How to Break a Business Contract

The law enforces business contracts and awards damages against those who breach them. If this were not so, people would hesitate to enter contracts, because they would be unsure that their contractual rights will be enforced. However, contract law contains a number of exceptions and loopholes that you may want to take advantage of, particularly if you wish to get out of a contract.

Suggestions

1. Read your contract carefully, because it may provide a way for you to terminate it without paying damages. Some contracts include termination clauses that allow either party to terminate if sufficient notice is given. Other contracts allow termination of the contract on appropriate grounds as long as notice is given.
2. Determine if the other party breached the contract in any way. For a breach to free you from your contractual obligations, it must be "material" (serious). In many cases, whether a breach is material or not depends on contract wording or surrounding circumstances. For example, if the other party was one day late closing a real estate sale, this would not be considered a material breach, unless the contract included special legal wording, such as "time is of the essence in this contract."
3.  Check your state's laws regarding "cooling-off" periods. If the contract is a consumer contract, you are the purchaser, and you signed the contract within the last 72 hours, some state laws give you the unilateral right to terminate it without explanation to the other party.
4. Determine if you have the right to void the contract. If you were under 18 or intoxicated when you signed it, or if you were mentally or physically coerced into signing it, you have the right to void it. You also have the right to void the contract if the other party made misrepresentations to you before you signed and you relied on these misrepresentations when entering into the contract.
5. Break the contract even if you cannot find any grounds for release, and try to reach a settlement. In the event of a lawsuit, the other party will be entitled to the benefit of the bargain. The amount of damages must put him in as good a position as he would have had if you'd completed the contract, rather than as good a position as he would have had if you'd never signed it.

The amount of damages can be reduced by mitigating circumstances. For example, if you break your calendar year lease on July 31 and your landlord rents the apartment to someone else at the same price on Aug. 31, you will owe one month's rent, not five. Take this into account when determining the value of a settlement.

Tips

• If your contract contains language specifying unreasonably high damages for a breach, do not be intimidated. Punitive damage clauses in contracts are unenforceable in court. That doesn't mean you won't be held liable for damages; only that the amount will be moderated.
• Liquidated damages clauses, which set dollar amounts on damages in advance, are enforceable, provided that the amount of damages specified is reasonable in light of anticipated and actual damages. It can sometimes be difficult to determine whether a damages clause should be classified as liquidated damages or punitive damages, because judges have different ideas about what amount is "reasonable" under the circumstances.

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