In some cases, a contract can be ended even before the parties have the chance to fulfill their contractual duties and responsibilities. This is known as “contract termination” or “termination of contract”, and can be based on many different grounds. Some common grounds for contract termination may include:
- Fraud: Contracts can’t be based on deception or fraud (such as fake documents, etc.)
- Mistake: A contract can sometimes be terminated and rewritten if the one or both of the parties is mistaken as to a contract term
- Misrepresentation: Contracts can’t be based on misrepresentation, such as when one party fails to state all the facts involved in a sale
- Breach of Contract: The non-breaching party is usually released from their contractual obligations
- Previous Agreement: Parties can sometimes end the contract if they have formally agreed to do so beforehand
- Impossibility: The contract can be ended if the duties become impossible to perform
Contract termination can sometimes be necessary for both parties. Unlike breach of contract, contract termination doesn’t necessarily have to involve the wrongdoing of one party. It can sometimes be based on the surrounding circumstances, as is commonly the case with contract impossibility.
Contract impossibility, or “impossibility of performance”, is a commonly cited ground for contract termination. Impossibility is when the duties and contractual obligations of one or more parties cannot be fulfilled under normal circumstances. Some examples of this may include:
- A key performer gets injured with no one to replace them
- Valuable or irreplaceable property gets lost, stolen, or destroyed
- Weather conditions prevent a performance or competition, or
- Natural disaster prevents the delivery of goods
- A government passes a law or decree that makes contract performance illegal
Impossibility of performance is often raised as a defense for breach of contract. For example, the party that is accused of breach may be excused from the breach if they can prove that it would have been impossible to perform the contract. This proof can sometimes be complex and usually requires the assistance of a lawyer or expert witness.
In addition to impossibility, some similar contract defenses include impracticability and frustration. Impracticability occurs where it has become impracticable or unreasonable for one or both parties to proceed with their contract duties. This is sometimes more difficult to prove than impossibility, since the duties might still be performed, but are difficult to do so in some way.
Frustration occurs where the overall purpose of the contract has been frustrated or negated. Again, the duties need not be impossible to perform, but it’s usually necessary to prove that both parties would not benefit by proceeding with their duties.
Impossibility or impracticability is not a defense if the person making the promise in the contract caused the contract to be impossible or impracticable. For example, A promises B that A will pay B $100 if B takes care of A’s cat for a week. The contract would be unenforceable if A’s cat suddenly passed away before the contract could begin. However, if A caused the cat to pass away, then A still owes B $100 because impossibility is no longer a valid defense. Note that this only applies to the party making the promise. If B had caused the cat’s death, then B would be liable for the value of the contract (and the value of the pet).
Impossibility and impracticability is not a defense if the impossibility or impracticability is foreseeable. Foreseeable means that a party could have predicted that the event causing the contract to be impossible or impracticable would occur. Let’s use the cat example again. If A knew that the cat was extremely sick prior to making the agreement, then A is still liable to pay B $100.
Impracticability is not a defense if the situation is not severe enough. In many business transactions, contract performance may often result in more costs than a party could foresee. A mere increase in costs though is not a barrier to contract enforcement unless the costs are extreme and unreasonable.
Yes, contracts can specifically state who will bear the costs of non-performance due to impossibility, impracticability or frustration of performance.
For example, a contract can say, “the seller will still pay the buyer in the event of fire, earthquake, flood, or other acts of god.” Note that such contract provisions are often limited to what they specifically state. The contract provision described above only covers “acts of god” or natural disasters. That contract provision will not cover other methods of impossibility, such as warfare or a government declaring the sales of the product illegal.
Terminating a contract can often be a complex and legally intensive process. It requires knowledge of both the existing contract as well as the contract laws in the area. Thus, it is to your benefit to work with a business lawyer if you need assistance with contract termination. Issues such as impossibility of performance can change the way a contract is terminated, so be sure to inform your lawyer if these issues may affect your contractual obligations.