Updated November 9, 2020:

The abandonment of contract definition is when both parties to a binding contract have acted in a way that makes the original contract invalid. The definition of abandonment itself is the act of surrendering your claim to, or an interest in, a specific asset.

Definition of Abandonment in a Business Scenario

With securities and investments, abandonment is an allowable withdrawal from a forward contract drafted for buying deliverable securities. In many cases, an option is not profitable or worthwhile, so the purchaser will let it expire without exercising it.

When you abandon a business asset, you must account for the asset's removal from the business's financial statements. This can result in a loss that affects the amount of net income reported on the company's income statement.

For property to be abandoned, two conditions must be met:

  • The owner has to take action that explicitly shows this person has given up his or her rights to the property.
  • The owner has to show an intention that demonstrates they knowingly relinquished their control over the property.

Essentially, the owner has to unequivocally demonstrate action that shows he or she no longer wants the property in question. As long as the property is left open and free to someone else who wants to claim it, that counts as abandonment.

Any inaction, or failure to do something with the property, and non-use, does not show the owner has relinquished their rights to the property, even if this non-action has existed for years. An example would be a farmer who doesn't grow crops on his own land. His failure to grow crops on his own land doesn't amount to legal abandonment.

Abandonment of Contract

When it comes to abandonment of contract, it can occur when both parties breach the contract and violate the terms of the agreement. Both parties must mutually agree to abandon the contract in question. If they can't reach a mutual agreement, you might wind up in litigation or arbitration. Abandonment of contract can also be shown by proof that one party acted in a way that was completely inconsistent with the contract, and the other party consented in the inconsistent actions.

If only one person abandons the contract, the other likely has a strong case for breach of contract. It's important to point out that public contracts can't be abandoned; only private ones can.

In the case of construction contracts, abandonment applies when a contractor cannot complete the work he or she was contracted for. The reasons for this can vary:

  • Contractor fails to start the project in a reasonable amount of time.
  • Contractor is unable to finish the work agreed upon in the contract.
  • Contractor fails to resume work in a reasonable time period.

This is referred to as abandonment of a construction project and, without a legal or valid excuse, the contractor can be subject to disciplinary action and forced to reimburse the owner.

Abandonment Clause in Contracts

An abandonment clause in a contract can allow either party to leave prior to fulfilling the contract's terms. Neither one will incur any penalties for the withdrawal. An example is an employee who has an abandonment clause in their employment contract and opts to withdraw. The employer cannot contest the employee's resignation.

You may see an abandonment clause in insurance contracts that allow an insured owner to abandon damaged property while receiving a settlement. The insurance company then becomes the owner of the property. This is especially common with marine property policies for watercraft and boats. If the boat sinks, the abandonment clause kicks in and gives the owner the right to give up the search and collect a full settlement. Insurance policyholders may also invoke the abandonment clause when the cost of recovering the sunken boat is more than the replacement cost from a settlement.

Abandonment and Salvage

Abandonment and salvage is where someone relinquishes an asset and another party subsequently claims the asset. This clause is also common in insurance contracts. If the owner abandons a piece of property or another insured asset, the insurance company might claim the right to salvage the item.

Owners must put their intent to abandon the property in writing. For example, if a homeowner suffers heavy flood damage, the owner can provide written notice to intentionally abandon the home to the insurance company. The insurance company can then try to sell it. This can be lucrative for salvagers, so you might find multiple parties who try to lay claim to an abandoned property or another asset.

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