Do Companies Have to Honor Previous Contracts?

A contract is a legally binding document, which means that companies must honor it even if they no longer want to. There are some limited circumstances in which a company might be able to get out of honoring a contract, such as bankruptcy or your breach of the contract. If your company violates a contract, you could be sued.

Because a contract is a voluntary agreement, the parties can't later change their minds because they dislike the contract. Once a contract is signed, it has the force of law, which means either party can sue to enforce the contract. The parties to a contract can mutually agree to alter it through a new contract or termination agreement. Your business might offer an incentive to a customer to change a contract, but the other party is under no obligation to do so.

When a company with which you have a contract goes bankrupt, honoring contracts can become nearly impossible. If your business signs a contract with a company that subsequently goes bankrupt, the bankruptcy court will determine how and if the contract will be honored. You'll be placed on a list of debtors that will be prioritized according to bankruptcy law and the type of bankruptcy the company files for; you could get all, part or none of the money owed to you.

Most contracts have "assignment" clauses, which means that if the company changes owners, the contract will apply to the new owner. Without such a clause, the company might be able to get out of the contract. Some contracts contain anti-assignment provisions that prohibit the contract from being assigned to a new party. You'll need to check your contract to determine if either situation applies to you.

If one party can demonstrate that the contract was signed under duress or by a person who did not understand what he was signing due to an illness or mental defect, the contract could be deemed null and void in court. Courts can also determine that a contract is "unconscionable" and void it. For example, a person who agrees to work 120 hours per week might argue that her contract was unconscionable. While contracts can override some laws -- such as when a company makes an employee agree not to express political opinions publicly -- contracts can't violate fundamental rights. A company can't, for example, honor a contract that violates child labor laws or puts someone in imminent danger.