Topic 11.5: Termination of Contracts

Learning Objective

After successfully completing this topic, you will be able to list the four methods to terminate a contract.

Methods of terminating contracts 

Contracts can be terminated by
• performance,
• impossibility of performance,
• rescission, or
• operation of law.

Performance

The most common way to terminate a contract is performance. Both parties fulfill their obligations and the transaction is completed to the satisfaction of all parties.

Impossibility of Performance

Sometimes a contract becomes impossible to perform and must be canceled. A court will want to see that something unexpected happened and that the unexpected event was not intentional.

Earth movement makes a contract impossible to perform.
Example: A house is under contract and the transaction is scheduled to close on Friday. On Tuesday, a sink hole opens and the house is destroyed. Obviously, the destruction of the house makes the contract impossible to perform.  

Example: A roofer has contracted to replace a roof on a house no later than April 18 for a price of $5,500. A hurricane flooded the neighborhood making it impossible for the roofer to get to the house. The contract can be terminated because of this unexpected event not caused by either party.

Mutual Rescission

Sometimes the parties decide that it would be in their best interests to reverse the contract.

Example: Perhaps a buyer claims that the seller misrepresented an important feature of the property. The buyer requests that the good faith deposit be returned and that the contract be cancelled. The seller does not want a lawsuit, and agrees to the cancellation. The buyer and seller enter into a separate agreement to rescind the sales contract.

Operation of Law

A contract may be declared void by a court because of
• fraud or misrepresentation by one of the parties,
• illegal purpose, or
• bankruptcy either party. In the case of bankruptcy, a trustee will seize the real property for the benefit of the creditors and may void the contract.