Contracts are agreements between two or more parties which are legally binding. Written contracts consist of specific provisions or clauses.

Contract clauses outline the rights and obligations each party has under the contract. A contract clause will typically fall into one of three categories, including:

  • Enforcement clauses;
  • Interpretation clauses; and
  • Execution clauses.

What is a Termination Clause?

Termination clauses are clauses, or provisions, in contracts that explain the rights of the parties to the contract to terminate, or cancel, the contract. In many cases, a contract will provide the specific steps required to cancel the contract.

What Does it Mean to Terminate a Contract?

As previously noted, contracts are legally binding agreements. They can be written or oral but it is recommended that a contract be in writing and be signed by all parties involved.

Contracts are formed when there is:

Consideration is something of value that is exchanged by the parties. For example, if an individual contracts with a carpenter to build cabinets, the carpenter builds those cabinets in exchange for payment of the agreed upon price.

Once the parties have come to an agreement on the terms of their contract, they are legally obligated to fulfill their obligations under that contract. If one of the parties fails to do so, then they have breached the contract and may be held liable in a court of law.

When a contract is terminated, it means the contract is legally ended before the parties have fulfilled their obligations under the terms of the contract. There are numerous reasons why parties may want to terminate a contract.

When and how a contract may be terminated depends upon whether any party has any liability for a breach of the contract before its termination.

When Can You Terminate a Contract?

The parties to a contract may be able to legally terminate their agreement for a variety of reasons, including:

  • Impossibility of performance;
  • Fraud, misrepresentation, or mistake;
  • Illegality;
  • Breach of contract; or
  • Prior agreement.

Impossibility of performance occurs when it is impossible for one or both of the parties to fulfill their obligations. In these cases, a contract may be terminated. It must be impossible for any party to perform, known as objective impossibility.

If another party could perform the duties in the contract, impossibility does not exist. One example of impossibility of performance may be when an individual has agreed to paint a house but the house burned down prior to being painted.

If a contract is formed under circumstances which constitute fraud, misrepresentation, or mistake, a contract may be terminated. In this situation, there was no meeting of the minds on the contract terms because the parties to the contract were not aware of the true facts.

In certain cases, the subject of a contract may become illegal if a law is passed after the contract is formed. This type of supervening illegality means that a contract cannot legally be performed and may be terminated.

Under a contract, all parties involved have obligations to perform according to that contract. If one of the parties fails to perform, blocks another party from performing, or violates the terms of the contract in some other way without a legal justification, that party has breached the contract and the contract may be terminated. A non-breaching party may pursue a claim for damages which are caused by the breach.

The parties to a contract may also agree to a termination if specific circumstances exist, known as a prior agreement. The specific conditions agreed to must be present or there will be a breach of contract. This type of prior agreement is referred to as a termination clause and is enforceable as long as both parties agree to the terms.

How Do You Terminate a Contract?

When a party wants to terminate a contract, their first step should be to refer to the contract and see if there is a termination clause. In addition to including the reasons why a party is permitted to terminate their agreement, a termination clause may provide instructions regarding how to notify the other parties that a party desires to end the contract.

The contract may provide for how and when notice is required to be given. For example, a contract that has a termination clause may state that an agreement may be terminated by either party, in writing, and within 7 days of signing the contract.

Generally, the notice to terminate a contract should be provided in writing. An oral conversation regarding terminating the contract in person or over the phone should be followed up in writing.
It is important for an individual to review the contract for instructions, which includes where and to whom to send the written notice.

Is There a Difference Between Canceling a Contract and Terminating a Contract?

Yes, there are differences between canceling contracts and terminating contracts. Rescission is the legal term for canceling a contract when certain issues have occurred, including:

Recession essentially voids a contract and treats it as thought it was not formed. Termination means that the parties are not under an obligation to perform in the future.

Where Are Termination Clauses Found?

Termination clauses are commonly found in employment contracts and property leases. An employment contract may provide either party the right to terminate the contract by providing notice.

Termination clauses in employment contracts may also provide an employer with the right to terminate an employee immediately under certain circumstances. This type of agreement is referred to as at-will employment.

A property lease may provide a termination clause which is referred to as an escape clause. This clause provides a tenant with the right to terminate a lease prior to its completion.

What is an Early Termination Clause?

Early termination clauses may penalize a contracting party if they terminate the contract too early. An early termination clause is often found in use agreements, including cellular phone contracts and automobile leases.

These types of clauses typically impose a fee for terminating an agreement prior to a specified date.

What is a Termination for Convenience Clause?

A termination for convenience clause is often found in a construction contract, as they provide an owner with the ability to terminate a contract at their own convenience, even if the contractor did not do anything wrong. The types of clauses also limit the amount which a contractor is allowed to recover if they sue for a breach of contract.

A termination for convenience clause was first used in government contracts. Many private contracts, however, are starting to use them as well.

How Can a Lawyer Help?

If you are a party to a contract that includes a termination clause, a contract lawyer can help you draft an agreement which protects your interests and legal rights. If you are a party to a breach of contract lawsuit, your lawyer will advise you of your rights and legal defenses which may be available in your case.

If you are terminating a contract, it may relieve you of any further obligations under the contract but it may also leave you vulnerable to a legal action for breach of contract. If you wish to terminate a contract, your lawyer can review your contract, guide you through the process, and advise you of any potential liability you may face.