How to Terminate a Contract

How to Terminate a Contract

Canceling or terminating a contract can occur when at least one party doesn't perform as promised when offering assent to the agreement. Legal termination of contracts in writing requires a party to submit a written termination; however, verbal agreements or implied contracts require only a positive statement of termination by either or both parties. Contracts, in whole or in part, are generally canceled due to vitiating circumstances such as duress, undue influence, mistake, misrepresentation, breach (nonperformance) or illegality.

Void

A contract that is void is one that basically never existed. Agreements to commit crimes cannot be enforced because enforcement would mean validating the void contract, which is illegal. Though an agreement can be considered valid upon formation, it loses its enforceability because of the nature of the performance. The term void (or null and void) in contractual issues means having no legal effect. If two men agree to rob a bank and one makes off with all the cash, the other cannot sue his partner to demand his portion because the agreement was voided when the robbery took place.

Voidable is somewhat different; a contract may be valid and enforceable, but conditions or provisions may invalidate the entire contract or a part of it. In some cases, one party may annul his obligations, but the other party could still be bound to perform. For example, a contract between an adult and a minor may be enforceable on the adult but voidable by the minor.

Estoppel

A legal principle which establishes a right to avoid a contractual obligation is called estoppel. This rule prevents a party from having to perform if the performance contradicts an already established condition. Estoppel may only allow the party to escape from part of the contract that is in contradiction. Let's say a landlord allows a tenant to pay only part of the rent for a month to make up for repairs that the tenant made to the property. He later brings an action to demand payment for the additional amount from the tenant for late payment. The tenant would assert estoppel because the landlord's original statement indicated approval.

There are several variations of estoppels. Some are

· Equitable estoppel. A principle that stops a party from establishing a new expectation that contradicts a previous expectation, expressed through words, actions, or silence when continuing without the estoppel will cause harm.

· Promissory estoppel. Prohibits a promisor from denying a promise they previously made when the promisee relied upon that statement.

· Estoppel by silence. Prevents party A from making an assertion that puts another party at a disadvantage when party A had an opportunity and the obligation to speak but did not do so. Bill can't refuse to pay Tom when Tom mistakenly replaces Bill's roof shingles while Bill is home.

· Estoppel by deed. When a contract performance (such as issuing a property deed) is promised to a party, that party cannot return to deny the contract's validity.

· Collateral estoppel. Establishes that if a truth in an agreement has been previously established, it cannot be denied in any subsequent actions.

Rescission

Rescission is a method of denying further performance under a contract's terms. Also called setting aside the contract, rescission essentially means to revoke the contract. The contract may be rescinded by one party, or all parties may agree to terminate the agreement. It may be more difficult to rescind the contract if substantial progress has been made towards performance. Rescinding the contract unwinds the agreement, in other words, it brings all parties back to a state that existed prior to the contract being executed; this provides the parties with an equitable remedy, similar to an estoppel. Some states, such as California, recognize rescission as a statutory remedy, governed by law. Reasons for rescission include:

1. Fraudulent activity.

2. Mistake.

3. Lack of capacity to contract.

4. Impossibility to perform.

5. Duress.

6. Undue influence

Many states allow a rescission period when entering certain contracts, such as a real estate agreement. Typically, this period is enforced on large purchases, and periods can range from one to several days. A valid contract should state the right to rescind and the time period allowed. If rescission rights are not disclosed at the time of signing, an offended party may have the right to rescind even after the period expires.

A contract can only be rescinded if all parties can be restored to a condition prior to execution. If one party has received a benefit from the contract, rescission is not an option. For example, selling vegetables grown on a property acquired by one party before the selling party realizes they had no legal right to sell the property provides the buyer with a benefit, therefore the selling party cannot claim rescission, and will likely be found in breach of contract. Additionally, a contract cannot be rescinded in part; the entire contract must be terminated.

Breach

A party may file a claim of breach of contract to terminate its obligations if another party fails to perform or deviates from specified performance, performs a prohibited act, or interferes with the claimant's ability to complete the agreement. Parties that suffer loss or harm can recover damages under a breach complaint. Depending on the severity of the breach, the aggrieved party can terminate the entire contract or the parties may negotiate an amendment to the contract. A breach can be material (a significant violation of the terms which may result in terminating the contract and assess payment of damages) or immaterial (a minor deviation that may or may not terminate the contract and likely won't result in damages assessed).

Breach can occur in several forms. The parties' relationship, contract performance and timing, outside influences, and the promises committed may all affect whether a breach has taken place. According to the American Law Institute, among the most common breach complaints are

· Breach of duty. A failure to perform a duty to the other party(ies) or the public at large; failure to exercise such caution that a reasonable person would exercise.

· Breach of promise. A failure to follow through with a promise that induced another party to act.

· Breach of the covenant of warranty. Governed by the UCC, a failure of a seller to guarantee a good title (unencumbered, free of defects, and so forth) when the buyer can reasonably expect such guarantee.

· Breach of trust. A failure to perform a duty as a trustee, done willfully, fraudulently, or negligently, that violates the equity expected by a vulnerable party.

· Breach of warranty. A failure of a seller to adhere to a warranty, whether implied or expressed, as to the quality, content, or condition of a good sold.

· Constructive breach. An act perpetrated by a party that precludes them from performing according to the contract.

· Anticipatory breach. An act or statement made by a party which repudiates (denies) a promise to perform that occurs before the party is due to perform; such repudiation involves "a positive statement indicating the promisor cannot or will not substantially perform his contractual duties."

Once a breach has been determined to have occurred, an aggrieved (injured) party can sue for a remedy to compensate him for any losses incurred by the breach. He must show a breach has occurred and he has suffered a tangible, substantial loss. That does not mean the loss has to be a high value; simply that the injured party would not have suffered the loss if the contract never existed. There are three primary forms of remedy: damages, specific performance, cancellation, and restitution.

1. Damages. Three common forms include a) Liquidated damages previously identified in the contract, typically an estimate that would result following an actual breach, b) compensatory damages put the non-breaching party in a position they would never have been in if the breach occurred, c) punitive damages that require payment above and beyond the point that would fully compensate the non-breaching party, and d) nominal damages that act as a token of acknowledgement that a breach occurred, though no money was lost or substantial damage was involved.

2. Specific Performance. The breaching party must continue to perform their duty towards completing the contract. Usually ordered in cases where the contract's subject matter is rare or unique, and awarding damages would not suffice.

3. Cancelation and Restitution. If a benefit was gained by the breaching party, the non-breaching party can sue to cancel the contract and be awarded compensation that would put them back in a position prior to the contract. This voids the contract and all obligations are dismissed.

Completion

Once all the parties have performed according to each promise, and all the terms have been satisfied, then the contract is considered completed. Generally no party has further obligations, though a contract might stipulate that completion allows both parties to enter into a subsequent contract. The subsequent contract is held as its own distinct agreement and all terms and conditions must once again be agreed to by all parties involved.

Special Contract Situations

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Real Estate

There are few contracts used more often than a real estate agreement. Because of the expense and relative complexity, real property transactions must be executed in writing (or by parol). Though sales can be negotiated between two private parties, most state laws require a licensed agent to be present when the final sale is transacted. A lawyer or title company typically handles the completion of a purchase or sale. Parties are allowed to terminate a contract by rescission within a short period after agreeing to the terms; the time period varies from state to state.

There can be several documents which are included in real property purchases. Not only are there contracts assigning legal ownership, but documents for financing, testing and repair requirements, insurance, taxes, and more. New buildings require an additional, separate contract. A package for a property with an existing home typically includes a purchase and sale agreement, deed of trust, mortgage, home inspection, disclosures, escrow instructions, and a closing settlement statement.

Elements of a Purchase and Sale contract

Parties. Includes all obligated persons as parties to the transaction. Names will be placed upon the deed (which acts as a title of ownership).

Property location. Describes the address and legal description (the location on a municipal survey map). Some contracts also describe the property itself, indicating improvements like buildings, swimming pools, and barns.

Purchase price. Includes the total price and may indicate the appraisal amount, if known.

Financing. The payment method is described here. It should include the down payment amount, financed amount, and could include terms like interest rate and repayment term.

Title. A search conducted must reveal that the seller has the right free and clear to sell the property.

Closing. The closing date, the actual date that the transaction takes place, and requirements for closing are usually included.

Warranties. Indication that the seller holds the title (has ownership) and guarantees the proper working condition of the systems and construction of the building.

Earnest money. A deposit is usually included with the purchase and sale agreement (P&S) to hold the contract in place while factors like inspections and financing are completed.

Property condition. Some agreements include specifics regarding the condition of the property or improvements.

Restrictions, easements, and covenants. The contract will be subject to existing requirements concerning zoning, access, and property lines among others.

Inclusions and exclusions. Details of what fixtures or elements are included or excluded in the sale.

Default. Provisions for protecting each party in the event a party does not complete his obligations are specified.

Dispute resolution process. In the event of default, breach, or other dispute, the contract will describe the method of resolving the disagreement.

Survival. This clause explains that the provisions within the contract shall continue for a period following the purchase settlement.

Assignment. The right to extend the obligations of the contract to heirs or successors following the death of a signatory party is typically included.

Hazards disclosure. United States Federal law requires that contracts include a clause which describes hazards such as lead paint or radon gas.

Right to rescind. A clause indicating that the purchaser has a right to revoke their offer within a brief period is required in some states. Contingencies. Nearly every real estate agreement will be based upon satisfying some requirements prior to settlement.

Contingencies

A contingency clause makes a real estate contract unique among most standard contracts because they allow renegotiation or rescission if the contingency is not met. A contingency is an element that must be completed but the outcome is initially unknown. For instance, if a potential buyer must sell his home in order to purchase a new house, he can include a contingency that reads "purchase based upon successful sale of current property" or similar. Home inspections are common in the industry, therefore a contingency based upon the results of an inspection are fairly standard in real estate contracts. Some other common contingencies include:

· Obtaining financing to purchase the property.

· Receiving an appraisal price near the purchase price.

· A safe water source test result.

· Satisfactory hazard testing results

· A homeowner's association policy review, if the property is commonly owned or managed.

· A clear title history.

If a contingency is not met to a party's satisfaction, they may cancel the agreement by rescinding their offer. However, the parties can choose to renegotiate the clause that fails satisfaction, thereby making a counter offer that must be accepted by the seller to become valid. The balance of the contract typically remains in force.

Credit and Financing Agreements

Consumers applying for credit or financing enter a contract with a lender that must follow regulations set out by the Truth-in-Lending Act (TILA), enacted in 1968. The Act provides consumer protection by requiring standardized disclosures of certain provisions. It covers both open-end credit (revolving credit such as a credit card) and closed-end credit (fixed payment loans such as a mortgage). Though a contract is typically governed by the laws of the state in which it is executed, the TILA can, in many cases, preempt the regulations set by the state. Credit applications and contracts must clearly explain the following terms under the Act

Amount Financed. The contract must explain the amount to be financed minus any prepaid fees, down payment, and other charges.
Finance Charge. The lender must disclose the cost of borrowing the funds, in the form of an Annual Percentage Rate (APR).
Financing Costs. The contract must list any costs associated with repayment, such as late fees or accumulated charges.
Balance Computation. The lender must explain how payments are credited to the outstanding amount, and how the remaining balance will be calculated upon payment.
Right of Rescission. Mortgage loans provide the right to rescind the contract within a short period after signing.
Dispute Settlement. The contract must clearly define how disputes may be resolved, and what forum must be chosen.
Total Payments. For fixed loans, the total amount to be repaid must be listed.
Acceleration Clause. Conditions that allow a lender to demand repayment of the entire loan in the event the borrower violates a term or defaults on the contract.
Security Interest. The collateral to be demanded if the borrower defaults must be listed in the contract.

Commercial credit agreements are structured in favor of the consumer; however, he may not claim a lack of understanding as a basis for canceling the contract. To offer a legal tender of credit, a creditor must be licensed in the state that the company is headquartered in, and violations of the TILA can be prosecuted as a civil or criminal case.

Government Business Contracts

Contracts made with the governmental bodies in the United States are highly regulated. Government contracts are governed by statutes and regulations as opposed to most other contracts that are governed by common law or the UCC. These statutory requirements dictate how an agency can solicit bids from contractors, how a contract can be negotiated, what types of businesses are eligible to contract, and whether the process allows for open, competitive bidding or restricts the number of bidders. Agencies purchasing goods and services must follow the Federal Acquisitions Regulations (FAR). Businesses entering into a government contract must follow procedural requirements that, in many cases, provide "full and open competition." The amount to be awarded to a bidder dictates what process is used and who is eligible to bid.

Statutes impose a number of socio-economic conditions that a business must address before it is eligible to compete for a contract. Affirmative action, drug-free workplace, and minimum wage requirements are just a few conditions that must be met. Though agreements appear to be contracts of adhesion, there is some negotiating room if the bidder fulfills the conditions to be eligible to participate in the procurement process.

Contracts formed with federal and state governments have a number of non-negotiable clauses, anywhere from fifty to seventy-five in federal contracts, that are standard across agencies. Many clauses are similar to usual commercial contracts; however, there are some that are unique (and fully enforceable) to government agreements. Two notable clauses are

Termination for the Convenience of Government. Allows the agency to terminate the contract at any time, if it is in government's best interest. Wars, changing technologies, and diminished natural resources are a few reasons where the contract could be voided. The agency must notify the other party(ies) in writing according to regulations. This unilateral term is offset by the affected parties' right to recover certain expenses.
Changes. Considered by many to be the most powerful clause in contracts, this allows the agency to make unilateral changes to provisions within the contract, provided they are made within the scope of the agreement. In exchange for this privilege, the U.S. government allows for an equitable adjustment if the change warrants higher contractor expenses or additional performance time.

Labor Contracts

Contracts for employment can be structured in one of three ways 1) a contract of service, whereby one party agrees to become employed by another, 2) a contract for services, which stipulates an agreement to provide work as an independent contractor or subcontractor, and 3) a collective bargaining agreement that brings an employer and a group of employees (such as a union) together. While most employment is on an at-will basis, which constitutes an implied contract, sometimes agreements are created to clearly define compensation, responsibilities, rights, and duration of employment.

Contract terms typically include

Pay Rate. Specifies compensation criteria, including salary or wages, vacation and bonus pay, overtime, holiday and sick pay details, or pay increase criteria.
Work Conditions. Includes place of employment, health and safety compliance, work hours, and reporting responsibilities.
Benefits. Includes health and other insurances offered, retirement programs, and other special considerations available.
Discipline. Describes which situations are grounds for termination, suspension, or dismissal.
Complaints and Grievances. Includes the forum, process, and resolution options for employee disputes with management.
Confidentiality. Requires that subject matter must be held as confidential as a requirement for the job.
Non-competition. Explains that an employee may not seek employment from a direct competitor performing similar functions.
Termination. Stipulates the requirements for terminating the contract.
Exclusive Employment. Requires that the employee may be employed by only the contracting company.
Governance. Explains that lawsuits are governed by the laws of a particular state, no matter where the lawsuit is filed.

Labor relationships are best defined by a written contract. Verbal agreements, and offer letters, are generally difficult to enforce; conditions may change and terms can be adjusted without notice. Employees are best protected from unfair termination or discipline if employment terms are clearly defined within a written contract.