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4 factors that allow for the dissolution of a business contract

On Behalf of | Mar 19, 2024 | blog, business litigation

Business contracts are legally binding agreements. They define the conditions and terms of the business relationship. Breaching them can lead to legal and financial consequences.

However, there are circumstances in which one party may legally break one.

1. Mutual agreement

When all parties involved agree, it is legal to break a contract. They must document this agreement in writing to dissolve the previous one.

2. Breach of contract

Another potentially legal reason to break a contract is when one of the other parties involved breaches it by failing to perform specified obligations. The non-breaching party must notify the breaching party of the breach and allow a reasonable amount of time for breach rectification before taking action. If, based on the contract terms, the breach is substantial and material, the remaining parties may be able to render the contract null and void without legal repercussions.

3. Inability to fulfill

If circumstances arise that make it impossible to fulfill the terms of the contract, such as a natural disaster or government regulation, the involved parties can legally terminate the contract. This also applies if they are unable to fulfill the primary purpose outlined in the contract, again due to factors beyond their control.

4. Illegality

Illicit circumstances also make it legal to break a contract. If one party entered the contract based on fraudulent or misleading information provided by the other party, the contract may be void. Contracts that go against public policy or specify illegal behaviors are also not legally enforceable and the parties involved can break them.

According to the U.S. Small Business Administration, the nation boasted over 33 million small businesses as of 2023. Many of these businesses enter contracts with each other, clients and contractors. Parties involved need to look carefully at the terms of their contract for any clauses that may safeguard against its breaking.