Contract Termination Explained
Contract termination refers to the formal cancellation or annulment of an existing agreement between two or more parties. This can happen for various reasons, including but not limited to a breach of contract, the completion of contract obligations, or a mutual agreement to terminate. Other reasons might be frustration (a fundamental change in circumstances that makes it impossible for one or both parties to meet their obligations), breach of a condition precedent (a requirement that must be met before the contract can be enforced), or anticipatory breach (when one party indicates it will be unable to meet its contractual terms).
While termination refers to the dissolution of a contract, it can sometimes be only partial, such as the termination of a specific element of a multi-faceted contract. An example might be the termination of a specific work order under a master services contract. Neither party to a contract should simply stop doing business with the other without some form of formal notice to the other. The general presumption is that contract termination usually requires formal notice and documentation . Although verbal termination may be sufficient in some cases, failure to document contract termination can lead to misunderstandings in a business relationship, and can jeopardize a business relationship.
Termination should always be done with professional decorum to avoid negative impacts on business relationships. Formal contract termination can protect a business from liability. Proper notice of a contract termination can also prevent liability for the cost of performance following the termination date. For example, if no action is taken to document contract termination, a party may be liable for breach of contract following the contract termination date. If the party receiving a termination has incurred the cost of performance, then they may be able to seek reimbursement from the other party. Documentation of contract termination, even when based on previous conduct such as breach, is often necessary to protect a business from future breaches and lawsuits. Sometimes a party may desire to avoid termination so that it can continue doing business with the other party.
Termination Letter Essentials
When writing a contract termination letter, you are legally required to include certain elements. Whether you are the employee or the business firing an employee, or you are terminating a contract with another business, a contract termination letter will have the following key components. The first piece of information that should be included in the contract termination letter is the date when the letter was written. This may seem like a no-brainer, but it’s essential to have documentation showing when the letter was sent to the other party. Next, you should include the date on which the contract will be considered terminated, and make it clear that the date is the official termination date. For example, if your contract has a 30-day termination clause under which you must give the other party 30 days notice before the expiration of the contract, make sure to list the date that the letter was written, the date the other party will receive the letter in the mail, how long you expect it will take them to sign for the letter, and when the deadline will be for them to respond. It’s also important to include the name of the parties involved, and who exactly is writing the letter and terminating it. For instance, if you are writing the letter on behalf of your company, state that in your letter. Similarly, if you are writing the letter to the company whose employee is being terminated, make sure to list them as well. The final key element is what is known as "the reason for the termination." This should be near the end of the letter, and should be a very clear and concise statement of why the contract is being terminated. This need not be an essay-length paragraph, and as has already been mentioned above, for employment contracts, there may already be a reason for termination spelled out in the terms of the agreement.
Termination Letter Composition
The termination letter should be written in a professional tone while remaining simple to follow. The language that you use should be direct and to the point but still respectful and to the level that you would not be embarrassed to repeat it in front of the person who is the subject of the termination letter.
The start of the termination letter should include the name of the recipient, the address of the recipient and the date. From that point, you should inform the recipient why they are being terminated, stating the exact reason for the termination so the needed information is present in the contract termination letter.
The terms of the contract termination letter should inform the recipient about how much notice they are being given if they are provided with notice. It should also inform the recipient if there are any possible termination payments or other entitlements such as severance pay. It is recommended that you provide the recipient with a notice of termination at least a month before their contract is to be terminated but it should be longer if there are payments due to the employee.
Legal Issues to Consider
Before you put virtual pen to paper, or type out the words on your laptop, it’s important to consult the original agreement and determine if you have any legal obligations. You’ll want to look at any legal language pertaining to your termination letter or notice. If the contract states a specific timeframe for the notification, be sure to follow that. You may also have to engage the services of a legal professional to ensure that your notice of termination letter complies with the law and does not expose you to liability. Depending on the type of contract, having a legal professional review your termination letter may also help your argument should you terminate your contract because of a breach. It’s important to note that in many states , breaking a service contract prematurely is illegal. However, assuming the contract in your situation has not been broken by the other party, the main reasons for an early termination of contract as defined by traditional contract law are as follows: ● Non-performance ● Misrepresentation ● Duress ● Undue influence ● Fraud ● Intentional conduct in restraint of trade Before writing your termination of service contract, take the time to consider the type of contract you are terminating and any obligations or terms that you have and need to honor.
Termination Letter Templates
The phrasing and structure of a termination letter can differ depending on the reason for the termination. Here are some example templates for the different situations that may call for a termination letter.
Objectively: As per the terms of our [name of contract] dated [date of contract]. Termination shall become effective on [insert date 30 days after the date of the letter, or sooner if you are exercising an immediate termination clause] to allow both parties to fulfill any obligations under the contract.
Phrasing for termination without cause at will:
Mr. Smith,
This letter serves as written notice of my resignation from [insert position] with [insert name of company] as of [insert date]. This also confirms that my last day of employment will be [insert date].
Sincerely,
[Your signature]
[Your printed name]
Phrasing for termination due to nonperformance or employee misconduct:
Dear [insert name],
This letter confirms the termination of your lease with [insert name of shopping center] due to [insert list of reasons, such as: tenant’s breach of lease terms; failure to pay rent; tenant bankruptcy; use of the leased premises for illegal activity; unauthorized assignment or subletting by tenant; bankruptcy sale; failure to vacate upon expiration of lease; etc.]. Your Lease will terminate as of [insert date] in accordance with Section [insert reference to relevant section of contract].
Termination for failure of a condition precedent:
Sorry, but our [insert type of contract] ended up falling apart because [insert reason for contract falling through, such as that the parties involved could not come to an agreement on price]. Please take this letter as our formal notification of the termination of our contract dated [insert date of contract].
Sincerely,
[Your signature]
[Your printed name]
Termination of a construction contract for delay:
Pursuant to clause [insert clause number] of the Contract between [insert name] (the "Owner") and [insert name], (the "Contractor") dated [insert date], I hereby give notice to you that [insert name] is in default of the Contract as explained below.
[Explain any delay or other reason for notification]
[Insert details as necessary regarding how the Contractor has failed to comply with the Contract terms.]
In accordance with the requirements of clause [insert clause number] of the Contract, [insert name] hereby gives you notice that unless you rectify the defaults outlined above within [insert timeframe range, such as: seven days; ten days; fourteen days; etc.] the Owner will have no alternative but to terminate the Contract forthwith.
The Owner demands the Company return all amounts collected thus far in accordance with clause [insert clause number] of the Contract.
Yours sincerely,
[Your signature]
[Your printed name]
Aftermath of Contract Termination
After the dust of a terminated contract settles, one may be faced with a number of outstanding matters. Foremost among these are those final obligations owed by or to the terminated contract’s counterparty. As should be shockingly clear to any seasoned practitioner and experienced contract-drafter, a common legal conflict is whether the obligations of a contract extend beyond its termination. This includes obligations to provide notice of termination before the termination date. It is possible that a party has a contractual obligation to provide prior notice. The counterparty’s breach of that obligation may, in some circumstances, entitle the aggrieved party to damages. Where the termination date is subject to a reasonable extension in some situations, whether it has been extended (and the effect of such an extension) is a question for interpretation and may not be subject to litigation.
Secondly, many contracts require the parties to either cooperate in winding itself down , or provide one another with assistance in finding substitutes for certain contracted services (often involving confidential or proprietary information). A party’s contractual obligation to oppose a "third party" like the FBI is subject to the qualified immunity conferred by the Supremacy Clause and is not litigable.
Thirdly – on the issue of winding down cooperation or providing information on a substitute – it is the responsibility of the contract party opposing to the contract to bear the burden of providing notice of the issue to the non-terminating party. At the same time, however, the non-terminating party has an obligation to accept lawful and respectable notice. In this regard, a party’s acceptance of an email requiring a courteous, yet firm response, should not be too difficult to master.
Parties that have conducted themselves consistently with the other’s obligations may enjoy a prelude to a good relationship going forward. Independent from the merits of the dispute that results in a contract’s termination are repercussions for pre-termination conduct. By agreeing to postpone enforcement of some of those provisions (notably including the right to seek attorneys’ fees and any right to an injunction), many disagreements may never hit the courts.