What is a Contract Termination and how does contract termination work? 

Did you know that every contract has a life cycle? This cycle begins with an agreement between two or more parties, in order to achieve a specific objective, and ends when the agreement's term expires or in the case of contract termination. Do you know what a contract termination is and what types there are?

Read on to find out! 

What is a contract termination?

Contract termination occurs when one of the parties seeks to undo or cancel the contract that was previously agreed upon.  

To illustrate, imagine that you and another person have signed a contract to purchase a product or hire a service, such as purchasing a tax management system or hiring a company to carry out pest control at your workplace.  

The contract establishes the terms and conditions that both parties must comply with, but you may want to terminate the contract before the established term or before fulfilling all obligations. You may also want to change some of the items previously agreed upon.  

The termination agreement will be the legal instrument that allows both parties to agree to terminate or update the contract in an amicable manner, following the proposal of the Art. 472 of the Civil Code. 

How does termination work in practice, in a management system? 

Within the scope of management systems, contract termination can be an important feature for recording and monitoring the completion of contracts in an organized manner.  

A good system should contribute to simplification and management of contracts. It needs to include details about how the contractual items will be changed or removed, how funds will be returned, if any, any financial penalties to be paid, and other specific terms that both parties agree to for the termination of the contract. 

Example in ContractPlus:

You don't have to go through the hassle of automatically removing an item from your contract. 

At ContractPlus, we solve your problem and simplify this action. The termination will consist of a process in which the user informs the system of the quantity or value of an item that must be removed from the contract, in whole or in part.  

In this sense, the termination does not need to be the end of an agreement, but rather an update of it, as long as both parties agree.  

When does a Partial Termination occur?

If your client is asking to remove an item from the contract that was previously agreed upon, this is a sign to opt for partial termination.  

We have listed some partial termination scenarios to illustrate this in the best possible way: 

1: When the customer requests that the item be removed from the contract.  

In this case, a “Partial” type of cancellation must be made. This cancellation may be for the total outstanding quantity, total outstanding value or, in the case of installment or recurring items, all outstanding installments for this item must be selected, with the aim of the balance being zeroed and its status being updated to “Cancelled”; 

2: When the customer requests a reduction in the quantity or concentrated value.  

In this scenario, a partial cancellation of this item must be carried out. This cancellation may also be for the quantity or the outstanding amount. In the case of installment or recurring items, these items must have their installments selected according to the need for the cancellation; 

When it is necessary to terminate the contract and the items have an outstanding balance, whether in value or quantity for measurement or installments, this balance must first be canceled, and then the termination process must be carried out. 

The 3 types of contract termination in management systems 

How to terminate what was agreed in the contract? 

They exist termination of partnership agreements, when one of the partners decides to withdraw from the SA or when all of them intend to dissolve the company; real estate cancellations, when a real estate contract (purchase and sale) is terminated by the buyer or seller; and even labor terminations, provided for in Art. 484-A of Law 13467/2017. 

There are several types of termination, but when we talk about management systems, it is a little different. For companies that seek to close what was agreed upon, it is not always feasible to carry out a manual action, closing document by document.  

Therefore, when we talk about management systems, there are generally 03 types of terminations: 

1 – Total 

Cancels the entire contract balance, including any installments that may be outstanding, and updates the contract status to “Cancelled”;  

2 – Partial 

Cancels the contract for selected items, and quantities and installments can be edited; 

3 – Conclusion 

Cancels the entire contract balance, including any installments that may be outstanding. If the “Close contract without balance when canceling completion” parameter is enabled, the status will change to “Closed”. 

Is there a difference between a contract termination and a contract rescission? 

A customer or supplier may opt to terminate a contract when there is a change in the circumstances of the contract, a failure to fulfill contractual obligations or simply a mutual decision to end an agreement. 

Termination, on the other hand, is usually a unilateral act (requested by only one party) or a legal act to end the contract due to a breach of the agreement or other circumstances specified in the contract. 

#InventTip: 

Are you having difficulty terminating your company's contracts safely?  

Now that you know what a termination agreement is and how it works, it's time to learn about our Complete Solution for Contract and Termination Management, and Customer and Supplier monitoring. Click here to learn more about ContracPlus.

For those of you who already know our solution and want to understand how to close documents in your company efficiently, get in touch with our Team of Experts!

And if you liked the article, how about sharing it with your friends on social media? 😀