Rules of Contract Termination

While a contract is a legally-binding document, there are ways to terminate a contract. If your business is thinking of getting out of a contractual agreement, be sure you understand the rules and laws pertaining to contract termination to guarantee that your company isn't unintentionally held liable for the contract or any of its obligations. Likewise, if a customer or vendor breaches a contract to which your business is a party, you have the right to claim damages.

A contract that has clearly delineated all of its terms and conditions and which has been agreed to by both parties is said to be a valid contract. However, if either of the parties fails to uphold her side of the bargain, breach of contract occurs. The damaged party, that is the one that did not renege on the contract, may sue the other party for terminating the contract. Furthermore, a contract can also be considered terminated if an essential element of the contract, such as the price to be paid or the legality of the products or services, is missing. In these cases, the contract may be void, voidable or unenforceable. A void contract means that technically no contract has ever existed and any goods or money must be returned. A voidable contract means that the contract did in fact exist but that it was unknowingly entered into with someone who didn't have the capacity to make a contract, such as a minor. In this case, money and goods must be returned if they haven't otherwise been used or consumed. On the other hand, an unenforceable contract is a valid contract but because one of the parties fails to keep her side of the deal, the contract's obligations cannot be carried out. If a customer refuses to pay you and you therefore refuse to deliver products, this would be an unenforceable but still valid contract.

If a customer makes a misrepresentation to your business, or conversely if you misrepresent your products and services to a customer or client, the contract can be terminated through rescission. This means that the party to whom the misrepresentation was made has avoided the obligations of the contract by rescinding it within a reasonable time. This time frame is normally outlined in the contract's terms. If the contract is rescinded, it is no longer binding and the courts will try to put the parties into the position they were in before the contract was made. Importantly, the contract is not rescinded until the person to whom the misrepresentation was made notifies the other party that she wishes to terminate the agreement.

Frustration is a special way of terminating a contract after the agreement has been made but before any of its obligations have been carried out. If the subject matter of the contract no longer exists, if a person who was meant to perform the contract is no longer available, if the timeframe cannot be met or if the contract has suddenly become illegal because of a new law, then the contract is automatically frustrated, meaning it is now terminated. Once the contract is frustrated, any money owed cases to be due and any money that has already been paid must be returned.

Sometimes mistakes can happen when contracts are drawn up. The law allows for contracts to be terminated or nullified if a mistake occurs. A common mistake means that the parties have reached an agreement but have both made the same mistake, such as assuming that a product existed when it in fact did not. If only one party makes the mistake, a unilateral mistake has occurred and that party must rectify the mistake by rewriting the contract or voiding it and forming a new agreement.