Termination Agreements

There are many reasons why a business may wish to terminate a contract before the agreed-upon date. Although each business relationship is different, the two most common reasons for contract termination include:

• Termination by Breach: This is when one party material breaches the contract by failing to follow through with their contractual duties. Under common law, when a serious breach of contract occurs, the innocent party may be entitled to terminate the contract. This releases them from their contractual obligations. In this case, a legal document called a Termination Notice is usually required.
• Termination by Mutual Consent: This is when both parties mutually agree to terminate the contract. In this case, a Termination Agreement is required.

The following are less common reasons for contract termination:

• Termination due to Frustration of Contract: A contract may be “frustrated” when there has been an unforeseen situation or supervening event which was not self-induced or the fault of either party. This unforeseen situation or supervening event must have caused a radical change in the nature of the fundamental contractual obligation. There is a high bar to proving that a contract has been “frustrated.”
• Termination due to Force Majeure: A contract may terminate if there is a “force majeure” clause and a force majeure event occurs. The force majeure event must be contemplated in the force majeure clause and the event must be beyond the control of the parties. Moreover, it must make the contract performance impossible.

Regardless of the reason for contract termination, it is beneficial to put the termination in writing via a Termination Agreement or Termination Notice because it clarifies that the parties no longer owe each other any contract obligations. Plus, a Termination Agreement creates written evidence in case things go sideways. For example, a party may sue the other party, claiming breach of contract even though the other party believed that they both mutually agreed to terminate the contract.

If a contract is properly terminated, all parties will be released from their remaining contractual obligations. This is known as discharging a contract.

If the contract termination was due to a severe breach (i.e., a repudiatory breach), then the breaching party may even owe the other party certain remedies. For example, they may be ordered to pay damages to the other party.

However, keep in mind that there are often specific laws regarding the cancellation of certain agreements, such as Commercial Leases, Loan Agreements, or Employment Agreements depending on your jurisdiction. Not all contracts can be terminated without consequence. This is why it is important to consult with a lawyer to determine if a clean break from your legal responsibilities is truly feasible.

Unless all parties mutually agree to terminate the contract, the process of terminating a contract can be challenging. A careless attempt to terminate the contract can expose you to legal liabilities and financial consequences. It is not enough to say that you want out of a contract simply because the other party made a minor breach. If you attempt to terminate a contract without sufficient grounds to do so, then you could be liable for wrongful termination or anticipatory breach. Therefore, before you express your intention to terminate a contract, you should consult a lawyer to determine whether or not you have valid grounds to do so.

Termination rights will often be laid out in the contract itself in a termination clause. Although this termination clause should make it clear whether you have grounds for termination, these termination clauses are often worded in complicated legalese. Moreover, the termination clause will usually detail the process for terminating the contract, including whether mutual agreement is required, whether you have to provide notice, and what the notice period is. It is important to adhere to this process.

If all parties mutually agree to terminate the contract, then all that is usually required is a Termination Agreement. Note that only the parties that have signed the contract can terminate the contract.

However, if a party decides to terminate the contract without mutual agreement, then written notice should be provided to the other party. This is where Termination Notices come into play. These should detail the reason for the contract termination, including the section of the contract that the party breached, if applicable.

Depending on the circumstances, it may be better to just amend the original agreement rather than terminate the contract entirely. In this case, an Amendment Agreement outlining the fact that the parties have all agreed to end the contract should be signed.

A contract lawyer can help you draft or review your Termination Agreement. Importantly, we can analyze your particular circumstances to determine if you have the right to terminate the contract legally.

Since terminating contracts without grounds to do so can expose you to legal liability, we recommend against downloading a basic template online and sending it without careful consideration. Consult with us to ensure that you are making an informed decision before terminating a contract.