1. General Contract Information
2. About Termination Agreements
3. Terminating a Contract by Mutual Consent

Updated October 28, 2020:

Termination of contract by mutual consent takes place when a contract is no longer being followed, if the contract can no longer be performed, or the parties involved ceased operating the business. When these situations occur, the parties can formally terminate the agreement in writing.

General Contract Information

Contracts are legally binding agreements that parties voluntarily enter into. Parties always have the option to terminate a contract by mutual consent. They also have the option to create a new contract.

Terminating a contract will not affect any liabilities for breach of contract that occurred before the contract ended.

When one party wants to terminate the contract but the other does not, this can cause problems with contracts. When the termination is mutual, no adverse or negative consequences are involved unless the contract affects other contracts. The contract is no longer enforceable once it is terminated.

In the event that terminating the contract affects other contracts, it will be necessary to renegotiate those contracts. This must be done before terminating the contract. Although you are terminating one contract, you are still obligated to adhere to the terms of other contracts.

Do not attempt to terminate a contract without first having the consent of the other party. Also, do not terminate without first consulting with an attorney to make sure you are not held liable for breach of contract.

About Termination Agreements

There is always the option of verbally agreeing to terminate a contract and discontinue performing the terms. To protect yourself from being sued at a future date in such a case, it is recommended that a contract termination agreement be drawn up.

A termination agreement formally records the parties' decision to cancel the contract. Termination agreements are also referred to as a termination of contract, notice of cancellation of contract, and notice of termination of contract. When drafting the agreement, keep it simple but straightforward, detailing the facts. Have all parties sign the agreement. Have it witnessed by a notary or another person.

The specific terms and conditions of the agreement may include the option to back out of the contract within a certain timeframe. This is referred to as the cooling-off period. This is generally applied when transactions occur at a different location, such as a trade show or door-to-door sales.

Each state has its own rules and regulations regarding the terms of contracts. Moreover, one state may have a rule or regulation while another state requires something different. For this reason, it is best to seek legal advice when dealing with a termination agreement.

A termination agreement becomes effective:

  • On the specific date that both parties have agreed to.
  • Once it has been hand-delivered.
  • When it is delivered by an agent.
  • Seven days after being placed in the mail with prepaid postage.
  • When it is post-dated for a future date.

If the change to the contract is minor, both parties can agree to create and sign an addendum to the existing contract. If the terms are being significantly altered, it may be easier to terminate the existing contract and renegotiate a new one. Either way, it is best to consult with an attorney.

Consider the following when terminating a contract by mutual consent.

  • With some agreements, there may be an automatic date when the contract will expire. Others may be rescinded without the consent of both parties. Check the terms of your agreement for either clause.
  • Check for a notice provision, which requires formal written correspondence between the parties.
  • Draft a letter explaining your desire to terminate the contract by mutual agreement and the reasons why you believe this course of action is beneficial to both parties.
  • Request a response to the letter.
  • Mail the letter to the other party to be in compliance with the notice clause in your agreement.

Keep in mind that when terminating a contract, if the other party is unwilling to consent to the termination but you have determined he or she has violated a material portion of the contract, you may have grounds to terminate the contract for cause.

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