Contract Termination: Definition & Types

What is Contract Termination
by Sarvarth Misra

Understanding Contract Termination

The act of terminating a contract is ending an agreement prior to parties performing their contract obligations. However, contract termination does not affect parties’ liabilities and obligations if the latter predates the contract’s creation. And although all future obligations are terminated along with the contract, that does not preclude parties from pursuing claims for damages under common law or the contract’s termination conditions.

What Does It Mean When a Contract Is Terminated?

Terminating a contract means legally ending the agreement before all parties have completed the terms and obligations of the contract. The reasons this happens vary and depend on the parties’ situations. But when and how the contract is terminated will determine whether any of the parties are liable for breach of the contract before it was terminated.

Why Does a Contract Get Terminated?

A contract can be terminated for a number of reasons, including the following:

Convenience: A contract can be terminated for convenience, if there is a clause titled, “termination for any reason by notice.” If the contract does not include the option to terminate for any reason without notice, a party cannot legally terminate a contract simply because the agreement no longer fulfills their needs.

A party is no longer able to hold up their end of the agreement: Before a party agrees to the terms of a contract, they must understand the importance of being able to get out of it if needed.

Automatic termination: If the term of the contract is set for a certain period and the time has expired or ended, the contract will be terminated automatically unless it has been renewed. Termination may become necessary if the obligations are impossible to maintain due to events beyond contract parties’ control, such as “force majeure” situations.

What Are The Conditions for Terminating a Contract?

Fraud or a mistake: If the contract was formed under circumstances that include fraud, the contract can be terminated.

Illegality: If the main subject of the contract becomes illegal because of a new law, the contract may become illegal and, therefore, must be legally terminated.

Breach of the contract: All contract parties have an obligation to perform obligations according to the contract. If a party fails to perform them, blocks the other party from performing the same, or violates the terms of the contract, they will have breached the contract, and the contract can be terminated.

Prior agreements: The contract parties may agree together to allow the termination of the contract under specific circumstances. Those specific conditions must be in place in order to prevent a breach of a contract.

7 Ways to Terminate a Contract

  1. Impossibility of Performance
  2. Breach of Contract
  3. Termination by Prior Agreement
  4. Rescission of the Contract
  5. Completion of the Contract
  6. Termination for Convenience
  7. Termination for Insolvency

 

What Happens After a Contract Is Terminated?

Once a contract is terminated, the parties to the contract do not have any future obligations to each other.

If there is no clause stating what will occur if the contract is terminated, all parties have the option to seek legal aid for any breach of contract. Here are several legal remedies that are available in the case of a contract breach:

Monetary damages:  This kind of compensation allows a contract party to enter into the same agreement with another party instead.

Restitution: Restitution is intended to put the innocent party in the position they were in before they entered into the contract.

Specific performance: If monetary damages and restitution are insufficient to compensate the party, the court can require the breaching party to perform their obligations under the contract or face court charges (This is a rare occurrence, however).

Contract Termination Letters

A contract termination letter is an official letter, sent by one contract party to the other, formally declaring the intention to terminate or cancel an agreement. This letter can be used in an employee termination, business termination, or simple contract termination. Or if one party feels that specific contract changes have been made without consultation or if the other party is not fulfilling their duties and obligations.

Whatever the situation, these letters are meant to be a professional way of leaving a contract.

How Does Contract Termination Fit within the CLM Process?

A standard agreement should go through the entire contract lifecycle: initiation, authoring, editing and review, approval, tracking and auditing, reporting — and, finally, renewal or termination. But today’s organizations typically hold 20,000 to 40,000 contracts at a time. And when companies manage contracts manually, they can have a difficult time keeping track of them all. They can miss out on renewal and termination opportunities, and lose a significant amount of revenue. However, this issue can be solved with a contract lifecycle management (CLM) system with automated workflows and notifications.

To learn more about modern contracting, download our Contract Management Primer. It is a free guide that includes a handy contract management checklist for you and your legal team. And to find out how ContractPodAi can help you adopt and implement a CLM system of your own, contact us today to book a demo.

 

Request a demo

Contact us today for your personalised demo.