Termination of Contract

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 What Does It Mean to Terminate a Contract?

A contract is a legally enforceable agreement between two parties for goods or services. Contracts can be oral or written, though it is generally recommended that contracts be in writing and signed by both parties.

A contract is formed when there is an offer to do something, acceptance of that offer, and consideration. Consideration is the agreed upon exchange between the parties. For example, when a person contracts with a carpenter to build a bed, the carpenter builds a bed in exchange for payment at the agreed upon price.

Once the parties have come to an agreement regarding the terms of the contract, they are both legally obligated to fulfill their obligations under the contract. If they fail to do so, they have breached the contract and can be held liable in a court of law.

Terminating a contract means legally ending the contract before both parties have fulfilled their obligations under the terms of the contract. There are a variety of reasons why a party can terminate a contract. When and how the contract is terminated will determine whether either party has any liability for breach of the contract before it was terminated.

What Happens After the Contract is Terminated?

After a contract is terminated, the parties to the contract do not have any future obligations to each other. However, one or both parties might be liable for breach of the terms of the contract prior to termination. The terms of the contract might also determine what happens after the contract is terminated.

In the absence of language in the contract that states what will happen if the contract is terminated, the parties have the option to seek a legal remedy for any breach. There are several legal remedies available when there has been a breach of contract.

  • Monetary Damages: Compensatory damages are awarded in an attempt to put the innocent party in the position they would have been in if the contract had been performed.
    • Usually that means awarding the innocent party an amount of money that gives them the “benefit of the bargain” or allows them to enter into an agreement with someone else for the same service. Punitive damages might be awarded to punish the breaching party, but are much less common.
  • Restitution: Restitutionis intended to put the innocent party in the position they were in before they entered into the contract. The court looks at what the party who breached the contract gained prior to the breach and orders it returned to the other party.
    • For example, a customer enters into a contract with a carpenter to build a bed. After the carpenter builds the bed, the customer refuses to pay and breaches the contract. Restitution would require the customer to return the bed.
  • Specific Performance: If monetary damages are insufficient to compensate the innocent party, then the court might order specific performance. The breaching party would be required to perform their obligations under the contract or face contempt of court charges.

Specific performance is rarely awarded for breach of contract, unless the subject of the contract was so rare or unique that no amount of compensatory damages could put the innocent party in the position they would have been in had there been no breach.

When Can You Terminate a Contract?

Parties to a contract can legally terminate their agreement for several reasons.

Impossibility of Performance. If it is impossible for one or both parties to fulfill their obligations, the contract can be terminated. It must be impossible for anyone to perform. This is called objective impossibility. If someone else could perform the duties in the contract, there is no impossibility.

An example of impossibility of performance is when someone has agreed to paint a house, but the house burned down before it could be painted.

Fraud,Misrepresentation, or Mistake. If the contract was formed under circumstances that constitute fraud, misrepresentation, or mistake, the contract can be terminated. In this situation there could not have been a “meeting of the minds” on the terms of the contract because the true facts were not known to the parties.

Illegality. In some cases the subject of the contract may become illegal because a law was passed after the contract was formed. This “supervening illegality” means the contract cannot be legally performed and can be terminated.

Breach of Contract. Under the terms of any contract, both parties have an obligation to perform according to the contract. If one party fails to perform, blocks the other party from performing, or otherwise violates the terms of the contract without a legal justification, they have breached the contract and the contract can be terminated. The non-breaching party can pursue a claim for damages caused by the breach.

Prior Agreement. The parties may agree to allow termination under certain specific circumstances. Those specific conditions must exist or else there is a breach of the contract. This prior agreement is a termination clause and is enforceable as long as both parties agreed to its terms.

How Do You Terminate a Contract?

When you want to terminate the contract the first step should be to check the contract for a termination clause. In addition to including the potential reasons why either party can terminate their agreement, it might include instructions for how to notify the other party that you want to end the contract.

The contract might outline how and when notice must be given. For example, a contract with a termination clause could state that the agreement can be terminated by either party, in writing, within seven days of signing the contract.

As a general rule, notice to terminate a contract should always be in writing. Any conversation about terminating the contract in person or over the phone should be followed up in writing. Always check the contract for instructions, including where and to whom to send the notice.

Is There a Difference Between Cancelling a Contract and Terminating a Contract?

Rescission is the legal term for cancelling or overturning a contract where there has been fraud, misrepresentation, mistake, duress, or undue influence. Rescission essentially voids the contract from the beginning, while termination means the parties are under no obligation to perform in the future.

Do I Need a Lawyer If I Want to Terminate a Contract?

Terminating a contract might relieve you of further obligations under the agreement, but could leave you vulnerable to legal action for breach of contract. If you are a party to a contract and want to terminate it, an experienced contract attorney can guide you through the process and advise you of any potential liability.

An experienced attorney can help you draft a contract, resolve any disputes that arise during the performance of the contract, and represent you in court if you are involved in a lawsuit arising out of a contract termination.

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