What does close out mean?
Close out means the termination or cancellation of all transactions under a contract. In that way, it can also mean liquidating or even accelerating transactions so that they are completed more quickly than the original contract stated.
That’s why it is so important to understand it so you can glean your rightful legal position should a party of a contract ask you to close out positions, or if indeed you would like to close out a contract yourself. In understanding close out, you can also ensure that you know what terms, conditions and situations closing out a contract can occur within.
How does close out work?
Closing out a contract should be stipulated within the terms and conditions of the contract itself. When it comes to closing out transactions, how those transactions are completed can vary. As briefly alluded to above, they can be terminated or cancelled which would put a stop to any future transactions immediately or as soon as possible. However, if the initial contract allows it, transactions can be accelerated so that they can be completed as soon as possible.
Closing out a contract is often referred to in terms of futures contracts - a financial transaction. Parties who hold a futures contract may want to close out a position. To do so, they actually have to enter into another contract which will offset the eventual result of the initial transaction. In doing so, they close out their position as both contracts in essence cancel each other out.
Advantages of close out
The true advantages to a close out of a contract is enabling one or both parties to complete transactions that either or both may no longer want. Being able to close out a position is therefore a fantastic form of protection, and in the case of financial futures contracts a good way of hedging out risk. It is important as it means that the initial transactions do at least take place and it is only when they have been seen not to be as commercially viable as had been initially thought, that they are stopped. In essence, it means people are not beholden to contracts that were signed based on the information available at the time, which has been seen not to generate the returns initially anticipated.
Contractbook and close out
At Contractbook, we are big believers in any legal process that can help establish a contract in the first place. Contracts can become assets and provide a company with real value. However, that is not to say that they cannot have risk measures built into them to help protect both sides from being locked into a contract that does not transpire to be as profitable or productive as once hoped. If that means that a contract can be closed out, then so be it.