Terminate a Contract

There are many reasons you may want or need to terminate a contract. A contract may be terminated if certain conditions have changed since the contract was created. Some contracts may also be voided if the contract was never legal in the first place. If you decide to terminate a contract, you should make sure that the termination will result in the least amount of damages for you.

Steps

Sample Termination Letters

Doc:Termination of Contract Letter

Terminating a Contract Legally

  1. Use a termination clause. Many types of long-term and automatically renewing contracts have a termination clause. This gives you the steps you need to take if you want to terminate the contract. A common termination clause says that the person who wants out of the contract must notify the others involved of his intent to do so. This must be in writing and within a certain number of days from when they want to end the contract or when it will be automatically renewed.
    • Termination clauses may include fees for early termination. Be sure you are willing to pay the penalty before using the clause and terminating the contract.[1]
  2. Argue the contract is impossible. If you are unable to perform your obligations due to some impossibility, you may have a legal right to terminate the contract. You cannot be unable to fulfill the contract because of circumstances you caused yourself. It must be either the fault of the other person involved. It can also be the result of an act of nature, such as a hurricane or tornado. [2][3]
    • For example, if you agree to sell your boat tomorrow and tonight a hurricane comes and damages it beyond repair, the sale becomes impossible, and both parties can be excused from the contract. [4]
  3. Claim a frustration of purpose. Frustration of purpose occurs when the reason behind entering a contract goes away. To be able to terminate a contract based on frustration of purpose, the purpose of the contract must be known by all parties involved.[5]
    • For example, if you sub-lease an apartment in order to participate in a large local event such as a parade, but the parade is cancelled, you may be able to terminate the sub-lease contract if the other party involved was aware that your purpose for the sub-lease was to participate in the parade.
  4. Identify a failure of condition. If one party fails to fulfill his end of a contract, that lack of performance may allow the second party to terminate his end of a contract.[6]
    • For example, if someone was contracted to paint a wall, the other party was contracted to pay him for his service. If the painter fails to uphold his part of the contract (painting the wall), then the other party can legally terminate his side of the contract (to pay for the service) because the painting is a condition of the payment.
  5. Negotiate a termination. If you know you want to terminate a contract, contact the other person involved in the contract. Attempt to negotiate an end to the contract. You and the others involved can cancel the contract by mutual agreement at any time. You may want to offer some compromise by offering to pay some type of cancellation fee, returning funds received as a result of the contract, or offering to continue the contract for a few more months. Be sure to put any new arrangement reached in writing and have both parties sign it.
  6. Claim breach of contract. If the person you are in the contract with knowingly fails to keep the terms of the contract, you may terminate your end of the contract. The person who broke the contract has no right to complain that you ended the contract. Since she breached the contract, they have no say in whether or not you terminate the contract. [7]

Rescinding or Voiding a Contract

  1. Rescind the contract. Rescission, or cancellation, of a contract returns the people involved in the contract back to the way they were before they signed the contract. It is a complete cancellation of a contract and may be allowed in certain circumstances. You need to look for the cancellation clause in the contract. The clause will have instructions for rescinding the contract. It will also tell you the time frame that you can do this within. If you are still within the time frame, you need to follow the instructions in the contract to cancel it.[8]
    • For example, a cancellation clause might say that anyone involved in the contract can write to the others involved in the contract and formally cancel the contract. This can be a pre-made form or simple letter stating that you are rescinding the contract. This is only valid after they allow 30 days to pass from the time they wrote the letter of cancellation.[1]
  2. Show a Statute of Frauds violation. Each state has a Statute of Frauds, which determines that certain types of contracts must be in writing in order to be legally enforceable. These types of contracts include the sale of goods with a value over $500, the sale of land or real estate, the payment of another person’s debts, contracts of marriage, and contracts that cannot be completed in one year.[9] You should be able to terminate a verbal contract for any of these things, since they must be in writing to be legally enforceable.
  3. Deal with a no cancellation clause. If your contract does not have this clause, check your state’s statutes to see if you may be within a cancellation period. You can also check with a lawyer or your state’s Attorney General. Some state and federal laws require that certain contracts allow for cancellation within a specific period. This can range from 3 days to an indefinite period, depending on the law.
    • For example, the Federal Truth in Lending Act (Regulation Z) lets you cancel certain contracts, in which your home is used for collateral, before midnight of the third business day after signing the contract. Federal law also allows you three days to cancel a contract for the purchase of $25 or more in goods or services from a door-to-door salesperson.[10][11][12]
    • You can also look for resources from your State Attorney General’s office or on their website.
    • Alternatively, you can check court records in your jurisdiction to see how other contracts without cancellation clauses were treated.
  4. Negotiate cancellation. If your contract does not have a rescission clause and cannot be cancelled by state or federal law, you can try to arrange a cancellation with the other person who signed the contract. You and the other person or people who are part of the contract may agree at any time to cancel it. This can happen even if the contract itself says it can't be cancelled. If you are able to get the others to cancel the contract, be sure you put any agreement in writing. It also need to be signed by everyone involved in the contract.
  5. Claim Constructive Fraud. You may be able to void a contract because of fraud. There are two kinds of fraud, Constructive Fraud and Actual Fraud. Constructive Fraud occurs when one of the people involved unintentionally makes a false claim about something that the other person relies on. As a result of this action, the person is injured.
    • For example, a real estate broker accidentally tells a buyer that the property they want to buy is larger than it really is. Based on this, the buyer purchases the property. The court can find that the broker committed constructive fraud, even though he didn't do it on purpose. If this happens, the broker will have to pay any damages to the buyer and the contract would no longer be valid.
  6. Declare Actual Fraud. This type, also known as fraudulent misrepresentation, happens when one person intentionally lies about something regarding part of the contract. If the other person believes it and is somehow injured, then it is Actual Fraud. This has to be about something material that can be proven false.[13]
    • For example, a painter says he will paint your living room brown using a specific brand of paint. Even if he knows he will use a different brand, the lie is not material. You asked for a brown living room and got one. If the paint works and is brown, the fact that the painter used the wrong brand doesn't matter. If he paints it red instead, he has committed actual fraud.
  7. Prove lack of capacity. There are certain types of people who lack capacity, or the ability, to make certain decisions for themselves. These people cannot enter into legally binding contracts. Age, mental incapacity, or intoxication can interfere with an individual’s capacity to sign contracts. ).[14] If you signed a contract and lack capacity, you can void your contract. If you signed a contract with someone else who lacks capacity, he may terminate the contract at any time.
    • For example, Melissa, 17, signs a contract for a mobile phone service without her parents’ permission. Since Melissa is under 18 and considered a minor in her state, she cannot be held to the contract.[15]
  8. Reveal that you entered into a contract under duress. If you were forced, pressured, or blackmailed into entering a contract, the contract becomes void. You must have entered into the contract knowingly and freely, of your own will, for it to be enforceable. [14]
  9. Show illegality. A contract that is drawn up for something that is illegal is void and unenforceable. This means that either person involved may terminate the contract at any time. In the eyes of the law, there is no contract. For example, Adam agrees to purchase a brothel from Barbara for $500,000. Since brothels are illegal, both Adam and Barbara have the legal right to terminate the contract.[16]
    • This is also true if something makes the action illegal after the contract is signed. For example, Adam agrees to lease property to Barbara for a commercial purpose. Just after they sign, the city rezones the property for residential use only. Because the reason for the contract is now illegal, both Adam and Barbara have a legal right to terminate the contract.
  10. Decide it was a mutual mistake. Mutual mistake occurs when the parties involved in the contract miscommunicated and really never agreed on anything because they did not understand what they were agreeing on. If both you and the other people involved make a genuine mistake in the details of the contract, the contract can be voided if the other person has not yet fulfilled his part of the contract. Once either of you realize the mistake, the contract can be terminated.
    • For example, you buy a piece of cattle at a low price because you and the seller believe the cattle is infertile. You later realize that the cattle is fertile. This would raise the price of the cattle from what you paid. In this case, you both made a mutual mistake that can make the contract unenforceable.[17]

Handling a Breach of Contract

  1. Identify a breach of contract. A breach of contract occurs when one party fails to uphold his side of the contract without an adequate legal excuse. A breach of contract can be indicated by a failure to perform or by words or actions that indicate future nonperformance.
  2. Recover your materials. If you are involved in a contract that involves materials (such as the sale of an item), you should be entitled to a full recovery of materials if the other party does not fulfill his end of the contract.[18]
    • For example, if you sell a boat to your neighbor and give him an owner-financed payment plan but he stops making payments, you are entitled to a full recovery of the boat, regardless of the amount your neighbor has paid towards the full amount.
  3. Mitigate your damages. If you are the non-breach party in a contract, you can seek to mitigate (lessen) the damages caused by the other party’s breach of contract by seeking replacement goods or services (known as “cover.”) If the cover costs you the same or less money than your original contract, you may not be entitled to damages. However, if your cover costs you more, you can ask the contract-breaching party to pay the damages (the difference between the original cost and the cover.)[19]
    • Finding cover as soon as possible to the breach of contract can help you show the court that you’ve done your best to avoid consequential damages, or further expenses due to your own failure to act.[20]
    • For example, you may have a contract with a wedding photographer. If your photographer backs out of the contract the week before your wedding, you may need to scramble and find a new photographer at the last minute. If the last-minute photographer costs the same as your original photographer, there are no damages. If the last-minute photographer charges you an additional $500 for the lack of notice, you can ask that the original photographer pay the $500 fee.
  4. Refuse to perform. If you cannot uphold your end of a contract, you can refuse to fulfill the obligations that are laid out in the contract. Refusing to perform your contractual obligations will constitute a breach of contract and may expose you to a breach of contract lawsuit. Before choosing this option, you should consult with an attorney to ensure that you completely understand all consequences of deciding to breach a contract.
  5. File a lawsuit against the breaching party. If the other party has breached a contract, you can file a lawsuit for damages incurred due to the breach. Be sure that you have a copy of the contract, can specifically identify how and when the breach occurred, and document any financial or other damages that you accumulated as a result of the breach.
    • You can hire a lawyer to file the lawsuit for you, or you can do it yourself at your local courthouse.
    • File the lawsuit as soon as possible after the breach. States have varying statutes of limitations for how long after a breach a lawsuit can be filed, but waiting too long can prevent you from being able to take legal action against the breaching party.
  6. Consider Alternative Dispute Resolution. After a contract has been breached, the parties involved may want to consider using Alternative Dispute Resolution (ADR) as a tool to settle a contract dispute. With ADR, anyone involved in the contract often share the cost of hiring a neutral mediator. This person will assist all of you to work out a mutually agreeable outcome. The ADR process includes an evaluation by a neutral third-party who isn’t a lawyer. It also includes a negotiation and mediation.[21]
    • Arbitration is another form of ADR. It allows you to take care of the problem without going to court. Arbitration is a good idea in complex cases or when damages are difficult to calculate.[22][23]

Warnings

  • This article is for informational purposes only and not for the purpose of providing legal advice. You should consult with a licensed attorney before taking any action which may affect your legal rights and obligations. If you need additional guidance you may contact a lawyer through your State Bar Association.

Related Articles

Sources and Citations

  1. ↑ 1.0 1.1 http://www.entrepreneur.com/article/191778
  2. ↑ https://www.law.cornell.edu/wex/impossibility
  3. ↑ http://www.kentlaw.edu/faculty/rwarner/classes/contracts/cases/transatlantic/transatlantic.htm
  4. ↑ http://www.legalmatch.com/law-library/article/grounds-for-contract-termination-impossibility-of-performance.html
  5. ↑ Krell v Henry [1903] 2 KB 740
  6. ↑ AIG Centennial Ins. Co. v. Fraley-Landers, 450 F.3d 761, 763 (8th Cir. 2006)
  7. ↑ https://www.law.cornell.edu/wex/breach_of_contract
  8. ↑ http://legal-dictionary.thefreedictionary.com/Rescission+of+contract
  9. ↑ https://www.law.cornell.edu/ucc/2/2-106#contract_2-106
  10. ↑ http://www.dca.ca.gov/publications/legal_guides/k-6.shtml
  11. ↑ https://www.fdic.gov/regulations/laws/rules/6500-1360.html
  12. ↑ http://www.ecfr.gov/cgi-bin/text-idx?SID=dbd069a0ccd2a7dae84e450149213577&node=pt16.1.429&rgn=div5
  13. ↑ https://www.law.cornell.edu/wex/fraudulent_misrepresentation
  14. ↑ 14.0 14.1 http://www.legalmatch.com/law-library/article/void-vs-voidable-contract-lawyers.html
  15. ↑ http://www.nolo.com/legal-encyclopedia/lack-capacity-to-contract-32647.html
  16. ↑ http://scocal.stanford.edu/opinion/lewis-queen-v-n-m-ball-sons-29738
  17. ↑ http://www.lawnix.com/cases/sherwood-walker.html
  18. ↑ http://www.nolo.com/legal-encyclopedia/breach-of-contract-material-breach-32655.html
  19. ↑ https://www.law.cornell.edu/wex/actual_damages
  20. ↑ http://definitions.uslegal.com/c/consequential-damages/
  21. ↑ http://biztaxlaw.about.com/od/glossarym/g/mediation.htm
  22. ↑ http://www.sdcourt.ca.gov/portal/page?_pageid=55,1555406&_dad=portal
  23. ↑ https://www.adr.org/aaa/faces/educationresources/adrresources

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