Contracts are legally binding agreements. Each party to a contract is obligated to hold up their end of the bargain. If either party fails to fulfill their obligations under a contract, they run the risk of being sued for breach of contract and can be on the hook for damages. Sometimes, though, the law will allow you to terminate a contract without running that risk.
You can’t get out of your obligations under a contract simply because you’ve changed your mind about what you bargained for or because it would be inconvenient for you to have to perform your end of the deal. You need to show legal grounds for breaking the contract. Here are some of the basics of contract performance and some common grounds for getting out of a contract.
The Basics of Contract Performance
Doing what a contract calls for is called “performance.” For example, suppose you enter into a contract to design a website for a business. You deliver the website as promised and the client pays you. That’s it—the contract is completed.
Similarly, you could enter into a contract to sell your house for a certain amount of money. If the buyer pays the purchase price and meets all the other requirements of closing, you’re obligated to sell the house to them.
But if either side fails to perform as required in the contract, that party has breached the contract.
Ways to Get Out of a Contract
Starting with a breach of the contract by the other side, here are some of the most common scenarios where businesses and people are able to legally get out of contracts.
The Other Side Breaches the Contract
If the other party fails to perform their end of the bargain, you’re not required to uphold your end. Indeed, the most common basis for allowing a party to get out of a contract is that the other side has breached it.
Consider a business contract for the purchase and sale of goods. If the vendor fails to deliver the goods as specified in the contract, the customer isn’t obligated to pay. On the flip side, if the contract calls for payment in advance and the customer doesn’t pay, the vendor isn’t obligated to deliver the goods.
You can think of it this way: Once one side breaks a contract in a significant way, the contract is broken for both sides, meaning the non-breaching party doesn’t have to perform their obligations.
For you to be able to get out of the contract, the breach by the other side must be “material.” It has to be substantial enough to significantly decrease the value of the contract to you. It has to be more than a minor or “immaterial” failure by the other party.
What’s material or immaterial depends on the terms of the contract, the parties’ expectations, and the impact of one side not holding up their end. Consider the following example.
The Contract Becomes Impossible to Perform
When two sides make a contract, it must be possible for both to perform their obligations. Sometimes, though, something happens after the contract is finalized that makes performance by one or both parties impossible. In that situation—if it’s impossible for either side to do what the contract calls for—the parties can mutually cancel (“rescind”) the contract.
For example, assume that you enter a contract for a painter to paint your portrait but the painter then dies. The contract to paint your portrait is terminated by impossibility of performance.
For a contract to be impossible to perform, the circ*mstances must make it literally not possible for a party to fulfill their obligation. Inconvenience won’t do the trick. If the painter in the above example doesn’t die but rather finds a more lucrative gig painting someone else’s portrait, the contract isn’t impossible to perform. By not doing your painting, the painter will be in breach of the contract.
The Contract Is Based on a Mutual Mistake of Fact
For a contract to be made, there must be a “meeting of the minds.” In other words, the parties must agree about what they are bargaining for and about their rights and obligations under the contract. If the parties are mutually mistaken about some fundamental aspect of the contract, then they haven’t reached a meeting of the minds on it.
For example, imagine that you made a contract to buy a Picasso painting from an art dealer. However, after entering into the contract but before the purchase is completed, you and the dealer learn that the painting wasn’t actually by Picasso. The contract was clearly based on a mistake of fact, meaning you’re not obligated to proceed with the purchase after learning the truth.
The Contract Is Based on Fraud or Misrepresentation
If one party uses fraud or misrepresentation to trick the other into making the bargain, there’s no meeting of the minds. The victim of the fraud doesn’t understand what they’re getting or what they’re committing to, so they haven’t really agreed to it.
In our Picasso painting example above, if the art dealer knows all along that the painting is a forgery but represents it to you as a genuine Picasso, the dealer has committed fraud. You think you are buying a Picasso; they know you aren’t. If you learn the truth about the painting, you can get out of the contract—you’re not obligated to pay for the fake.
A Party Lacked the Capacity to Make the Contract
Sometimes people can escape contracts because the law says they weren’t able to make them in the first place. The law recognizes two categories of parties who lack the “capacity” to contract:
- Minors, and
- people with psychological disabilities.
Say your 13-year-old child signs a contract to buy a used car. The contract is voidable because minors (usually defined as people younger than 18) aren’t old enough to make them. That the contract is “voidable” means that your child can get out of the contract as if it was never made. Of course, if your child has taken possession of the car, someone must return it to the seller in order to void the contract.
Or imagine that your mom is elderly and has lost the ability to understand what she’s doing. A contract she makes to buy a vacation property can also be voided, in this instance because she wasn’t mentally capable of understanding its terms.
In some cases, the law recognizes a third category of people lacking the capacity to contract: intoxicated people. People who are intoxicated by drugs or alcohol are usually considered to possess the capacity to contract. Courts generally rule that those who are voluntarily intoxicated shouldn't be allowed to avoid their contractual obligations, but should instead have to take responsibility for the results of their self-induced altered state of mind.
However, if a party is so intoxicated as to be unable to understand even the nature and consequences of the agreement, and the other (sober) party takes advantage of the person's condition, then the contract may be voidable by the inebriated party.
For more on this topic, see Who Lacks the Capacity to Contract?
There’s a Prior Agreement to End the Contract
Contracts can also be ended by a previous agreement. For example, the contract might state that either party can terminate it by giving written notice to the other party. Be careful and clear with contract language about termination in order to avoid misunderstandings about when and why the contract can be ended.
Getting Out of a Contract Can Be Tricky: Proceed with Caution
In some cases, the grounds for terminating a contract are clear and indisputable. In the example above of the painter dying after the contract is made but before the portrait is painted, the contract is terminated because it cannot be performed.
Some Cases Aren’t Clear-Cut
In other situations, though, the other party might dispute the facts and argue that you shouldn’t be able to get out of the contract. Maybe you say that they have materially breached the contract and they deny the breach or contend that any breach is immaterial. Or perhaps you argue that the other party misrepresented the thing they sold you and they say that they engaged in aggressive selling but didn’t mislead you.
If you refuse to perform your obligations under the contract and it turns out that you didn’t have legal grounds to do so, you will have breached the contract and could be liable for damages.
When in Doubt, Contact an Attorney
If you’re not sure whether you have legal justification to get out of a contract, or if you think the other side will dispute your right to terminate the agreement, consult an attorney before you act. Your attorney can help you assess the situation and come up with a strategy and documentation to terminate the agreement if the law allows you to do so.
