This article has been written by Yasar Arafath, pursuing a Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

A Termination Agreement is a legal agreement that exists between the parties to a contract which consists of the conditions known for the termination of the contracts if it should occur. Termination of Contract relieves the parties from the contractual liabilities involved in the contract.  When parties formally agree to enter into an agreement they become liable under the contract law to fulfil their contractual duties mentioned in the contract. When either party fails to perform contractual duties mentioned in the contract can result in a breach of contract and leads to termination of a contract. 

However, termination agreements can be used to terminate the contract even before the contractual duties have to be fulfilled under the contract. The termination agreement oversees the benefits, rights, and responsibilities of both parties involved in the agreement when the termination of the contract happens. Termination of contract may occur for many different reasons. Indian Contract Act governs the termination of contract and which may vary according to each individual case.

Termination of contract

Termination agreement brings a contract to an end before the performance of all those involved has fully manifested. Before the parties are able to complete all the contractual obligations stipulated by the contract, their ability to accomplish the obligations is cut short.

Generally, the termination releases the parties from their unfinished obligations mentioned to the agreement. Even though the contract has been terminated it doesn’t mean that one of the parties has committed a violation of the agreement and that can be the reason for the cessation.

 Despite the fact that the contractual obligations to fulfil according to agreement terms have ended, the parties can still file claims for restitution under the common law and if any termination allowances stated in the agreement.

Understanding the termination of contract

Usually parties in a contract focus on the implementation of a contract, the termination period is also an important aspect where the parties need to focus. The purpose of a termination agreement is not always to end the partnership.  The initiation of the termination agreement may be due to a change in relationship or services offered or that the contracted services have already been completed. 

In order to legally end a contract, a termination agreement should be created by a legal representative of both parties. When disputes arise the contract signed by the parties will act as the most important legal document.  The termination agreement should be prepared to ensure that every aspect of the original contract is understood.  A termination agreement will prevent confusion and can protect parties in the contract from future legal disputes involving a breach of contract. Verbal termination of contract agreement is very difficult to prove.

Reasons for Terminating a Contract

1. Mutual consent: A contract can be terminated for convenience, which may be done if the contract includes a clause titled “termination for any reason by notice.” If such a clause is mentioned in the contract carefully evaluate the termination section before you start the process. In general notice period is 30 days, but the contract should outline the required notice period to be served. If the contract doesn’t include the clause to terminate for any reason by notice, the contract cannot be legally terminated just because it doesn’t meet the services mentioned in the contract. 
2. When one of the parties becomes bankrupt: Another reason to terminate a contract is if the other party involved in the contract is no longer able to pay their debts or hold up their end. When such a situation arises, it is possible to terminate the contract for insolvency. 
3. Failure of a set precedent or condition: Termination becomes necessary if the contractual obligations are now impossible to perform due to events that are beyond the control of the parties involved in the contract. These events might include major weather issues a riot, or an act of war which are outside of either party’s control. This is referred to as a “force majeure,” clause in the agreement. 
4. When a Legal order is passed: when a legal order is passed that prohibits the agreement and performing such will be illegal.

In all such situations performing a contract is not possible, where performing the contract will cause loss. At such times, the parties look at the clauses present in the agreement to terminate the contract. If no such clause is mentioned either of the parties need to send notice to the other party expressing the intention and reasons for the termination of the contract. Both the parties need to enter into a termination agreement that outlines the terms and conditions for the termination of the contract.

Kinds of termination

• Termination for cause.
• Termination for convenience.

The right to terminate the agreement is based on the rules of contract law or based on the terms of the agreement itself. Termination for convenience may have received referring to in the conditions of an agreement, which allows for such termination to take place because there is no basic contract rule that allows for termination for the sake of convenience. Termination for cause is made as a reaction to a material breach of the agreement by the other party.

What qualifies as a material breach of the agreement may be determined by the terms stated in the agreement itself, and when one party is negligent to perform any term of the contract it is considered an infringement. Significant damages can be awarded because of a material breach and that entitles the non-breaching party to view the material breach as an infringement of the entire agreement.

How do you terminate a contract?

Sometimes in a contract one or both contracting parties may not be interested in completing the contract and instead terminate the agreement before fulfilling the contractual obligations mentioned in the contract. Termination of a contract is required for an economical decision where the working relationship between the parties is no longer beneficial or parties have found a better deal elsewhere. Generally, it is a good practice to negotiate the termination with the other party and if necessary to compensate the other party for terminating a contract before fulfilling the contractual obligations. Handling the negotiation for termination and compensation out of court will save both parties time and expense.

The Parties to a contract need to understand that contract terminations are often loaded with legal risk. For termination of a contract, there must be a justifiable reason, otherwise, it would amount to a material breach of the contract and liable to pay the other side damages.

The first step in termination of the agreement is to check the contract for a termination clause. In addition to the potential reasons why either party can terminate the agreement, the agreement might include instructions on how to notify the other party that you want to end the contract.

The contract might provide guidelines on how and when notice must be given. As a general rule, notice to terminate a contract should always be in writing. Always verify the contract for instructions, including where and to whom to send the notice

Why you need clear termination agreements

Lawsuits

Nobody likes the sound of that and they will come when you least expect of them. Your termination agreement can save thousands of dollars in legal services. Even when it is all set and there is nothing to worry about, still your business is not protected.

Entering into a termination agreement can save from Lawsuits and keep the business going with good relations with the other party.

Damages

If the contractual obligations are not possible to perform and due to which the other party is possibly suffering loss, he would sue for the damages for the loss caused by the breach. Generally terminating party compensates the non –termination party for all the profit the other party couldn’t make due to termination. Termination Agreement can save the party from paying huge amounts for the loss caused by the breach as the other party is notified well in advance before it amounts to breach.

Reputation

Termination agreement can protect from wrongful information distribution. With a clear termination agreement notified and signed can save the image of the parties and set a clear image in the field.

Difference between cancellation and termination?

The legal term for cancelling a contract where there has been a breach of contract due to fraud, misrepresentation, mistake, duress, or undue influence is Rescission. It essentially voids the contract from the beginning, while a termination agreement means the parties are under no obligation to perform in the future.

Conclusion

A contract is an agreement between two or more parties that legally binds them together. In which at least one of the involved parties must meet all obligations made in the contract before it can be considered complete. One exception to this rule is terminating the contract, which voids the legal terms. Many circumstances could arise that would cause the necessity to terminate a contract. A termination agreement can save the parties from committing the breach and also relieves the parties from future obligations. Termination should be the last option in a Contract.

Reference

• https://www.upcounsel.com/termination-agreement-definition
• https://www.upcounsel.com/end-of-contract
• https://www.upcounsel.com/terminate-contract
• https://www.whiteplainslawyer.com/importance-termination-clause-contract/
• https://barneslawassociates.com/terminating-a-contract-the-importance-of-getting-it-right/
• https://www.legalmatch.com/law-library/article/termination-of-contract.html
• https://www.lawteacher.net/free-law-essays/contract-law/termination-of-contract-and-invitation-to-treaty-contract-law-essay.php
• https://www.legawise.com/drafting-the-termination-clause-in-a-contract#:~:text=Drafting%20a%20correctly%20worded%20termination,be%20brought%20to%20an%20end.
• https://www.digitalagelawyers.com/article-top-3-reasons-why-you-need-a-clear-termination-clause-in-your-employment-contracts/
• https://www.beswicks.com/the-importance-of-termination-rights/ 
• https://smallbusiness.chron.com/termination-clause-agreements-68826.html