Termination of Contracts – How To Get Out Of A Contract

by Derek Thooft

Contract terminations are common in all parts of business. Sports teams terminate a contract with a player when they cut the player. Cities may terminate contracts with various service providers (trash collection, security companies, road maintenance). Most likely you have also terminated a contract such as switching to a different wireless carrier, ending a lease early, or renegotiating the terms of your employment. There are often many reasons for a party to terminate a contract, however without being fully informed about the consequences, you may find yourself paying large fees or even in court for breach of contract.

There are generally five types of terminations that are most often used to terminate a contract.

Breach of Contract

One of the broadest types of termination. This type of termination happens when a party repudiates the contract (renounces the contract and refuses to perform), when there is nonperformance (that is that a party does not perform their duty as written in the contract and agreed to by the parties), when there is late performance (not in the timeframe of the contract), incomplete/faulty performance (failing to finish performance or performing defectively), wrongfully rejecting the other party’s performance (e.g. refusing entry on property to perform), and failure to perform in good faith.

Impossibility of Performance

Sometimes not everything can be accounted for in a contract. Weather patterns, political unrest, bankruptcy, or other events can result in an unexpected circumstance arising and therefore an inability or delay in performance of the contract.

Another example of this termination is when the event that is to create a duty never comes into existence. If the contract provides that upon sale of a good to Party A, Party A will sell it to Party B, but A is never sold the goods to begin with, then this would be a impossibility of performance situation as A does not have the goods to sell to B.

The law often recognizes these types of situations and will generally excuse performance when extreme or unforeseen circumstances arise.

Rescission of the Contract

When parties enter into a contract, they rely on particular facts on which basis their agreement is based. Both sides however may have a slightly different view of the facts when contracting, effecting their view of the contract. When these facts are found to be incorrect, either through misrepresentation of the facts, or lack of information, a party that is harmed as a result can chose to rescind the contract.

A contract is said to be rescinded when cases of mistake or misapprehension of the parties arise. Courts will not grant rescission in every case, so it usually reserved for a very limited number of cases with clear evidence of different fact patterns and assumptions by both parties.

Termination by Prior Agreement

Sometimes there may be prior agreements that can get in the way of a new agreement. For example if a prior agreement stated that you can terminate the contract because of a particular reason (labor strike, weather event, etc.) then you may be able to give written notice to the other party to terminate the contract. What qualifies under this termination will vary based on the text of the agreement so it is important to examine prior agreements carefully and speak with legal counsel to use this option.

Completion of the Contract

Once all the obligations of the parties are fulfilled in the set time period, then the contract is said to be essentially terminated. Each side can then renegotiate to continue the relationship, but is also free to walk away and contract with other parties if they desire. If the completion is disputed at a later time, it is important that the party keeps documentation of the fulfillment of their contract obligations as a court will require proof of fulfillment if a dispute occurs.