Articles

Company Guide to Contract Performance and Termination

By Joanne Hue, Last updated: 2023-01-12 (originally published on 2022-12-06)

Contract Termination_Contract performance
Image by Freepik

The officially signed agreement between two or more than two parties is known as a contract. It is legally enforceable. A contract is a binding document and it pre-disposes the entities that enter it into obligations that have been outlined within the contract.

In this article, we provide you with a company’s guide to contract performance,  termination, and conditions of terminations. We will also help you understand what are the repercussions of terminating a contract and what might be the likely outcomes in case of breach of a contract.

What is the Performance of the Contract?

In a contract, obligations are established and exchanged between the parties. This means your company promises to provide or conduct something in exchange for performance by the other entity with whom you form the contract. When the second party completes their half of the promised obligation, they are said to have performed their contractual obligation. Both parties don’t need to complete their obligation for one party to fulfill their responsibility under the contract.

 Likewise, a contract can also have perpetual reciprocal provisions. Hence, the complete fulfillment of one party’s role is not necessary for the performance of a contract. 

For instance, if your company forms a contract with an agency to supply materials for financial exchanges, and the contract entails continuous exchange for the next three years, completion of the term of the contract is not necessary for substantial performance. In this case, the standard is the recognition of substantial performance and not the fulfillment of contractual obligation till term. If there is a material breach from a party, then their standard for substantial performance is not met.  

Occasionally, you and the party who has entered into a contract might fail to fulfill the performance of the contract. This failure to perform the agreed obligation is known as a breach of contract. Partial performance is when a party only performs a portion of its obligations and does so only partially or with significant defects. 

There are various situations where a partial performance under a contract may be acceptable. However, the compensation would change to reflect the level of performance. You need to understand that partial performance may not always entitle the violating party to compensation.

What is Contract Termination?

Not all contracts are performed to term. Discontinuing the applicability of a contract before all parties have completed their obligations under it is known as contract termination. There could be multiple reasons to contract termination, ranging from the impossibility of performance to a fundamental change of circumstances.

 Contract Termination indicates that one or more parties have decided to end the contract earlier than they had initially anticipated. If a contract is terminated, it is no longer enforceable to the parties in question. 

Generally speaking, the result of a company terminating a contract refers to it releasing the second party from any unfulfilled duties. However, termination of the contract does not mean that parties do not hold any liabilities for the violation of the contract before termination. Hence, it is always safe to have indemnity clause in the contracts.

If you intend to terminate a contract, your company or the parties involved can still be held liable for the breaches of the contract. This means, even if the contract is terminated, your company may still go forward and make claims to seek compensation for the damages that may have occurred from the violation of the contract.  

Within the common law, it’s completely reasonable for a company to argue on the validity of the contract before termination and make claims on breaches from the other side.

Types of Contract Termination in Employment Contracts

There are two types of contract termination: termination for cause and termination for convenience. For example if the dismissal is for a good reason, it is known as a termination for cause. A company may decide to let go of an employee for several reasons.  Dishonesty, fraud, and divulging private information are some acts that may lead to a company terminating an employment contract.

 Likewise, when exercising a right to terminate for convenience, the terminating party is typically required to give written notice before the termination becomes effective.

The ability of a business to terminate a contract may be based on the terms of the agreement or general contract law principles. Conversely, there is no universal rule of contract law that allows for termination for convenience. Termination for convenience may only result from the conditions of a contract. If the contract outlines situations in which termination for convenience is permissible, only then a company can use convenience to terminate it.

While formulating a contract, you may define what is a major breach. It is advisable to review contract case laws that hold relevance to your company’s position. 

Breach of Contract

A breach occurs when the conditions laid out in a contract are not followed. If the breach is substantial, it gives the non-breaching party the authority to treat the violation as a breach of the entire contract.  Violation of a contract can be used to seek compensation for damages caused by the breach.

 A material breach can be identified by the gravity of the violation. However, the material breach is viewed on a case-by-case basis. Usually, when the aggrieved party has suffered serious financial losses as a result of the contract violation, then the breach is regarded as a material breach.

How to avoid Contract termination?

Usually, contract termination is disadvantageous in a business. It stagnates progress and prevents both parties from acquiring their intended objectives from the contract. To prevent contract termination, It is preferable to draft stronger contracts. It is also necessary for both parties to monitor whether the other is following through with their contractual commitments. This will help prevent contract termination.

 While unforeseen circumstantial changes could occur, it is wiser to observe whether the other party holds the ability to carry out their contractual obligations. 

Oftentimes, companies that are rapidly expanding have smaller resource allocations. It might be difficult to identify and examine earlier contracts after they have been signed since many businesses don’t have a consistent approach to contract management. This makes them difficult to navigate through. Because they are not aware of their contractual obligations, the legal and business teams are unable to oversee contract compliance. A company should have an efficient system of contract management and rapidly make amends to any updates.

Furthermore, badly written contracts can be detrimental and lead to unintended contract termination. It is inadvisable to leave business teams unsupervised while they create contracts. This may entice contract risks. 

What happens after you terminate a contract?

If you terminate an ongoing contract, all parties will be freed from their remaining contractual responsibilities. However, contract termination depends on how successful you are in ending your agreement. If a serious violation led to the termination, the breaching party might even be required to offer the other party specific remedies for the termination and breach. The possible outcomes of a contract breach could be injunction and damage compensation. 

What happens if you terminate a contract incorrectly?

Prematurely ending a contract without proper justification might lead to a charge of wrongful termination. The party to a contract may make claims of breach of contract.  Before enforcing contract termination when the other party commits a small breach, it is important to take the rights of another party into account. The majority of the time, the most viable ground for contract termination is a material breach. If you terminate a contract without the other party committing the material breach, they may have the entitlement to make claims against your company. 

To further understand how you can amend your contract without having to terminate it, read: Amend a contract you’ve already signed and choose the options provided by Zegal. 

You may also like:

Tags: contract performance and termination

Like what you just read?


Subscribe to our newsletter and be the first to hear of the latest Zegal happenings, tips and insights!