How to Get Out of a Contract

“How to Get Out of a Contract?”

If I received a dollar for every time I was asked this question, I would be a rich attorney indeed.

Unfortunately many people sign a contract without carefully thinking through the issues and then find themselves in a contract they wish they never signed. I find there are many reasons for this. Sometimes people can just be too busy or careless. Other times, circumstances change after signing a particular contract. Then they find themselves in a difficult situation where they wonder how to get out of a contract.

Whatever your reason, figuring out how to get out of a contract can be easy or can be nearly impossible. It all depends on the language within the contract itself and the factual circumstances surrounding the contract. The basic rule is that each party is entitled to “the benefit of their bargain.”

What Does the Contract Say?

First, does the contract have language on early cancellation? Many contracts will contain provisions that permit “early termination” either by simply providing notice within some period of time, or by paying a fee.

Factual Circumstances

Second, are there any factual circumstances that could make the contract voidable or otherwise impossible to enforce? Circumstances that can lead to an unenforceable contract include:

• Lack of Consideration. Are all parties in a contract paying or give something of value? In a commercial lease, the tenant is paying money and the landlord is giving space to the tenant. Giving something of value can include “not doing something,” such as not filing a report, not collecting a fee or otherwise not exerting a right or benefit. Be aware that consideration can be very minimal, such as “a dollar”, although read “unconscionability” below.
• Lack of Capacity. Are all parties capable of understanding the contract? Infirm adults, people with mental or memory issues, minors and individuals under the influence of alcohol, drugs or significant medications are generally deemed to lack capacity to enter into a contract.
• Misrepresentation, Duress or Undue Influence. Coercion, threats, false statements, or improper persuasion by one party to a contract can void the contract. Do note that these criteria are very fact specific and require specific elements to void a contract.
• Unconscionability. If you find yourself in court, this could be used as a defense if you can show the court that one of the parties maintained significant bargaining power over the other, so the weaker party was unable to effectively bargain or negotiate the terms of a contract or otherwise have a choice. Someone paying grossly over fair market value could be considered unconscionable.
• Against Public Policy or Otherwise Illegal. The courts will not enforce contracts that involve illegal or immoral conduct.
• Mistake. If there is a general mistake of fact, and the mistake leads to a material impact on the “benefit of the bargain” of the contract.
• Unregistered Company. If a company is “doing business” or “transacting business” in a state, and it is not properly registered in that state, some states (such as California) will penalize such companies by making their contracts unenforceable in that state. Other states (such as New Mexico) will not void their contracts, but they will prohibit such companies from availing themselves in those state’s courts (effectively making it impossible for them to enforce their contracts in such states).
• Lack of Specificity. Vague or ambiguous contracts are very dangerous. For most states, the general rule is that extrinsic evidence may not be introduced to prove terms of a contract (this is called the “parol evidence rule” in contracts). However there are many exceptions to this rule, and if a contract lacks any specific terms a court may declare the contract void unless extrinsic evidence can help the court obtain the true intention of the parties.

Breach

Third, did the other party breach the contract? If so, is that breach “material?” (Material breach refers to a failure to perform that leads the other party in the contract to demand performance or damages). Breaching by being late one day on payment may not be considered material, unless the contract explicitly says otherwise (i.e. such as “time is of the essence,” “late payments shall be deemed a material breach,” etc). However, being over thirty days late on payment could be considered material and creates a potential cause of action for the non-breaching party. Specific terms that identify material breaches are important, but other important terms in the contract may also be material, especially if their lack of performance alters the value of the contract for either party.

If the other party is materially breaching the contract, you may be able to terminate the contract. Don’t just assume you have this right, however. Make sure the contract doesn’t address the particular breach, have some sort of permissible remedy for that breach that keeps the contract going, or otherwise require you to serve notice of the breach and give the non-breaching party time to remedy the breach. Also check for “dispute resolution clauses” that may govern what you do in the situation of a breach or other disagreement between the parties.

Damages and Negotiations

Forth, if none of the above possibilities are available to you, then figure out what the damages might be if you simply stop performing and unilaterally terminate the contract. This is an economic analysis, which gives you the ability to potentially negotiate a termination to the contract. After all, the other party may prefer to simply negotiate with you rather than have to hire an attorney and take you to court. People and companies are very different, and you don’t know how they will react until you talk to them about the issues, and discuss a fair settlement for termination.

On Termination

Before you unilaterally just terminate the contract, please keep in mind a few things:

• Consult with an attorney first.
• Remember “benefit of the bargain”. What this means, is that most parties are entitled to the “profits” or specific performance of a contract. Profits are NOT what you pay, but what the party expected to earn, after deducting all their costs and expenses. This provides some negotiating room when trying to get out of a contract, depending on the circumstances.
• Double-check the contract. Make sure there are no “liquidated damages” provisions, and that you don’t give the other party some ammunition to really go after you. Clauses that include “attorneys fees and court costs” can be a real problem. Not following the dispute resolution process can also be a problem.

Of Course, Hire an Attorney

What I discussed above just scratches the surface of possibilities. Depending on the subject matter of your contract, i.e. employment law, landlord/tenant, regulated industry, stocks/bonds, banking, intellectual property, admiralty, utilities, etc, etc, etc, specific laws may apply to you and your contract.

Contract attorneys are professionally trained to read a contract, review your factual circumstances and apply the law given your contract and the facts. Make sure you consult with a properly licensed attorney to give you a second opinion on your contract, and see if they can give you some options.

Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later.