Cutting Ties: The ABCs of Contract Termination

”Contract termination” is commonly used to describe a scenario in which one party seeks to disengage from a contractual agreement, be it of a commercial or private nature. From a legal standpoint, contractual termination can occur under various scenarios, ranging from situations where the contract no longer serves the interests of one party to breaches.

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One of the first rules regarding contracts that you are taught in law school is that they represent a binding agreement between parties. Once consensus is achieved and a written agreement is executed, the agreed-upon clauses and conditions can only be modified through mutual agreement or, in the case of multipartite contracts, by unanimous consent.

The legal principle is rooted in the reasonable expectation of predictability, ensuring that neither party can unilaterally alter the terms of the agreement to the detriment of the other. However, as changes are an inevitable part of both personal and business landscapes, a contract deemed useful today may lose relevance tomorrow.

In such circumstances, it becomes useful to familiarize oneself with the remedies through which contracts may terminate. If you find yourself in one of the situations below, you may utilize the relevant information and indicated document to terminate the contract. Conversely, if your circumstances do not align with any of scenarios below, you might be in a very particular case, and we recommend booking a professional consultation with legal counsel.

1. Expiration of the Contractual Term

When a contract is established for a specific duration, it automatically terminates upon the agreed term's expiration. The law assumes that, at the time of signing, the parties implicitly determined the necessary interval to achieve the contract's objectives. Consequently, once the term lapses, there is no justifiable reason to uphold the contract.

However, this seemingly straightforward process can be nuanced. Various contractual mechanisms, such as automatic renewal clauses, have been created to adapt to market dynamics.

Automatic renewal clauses allow for the extension of the contract beyond the initial term. The extension may be for a specific duration (usually equal to the initial period) or indefinite. Some automatic renewal clauses are embedded in the legal provisions, applying to contracts unless expressly excluded by specific clauses.

Additional agreements (or addenda) may also facilitate the extension of a contract beyond the initially agreed-upon term. Through such additional agreements, parties can modify other contract clauses or agree solely on their extension for a new period, whether determined or not. A model for an additional agreement facilitating contract extension can be found here. If you wish to modify additional contractual clauses as well, get a customized additional agreement drafted.

2. Termination of the Contract by Mutual Agreement

Termination by mutual agreement is the most straightforward method through which a contract ends before its stipulated term. Essentially, parties enter into a new agreement by mutually deciding to waive the initial contract.

Legally, termination by mutual agreement is highly flexible, affording parties a broad spectrum of options to determine when, how, which part of the contract concludes, and under what conditions.

This model for a mutual termination of a contract is user-friendly, especially for common contractual scenarios.

3. Contractual breach (in Romanian, ”reziliere”)

Termination for breach serves as a penalizing mechanism in cases where one party fails to fulfill its contractual obligations, thereby breaching the agreement. An illustrative example is a buyer not paying the stipulated price for goods.

Importantly, only the ”innocent” party can decide to terminate the contract. This implies that no party has the option to refrain from contract performance solely to initiate termination. Furthermore, it is not mandatory to pursue termination in every instance of contractual breach. Some breaches are of minor significance, while others can be resolved without terminating the contract.

In any way, termination for contractual breach comes at a cost. The non-performing party is liable for damage caused to the other party and must fully compensate for the immediate, visible harm resulting from non-performance and well as for the non-achieved (hypothetical) benefit.

4. Unilateral termination following a notice of termination

In specific scenarios, a party may terminate a contract unilaterally without the consent of the other party. This possibility exists when the contract's clauses or applicable laws provide for the right to unilaterally terminate the agreement.

The party opting for unilateral termination is obligated to grant a grace period to the other party. Typically, this obligation is fulfilled through written notice sent via email or courier.

The conditions and effects of unilateral termination may vary based on the contract type and its provisions. Generally, when such a provision exists, the terminating party is not required to justify its decision.

5. Annulment (cancelation) of contracts

Certain contracts have not been validly concluded and are therefore considered null and void. This circumstance arises when parties breach mandatory legal conditions upon their conclusion.

The legal mechanism addressing this situation is called contract annulment. Common instances include violations of mandatory legal provisions or vices of consent, where a party has not validly given consent to contract formation.

6. Termination of contracts in special cases

Contracts can also terminate in exceptional circumstances. Notable examples include:

• Force majeure/fortuitous event: encompassing unforeseeable events beyond parties' anticipation and prevention, such as natural disasters.

• Unforeseeability: a mechanism meant to rebalance contractual relations when market developments render one party's performance effort disproportionately larger than the other's, leading to potential contract termination.

• Destruction/loss of the asset: wherein the subject matter of the contract is destroyed or lost before performance, prompting contract termination.

7. Make an informed decision

We now know that contract termination can occur automatically, by mutual consent, unilaterally, due to breaches or under special circumstances.

Each termination scenario comes with legal consequences. Therefore, selecting the appropriate termination mechanism for a specific situation is crucial to manage potential negative consequences and avoid situations where contract termination proves more costly than executing it until its term.

If you have a contact that no longer serves your purposes, an expert’s opinion on termination might be what you need.