We discussed contracts extensively in several posts. More specifically, we talked about how to form contracts, how to negotiate contracts, etc. However, today, we’re going to address the elephant in the room-how to terminate contracts and be able to get out of them.
Terminating a contract is not an easy task. There are many reasons why terminating a contract is complicated. It can cause lawsuits, destroy business relationships, put you under financial obligation, and more.
However, there are times when you want or need to get out of a contract, to terminate it either before its natural term or immediately at that time.
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What is the Termination of a Contract?
Before we discuss particulars about how you can go about terminating a contract, let’s first discuss what is the termination of a contract.
Termination is the act canceling or voiding the existing agreement or contract before it’s performed completely, or before its natural end date. To put the termination of a contract more simply, it means that either one or all parties involved want to end or cancel the contract.
There are many reasons why someone might wish to terminate a contract, such as a contract is no longer fair, the contract is not relevant anymore, the business partners don’t see eye to eye, the contract allows it, It’s impossible to perform the contract, etc. These are by no means the only reasons, but they are a good start.
Grounds for termination of a contract
Termination of a contract is a complicated matter and more often it gives rise to strained relationships between the parties to the contract, can become a reason for lawsuits, fines, and much more.
However, there are some grounds for termination of a contract that will make the process relatively easier. Let’s explore some of those grounds under which termination of the contract may be an option.
The Contract Allows Termination
One of the easier and least problematic methods for terminating a contract is when the contract itself allows termination and has specific directions on how to accomplish it. This is the reason why it’s important to pay attention to how contracts are drafted, what sections and clauses are included in the contract.
A good contract will try to address most, if not all, potential issues that might come up with time, including the topic of termination of a contract. You can read my post on how to write business contracts and include some of the important clauses in your contracts.
The termination clause in the contract will usually specify terms that you need to abide by. There might be a time requirement, for example, giving 30 days of advanced notice before the contract is terminated.
Moreover, termination can occur both for cause and without. The contract should state how a termination for both reasons should proceed, what notices, if any, should be given in advance, whether a letter of intent to terminate or another document must be submitted.
Clearly, when termination of a contract is permitted under the contract itself, this is the least problematic and complicated method for terminating a contract.
The Contract Was for a Fixed Period of Time
If the parties to the contract entered a contract that was for a fixed period of time, and that has passed, then the contract can be terminated without issues because it’s been either performed or it is moot.
Either scenario brings the process to the same stage-a contract that is for a fixed period of time can be terminated if that period has expired. This means that either the contract has been performed satisfactorily, or that it hasn’t but it’s not relevant anymore because the time provided for it is over.
The Contract Was for a Specific Project
Just like above, when a contract can be entered for a fixed period of time, a contract can also be entered for a specific project or event.
In the circumstance that the contract is performed, meaning the specific project or event is performed or carried out, the contract is considered void unless it renews itself. Once the contracted specific project is done, the contract is carried out and the parties are permitted to terminate it.
The Contract is Impossible to Perform Under the Circumstances
When people enter into a contract, it’s with the expectation that the contract terms will be carried out, in other words, the contract will be performed. However, there are some circumstances that make it impossible for the contract to be performed.
Regardless of how much the parties want to perform the terms of the contract, sometimes they just not be able to. For example, in situations such as natural disasters, wars, shutdowns, etc.-performance might simply not be an option.
If there is a natural disaster such as an earthquake, tornado, tsunami, then performing a contract is simply not possible since you and everyone else will be more concerned with survival over contract performance.
In such situations, the other party to contract will be allowed to terminate the contract since you’re not performing. However, that termination is not the same as another termination for non-performance because you had no control over the situation. So if there was going to be a fine or restitution, this is one instance where such a penalty might not apply.
Again, when drafting your contracts, you want to make sure that there is a clause about this situation. Usually, in contracts, this is called a force majeure clause.
Parties Agree to the Termination of the Contract
A contract can always be terminated if both parties agree to it. Regardless of what the terms of the contract are, for how long it is, and the certain conditions, if both parties want to or agree to terminate it, then they can.
Once the parties to the contract decide that they don’t want the contract to continue and that neither party will try to enforce it against the other. The parties should draw up a letter in relation to their intent to terminate, plainly and simply write down all the terms and agreements relating to the termination of the contract, and what’s expected of each party.
Contract Can Be Terminated If One Party Lacked Capacity
One of the main tenets of entering into a legally binding contract is that there must be a meeting of the minds. This means that both parties must understand completely what the contract means, what it entails, what their obligations are.
All the parties must willingly, knowingly consent to the contract terms. If one of the parties lacks the capacity to enter into the contract, then there is no meeting of the minds.
Capacity means several things and sometimes can depend on the particular circumstance as well. For example, a child lacks the capacity to enter into a contract. If a contract is created between one party and a child, then that contract is not enforceable because there was no meeting of the minds as the child doesn’t have the capacity to enter into contracts.
Another person who might lack capacity can be someone with health and mental issues that prevent that person from being able to understand the contract terms properly and give informed consent. Such a contract would be easily terminated.
Another situation where the person can lack the capacity necessary to enter into the contract is when the person is forced into it or blackmailed.
The reason such a contract is not enforceable is that the consent that the parties give to enter into the contract must be informed, voluntary and clear. Here, is someone is forced into by any means does not have the “voluntary” requirement for entering into the contract.
There are many other reasons under which a contract can potentially be terminated. However, the ones mentioned above are the most common ones.
How Should One Terminate a Contract
Terminating a contract is a complicated matter because it can create tense situations between the parties involved. For that reason, one of the best ways to terminate the contract would be to look to the contract itself. For additional reading on this, this article is a good read.
If the contract has a termination clause in it already, then follow that clause to the letter. Do everything as instructed in the contract. Whether it requires a notice or cause or a letter, it’s up to the individual contract terms.
Since a termination clause is extremely important in case a situation involving contract termination arises in the future, you need to negotiate initially to include a termination clause.
So for the least complicated option, just follow the contract to the letter, and in case you want to terminate the contract, follow the instructions there as well.
When terminating a contract, the terminating party should always send a letter of either intent to terminate, or a letter of termination. The reason for this is that you want to have documented evidence of when you wanted the termination, that you gave advance notice of it, and if you’re following the contract guidelines, then that you followed the instructions present in the contract for termination purposes.
The way you talk, the way you express yourself or convey your wishes matters in business dealings, but never more so than when terminating a contract.
Your goal is to be polite and never come off as rude. However, be efficient in your language. Express yourself clearly, simply and without leaving any room for doubt or interpretation.
When terminating a contract, you want to be clear, conscience and avoid any ambiguities. Be firm and make sure your intent to terminate the contract is well understood.
What is a notice of termination
A notice of termination is a notice or a letter that states one party’s desire to terminate the contract. Usually, the notice might include reasons for the wish to terminate, the timeline for termination, and the obligations going forward.
The notice of termination is an important document because this is the documentary evidence of who wanted to terminate the contract first, whether or not the party followed the rules for termination (if they are specified in the contract), how many days advance notice was given if any, and for what reason.
Can you terminate a contract without a termination clause?
As we covered above, a termination clause is always an important clause to have in a contract because it can potentially save a lot of money, arguments, and even litigation in the future if one party wanted to terminate the contract.
However, sometimes be design, sometimes by accident, and/or as a result of inexperience, termination clauses get left out of contracts. So a question arises whether a contract can be terminated without a termination clause.
The simple answer to that is yes. In fact, we covered several different situations when a contract can be terminated because it’s unenforceable (due to age, incapacity, illegality, etc.).
A contract can be terminated even without a termination clause if both parties agree to the termination.
Also, note, as mentioned above, if the contract was for a fixed time or a specific project/event, then those contracts can also be terminated if the fixed period of the contract is passed and/or the project the contract was for is no longer an issue.
Being an entrepreneur and a business owner means that you will engage in activities that will require contracts and agreements with the other person or business. Sometimes enter into a contract, but at some point want to be able to get out of it.
This is the reason why you might start looking at options for terminating your contract. Clearly, the simplest and easiest way to terminate is when both parties agree to it, and to take it a step further, when the contract specifically laid out contract termination directions.
If the parties to the contract do not both agree to the termination, then the party that does want to nullify the contract will need to do so under proper grounds and follow the procedures and rules to the letter. Generally, when only one party wants to terminate, it can create a stressful environment. Therefore, it’s doubly important to not let go of your professionalism, maintain a polite attitude throughout the process, but be firm in your wishes.