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Contract Termination Agreement

Contract Termination Agreement

Simply put, a contract termination agreement ends a contract. This is one of the most basic ones in documents of mercantile law. Here, we shall be discussing the legal premise of the termination of a contract, and a sample agreement provided will help you draft one for yourself.
Scholasticus K
A contract, though one of the most primitive and simple agreements, presents a very complex premise and since the times of the barter trade it has been used extensively for trade and commerce. A contract is a legally enforceable agreement which is backed by consideration. It means that a contract is chiefly an agreement between two or more parties where in one party does or promises to; do something or abstain from doing something or giving something or abstain from giving something, in the exchange of consideration, then the agreement is said to be a contract. Thus, any given contract has two primary composing elements, namely, a promise and a consideration.

For example: A agrees to sell B a car in exchange of $15,000. In such a case for A, the car becomes the promise and the money becomes the consideration. From the point of view of B, the money becomes the promise whereas the car becomes the consideration received.

1. The Legal Premise of Contract Termination

When the transaction, that is the give and take of considerations and fulfillment of promises takes place, then the two parties are said have 'performed' the contract, or have 'honored' the contract. When a party does not perform a certain contact, the contract is said to have been 'breached'. Breach of contract is basically non-performance of a promise. There are however, several situations where in both the parties are unable to or are not willing to perform or honor the contract. In such a situation when both the parties cannot perform the contract or are not willing to honor the contract, an agreement to terminate the contract can be reached. There are 3 very important constituents for the termination agreement:
  • There should be a mutual understanding; which should be brought by an act of agreement.
  • There should be an indication of non-performance, or partial performance on either side.
  • The agreement should be mutual and should not be brought about by an act of coercion.
Upon agreement, the promise and consideration automatically get terminated and canceled with immediate effect, save any changes or provision as stated by the agreement.

2. About Contract Termination Agreement

The two or more parties involved sit down, discuss, negotiate and accept the non-performance of promises and the non-payment of considerations. In cases, partial performance or partial payment of consideration is also observed. The terms and conditions which have been agreed upon, are put down on a piece of paper along with citations and references from the original contract. The forfeiture of the duty and right which had been imposed in the original contract are declared either void and modified.

The agreement in most of the cases is written down, then signed by the parties involved plus two impartial witness and is then stamped, notarized and registered with a notary upon which it becomes applicable, legally recognized and enforceable. Original contracts often tend to have certain remedy clauses in them which provide for the creation and process of the agreement as a remedy. In several cases a contract termination letter is also issued to initiate the process.

3. Example of a Contract Termination Agreement

The following is a very small example of a termination agreement, between two merchants of electronic goods. Also note that the contract and the parties mentioned are fictitious.

Contract Termination Agreement

As mentioned in the contract signed by A and B as of date, was to be executed by performance on date. Owing to financial troubles and credit problems on either sides, the contract dated date, has been terminated with partial performance and partial payment of consideration by either sides.

Citing the reference of the original contract dated date, A was to supply B with 15,000 electronic items by date, for which B was to make a payment for 10,000 goods in cash and the payment for remaining 5,000 goods in the forthcoming 6 months following date, chargeable with an interest of 2%. The payment was to be made as per fair invoice price of each item good, which has been mentioned and had been agreed upon in the original contract.

Citing reference to the initial and originally accepted contract, A and B both find themselves incapable of performing the complete contract. The parties in the presence of lawful witness, and at the absence of coercion, have reached an agreement that the contract be terminated, with immediate effect.

In the light that A has already supplied B with 5,000 items as per the initial contact, the same has been paid for in cash, through transaction dated date.

With immediate effect, either party does not owe the other anything, and both parties have accepted the settlement, final payment and full and final termination of the contract dated date, in the presence of two impartial witnesses and Notary of State.

Signatures and Seals

Now in case of smaller termination contracts, one can rely on a self composed agreement and the notary's signature. In cases where there are several more complications involved, it is better to approach a lawyer or attorney, in fact your lawyer would also be able to do it pretty quickly.