A contract is legally binding agreement. Contracts may be written or oral, but many important contracts are often written and signed by both parties. Examples of contracts include sales agreements, real estate purchase contracts, employment contracts, finder’s agreements, or insurance contracts, to name a few.
Once a party formally agrees to a contract, they become liable under the eyes of the law and contract to fulfill their contractual duties. Failure to perform the terms agreed to in a contract can result in a breach of contract lawsuit or various other legal liabilities.
Termination of contract is an act that may occur wherein a contract can be legally terminated before the contractual duties have been fulfilled. Parties may choose to terminate contracts for a variety of reasons, but not all terminations of contracts will allow them to escape liability.
However, some instances of contract termination will result in making the contract void altogether. Termination of contracts is governed by contracts laws, which means the law may vary according to your local state and jurisdiction.
As noted above, terminating a contract does not automatically rid you of your obligations under the contract. However, there are some instances in which terminating a contract will free you from your obligations under the contract.
Termination of contract is considered to be lawful when a legitimate reason exists to end the contract before one’s performance has been completed. The most common reasons for termination of contract may include:
- Agreement Between the Two Parties: This may seem obvious, but the most simple reason when contract termination would result in nullifying one’s responsibilities under the contract, is when both parties agree to terminate the contract;
- Fulfillment of the Contract: Almost as simple as the last, a contract will naturally terminate when both parties fulfill their obligation under the contract through performance;
- Impossibility of Performance: Sometimes, a contract may become impossible to perform due to an unforeseen event, after the contract was made. For example, a natural disaster might make performance of a contract impossible by preventing a party from fulfilling their obligations. The classic example of impossibility excusing one’s obligations under a contract, is where a party was contracted to paint a house, but the house burnt down before the party could perform;
- Instances of Mistake, Fraud, or Misrepresentation: If a contract was formed under conditions involving mistake, misrepresentation, or fraud, the contract may be terminated, since it was not formed according to sound contract principles;
- Breach of Contract: As noted above, both parties have a duty to perform in a contract. Therefore, if a party fails to perform their contract duties, the contract may be terminated, and the non-breaching party may be able to recover losses caused by the breach. Breaches may occur where one party fails to perform their duties, blocks you from fulfilling your duties, or when one party violates the terms of the contract; or
- Prior Agreements: Termination of a contract may occur if the parties had previously formed an agreement regarding contract termination. For example, the contract may have contained a specific provision stating the conditions under which it may be terminated. Such a provision is known as a “termination clause”, and is enforceable if both parties agree to the termination terms.
As can be seen, there are various reasons that a contract may be terminated. Therefore, it is important that you review the contract thoroughly and make sure you fully understand your contractual duties before signing the agreement. Further, you also want to ensure that the contract is clearly written, as a poorly written contract will often result in the contract being unlawfully terminated before it has been completed.
Contract termination can often result in several different legal consequences which may affect each party differently. If a contract has been terminated, one party has legal recourse against the other party that breached the contract, unless the parties agreed to terminate the contract and release one another from their duties. Remedies that may be awarded against a breaching party may include:
- Monetary Damages: Monetary damages refers to the monetary payments which a breaching party has to make for violating the terms of contract. These damages may include compensatory damages (damages that help cover the losses of the non-breaching party) or punitive damages (rarely awarded damages which may be given in addition to compensatory damages to punish the breaching party);
- Restitution: Restitution is a remedy utilized to restore the injured party to the position that they occupied before they entered into the contract. This usually means that the breaching party is required to compensate the innocent party by giving back any money or property they received from the innocent party. Unlike other money damages, restitution is not used to compensate the innocent party for any lost profits or other earnings that occured due to the unlawful termination of the contract.
- Rescission: Rescission is a remedy utilized by the courts to terminate a contract when the parties enter into a contract because of mistake, fraud, undue influence, or duress. Rescission is also referred to as the “cancellation” or “overturning” of a contract;
- Reformation: Reformation occurs when a court reforms or changes a contract to correct any inequities. Reformation is utilized by courts to rewrite an otherwise inequitable contract, instead of setting aside the entire contract; or
- Specific Performance: Rarely a court might order specific performance, meaning that one party will have to perform their duties under the contract. Often, specific performance will only be ordered where money damages are not adequate to compensate the innocent / non-breaching party.
As can be seen, terminating a contract is a process which may either free you from your obligations or subject you to numerous legal liabilities. Thus, if you are in a situation in which a contract has been or may be terminated, consulting with a knowledgeable and well-qualified business attorney may be in your best interests.
A contract attorney near you will help guide you through the termination of a contract, help you resolve any disputes, and even represent you in front of a court of law, if necessary. Additionally, an attorney will help you in reviewing or drafting any prospective contracts.