How Can You Get Out of a Contract

You've head the phrases. Buyer's remorse. Caveat emptor, let the buyer beware. But what can you do if you enter into a contract and find out that the deal you struck was not as good as you thought, or if you believe that you were cheated?

In most cases it's tough to get out of a contract, but in some cases it may be possible to revoke, rescind or terminate a contract.

Cooling Off Rules for Contracts

For some specific transactions, cooling off periods are required by federal and state law. Cooling off periods usually start at the time of the transaction. In some cases they do not start until the buyer receives specified documentation, if that documentation is not provided at the time of sale.

72-Hour Cooling Off Period

Under federal laws and regulations, certain consumer contracts may be canceled within a 72-hour period. The primary federal cooling off period rule, issued by the Federal Trade Commission (FTC), applies when:

  1. The contract involves the sale, lease or rental of goods or services for personal, family or household use, or courses for instruction or training;
  2. The sale is in the amount of $25 or more if entered at home, or $130 or more if entered at another covered location, including any interest, delivery charges or other charges relating to the agreement;
  3. There is a written contract describing the terms of the sale; and
  4. The contract was entered into at a location other than the regular place of business of the seller, such as your home, a party where consumer products are sold, a seminar or sales pitch at a hotel or conference center.

The rule has some significant exceptions:

  • The rule does not apply if the contract is entered into in the seller's place of business, or where the terms of the contract were previously negotiated at the seller's place of business.
  • Although home repairs and renovations are generally covered, the rule does not extend to emergency home repairs.
  • The rule does not apply to the sale of real estate, securities, insurance, or contracts where your home is used as collateral or a security deposit for the transaction.
  • The rule does not apply to transactions that are completed entirely by mail or by telephone.
  • The rule does not apply to requests for repairs or maintenance on items of personal property.
  • The rule does not apply to car or motor vehicle sales, even if the sale occurs a location apart from the seller's usual place of business.
  • The rule does not apply to¬† the sale of arts or crafts at locations such as art fairs, farmers' markets, shopping centers, schools, or civic centers.

The seller must provide two copies of a cancellation form that details how cancellation may be effected, and the deadlines and procedure for serving notice of cancellation. One copy is for the consumer's records, and the other may be used to give notice of cancellation.

Notice must be delivered to the seller by midnight on the third day after the transaction occurs. As an unscrupulous seller may deny receiving notice even if it is sent and received in a timely manner, if notice is given by mail, the consumer should send the notice by certified mail, return receipt requested, so that there is a record of delivery. For delivery in person, the consumer should have a representative of the seller sign and date a receipt reflecting that the notice was received. Cancellation may also be made by regular mail or telegram, but it is important to keep copies of documentation send and evidence that notice was sent in a timely manner.

If cancellation occurs, the consumer must return any products received prior to the cancellation date. The seller may be responsible for picking up the products or arranging their return and, if so, may lose the right to recover the product if they do not recover the products in a timely manner. If the seller received a trade-in product, the seller must return that product to the consumer. If the contract is for services and the seller provides services during the cancellation period, the seller may not collect payment from the consumer for services provided before a timely notice of cancellation is received.

Cooling Down Period for Mortgages

If a consumer enters into a loan that:

  1. Is for personal, household or family purposes;
  2. That results in the placement of a lien or security interest on the consumer's principal dwelling in order to secure payment; and
  3. Is not obtained for the purpose of purchasing or constructing a home;

the loan is probably covered by the Federal Truth in Lending Act (FTLA), pursuant to which there is a three-day cancellation period for the loan. As cancellation can be complicated, it is sensible to consult a lawyer before attempting to cancel a mortgage under the FTLA.

State Cooling Down Period Laws

States may also offer similar rules under their own codes of law. When the law applies to a transaction, the seller is required to provide the consumer with a prominent notice describing the 72-day cooling-off period at the time the consumer signs the contract. If that notice is required but is not provided, the consumer may be able to cancel the contract even after the 72-hour period expires. Some states extend the FTC's cooling off rule to additional types of transactions or locations where transactions may occur.

Some states offer additional cooling off periods for specific types of consumer contract. For example,

  • The State of Georgia requires a 7-day cooling off period for membership contracts with health spas and fitness centers.
  • Georgia imposes a 7-day cooling off period for campground and marine memberships.
  • In Michigan, where a consumer attends a sales presentation in response to the promise of a gift worth $25 or more, and makes a purchase at that sales pitch of $500 or more, the consumer may cancel the contract within three business days.
  • Michigan has a one-day cancellation period for home construction loans, where the contract is for home improvement and the homeowner agrees to make payments to the contractor performing the improvement services over time.

A number of states have passed laws that require sellers of time shares to notify consumers of a right to cancel a purchase, and define a notice period during which cancellation may occur. For example, the State of Florida offers a cooling off period for time share purchases of ten calendar days.

The Importance of the Deadline

When a transaction has a cooling off period, and the buyer wants to cancel the contract, it is crucial that proper notice be given within the notice period. The notice of the right to cancel will include a description of how to properly cancel the contract. It is important to read that description and to follow all of the instructions given.

For example,

  • The law may require that notice be written, not given orally;
  • The law may allow the seller to designate a specific address to which any notice of cancellation must be sent;
  • The law may require that a notice sent by mail be postmarked within the notice period, with no exception made for days when the post office is closed.
  • A notice period may end at a specified time during the day, such as 5:00 PM, and it is important to ensure that notice is received by that deadline. Don't assume that the deadline is midnight.

If you do not follow the instructions to the letter, you may find that your notice of cancellation is invalid and that the seller refuses to let you out of the contract.

Even if the seller doesn't follow the letter of the law, in order to best ensure that your cancellation notice will be held valid, it is sensible to investigate the law yourself and provide timely notice of cancellation just as you would have done had the seller been in compliance.

Cancellation Provisions Within the Contract

Man contracts include clauses that allow for termination of the contract. Thus, if you hope to escape a contract, you should look at the terms of the contract to see what cancellation provisions are included.

Not all contracts allow for early termination, and many that allow for early termination require the payment of a fee in association with the termination.

Even if no cancellation provision exists between the parties, it may be possible to negotiate the cancellation of a contract, often based on the payment of an agreed amount of compensation to the party that is being asked to allow early cancellation.

Common cancellation provisions include:

  • Contingencies in contracts for home purchases: A buyer may specify contingencies that must be met for the contract to be enforceable, and if the contingencies are not met the buyer can cancel the contract.
  • Financing provisions in car purchase agreements: Where a car buyer finances a new or used car at the dealership, the agreement will often include a clause that allows for cancellation of the sale if the financing agreement fails.
  • Lease agreements sometimes include provision for early termination, such as the payment of two months rent as an early termination fee.

Beware automatic renewal provisions in contracts. Sometimes a contract will provide that if you do not provide notice of cancellation by a specified date the contract will continue or renew. Some contracts renew for periods of a year or more so, if you hope to escape the contract at the end of its present term, you must know what your contract requires and provide any required notice of termination.

Rescission of Contracts

In some cases it is possible to rescind a contract, based upon principles of law or public policy. For example:

  • Statutes of frauds: A statute of frauds requires that some contracts be in writing and be signed by the party to be charged with the contract. When a statute of fraud applies, an oral contract may not be enforced, nor may a written contract if not signed by the person who is alleged to have breached its terms. Exceptions exist that may nonetheless allow a contract to be enforced, notably when there is partial performance of the contract before the breach occurs. (The statute gets its name from its goal, which is to prevent fraud, and the name is not meant to suggest that contracts affected by the statute are fraudulent.)
  • Public policy: Some contracts are deemed void as a matter of public policy, and will not be enforced by courts. For example, a contract that offers payment for the commission of a crime is void and unenforceable, and no claim for compensation may be enforced by the person who commits the crime.
  • Disability: A person who suffers from a legal disability may be able to cancel a contract, if the cancellation occurs within a reasonable time after removal of the disability. For example, if a person is not mentally competent to enter into a contract at the time it is entered, the contract is deemed voidable based upon that disability. Similarly, for many contracts with minors, the minor can rescind the contract before reaching the age of majority, and usually within a reasonable amount of time after reaching that age.
  • Impossibility: A party to a contract may attempt to avoid fulfilling its terms by claiming that it would be impossible to do so. For example, if a singer contracts to perform at a specified date and location, but suffers from severe laryngitis on that date, the singer can assert impossibility as a basis to rescind the contract. Where a product that was to be sold is stolen or destroyed before delivery, it becomes impossible to provide that product, either because the product was unique and irreplaceable, or because acceptable replacements cannot be obtained by the seller.
  • Force Majeure: A party may claim that unforeseeable circumstances prevent the completion of a contract. For example, if goods are to be provided from a location where a war breaks out, it may not be possible to complete the contract due to that war.

Rescission requires that the parties be restored, as much as possible, to their original condition. For a sale of goods or a vehicle, the goods must be returned and the seller may be entitled to compensation for any damage or wear and tear. If the contract involves a product that has been consumed or destroyed, even if the contract was otherwise voidable, the contract cannot be rescinded. If a contract for services is rescinded, the person providing the services remains entitled to the reasonable cost of services performed through the date of rescission.

Litigation Over Contracts

At times, the parties to a contract may not agree that a contract has been canceled, that it is not enforceable, or that it can be canceled. When such a disagreement arises, the parties may end up litigating their dispute in court. Possible court actions include:

  • Breach of Contract: The party seeking to be released from a contract contends that the other party committed a material breach of the contract, a breach that is so serious that the contract should no longer be enforced.
  • Fraud: The party seeking to avoid the contract may allege that the contract was obtained through acts of fraud, and should thus be deemed unenforceable. A party may also seek damages for fraud.
  • Duress: The party seeking to avoid the contract may claim that they entered into the contract only as a result of duress, such as in response to threats, violence or fear of violence, restraint, or other similar conduct attributable to the other party.
  • Declaratory Action: Where an actual dispute exists between the parties, one of the parties may file a declaratory action with a court, a special type of lawsuit that does not seek damages but instead asks a court to review a contract and determine the parties' rights under the contract, including the enforceability of the contract or its provisions.
  • Failure of the Contract: A party to a contract may allege that the contract is not enforceable because the elements of a contract were not met. For example, a party may claim that there was no meeting of the minds, and there is no agreement between the parties as to what the contract covers. A party may claim failure of consideration, meaning that the party did not receive the benefit of the contract and is thus not obligated to provide any goods or services to the other party.
  • Impracticability: In some jurisdictions it may be possible to convince a court to modify or terminate a contract based upon circumstances that could not reasonably have been anticipated at the time the contract was negotiated, that make it impractical to continue with the contract. For example, if a manufacturer's key supplier for a part had a factory fire and was no longer able to provide the part, and retooling to use a different part would increase the product cost tenfold, the manufacturer may be able to get out of a contract for that product based upon impracticability.

In some cases a party to a contract may contend that the terms of the contract have been completed, while the other party contends that additional goods or services remain due. When that happens, either party may file a court case, either a declaratory action to determine whether the contract has in fact been satisfied, or a motion for relief or damages based upon an alleged breach of the contract.

What to Do if the Contract is Binding

If you examine a contract, review all of the facts, and conclude that a contract is binding, and the other party doesn't want to simply walk away, how can you improve your position? Options include:

  • Negotiate for Early Termination: Although you will typically have to pay money to the other party, it is often possible to negotiate an agreement to terminate a contract early in exchange for payment or some other consideration that the other party desires.
  • Negotiate to Modify the Contract: Even if the other party does not want to let you out of the contract, that party may be willing to negotiate with you. A seller or service provider may be more interested in your long-term business than in holding you to contract terms that are likely to cause you to look elsewhere for your future needs. A landlord may not be willing to release you from a lease, but may be willing to negotiate a shorter lease term or modified rate of rent.
  • Breach and Pay Damages: If you examine your situation and realize that it will cost you more to comply with the contract than to complete its terms, you have the option of breaching the contract and paying damages to the other party. Be aware, however, that such a breach could result in your being sued and incurring legal fees, and in getting a court judgment entered against you.

If you do negotiate different contract terms or early termination, make sure you put that agreement into written form, get the other party to sign and date the agreement, and keep a copy for your records. Don't make payments under such an agreement until the agreement is signed.

Copyright © 2018 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on May 8, 2018.