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What Are the Different Types of Contract Termination?

By K. Kinsella
Updated May 16, 2024
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A contract is a written agreement between two parties that involves one party providing some kind of product or service to the other party in exchange for payment. Contract termination occurs when one or both of the parties involved in a contract decide to cancel the agreement. Terminations can occur for a variety of different reasons ranging from monetary disputes to dissatisfaction with the services provided. Most countries have laws that prevent people from breaking contracts unless certain conditions exist, such as when both parties agree to cancel contract or when one party violates the terms of the contract.

Employment contracts normally have an expiration date and the employer is only required to pay the employee for work performed during the contract term. Standard employment contracts normally include a clause giving the employer the right to terminate the contract if the employee fails to perform to the expected level. Employees also have the right to terminate a contract if the employer fails to pay the employee in a timely manner or expects the employee to perform work that was not part of the employment contract.

Service providers, such as telecommunication companies and wholesalers, agree to contracts with businesses and consumers. Typically, service providers have the right to cancel a contract if the individual or business that ordered the service fails to pay for it. Consumers and businesses often have the right to arrange a contract termination if they are dissatisfied with the service provided. Depending on the terms of the contract, the service provider may have to offer a refund or the party canceling the service may have to continue to make payments for a specified period of time.

In some instances, a contract termination occurs as a result of a mutual agreement between the two parties that signed the contract. This often occurs during an economic downturn when parties begin work on joint ventures that become unfeasible as a result of a loss of funding or lack of liquidity caused by wider economic problems. Contracts that begin with a probationary period stipulate that either party can initiate a contract termination for any reason. Since both parties agree to this probationary period, the termination of the contract is seen as mutually agreed upon even if only one party is in favor of it.

When one party decides to terminate a contract, the other party involved can sue that party for damages if the contract termination is not permissible under the terms of the contract. Laws in most countries enable people and businesses to sue for income or revenue that was lost as the result of a contract being wrongfully or illegally terminated. To avoid such situations, many people hire lawyers to review contracts before the contracts are signed and prior to terminating any in-force contracts.

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