declaration of your intent to cancel a contract and states when the termination becomes effective.
Use a termination letter template to streamline the process.
A written termination notice will also mention any other details and provisions necessary to go through with the termination. It’s best to use non-combative language.
If you can prove fraud, misrepresentation, or some other mistake was made at the time of consideration, the contract will be terminated.
A proven breach of obligation will also result in the voiding of a contract.
Other reasons include an “impossible” performance or “impractical” obligations.
Always seek legal advice when seeking to terminate a contract.
You’ll need to examine any agreed-upon termination clauses found within the document.
If none of those have been met, you must prove that fraud or a breach of contract has taken place.
Other options include “act of nature” events or law changes that now make your ability to perform impossible.
You can also reach out and negotiate early termination.