Contract termination occurs when one or both parties decide to end their contractual obligations. The easiest way to terminate a contract is to have both parties mutually agree that the contract is no longer necessary. If only one party wants to end the contract, it may be much more difficult. There are a few steps, however, that a party can take before it starts down the road to contract termination. In addition, there are several situations, such as illegality and unconscionable acts, that can cause a contract to be unenforceable and, consequently, terminated.
Mutual termination is the easiest form of contract termination. It occurs when both parties decide that the terms of the contract are no longer applicable. For example, if one party makes a contract with another party to sell widgets for six months, then after only three months, one party decides they no longer want to buy widgets and the other decides they no longer want to sell widgets. The two parties can easily decide the contract is mutually terminated. There will not be a lawsuit or a settlement over the contract termination, only simple paperwork stating that the contract is mutually terminated.
A termination clause with a clear, reasonable notification provision in a contract can also make contract termination fairly easy. If the statement is unclear, for example if a termination clause states that a party has the right to terminate the contract for any reason at any time, the termination clause may not be enforceable in some courts. There needs to be a clear, reasonable notification provision. For instance, if a provision states that one party must give two months notice before they dissolve the contract, then the termination clause is enforceable. As a result, either party can terminate the contract, if they give the appropriate notice to the other party. It is important to read the termination provision and follow it explicitly to avoid lawsuits.
In many cases, contract termination can occur if a party is in breach of the contract. In other words, if one party is not holding up his end of the bargain, the contract may be terminated. If a party tries to terminate the contract based on a breach, it may lead to a lawsuit. Many times, the party in breach does not agree that he has broken the terms of the contract and will fight in a courtroom setting to prove that he is not in breach. It is best to wait for the other party to be in material breach and to look at how each party may have contributed to the breach before terminating the contract. Bringing the other party to court too soon may backfire, as the courts may hold the suing party in breach and also liable for damages.
Other reasons for contract termination include illegality and unconscionable acts by one of the parties. For example, if the contract was made with a party who is not old enough to make a binding, legal contract, the contract will be dissolved. In addition, if a party commits an illegal act to uphold the terms of the contract, the contract can be terminated, especially if the illegal act was not a necessary party of the contract. Also, if a contract includes an unconscionable act in its terms, it can be terminated. For example, if the contract contains a clause that states that a landlord can never be held liable by his tenants, the contract may be terminated.