A legal contract can be terminated for various reasons. For some, you will have control to voluntarily end the agreement. Other grounds for termination may be inevitable and are called involuntary.
As a small business owner, you will enter numerous contracts during day-to-day operations. Some are long, defined term deals like a real estate lease. Others may be of the one-off variety, like an agreement to buy new laptops. No matter why you decide to sign a legally binding contract, you need to know when and how the deal may be terminated.
To be enforceable, an agreement must meet all the elements of a valid contract.
The elements of a contract are: offer and acceptance, consideration, capacity, and legality. Each will be explained further below. Without any of these requirements, your agreement is not a legal contract.
Obviously, a binding contract is agreed to by both parties, and each party must exchange adequate consideration upon striking a bargain. Consideration is a thing of value given from one party to the other, whether money, labor, or the promise to do something.
Also, each party must have the capacity to agree to the deal. For example, you cannot bind a Fortune 500 company to a contract if you only make a deal with one of their interns. That person does not have the power - or capacity - to sign a contract on the corporation’s behalf.
Finally, your bargain must be legal to be enforceable. A contract for the sale of illegal drugs will not hold up in a court of law.
What Does Contract Termination Mean?
If you have a valid agreement, the termination of contract may be included within the deal. For example, once a vendor delivers goods to your warehouse, that contract may end.
However, other contracts may require proper notice before they are terminated. You may have an ongoing contract for monthly deliveries from a vendor. To end this arrangement, you may need to be aware of the state laws on employment termination letters in order to send a proper contract termination letter.
No matter how a contract is ended, neither party owes the other side any additional performance once the agreement is terminated.
Contract Termination Right
Some contracts merely cease because an action has been performed or a time has elapsed. These rights of termination are known as termination for convenience. Typically, this is how business relationships are handled. A new contract can be drawn up once the original has terminated if the sides can reach another agreement.
Other times, you will need to actively terminate a contract. These terminations for cause can create problems, including lawsuits for breach of contract.
Impossibility of Performance
Things happen that are outside the control of businesses. For example, if one of your vendors has a break-in at their warehouse, they may be unable to ship your monthly supply of widgets.
In this case, the terms of your contract are impossible to fulfill. The agreement is terminated by the cause of impossibility of performance.
Misrepresentation
A difficult situation occurs when one of your contract partners turns out to not be what they claimed. If you attempt to terminate a contract for the cause of misrepresentation, you will likely face lawsuits.
However, if the other side misrepresents themselves, you may have little choice but to terminate the contract. Imagine they claim to have a decade’s worth of experience painting offices. If you find out that you would - in fact - be their first-ever client, you likely would have contracted with another painter. Their misrepresentation is material and grounds for terminating your deal.
Breach of Contract
There are other ways someone can breach a contract besides misrepresentation. For example, a supplier may fail to deliver your goods on the date specified in the contract. Sometimes, a slight delay is minor. But if you are counting on those products being at your factory when the supplier promised, the breach may affect your entire operation.
If another side breaches the contract in such a way, you can typically sue them for the damages they caused your business.
Statute of Frauds
The Statute of Frauds is a law that varies from state to state but at its core requires specific contracts to be in writing and signed.
So, you cannot enforce an oral agreement to sell land or hire someone as a laborer for more than a year. Contracts that violate the Statute of Frauds can be legally terminated if they are not in writing.
Mutual Mistake
Sometimes, both you and the other party are mistaken about a basic fact underlying a contract. If the mutual mistake could not be reasonably foreseen by either side, it is grounds for terminating the deal.
Prior Agreement
Many business contracts contain terms regarding how they can be terminated by either party with proper notice. If the contract includes a prior agreement on how it can be concluded, you should follow the steps outlined in the document.
Often, you must send a contract termination letter to the other side, usually more than 30 days (one month) before you would like the agreement to cease.
Completion
The final way a contract can be terminated is through valid completion. This termination for convenience just means that both you and the other party performed your duties under the agreement.
Once completed, the contract ends. For example, you may have agreed to deliver 100 products to a customer on the first of the month for $10,000. Once your delivery truck unloads the pallet of goods at the client’s location, your performance is complete. Then, after the customer conveys $10,000 to you (or your bank account), they have also completed their side of the bargain.
Before you can worry about termination, you first must create and sign legally binding contracts. LawDistrict has an easy-to-use contract maker to help you and your small business draft individually tailored documents that you will use daily.
Follow the simple, step-by-step guides in the contract template, and your company will be set up to create legally binding agreements with all your business partners, vendors, customers, and employees!
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