Contract Termination: When Ending an Agreement Is Legally Permissible

Understanding the "why" behind the conclusion of a contract is the first step in a risk audit:

• Expiration: The contract naturally reaches its end date as defined in the term clause. No party is at fault.
• Termination: One or both parties exercise a specific right to end the contract before the natural expiration date.
• Breach of Contract: One party fails to perform, leading the other party to potentially seek termination as a remedy.

The law generally favors the stability of contracts. Because the court views a contract as a binding private law between parties, any attempt to break that bond is scrutinized. If you terminate without a clear legal basis, a court may view your exit as a wrongful termination, which is itself a material breach of contract.

This is a fault-based termination. It occurs when one party has failed to meet a vital obligation. 

Common triggers include:

• Insolvency or bankruptcy of the counterparty.
• Repeated failures to meet performance benchmarks.
• A material breach that goes to the heart of the agreement.

Many modern service agreements include a termination for convenience clause. This allows a party to end the contract for any reason(or no reason at all)provided they give the required notice. While this offers maximum flexibility, it often comes with a termination fee or specific post-termination obligations to mitigate the harm to the other party.

Not every mistake allows for contract termination. Only a material breach(one that deprives you of the benefit of the bargain)justifies an exit. If the breach is minor or technical, the law typically requires you to stay in the contract and sue for damages later, rather than ending the relationship immediately.

Most contracts provide a safety valve known as the cure period. If you identify a breach, you must usually send a formal notice and give the counterparty a specific window (e.g., 15 or 30 days) to fix the issue. If the party cures the breach, your right to terminate for that specific issue is extinguished.

The notice requirements clause is one of the most frequently litigated sections of a termination dispute. 

It defines:

• The Method: Does notice have to be via certified mail, or is email sufficient?
• The Recipient: Who exactly must receive the notice?
• The Content: Does the notice clearly state it is a "Notice of Default" or a "Notice of Termination"?

If a contract requires a 60-day notice period and you walk away after 30 days, you have committed an anticipatory breach. The law requires clinical adherence to the timelines established in the agreement to avoid liability.

Upon termination, the breaching party is usually liable for compensatory damages. However, the terminating party also has a duty to mitigate their losses. You cannot simply walk away and let damages accrue if there were reasonable steps you could have taken to minimize the harm.

Certain parts of a contract are designed to survive the termination.

These survival clauses often include:

• Non-Disclosure Agreements (NDAs): Confidentiality duties usually last for years after the contract ends.
• Indemnification: The duty to pay for legal losses caused by your prior actions remains.
• Dispute Resolution: The requirement to go to arbitration rather than court still applies to the termination dispute itself.