Once a party formally agrees to a contract, they become liable under law to fulfill their contractual duties. Failure to perform the terms stated in the contract can result in a breach of contract lawsuit or other legal liabilities. 

However, there are some conditions under which a contract can be legally terminated before the contractual duties have been fulfilled. This is known as “termination of contract” and may occur for many different reasons. Termination of contract is governed by contract laws, which may vary according to each individual state.

When Is Termination of Contract Lawful?

Termination of contract is considered to be lawful when a legitimate reason exists to end the contract before performance has been completed.  Some of the more common reasons for termination of contract may include:

  • Impossibility of Performance: Fulfilling contract terms is called “performance”. Some situations may make performance of contract terms impossible. For example, in a contract for a musical concert, the contract may sometimes be terminated if the performer becomes incapacitated. 
  • Instances of Mistake, Fraud, or Misrepresentation: If the 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: In a contract, both parties usually have duties to fulfill.  If one party fails to perform their duties, the contract may be terminated, and the non-breaching party may be able to recover losses caused by the breach.
  • According to a Prior Agreement: Termination of contract may occur if the parties had previously formed an agreement regarding contract termination. For example, the contract itself may have contained a 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. 

Thus, it is important that a contract be clearly written and that the parties thoroughly understand their contractual duties. A sloppily-written contract can result in the contract being unlawfully terminated before it has been completed. 

What Happens When a Contract Is Terminated?

Contract termination may result in several different legal consequences, which may affect each party differently. In some cases, the contract termination might not have caused either party any losses. In such cases, the contract is simply terminated, and the parties are free to create a new one in the future if they so desire.

However, in the majority of cases, termination of contract usually results in losses to one or both parties. This is common in situations involving a breach of contract terms. If this happens, the aggrieved party can usually file a claim in court in order to recover losses that they may have incurred. The non-breaching party may then be eligible to receive a monetary damages award in order to be compensated for their losses.

In some cases a contract may be terminated, but the courts will allow the parties to form a new contract. This is now as “contract rescission” and is only available under certain circumstances. Contract rescission is common for claims involving mistake or misrepresentation. 

Should I Contact a Lawyer?

Termination of contract can often present many legal issues or disputes. If you have any questions at all about contract termination, you may wish to speak with a business lawyer for advice. An experienced lawyer can help you file a claim in court in order to resolve disputes over termination of contract. Also, you may wish to work with an attorney when drafting a contract, so that you understand how termination may affect your contract.