4 Ways To Legally Terminate A Contract
Disruption is common in the business world with unforeseen events or difficulties meaning that contracts sometimes cease to be beneficial or even possible. If you have entered into a contract that you later wish to terminate, it is important to follow the correct procedure. Failure to do this could constitute a breach of contract which could result in liability for damages.
There are a number of ways in which a contract can be terminated:
TERMINATION OF CONTRACT FOR BREACH
A contract can be terminated for breach if one party fails to fulfill their obligations as outlined in the contract. This can happen if the breaching party is unable to perform their responsibilities or they don’t perform them to the expected standard. Where a contract is substantially breached, the breach needs to be sufficiently serious, known as a “repudiatory breach.” In determining whether a breach was repudiatory, the court will look at whether the term that has been breached was vital to the performance of the contract. If it is, then termination is permissible, and damages can be claimed. If an intermediate term is not complied with, it will only justify termination of the contract if the breach goes to the root of the contract, frustrating its commercial purpose or depriving the other part of substantially the whole of the benefit of the contract.
If one party refuses to perform the contract or part of the contract, then the other party can hold the contract to be terminated. If this happens before the contract has been performed, it is referred to as an anticipatory breach. Nonperformance exists where a reasonable person would conclude from the conduct of the party in breach that there is no intention of carrying out the contractual obligations.
Issues such as poor performance, late payment or delays will not normally be held to be repudiatory breaches unless the contract states otherwise, for example, if strict deadlines have been included.
TERMINATION OF CONTRACT BY PERFORMANCE
A contract can be terminated by performance when both parties fulfill all of their obligations under the contract. This is the most common way for a contract to end. For a contract to be terminated by performance, the following conditions must be met: (i) all terms and conditions, both expressed and implied terms of the contract, must be met; and (ii) the terms must be met to the expected standard of performance. Even after a contract ends by performance, some obligations may still apply, for example, the contract may require the parties to keep certain information confidential.
TERMINATION OF CONTRACT BY AGREEMENT
A contract can be terminated by agreement when both parties consent to end it. This can be done through a process in the contract or by mutual agreement if there is no termination clause. To terminate a contract by agreement, the parties can openly communicate about the desire to terminate the contract or propose an alternative arrangement that benefits both parties. A termination of contract by agreement is a legal document that cancels the contract and release the parties from their contractual obligations. To be legally binding, a termination by agreement must be supported by new consideration. For example, if both parties still have performance obligations under the contract, an agreement to discharge each other from further performance is usually enough consideration.
TERMINATION OF CONTRACT BY FRUSTRATION OR FORCE MAJEURE
A contract can be terminated by “frustration” when an unforeseen event occurs that makes fulfilling the contract’s obligations impossible or radically different from what was intended, essentially rendering the contract useless. Frustration is a legal doctrine applied by courts even if not explicitly mentioned in the contract. Frustration applies when an event fundamentally changes the nature of the contract, making performance impossible. Frustration usually results in automatic termination of the contract.
A contract can be terminated due to “force majeure” when an event outside of a party’s control makes it impossible or extremely difficult to fulfill their contractual obligations. Force majeure is a contractual clause that allows for termination or suspension of obligations when an event beyond the parties’ control prevents performance, typically outlined in the contract itself. When a force majeure event occurs, the affected party is usually requited to provide prompt written notice to the other party. The notice should include details of the event and how long it’s expected to impact the party. Some contracts may state that if a force majeure event prevents a party from performing their obligations for longer than a specified period, the contract can be termination. Some examples of events that could constitute force majeure include but are not limited to, war, pandemics, earthquakes, typhoons, and other acts of God.
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Disclaimer: This information is made available by Bagla Law Firm, APC for educational purposes only as well as to give you general information and a general understanding of the law, and not to provide specific legal advice. This information should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
