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Termination Of Contracts Due To Breach: Legal Implications For Business Entities

Businesswoman signing a contract

The world of business runs on contracts. Without contracts, there is no supply chain, employees and employers have no accountability to each other, and businesses cannot coexist and cooperate. Business relationships thrive and rely on contracts because they clearly define expectations and hold each entity accountable to their agreements. They promote harmony and a stable environment for growth and prosperity.

But what happens when those agreements aren’t fulfilled? A breach of contract occurs when a participating party is unable or unwilling to meet the terms of the contract. Under these circumstances, the non-breaching party may choose to initiate a termination of contract, thereby releasing themselves from the contractual obligations to the breaching party.

For more information on contractual obligations and breaching of contracts, consider scheduling a consultation with an experienced New York business litigation lawyer from Schwab and Gasparini at (315) 422-1333 in Syracuse, (518) 591-4664 in Albany, (914) 304-4353 in White Plains, or (914) 304-4353 in Hudson Valley.

What is Contract Termination?

According to the Federal Acquisition Regulation (FAR), any terminated portion of a contract is not to be performed by the contractor following termination. There are numerous ways that this can happen, and not all of them involve breaches of contract. Mutual agreement is one of the most common ways to terminate a contract. In other cases, contracts are created with an expiration period, after which they are no longer valid.

However, contracts may also be terminated in the event of a breach. If one party neglects to fulfill the obligations outlined in the document, the non-breaching party may elect to terminate the contract. This may occur because the breaching party was unable to fulfill their responsibilities, or they did not fulfill them to the standard outlined and expected by their contract. When the contract is terminated, both parties are exempt from their duties as outlined by the document. Although, in some cases, special action must be taken in the event of a termination.

The Right to Terminate a Contract

The right to terminate often depends on the termination clauses of the contract. Most contracts detail under what circumstances and for what reasons any party can terminate the agreement. Therefore, the termination rights will vary widely between instances. If a contract does not have a termination clause, the involved parties may then defer to common law to find grounds for termination.

The binding terms of a contract are not just words on a page; they are an extension of the law regarding contractual relationships. If a party violates their contract, the non-breaching party may have the legal grounds to terminate the contract. However, before pursuing termination, the non-breaching party would benefit from assessing their grounds for this action, by reviewing the terms of the contract, consulting the termination clauses, and otherwise ensuring their actions are legally justified. The non-breaching party may also want to consider Alternative Dispute Resolution (ADR) including mediation and settlement.

What is Considered a Breach of Contract?

There are several varying kinds of contract breaches, but all of them can be defined as an action or inaction that fails to meet the criteria outlined in the contract. This can include failure to deliver goods and services, failure to provide payment for goods and services, failure to meet specified deadlines, or failure to maintain the quality of service outlined in the contract.

In contract law, different terms are used to define and describe breaches of contract.

A minor breach is a violation that does not cause significant damage to the non-breaching party or only indirectly violates the terms of the contract.
A material breach is a direct and substantial violation of the agreement. In the event of a material breach, the non-breaching party may be entitled to remediation.
There are also anticipatory breaches, in which the breaching party announces their intent to breach the contract.
This is different from an actual breach, in which the breaching party has already acted upon their intent to breach.

For more information on the differences between the various kinds of contract breaches and disputes, consider consulting a dedicated and experienced New York business lawyer at Schwab and Gasparini.

How to Terminate a Contract

If you are interested in terminating a business contract, you must do so in a specific way in order to ensure your legal and financial rights are protected.

Ensure Proper Grounds for Termination

The first step in the termination of contract is to review the contract itself and ensure that you have proper grounds for termination. If the contract is not clear on the issue or the non-breaching party is not properly informed, the attempted termination may backfire. Common grounds for this sort of action include a breach of the contract terms, changes in business circumstances, or non-performance of the breaching party. Be sure that the grounds for termination are legally sound and appropriately documented. Without sufficient evidence that there has indeed been a breach of contract, the termination may be unsuccessful.

Write a Termination of Contract Notice

Once the grounds for termination are clear, the non-breaching party must then provide a written notice informing the breaching party of their intent to terminate. This notice should be documented and provide evidence for the breach of contract, and it should be provided with sufficient time for the breaching party to respond. This action ensures transparency of the process and can help to protect against future litigation.

Deliver the Termination Notice

After this document is prepared, the final step is to deliver it to the breaching party to inform them of the non-breaching party’s intent to terminate the contract. The delivery of the notice should also comply with the expectations set out in the termination clause. Many contracts have specific stipulations of when, how, and with how much advance notice this document should be delivered. Adhering to these guidelines will ensure both parties can take appropriate action.

What Happens After Termination of Contract?

After the contract is terminated, all future obligations and expectations are nullified. However, pre-existing obligations may still be in effect depending on the terms of the agreement. Terminating a contract often does not absolve the parties from all responsibilities, as it may lead to disputes or claims for damages, depending on the reasons for termination.

Post-termination clauses are decided and agreed upon by both parties when the contract is created and will look different for every contract. Following these accordingly can help to prevent any further legal disputes. For example, many contracts allow for a negotiation of a settlement in the event of a breach of contract to reach a mutually beneficial end to the contract. These discussions and negotiations can help both parties to move forward and promote a positive business relationship.

Frequently Asked Questions

The following are some frequently asked questions regarding termination of contracts in New York due to breach.

Can Termination Clauses Be Found in All Types of Contracts?

Termination clauses help detail under what circumstances termination of contract is legally acceptable, including breaches, insolvency, or changing circumstances. They are not found in all types of contracts, however.

What Are The Legal Implications of Terminating a Contract for the Non-Breaching Party?

The non-breaching party, upon terminating a contract, is freed from their obligations to the breaching party to the extent determined by the termination clause. However, they may still be responsible for fulfilling the obligations present before the termination.

What Liabilities Can the Breaching Party Face Upon Contract Termination?

The breaching party may be liable for damages that came about as a result of the breach. This will vary between contracts but may include compensation for damages and legal consequences as detailed by the contract.

Contact an Experienced and Dedicated New York Business Attorney

Termination of contract is only one facet of contract law, and the legal proceedings and actions can vary widely depending on the actual legal working of the contract or agreement. If you are seeking a deeper understanding of contract law regarding your specific situation, consider scheduling an appointment with an experienced New York lawyer from Schwab and Gasparini at (315) 422-1333 in Syracuse, (518) 591-4664 in Albany, (914) 304-4353 in White Plains, or (914) 304-4353 in Hudson Valley.

Sun Jun 23 2024, 12:00am